<PAGE> 1
FILED PURSUANT TO RULE 424(b)(3)
Registration No. 333-81645
OAK HILL FINANCIAL, INC.
14621 State Route 93
Jackson, Ohio 45640
NOTICE OF SPECIAL MEETING
OF
SHAREHOLDERS
TO BE HELD SEPTEMBER 14, 1999
Jackson, Ohio
August 10, 1999
To the Shareholders:
A Special Meeting of Shareholders of Oak Hill Financial, Inc. (the
"Corporation"), will be held at the Ohio State University Extension South
District Office, 17 Standpipe Road, Jackson, Ohio 45640, on September 14, 1999,
at 1:00 p.m., local time, for the following purposes:
1. To consider and act upon the proposed acquisition of Towne
Financial Corporation as described in the accompanying
prospectus/proxy statement.
2. To consider and act upon such other matters as may properly
come before the Special Meeting or any adjournment thereof.
On July 30, 1999, there were 4,372,265 common shares outstanding. Each
shareholder is entitled to one vote for each common share held regarding each
matter properly brought before the meeting. Holders of record of the Corporation
at the close of business on July 30, 1999, are entitled to notice of and to vote
at the Special Meeting and at any adjournment thereof.
By Order of the Board of Directors,
/s/ H. Tim Bichsel
H. Tim Bichsel
Secretary and Treasurer
EVERY SHAREHOLDER'S VOTE IS IMPORTANT. IF YOU ARE UNABLE TO BE PRESENT AT THE
SPECIAL MEETING, YOU ARE REQUESTED TO COMPLETE AND RETURN PROMPTLY THE ENCLOSED
PROXY SO THAT YOUR SHARES WILL BE REPRESENTED. A STAMPED, ADDRESSED ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE.
<PAGE> 2
TOWNE FINANCIAL CORPORATION
4811 Cooper Road
Blue Ash, Ohio 45242
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 14, 1999
To the Shareholders of TOWNE FINANCIAL CORPORATION:
Notice is hereby given that the Special Meeting of Shareholders of
Towne Financial Corporation, an Ohio corporation (the "Corporation"), will be
held at the Corporation's main office at 4811 Cooper Road, Blue Ash, Ohio, on
September 14, 1999, at 1:00 p.m., Eastern Standard Time, for the purpose of
considering and acting upon the following:
1. A proposal to approve the merger of the Corporation into Oak
Hill Financial, Inc.
2. Such other business as may properly be brought before the
Special Meeting or any adjournment(s) thereof.
The Board of Directors has fixed the close of business on July 30, 1999
as the record date for the determination of the shareholders entitled to receive
notice of, and to vote at, the meeting and any adjournment(s) thereof,
notwithstanding any subsequent transfers of stock.
Your attention is called to the accompanying Proxy and Proxy Statement
submitted with this Notice.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ William T. Thornell
William T. Thornell, Secretary
Blue Ash, Ohio
August 10, 1999
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. WHETHER
YOU EXPECT TO ATTEND OR NOT, PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT
PROMPTLY IN THE STAMPED ENVELOPE PROVIDED. IN THE EVENT YOU ATTEND THE MEETING,
YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON.
<PAGE> 3
PROSPECTUS/PROXY STATEMENT
--------------------------------------------------------
OAK HILL FINANCIAL, INC.
14621 State Route 93
Jackson, Ohio 45640
(740) 286-3283
--------------------------------------------------------
1,000,000 SHARES OF COMMON STOCK
We are Oak Hill Financial, Inc., a bank holding company engaged primarily
in the commercial banking business. We are providing this prospectus/proxy
statement to you to seek your approval of our merger with Towne Financial
Corporation, a unitary savings and loan holding company. We will acquire Towne
Financial through its merger with our company.
The terms of the merger are contained in two agreements, the Agreement and
Plan of Merger and Supplemental Agreement, each dated as of March 11, 1999.
These agreements are attached as Appendix A to this prospectus/proxy statement.
Upon completion of the merger, each outstanding share of Towne Financial
common stock will convert into the right to receive 4.125 shares of our common
stock, subject to adjustment based on the market value of our common stock. You
should refer to the section of this prospectus/proxy statement entitled "The
Merger" for more information.
This prospectus/proxy statement also serves as a proxy for our special
meeting of shareholders to be held on Tuesday, September 14, 1999, and as a
proxy for the Towne Financial special meeting of shareholders, also to be held
on September 14, 1999.
Our common stock trades on the Nasdaq National Market under the symbol
"OAKF." The closing price per share of our common stock on July 30, 1999 was
$18.25.
OUR MERGER WITH TOWNE FINANCIAL CORPORATION HAS CERTAIN RISKS. SEE
"RISK FACTORS" AT PAGE 5 FOR A DISCUSSION OF FACTORS THAT YOU SHOULD CONSIDER IN
DECIDING WHETHER TO VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, NOR ANY BANK REGULATORY
AGENCY, NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS/PROXY STATEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus/proxy statement is August 4, 1999.
<PAGE> 4
<TABLE>
TABLE OF CONTENTS
<S> <C>
Table of Contents.............................................................................................. 2
Summary........................................................................................................ 3
Risk Factors................................................................................................... 5
Where You Can Find More Information............................................................................ 6
Information Incorporated by Reference.......................................................................... 6
Comparative Per Share Information.............................................................................. 8
Recent Developments............................................................................................ 9
The Merger..................................................................................................... 9
Background of the Merger.................................................................................... 9
Oak Hill Financial's Reasons for the Merger; Recommendation of Oak Hill Financial's
Board of Directors..................................................................................... 9
Towne Financial's Reasons for the Merger; Recommendation of Towne Financial's
Board of Directors .................................................................................... 10
Opinion of Oak Hill Financial's Financial Advisor........................................................... 11
Opinion of Towne Financial's Financial Advisor.............................................................. 11
The Merger Agreement and Supplemental Agreement ............................................................ 12
Regulatory Approvals........................................................................................ 12
Dissenters' Rights.......................................................................................... 13
Exchange of Certificates.................................................................................... 13
Nasdaq Listing.............................................................................................. 13
Resales by Affiliates....................................................................................... 13
Unaudited Pro Forma Condensed Combined Financial Position...................................................... 14
Pro Forma Condensed Combined Consolidated Earnings ............................................................ 16
Oak Hill Financial............................................................................................. 21
General..................................................................................................... 21
Subsidiaries................................................................................................ 21
Description of Oak Hill Financial Securities................................................................ 21
Related Transactions........................................................................................ 22
Security Ownership of Principal Shareholders and Management ................................................ 22
Towne Financial Corporation.................................................................................... 24
General..................................................................................................... 24
Description of Towne Financial Securities................................................................... 24
Related Transactions........................................................................................ 25
Security Ownership of Principal Shareholders and Management................................................. 25
Comparison of Rights of Shareholders of Oak Hill Financial and Towne Financial.............................. 27
Experts........................................................................................................ 28
Legal Opinion.................................................................................................. 28
Appendices
Appendix A - Agreement and Plan of Merger and Supplemental Agreement....................................... A-1
Appendix B - Opinion of RP Financial, LC................................................................... B-1
Appendix C - Opinion of Trident Securities................................................................. C-1
Appendix D - Section 1701.85 of the Ohio Revised Code...................................................... D-1
Appendix E - Oak Hill Financial Form 10-K for year ended December 31, 1998................................. E-1
Appendix F - Oak Hill Financial Form 10-Q for the quarter ended March 31, 1999............................. F-1
Appendix G - Towne Financial Corporation Annual Report to Shareholders
for the year ended June 30, 1998........................................................................ G-1
Appendix H - Towne Financial Corporation Form 10-QSB for the quarter
ended March 31, 1999.................................................................................... H-1
</TABLE>
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES IMPORTANT BUSINESS
INFORMATION AND FINANCIAL INFORMATION ABOUT OAK HILL FINANCIAL AND TOWNE
FINANCIAL THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS DOCUMENT. THIS
INFORMATION IS AVAILABLE WITHOUT CHARGE TO SECURITY HOLDERS UPON A WRITTEN OR
ORAL REQUEST TO OAK HILL FINANCIAL, INC., 14621 STATE ROUTE 93, JACKSON, OHIO
45640, ATTENTION: DAVID G. RATZ, (740) 286-3283. TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY SEPTEMBER 7, 1999, FIVE BUSINESS
DAYS BEFORE SECURITY HOLDERS MUST MAKE AN INVESTMENT DECISION.
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<PAGE> 5
OAK HILL FINANCIAL, INC.
AND
TOWNE FINANCIAL CORPORATION
--------------------------------------
PROSPECTUS/PROXY STATEMENT
---------------------------------------------
SUMMARY
OAK HILL FINANCIAL, INC.
We are a registered bank holding company headquartered in Jackson, Ohio.
Through our wholly owned subsidiary, Oak Hill Banks, we are engaged primarily in
the commercial banking business, which includes lending, investment, deposit and
borrowing activities. Oak Hill Banks, an Ohio state incorporated bank founded in
1902, operates 17 full-service offices in Jackson, Pickaway, Butler, Ross,
Scioto, Gallia, Vinton, Athens, and Warren Counties, Ohio. Our principal offices
are located at 14621 State Route 93, Jackson, Ohio 45640, and our telephone
number is (740) 286-3283.
TOWNE FINANCIAL CORPORATION
Towne Financial Corporation is a unitary savings and loan holding company
engaged primarily in the origination of permanent mortgage loans secured by
first mortgages on one- to four-family residential real estate located in its
primary lending area. To a lesser extent, Towne Financial also originates
mortgage loans secured by multifamily real estate and nonresidential real estate
in its market area. In addition to real estate lending, Towne Financial
originates loans to depositors secured by deposit accounts and other secured
customer loans.
Towne Financial obtains funds for lending and other investment activities
primarily from savings deposits and principal repayment on loans. Periodically,
the company draws advances from the Federal Home Loan Bank of Cincinnati as an
alternative source of funds to satisfy loan demand, to fund deposit withdrawals
or to pursue other investment strategies. Towne Financial's principal offices
are located at 4811 Cooper Road, Blue Ash, Ohio 45242, and its phone number is
(513)791-1870.
THE MERGER
Towne Financial will merge with and into us, and we will continue as the
surviving corporation. As consideration for the merger, each outstanding share
of Towne Financial's common stock will convert into the right to receive 4.125
shares of our common stock, subject to readjustment under the merger agreement.
REASONS FOR THE MERGER
Our Board of Directors has determined that the merger is in your best
interests as a shareholder of Oak Hill Financial. The Board believes that you
should vote in favor of the merger because it will produce the following
benefits:
o increased ability to satisfy customers' needs and to compete in the rapidly
changing financial services industry; and
o solidification of Oak Hill Financial's presence in the financial services
industry in Southern Ohio.
Towne Financial's Board of Directors believes that the merger is in its
shareholders' best interests because it will produce the following benefits:
o creation of a broader market for its shareholders;
o expansion of the range of products and services that it can offer its
customers; and
o greater opportunities for career advancement for Towne Financial employees.
EXPENSES
We are bearing principally all of the transaction expenses of the merger.
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ACCOUNTING TREATMENT
We intend to account for the merger using the pooling of interests method
of accounting under generally accepted accounting principles and the rules and
regulations of the Securities and Exchange Commission.
REGULATORY APPROVALS
Our merger with Towne Financial must be approved by governmental and
regulatory agencies, including the Federal Reserve Board, the Federal Deposit
Insurance Corporation, and the Ohio Superintendent of Financial Institutions.
You should refer to the section of this prospectus/proxy statement entitled "The
Merger - Regulatory Approvals" for additional information.
DISSENTERS' RIGHTS
Towne Financial shareholders may exercise dissenters' rights subject to
section 1701.85 of the Ohio Revised Code. You should refer to the section of
this prospectus/proxy statement entitled "The Merger - Dissenters' Rights" for
additional information.
FEDERAL INCOME TAX CONSEQUENCES
We anticipate that the merger will be a tax-free reorganization for federal
income tax purposes, and that Towne Financial shareholders will recognize no
gain or loss upon conversion of their Towne Financial shares into shares of our
common stock, except with respect to cash received in lieu of fractional shares.
Towne Financial shareholders may, however, recognize income, gain or loss in
connection with the exercise of dissenters' rights.
Towne Financial shareholders should consult with their own tax advisers
concerning the federal income tax consequences of the merger, as well as the
applicable state, local, foreign or other tax consequences, based upon their
individual circumstances.
THE OAK HILL FINANCIAL SPECIAL MEETING
We will hold our special meeting of shareholders at 1:00 p.m., local time,
on Tuesday, September 14, 1999, at the Ohio State University Extension South
District Office, 17 Standpipe Road, Jackson, Ohio. Only Oak Hill Financial
shareholders of record at the close of business on July 30, 1999 will be
entitled to vote at the special meeting. At that date, we had 4,367,765 shares
of our common stock outstanding and entitled to vote on all matters requiring a
vote of the shareholders, held by approximately 2,200 holders of record. Each
share of our common stock entitles the holder to one vote, exercisable in person
or by properly executed proxy, on each matter that comes before the shareholders
at the special meeting.
At the special meeting, we will ask you to adopt the merger and
supplemental agreements, and in connection with the merger, approve the issuance
of our common stock to Towne Financial shareholders. We are first sending this
prospectus/proxy statement and the accompanying proxy card to our shareholders
on our about August 10, 1999.
Our Board of Directors is soliciting proxies for the special meeting. The
shares represented by the accompanying proxy will be voted as you direct if you
properly sign and date the proxy, and if we receive it prior to the special
meeting. If you fail to provide instructions to the contrary, then the proxy
will be voted FOR the adoption of the merger and supplemental agreements. The
proxy also grants discretionary authority to vote on other matters which may
arise at the special meeting. Management is presently unaware of any such
matters.
Even if you properly execute and return the enclosed proxy, you may revoke
it at any time prior to the special meeting by either:
o filing with the Secretary of Oak Hill Financial a written notice of
revocation or a subsequent proxy relating to the same shares; or
o attending the special meeting and voting in person.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares entitled to vote at the special meeting will constitute a
quorum at the special meeting. Abstentions and broker non-votes will be counted
for purposes of determining the presence of a quorum at the Special Meeting.
Under Ohio law, and under the terms of our listing agreement with the
Nasdaq National Market, approval of the merger requires the affirmative vote of
two-thirds of the shares of Oak Hill Financial common stock entitled to vote at
the special meeting. Therefore, an abstention or broker non-vote will have the
same effect as a vote against the merger. As of June 30, 1999, Oak Hill
Financial directors and executive officers and their affiliates beneficially
owned 1,912,979 shares of our common stock (including shares subject to stock
options). This represents approximately
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<PAGE> 7
43.8% of the total issued and outstanding shares of our common stock entitled to
vote at the special meeting.
We will bear the cost of the solicitation of proxies, including the charges
and expenses of brokerage firms and others, if any, for forwarding solicitation
material to beneficial owners of stock. Representatives of our company may
solicit proxies by mail, telegram, telephone, or personal interview.
THE TOWNE FINANCIAL SPECIAL MEETING
We are also providing this prospectus/proxy statement to the shareholders
of Towne Financial in connection with the Towne Financial Board of Directors'
solicitation of proxies for its special meeting of shareholders to approve the
merger with Oak Hill Financial. The Towne Financial special meeting will be held
at 1:00 p.m., local time, on Tuesday, September 14, 1999, at Towne Financial's
main office, 4811 Cooper Road, Blue Ash, Ohio. The close of business on July 30,
1999, is the record date for determining the Towne Financial shareholders of
record entitled to notice of and to vote at the special meeting. On that date,
Towne Financial had 222,200 shares entitled to vote on all matters requiring a
vote of the shareholders.
At the special meeting, the Towne Financial shareholders will be asked to
adopt the merger and supplemental agreements with Oak Hill Financial, pursuant
to which :
o Towne Financial will be merged with and into Oak Hill Financial; and
o Towne Financial's shareholders will become shareholders of Oak Hill
Financial.
This prospectus/proxy statement and accompanying proxy card are first being
sent to Towne Financial shareholders on or about August 10, 1999.
The Towne Financial Board of Directors is soliciting proxies for the Towne
Financial special meeting. The shares represented by the accompanying proxy card
will be voted as each Towne Financial shareholder directs if the shareholder
properly signs, dates, and returns the proxy card, and Towne Financial receives
it prior to the special meeting. If a Towne Financial shareholder does not
direct to the contrary, then the proxy will be voted FOR the adoption of the
merger agreement and supplemental agreement. The proxy also grants discretionary
authority to vote on other matters which may arise at the Towne Financial
special meeting. Towne Financial's management is presently unaware of any such
matters.
A Towne Financial shareholder who properly executes and returns the
enclosed proxy may revoke it at any time prior to the Towne Financial special
meeting by:
o executing and sending a later dated proxy to Towne Financial, which Towne
Financial receives prior to the special meeting;
o notifying Towne Financial of the revocation either in writing or in open
meeting; or
o attending the special meeting and voting in person.
The presence in person or by proxy of a majority of the outstanding Towne
Financial common shares entitled to vote at the Towne Financial special meeting
will constitute a quorum at the meeting. Under Ohio law and according to Towne
Financial's Amended and Restated Articles of Incorporation, the merger agreement
must be approved by the affirmative vote of at least two-thirds of the
outstanding shares of Towne Financial common stock. As of June 30, 1999, Towne
Financial's directors, executive officers, and their affiliates beneficially
owned 69,951 shares of Towne Financial common stock. This represents
approximately 31.5% of the total issued and outstanding shares entitled to vote
at the special meeting.
EFFECTIVE TIME
Assuming that all conditions to the merger are either satisfied or waived,
we anticipate that the merger will become effective October 1, 1999.
RISK FACTORS
Our merger with Towne Financial, and the acquisition of our common stock by
Towne Financial shareholders, involves the risk that we will not successfully
manage the lending business of Towne Financial, which is more focused on real
estate than our present lending business. There is also the risk that we will
not successfully execute our plan to expand the business of Towne Financial by
marketing our available banking products to existing and new Towne Financial
customers.
Our shareholders should consider Towne Financial's financial performance
and the integration
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<PAGE> 8
of Towne Financial into our company in deciding whether to approve the merger.
WHERE YOU CAN FIND MORE INFORMATION
Oak Hill Financial and Towne Financial are each subject to the
informational requirements of the Securities Exchange Act of 1934, and its rules
and regulations. Therefore, we each must file annual, quarterly, and special
reports, proxy statements, and other information with the Securities and
Exchange Commission.
You can read and copy all of this information at the Public Reference Room
of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain information about the operation of the SEC's Public Reference Room by
calling the SEC at 1-800-732-0330. The SEC also maintains a website that
contains reports, proxy statements, and other information regarding issuers,
such as us, who file electronically with the SEC. The address of this website
is:
http:\\www.sec.gov.
Because our common stock is listed on the Nasdaq National Market, you can
also obtain information about us at the offices of the Nasdaq Stock Market,
located at 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus/proxy statement incorporates important business and
financial information about our company that we have not included in or
delivered with this prospectus/proxy statement. You may obtain this information
without charge by writing or telephoning us at the following address:
Oak Hill Financial, Inc.
14621 State Route 93
Jackson, Ohio 45640
Attention: David G. Ratz
Telephone: (740) 286-3283
This prospectus/proxy statement, which constitutes a part of a registration
statement on Form S-4 that we have filed with the SEC, omits some of the
information contained in the registration statement. You should review the
registration statement and its exhibits for further information. In addition,
statements that we make in this prospectus/proxy statement about any document
filed as an exhibit are not necessarily complete. In each instance, you should
refer to the exhibit directly.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the documents that we and
Towne Financial file with them, which means that we can disclose important
information to you by referring you to those documents. The information we
incorporate by reference is an important part of this prospectus/proxy
statement, and later information that we and Towne Financial individually and
collectively file with the SEC automatically will update and supersede this
information. We incorporate by reference any future filings that we and Towne
Financial individually and collectively make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus/proxy
statement and prior to the our special meeting of shareholders.
We incorporate by reference into this prospectus/proxy statement the
following documents and information filed with the SEC:
o Oak Hill Financial's Definitive Proxy Statement for the Annual Meeting of
Shareholders, filed on April 2, 1999;
o Oak Hill Financial's Current Reports on Form 8-K filed on April 12, 1999,
and on July 9, 1999;
o Market Price and Dividend Policy Data from Oak Hill Financial's Form 10-K
for the year ended December 31, 1998, filed on March 30, 1999;
o Selected Financial Data from Oak Hill Financial's Form 10-K for the year
ended December 31, 1998, filed on March 30, 1999;
o Management's Discussion and Analysis of Financial Condition and Results of
Operations from Oak Hill Financial's Form 10-K for the year ended December
31, 1998, filed on March 30, 1999, and from Oak Hill Financial's Form 10-Q
for the quarter ended March 31, 1999, filed on May 10, 1999;
o Towne Financial's Form 10-KSB for the year ended June 30, 1998, filed on
September 28, 1998;
o Towne Financial's Definitive Proxy Statement for the Annual Meeting of
Shareholders, filed on September 28, 1998;
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<PAGE> 9
o Market Price and Dividend Policy Data from Towne Financial's Annual Report
to Shareholders for the year ended June 30, 1998;
o Selected Financial Data from Towne Financial's Annual Report to
Shareholders for the year ended June 30, 1998; and
o Management's Discussion and Analysis of Financial Condition and Results of
Operations from Towne Financial's Annual Report to Shareholders for the
year ended June 30, 1998, and from Towne Financial's Form 10-QSB for the
quarter ended March 31, 1999, filed May 10, 1999.
In addition, we have attached the following documents as appendices to this
prospectus/proxy statement:
o Oak Hill Financial's Annual Report on Form 10-K for the year ended December
31, 1998, filed on March 30, 1999;
o Oak Hill Financial's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999, filed on May 10, 1999;
o Towne Financial's Annual Report to Shareholders for the year ended June 30,
1998; and
o Towne Financial's Form 10-QSB for the quarter ended March 31, 1999, filed
on May 10, 1999.
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<PAGE> 10
COMPARATIVE PER SHARE INFORMATION
The following table presents historical and unaudited pro forma per
share data for our company and Towne Financial and on a consolidated basis. This
information is qualified in its entirety by the historical financial statements
and accompanying notes for Towne Financial and for us incorporated by reference
in this prospectus/proxy statement. You should read this table in conjunction
with those statements and notes. For more information, please refer to the
financial statements contained in Appendices E-H of this prospectus/proxy
statement.
You should also read the following unaudited pro forma financial
information in conjunction with our and Towne Financial's unaudited pro forma
financial statements and accompanying notes included in this prospectus/proxy
statement. For more information, please refer to the section of this
prospectus/proxy statement entitled "Unaudited Condensed Combined Financial
Information."
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
--------------- ------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OAK HILL FINANCIAL(1)
Diluted Earnings Per Common Share $ .35 $ .29 $ 1.34 $ .83 $ .84
Cash Dividends Paid Per .09 .06 .29 .21 .17
Common Share
Book Value Per Common Share 8.79 7.83 8.58 7.58 6.90
(at period end)
TOWNE FINANCIAL CORPORATION(2)
Diluted Earnings Per Common Share 1.04 1.40 4.54 3.35 1.36
Cash Dividends Paid Per .12 .10 .44 .20 --
Common Share
Book Value Per Common Share 42.77 40.57 43.35 38.37 34.96
(at period end)
UNAUDITED PRO FORMA
COMBINED CONSOLIDATED
Diluted Earnings Per Common Share .34 .30 1.30 .83 .76
Cash Dividends Paid Per .08 .05 .26 .18 .14
Common Share
Book Value Per Common Share 9.06 8.16 8.90 7.86 7.16
(at period end)
</TABLE>
(1) Weighted-average common shares outstanding for purposes of computing
diluted earnings per common share totaled 4,448,146 and 4,477,867 for
the three month periods ended March 31, 1999 and 1998, and 4,497,989,
4,448,856 and 4,404,508 for the years ended December 31, 1998, 1997
and 1996, respectively. Book value per common share is computed based
upon shares outstanding totaling 4,367,765, 4,398,665, 4,367,765,
4,397,665 and 4,396,415 at March 31, 1999 and 1998 and at December 31,
1998, 1997 and 1996, respectively.
(2) Weighted-average common shares deemed outstanding for purposes of
computing diluted earnings per common share totaled 230,746 and
219,218 for the three month periods ended March 31, 1999 and 1998, and
220,086, 218,023 and 215,295 for each of the three years ended
December 31, 1998, 1997 and 1996, respectively. Book value per common
share is computed based upon shares outstanding totaling 222,200,
208,500, 210,000, 208,500 and 208,000 at March 31, 1999 and 1998 and
at December 31, 1998, 1997 and 1996, respectively.
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<PAGE> 11
RECENT DEVELOPMENTS
OAK HILL FINANCIAL
On July 7, 1999, we announced our earnings for the second quarter of 1999.
Net earnings for the three -month period ended June 30, 1999 were $1,580,000, or
$.36 per share on a diluted basis. The second quarter earnings represented an
increase of 1.9% over the $1,550,000, or $.34 per share on a diluted basis, in
net earnings recorded for the second quarter of 1998.
Year-to-date, our earnings of $3,152,000 ($.71 per share, diluted)
increased 10.36% from $2,856,000 ($.64 per share, diluted) in earnings for the
first six months of 1998. Return on average assets and return on average equity
for the first six months of 1999 were 1.47% and 16.58% respectively.
Our total assets increased 11.7% from December 31, 1998 to June 30, 1999 to
end the quarter at $440.8 million. This represents an increase of 13.7% over the
$387.6 million in total assets recorded at June 30, 1998.
TOWNE FINANCIAL
Towne Financial's consolidated net earnings for the fourth quarter ended
June 30, 1999 were $224,000, or $.88 per share on a diluted basis. These
earnings represent an increase of $3,000, or 1.4%, over the $221,000 in net
earnings recorded for the fourth quarter ended June 30, 1998. However, on a per
share basis, there was a decrease in net earnings per share on a diluted basis
from quarter-to-quarter of $.13, or 12.9%, from $1.01 per share diluted for the
three months ended June 30, 1998 to $.88 per diluted share for the three months
ended June 30, 1999.
Net earnings for the year ended June 30, 1999 were $938,000, or $4.05 per
share on a diluted basis. These earnings represent the same level of earnings
reported for the year ended June 30, 1998. On a per share basis, there was a
decrease of $.23 per share on a diluted basis, or 5.4%, from $4.28 per diluted
share for the year ended June 30, 1998 to $4.05 per diluted share for the year
ended June 30, 1999. Return on average assets and return on average equity for
the year ended June 30, 1999 were .78% and 10.24% respectively, compared to .84%
and 11.54% for the year ended June 30, 1998, respectively.
At June 30, 1999, Towne Financial's consolidated assets totaled $117.8
million, which approximates the same level of total assets at June 30, 1998.
THE MERGER
BACKGROUND OF THE MERGER
We began merger discussions with Towne Financial in November 1998. Both
firms contacted legal and financial advisors in January 1999. The merger
agreement and supplemental agreement were signed on March 11, 1999.
We and Towne Financial believe that Towne Financial's combination with our
company will enable us to reach a wider customer base, and thus strengthen our
position in the banking industry in Southern Ohio.
The terms and conditions of the merger were determined in arms' length
negotiations between the management teams and Boards of Directors of Oak Hill
Financial and Towne Financial with advice from their respective financial
advisors and lawyers, after evaluation of the current financial condition,
earnings potential and market position of Oak Hill Financial and Towne
Financial, as well as the business prospects of the combined companies.
OAK HILL FINANCIAL'S REASONS FOR THE MERGER; RECOMMENDATION OF OAK HILL
FINANCIAL'S BOARD OF DIRECTORS
At a meeting on March 9, 1999, the Oak Hill Financial Board of Directors
unanimously determined that the merger is advisable and in the best interests of
the company and its shareholders. The Board approved the merger and the merger
agreement, and decided to recommend that the Oak Hill Financial shareholders
vote in favor of the merger. In reaching these conclusions, the Board considered
the following factors in favor of the merger:
o the financial terms of the merger, based on the information it received
from Trident Securities indicating that the terms of the transaction were
fair to Oak Hill Financial's shareholders;
o the benefits to Oak Hill Financial through an enhanced ability to meet the
financial needs of its customers and compete in the rapidly changing
financial services industry;
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<PAGE> 12
o solidification of Oak Hill Financial's presence in the financial services
industry in Southern Ohio; and
o the likelihood of being able to obtain the required regulatory approvals
for the merger.
Oak Hill Financial also considered as factors weighing against the merger:
o the expense of operating two subsidiaries as insured depository
institutions;
o the potential dilution of earnings and book value;
o the difficulty of integrating some of the administrative functions of two
geographically separate subsidiaries; and
o merger-related costs.
Oak Hill Financial's Board of Directors determined that the benefits of the
merger outweighed its costs in concluding that the merger is fair to its
shareholders. The list of factors provided above is not intended to be
exhaustive. In addition, individual members of the Oak Hill Financial Board may
have given different weight to different factors.
For these reasons, the Oak Hill Financial Board of Directors recommends
that you vote FOR the proposal to approve the merger and supplemental agreements
with Towne Financial.
TOWNE FINANCIAL'S REASONS FOR THE MERGER; RECOMMENDATION OF TOWNE FINANCIAL'S
BOARD OF DIRECTORS
Periodically financial institutions have approached Towne Financial
expressing an interest in affiliating with the company. Each time, Towne
Financial's Board of Directors has carefully considered the company's future
prospects in view of prevailing and anticipated regulatory, economic and
competitive conditions, to determine the course of action that was in its
shareholders' best interests. Each time Towne Financial's Board determined that
Towne Financial's shareholders would best be served by remaining independent.
In November 1998, as part of the normal strategic planning process, Towne
Financial's Board of Directors solicited expressions of interest from potential
merger partners. The Board received four merger proposals from institutions
interested in merging with Towne Financial, including one from Oak Hill
Financial. As it had done with prior merger proposals, Towne Financial's Board
considered the potential benefits a merger could bring to its company,
including:
o the many changes that have affected the financial sector recently, as
regulatory matters continue to become increasingly complex and as
technology assumes an ever-increasing role in the delivery of financial
products and services;
o the competitive challenges that Towne Financial will likely encounter in
the future; and
o the lack of liquidity with respect to Towne Financial's common stock.
After reviewing the merger proposals and considering these and other factors,
the Board concluded that, at this time, Towne Financial's shareholders and
customers would be best served by affiliating with a larger financial
institution.
Towne Financial then retained RP Financial, LC., an investment banking firm
experienced in financial institution mergers and acquisitions, to advise Towne
Financial's Board of Directors about a possible affiliation. RP Financial
analyzed Towne Financial against comparable financial institutions and prepared
an extensive analysis to help the Board assess Towne Financial's valuation in an
acquisition context. With RP Financial's assistance, the Board evaluated Oak
Hill Financial's merger proposal relative to a stand-alone valuation of the
company, the potential value that could be generated for shareholders if the
company remained independent, and the ability of other potential merger partners
to pay a competitive merger price. In concluding that Oak Hill Financial was the
most suitable merger partner, the Board considered a number of factors,
including, but not limited to:
o the price per share offered by Oak Hill Financial relative to both the
stand-alone value estimated by RP Financial and the three other merger
proposals received;
o the strong market performance of Oak Hill Financial's common stock, and its
prospects for increased profitability and growth;
o the established market for Oak Hill Financial's common stock, which would
benefit Towne Financial shareholders;
o the absence of overlapping service areas between Oak Hill Financial and
Towne Financial;
o Oak Hill Financial's size, which is large enough to support the staff and
technology necessary to
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<PAGE> 13
offer products and services that Towne Financial does not now offer, but
small enough to allow the company to pursue a business philosophy based on
customer service and providing for the financial needs of small
communities; and
o the diverse opportunities for career advancement that Oak Hill Financial
could offer Towne Financial's employees.
Towne Financial's Board recognized that these features would provide the
foundation for a combination that would benefit its shareholders, employees,
customers and the communities it services. On March 11, 1999, at the conclusion
of arm's length negotiations between Towne Financial and Oak Hill Financial,
Towne Financial's Board of Directors met to consider approval of the terms of
the merger agreement. Representatives of RP Financial participated in the
meeting and, after reviewing the financial components of the merger with the
Board, advised the Board that in their opinion, the merger was fair to the Towne
Financial shareholders from a financial point of view.
Based on these considerations, Towne Financial's Board of Directors
determined that the merger with Oak Hill Financial was in the best interests of
the company and its shareholders, and unanimously approved the merger agreement.
For these reasons, the Towne Financial Board of Directors recommends that
you vote FOR the proposal to approve the merger and supplemental agreements with
Oak Hill Financial.
OPINION OF OAK HILL FINANCIAL'S FINANCIAL ADVISOR
We retained Trident Securities in November of 1998 to act as our financial
advisor regarding a possible merger with Towne Financial. Before the parties
executed the merger agreement, Trident provided our Board with a verbal opinion
that the consideration we would pay for each share of Towne Financial common
stock was fair to our shareholders from a financial point of view. After we and
Towne signed the merger agreement, Trident completed its due diligence and
delivered a formal written fairness opinion to our Board confirming its prior
verbal opinion. Trident has delivered its updated written opinion to our Board
of Directors as of the date of this prospectus/proxy statement. Trident has
consented to the inclusion of that opinion and the related disclosure in this
prospectus/proxy statement.
You should note that Trident's opinion is directed to our Board of
Directors, and only to the fairness to you, as our shareholders, of the merger
consideration that we will pay for Towne Financial's shares. Trident's opinion
is based on conditions as they existed and could be evaluated as of the date of
its opinion. Please keep in mind that Trident's opinion is not a recommendation
to either the Oak Hill Financial or Towne Financial shareholders as to how you
and Towne's shareholders should vote at the special meeting, nor does it address
the underlying business decision to effect this merger.
We have attached the full text of Trident's opinion as Appendix C to this
prospectus/proxy statement, and incorporate the opinion by reference into this
document. We urge you to read the opinion in its entirety for a description of
the assumptions made, matters considered, and limits on the review Trident
undertook to render its opinion.
OPINION OF TOWNE FINANCIAL'S FINANCIAL ADVISOR
Towne Financial's Board of Directors retained RP Financial, LC. in January,
1999 to provide financial advisory and investment banking services to Towne
Financial concerning the merger. Specifically, the Board desired that RP
Financial provide an opinion as to whether the exchange ratio of Oak Hill
Financial shares for Towne Financial shares was fair to Towne Financial's
shareholders from a financial point of view. In requesting RP Financial's
advice, the Board did not limit the scope of its investigation or provide RP
Financial with any special instructions. The Board selected RP Financial based
on its expertise in the valuation of businesses and their securities in
connection with mergers and acquisitions of savings and loans, savings banks,
and savings and loan holding companies.
RP Financial first rendered its opinion to the Board of Directors on
February 16, 1999, at a meeting to review the financial terms of the merger
agreement and supplemental agreement. At that meeting, RP Financial verbally
stated that, as of such date, the exchange ratio (which was determined by Towne
Financial through negotiation with Oak Hill Financial) was fair to Towne
Financial's shareholders from a financial point of view. RP Financial
subsequently updated this opinion as of March 11, 1999, the date that the Towne
Financial Board approved and adopted the merger and supplemental agreements. RP
Financial again updated this opinion as of the date of this prospectus/proxy
statement.
Towne Financial shareholders should note that RP Financial's opinion is
directed to Towne Financial's Board of Directors in its consideration of the
exchange ratio as described in the merger agreement. The opinion is not a
recommendation to any Towne Financial shareholder to act a certain way
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<PAGE> 14
in connection with the merger agreement, or otherwise. Towne Financial
shareholders should also note that RP Financial's opinion is based on market
conditions and other circumstances existing as of the date of this
prospectus/proxy statement.
The full text of RP Financial's opinion, is attached as Appendix B to this
prospectus/proxy statement, and is incorporated by reference into this document.
Towne Financial shareholders are urged to read the opinion in its entirety.
Based on an engagement letter dated January 20, 1999, RP Financial
estimates that it will receive fees of $25,000, plus reimbursement of certain
out-of-pocket expenses, for its services in connection with the merger. In
addition, Towne Financial has agreed to indemnify RP Financial against certain
liabilities, including liabilities under the federal securities laws.
THE MERGER AGREEMENT AND SUPPLEMENTAL AGREEMENT
The following is a summary of the material provisions of the merger
agreement and supplemental agreement, copies of which are attached as Appendix A
to this prospectus/proxy statement. We urge you to read these agreements
carefully.
The merger agreement provides that, following its approval by our
shareholders and the Towne Financial shareholders, and the satisfaction or
waiver of the other conditions to the merger, Towne Financial will merge with
and into our company. We will continue as the surviving corporation of the
merger, and Towne Financial will cease to exist.
The merger will become effective once we file a certificate of merger with
the Ohio Secretary of State, as required under Ohio law. We expect that this
will occur on or about October 1, 1999.
In the merger, each share of Towne Financial common stock will convert into
the right to receive 4.125 fully paid and nonassessable shares of our common
stock, subject to adjustment based on the price of our common stock.
Specifically, if the average price of our common stock for the twenty day period
ending three days prior to the closing date of the merger is $21.71 or greater,
then Towne Financial shareholders will receive less than 4.125 shares of our
common stock for each share of Towne Financial common stock. In turn, if the
average price of our common stock for this same period is $16.05 or lower, then
Towne Financial shareholders will receive more than 4.125 shares of our common
stock for each share of Towne Financial common stock, unless we choose not to
proceed with the merger.
No fractional shares of our common stock will be issued to Towne Financial
shareholders. Instead, each Towne Financial shareholder otherwise entitled to
receive a fractional share will receive its cash value, as calculated according
to the merger agreement. Towne Financial shareholders will not receive interest
with respect to any such cash payments.
Upon consummation of the merger, all unvested options to purchase Towne
Financial common stock that are outstanding will immediately vest. Each option
to purchase one share of Towne Financial common stock will automatically convert
into an option to purchase 4.125 shares of our common stock, subject to
adjustment.
The supplemental agreement contains additional covenants that we and Towne
Financial have made in connection with the merger. In the supplemental
agreement, we and Towne Financial each make representations and warranties about
matters including our respective assets, liabilities, financial statements, and
the authority each of us has to enter into the merger. These representations and
warranties are customary in this type of transaction.
In addition, the supplemental agreement sets forth conditions that we and
Towne Financial each must satisfy before either of us is obligated to complete
the merger. These conditions require that we and Towne Financial obtain:
o approval of the merger from our shareholders and from Towne Financial's
shareholders;
o all necessary regulatory approvals from the Federal Reserve Board and Ohio
Division of Financial Institutions, and other governmental authorities;
o opinions as to the fairness of the merger to our shareholders and to Towne
Financial's shareholders; and
o other tax and legal opinions.
The supplemental agreement also contains limited, customary conditions
under which we or Towne Financial may abandon the merger. If Towne Financial
terminates the merger outside of these limited conditions, then it will have to
pay us a cancellation fee of $500,000 as liquidated damages. If we and Towne
Financial do not complete the merger by December 31, 1999, the merger agreement
and supplement agreement will automatically terminate.
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<PAGE> 15
REGULATORY APPROVALS
The following governmental and regulatory agencies must approve our merger
with Towne Financial:
o the Federal Deposit Insurance Corporation (FDIC); and
o the Ohio Superintendent of Financial Institutions.
As of July 30, 1999, we will have submitted the notices and applications
required to be filed with each of these agencies. Towne Financial and we believe
that these agencies will approve our applications in connection with the merger;
however, we cannot assure you that we will be able to obtain these approvals.
DISSENTERS' RIGHTS
Under Ohio law, Towne Financial shareholders of record who properly
exercise and perfect dissenters' rights with respect to the merger will have the
right to receive the "fair cash value" of their shares (excluding any
appreciation or depreciation in the market value resulting from the merger). To
properly exercise and perfect dissenters' rights, a Towne Financial shareholder
must follow the steps set out in section 1701.85 of the Ohio Revised Code.
Failure to follow section 1701.85 may result in the loss of such rights, in
which case the dissenting shareholder will be entitled to receive the
consideration provided for in the merger agreement.
Towne Financial shareholders should read the full text of section 1701.85,
which is reprinted in its entirety as Appendix D to this prospectus/proxy
statement.
EXCHANGE OF CERTIFICATES
Upon completion of the merger, Towne Financial common stock will
automatically convert into the right to receive 4.125 shares of our common
stock, subject to adjustment. Therefore, Towne Financial shareholders will want
to exchange their old Towne Financial stock certificates for new Oak Hill
Financial stock certificates as a result of the merger.
Our transfer agent, the Fifth Third Bank, will deliver to Towne Financial's
shareholders of record a letter of transmittal and instructions to facilitate
the exchange of certificates. A Towne Financial shareholder who surrenders his
certificate to Fifth Third Bank, together with a duly executed letter of
transmittal and any other required documents, will be entitled to receive, in
exchange therefor:
o the Federal Reserve Board;
o a certificate representing shares of Oak Hill Financial common stock; and
o when applicable, a check representing cash in lieu of any fractional
shares.
If a certificate representing shares of Towne Financial common stock has
been lost, stolen or destroyed, the shareholder must submit to Fifth Third Bank
an affidavit in a form that we and Fifth Third Bank have approved.
Upon receipt of a properly executed affidavit, Fifth Third Bank will deem
the lost, stolen or destroyed certificate to be cancelled. As a condition to
issuing a new stock certificate, however, we may require the holder of any such
certificate to provide us with a bond in any amount as we may direct.
Towne Financial shareholders should not submit any stock certificates now,
but rather should only submit stock certificates upon receipt of, and together
with, the letter of transmittal and accompanying instructions.
NASDAQ LISTING
We expect that shares of our common stock to be issued in the merger will
be listed on the Nasdaq National Market. We have filed a listing application
with Nasdaq covering these shares. Nasdaq's approval of this application is a
condition precedent to the completion of the merger.
RESALES BY AFFILIATES
Shareholders who are deemed "affiliates" of Towne Financial under Rule 145
of the Securities Act of 1933 will only be permitted to transfer their shares of
our common stock issued in the merger under the following circumstances:
o pursuant to an effective registration statement under the Securities Act;
o in compliance with Rule 145; or
o pursuant to an exemption from the registration requirements of the
Securities Act.
We will place appropriate legends on the certificates of our common stock
to be received by affiliates of Towne Financial. We may also issue
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<PAGE> 16
stock transfer instructions to our transfer agent, Fifth Third Bank, reflecting
the resale restrictions on Towne Financial affiliates stated above. As a
condition to completion of the merger, the merger agreement requires those
individuals deemed to be affiliates of Towne Financial to deliver a written
agreement to us stating that they will not sell, transfer, or dispose of their
shares of Oak Hill Financial common stock received in the merger except in
accordance with the above restrictions.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION OF OAK HILL FINANCIAL, INC.
You should read the following information in conjunction with our
historical consolidated financial statements and with Towne Financial's
historical statements, which are incorporated by reference in this
prospectus/proxy statement.
<TABLE>
March 31, 1999
(dollars in thousands)
<CAPTION>
Towne Pro-Forma Pro-Forma
Oak Hill Financial Adjustments Combined
ASSETS Financial, Inc. Corporation Combined Dr(Cr) Total
--------------- ----------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 9,011 $ 5,407 $ 14,418 $ -- $ 14,418
Investment securities designated as
available for sale - at market 42,420 7,403 49,823 -- 49,823
Investment securities designated as
held-to-maturity - at amortized cost -- 889 889 -- 889
Mortgage-backed securities designated as
available for sale - at market 12,186 18,966 31,152 -- 31,152
Mortgage-backed securities designated as
held-to-maturity - at amortized cost -- 13,111 13,111 -- 13,111
Loans receivable - net (including loans
held for sale) 346,925 71,461 418,386 -- 418,386
Other assets 24,622 5,080 29,702 -- 29,702
-------- -------- -------- ----- --------
Total Assets $435,164 $122,317 $557,481 $ -- $557,481
======== ======== ======== ===== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits $370,933 $ 98,409 $469,342 $ -- $469,342
Borrowings 22,389 12,689 35,078 -- 35,078
Other liabilities 3,469 1,715 5,184 -- 5,184
-------- -------- -------- ----- --------
Total Liabilities 396,791 112,813 509,604 -- 509,604
Stockholders' Equity
Common Stock ($.50 stated value, 15.0
million shares authorized, 5,283,927
shares assumed outstanding) 2,208 222 2,430 (236)* 2,666
Additional paid-in capital 4,106 1,884 5,990 236 5,754
Retained earnings 32,896 7,478 40,374 -- 40,374
Treasury stock (755) -- (755) -- (755)
Less required contributions for shares
acquired by Employee Stock
Ownership Plan (ESOP) -- (15) (15) -- (15)
Accumulated other comprehensive
Income:
Unrealized losses on securities
designated as available for sale, net
of related tax effects (82) (65) (147) -- (147)
-------- -------- -------- ----- --------
Total Stockholders' Equity 38,373 9,504 47,877 -- 47,877
-------- -------- -------- ----- --------
Total Liabilities and $435,164 $122,317 $557,481 $ -- $557,481
Stockholders' Equity ======== ======== ======== ===== ========
</TABLE>
* Allocation to stated capital
- 14 -
<PAGE> 17
<TABLE>
December 31, 1998
(dollars in thousands)
<CAPTION>
Towne Pro-Forma Pro-Forma
Oak Hill Financial Adjustments Combined
Financial, Inc. Corporation Combined Dr(Cr) Total
--------------- ----------- -------- ------ -----
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 10,100 $ 4,959 $ 15,059 -- $ 15,059
Investment securities designated as
available for sale - at market 50,584 7,549 58,133 -- 58,133
Investment securities designated as
held-to-maturity - at amortized cost -- 890 890 -- 890
Mortgage-backed securities designated as
available for sale - at market 6,559 20,340 26,899 -- 26,899
Mortgage-backed securities designated as
held-to-maturity - at amortized cost -- 14,105 14,105 -- 14,105
Loans receivable - net (including loans
held for sale) 340,693 70,553 411,246 -- 411,246
Other assets 22,043 4,771 26,814 -- 26,814
-------- -------- -------- ----- --------
Total Assets $429,979 $123,167 $553,146 $ -- $553,146
======== ======== ======== ===== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits $366,090 $ 99,584 $465,674 $ -- $465,674
Borrowings 23,784 12,689 36,473 -- 36,473
Other liabilities 2,635 1,790 4,425 -- 4,425
-------- -------- -------- ----- --------
Total Liabilities 392,509 114,063 506,572 -- 506,572
Stockholders' Equity
Common Stock ($.50 stated value, 15.0
million shares authorized, 5,234,015
shares assumed outstanding) 2,208 210 2,418 (223)* 2,641
Additional paid-in capital 4,106 1,696 5,802 223 5,579
Retained earnings 31,718 7,262 38,980 -- 38,980
Treasury stock (755) -- (755) -- (755)
Less required contributions for shares
acquired by ESOP -- (15) (15) -- (15)
Accumulated other comprehensive
income:
Unrealized gains (losses) on securities
designated as available for sale, net of
related tax effects 193 (49) 144 -- 144
-------- -------- -------- ----- --------
Total Stockholders' Equity 37,470 9,104 46,574 -- 46,574
-------- -------- -------- ----- --------
Total Liabilities and
Stockholders' Equity $429,979 $123,167 $553,146 $ -- $553,146
======== ======== ======== ===== ========
</TABLE>
* Allocation to stated capital.
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<PAGE> 18
<TABLE>
Pro Forma Condensed Combined Consolidated Earnings
For the three months ended March 31, 1999
(dollars in thousands, except per share data)
<CAPTION>
Towne Pro-Forma Pro-Forma
Oak Hill Financial Adjustments Combined
Financial, Inc. Corporation Combined Dr(Cr) Total
--------------- ----------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $7,717 $1,467 $ 9,184 $ -- $ 9,184
Mortgage-backed securities 109 441 550 -- 550
Investment securities 762 109 871 -- 871
Interest-bearing deposits and other 160 53 213 -- 213
------ ------ ------- ------ -------
Total interest income 8,748 2,070 10,818 -- 10,818
INTEREST EXPENSE
Deposits 3,706 1,185 4,891 -- 4,891
Borrowings 352 182 534 -- 534
------ ------ ------- ------ -------
Total interest expense 4,058 1,367 5,425 -- 5,425
------ ------ ------- ------ -------
Net interest income 4,690 703 5,393 -- 5,393
Provision for losses on loans 303 7 310 -- 310
------ ------ ------- ------ -------
Net interest income after provision
for losses on loans 4,387 696 5,083 -- 5,083
OTHER INCOME
Gain on sale of loans, securities,
and other assets 164 160 324 -- 324
Service charges, fees and other
operating 422 22 444 -- 444
------ ------ ------- ------ -------
Total other income 586 182 768 -- 768
GENERAL, ADMINISTRATIVE AND OTHER
EXPENSE
Employee compensation and benefits 1,534 301 1,835 -- 1,835
Occupancy and equipment 317 99 416 -- 416
Federal deposit insurance premiums 18 15 33 -- 33
Franchise taxes 123 22 145 -- 145
Other operating 606 115 721 -- 721
------ ------ ------- ------ -------
Total general, administrative
and other expense 2,598 552 3,150 -- 3,150
------ ------ ------- ------ -------
Earnings before federal income taxes 2,375 326 2,701 -- 2,701
Federal income taxes 803 83 886 -- 886
------ ------ ------- ------ -------
NET EARNINGS $ 1,572 $ 243 $ 1,815 $ -- $ 1,815
======= ===== ======= ===== =======
EARNINGS PER COMMON
SHARE (DILUTED) $ .35 $1.04
======= =====
PRO FORMA EARNINGS PER COMMON SHARE $ .34
=======
</TABLE>
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<PAGE> 19
<TABLE>
For the year ended December 31, 1998
(dollars in thousands, except per share data)
<CAPTION>
Towne Pro-Forma Pro-Forma
Oak Hill Financial Adjustments Combined
Financial, Inc. Corporation Combined Dr(Cr) Total
--------------- ----------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $28,849 $6,206 $35,055 $ -- $35,055
Mortgage-backed securities 360 1,994 2,354 -- 2,354
Investment securities 3,257 155 3,412 -- 3,412
Interest-bearing deposits and other 487 291 778 -- 778
------- ------ ------- ---- -------
Total interest income 32,953 8,646 41,599 -- 41,599
INTEREST EXPENSE
Deposits 14,543 4,852 19,395 -- 19,395
Borrowings 1,188 756 1,944 -- 1,944
------- ------ ------- ---- -------
Total interest expense 15,731 5,608 21,339 -- 21,339
------- ------ ------- ---- -------
Net interest income 17,222 3,038 20,260 -- 20,260
Provision for losses on loans 1,238 28 1,266 -- 1,266
------- ------ ------- ---- -------
Net interest income after
provisions for losses on loans 15,984 3,010 18,994 -- 18,994
OTHER INCOME
Gain on sale of loans, securities, and
other assets 1,034 604 1,638 -- 1,638
Service charges, fees and other
operating 1,544 67 1,611 -- 1,611
------- ------ ------- ---- -------
Total other income 2,578 671 3,249 -- 3,249
GENERAL, ADMINISTRATIVE AND OTHER
EXPENSE
Employee compensation and benefits 5,270 1,178 6,448 -- 6,448
Occupancy and equipment 1,288 385 1,673 -- 1,673
Federal deposit insurance premiums 61 56 117 -- 117
Franchise taxes 472 100 572 -- 572
Other operating 2,512 466 2,978 -- 2,978
------- ------ ------- ---- -------
Total general, administrative and 9,603 2,185 11,788 -- 11,788
other expense ------- ------ ------- ---- -------
Earnings before federal income taxes 8,959 1,496 10,455 -- 10,455
Federal income taxes 2,918 497 3,415 -- 3,415
------- ------ ------- ---- -------
NET EARNINGS $ 6,041 $ 999 $ 7,040 $ -- $ 7,040
======= ====== ======= ==== =======
EARNINGS PER COMMON
SHARE (DILUTED) $ 1.34 $ 4.54
======= ======
PRO FORMA EARNINGS PER
COMMON SHARE $ 1.30
=======
</TABLE>
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<PAGE> 20
<TABLE>
For the year ended December 31, 1997
(dollars in thousands, except per share data)
<CAPTION>
Towne Pro-Forma Pro-Forma
Oak Hill Financial Adjustments Combined
Financial, Inc. Corporation Combined Dr(Cr) Total
--------------- ----------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $24,143 $5,869 $30,012 $ -- $30,012
Mortgage-backed securities 510 1,718 2,228 -- 2,228
Investment securities 3,156 104 3,260 -- 3,260
Interest-bearing deposits and other 445 144 589 -- 589
------- ------ ------- ----- -------
28,254 7,835 36,089 -- 36,089
Total interest income
INTEREST EXPENSE
Deposits 12,103 4,188 16,291 -- 16,291
Borrowings 1,604 731 2,335 -- 2,335
------- ------ ------- ----- -------
Total interest expense 13,707 4,919 18,626 -- 18,626
------- ------ ------- ----- -------
Net interest income 14,547 2,916 17,463 -- 17,463
Provision for losses on loans 1,150 21 1,171 -- 1,171
------- ------ ------- ----- -------
Net interest income after provision
for losses on loans 13,397 2,895 16,292 -- 16,292
OTHER INCOME
Gain on sale of loans, securities and
other assets 25 114 139 -- 139
Services charges, fees and other
operating 1,388 117 1,505 -- 1,505
------- ------ ------- ----- -------
Total other income 1,413 231 1,644 -- 1,644
GENERAL, ADMINISTRATIVE AND
OTHER EXPENSE
Employee compensation and benefits 4,342 1,051 5,393 -- 5,393
Occupancy and equipment 1,189 366 1,555 -- 1,555
Federal deposit insurance premiums 58 50 108 -- 108
Franchise taxes 327 94 421 -- 421
Other operating 3,134 447 3,581 -- 3,581
------- ------ ------- ----- -------
Total general, administrative and
other expense 9,050 2,008 11,058 -- 11,058
------- ------ ------- ----- -------
Earnings before federal income taxes 5,760 1,118 6,878 -- 6,878
Federal income taxes 2,052 389 2,441 -- 2,441
------- ------ ------- ----- -------
NET EARNINGS $ 3,708 $ 729 $ 4,437 $ -- $ 4,437
======= ====== ======= ===== =======
EARNINGS PER COMMON $ .83 $ 3.35
SHARE ======= ======
PRO FORMA EARNINGS PER
COMMON SHARE $ .83
=======
</TABLE>
- 18 -
<PAGE> 21
<TABLE>
For the year ended December 31, 1996
(dollars in thousands, except per share data)
<CAPTION>
Towne Pro-Forma Pro-Forma
Oak Hill Financial Adjustments Combined
Financial, Inc. Corporation Combined Dr(Cr) Total
--------------- ----------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $20,420 $4,757 $25,177 $ -- $25,177
Mortgage-backed securities 273 1,794 2,067 -- 2,067
Investment securities 2,907 77 2,984 -- 2,984
Interest-bearings deposits and other 569 157 726 -- 726
------- ------ ------- ----- -------
Total interest income 24,169 6,785 30,954 -- 30,954
INTEREST EXPENSE
Deposits 10,616 3,672 14,288 -- 14,288
Borrowings 1,003 600 1,603 -- 1,603
------- ------ ------- ----- -------
Total interest expense 11,619 4,272 15,891 -- 15,891
------- ------ ------- ----- -------
Net interest income 12,550 2,513 15,063 -- 15,063
Provision for losses on loans 859 20 879 -- 879
------- ------ ------- ----- -------
Net interest income after provision
for losses on loans 11,691 2,493 14,184 -- 14,184
OTHER INCOME
Gain on sale of loans, securities and
other assets 109 218 327 -- 327
Service charges, fees and other
operating 1,292 151 1,443 -- 1,443
------- ------ ------- ----- -------
Total other income 1,401 369 1,770 -- 1,770
GENERAL, ADMINISTRATIVE AND OTHER
EXPENSE
Employee compensation and benefits 3,978 980 4,958 -- 4,958
Occupancy and equipment 1,036 360 1,396 -- 1,396
Federal deposit insurance premiums 395 520 915 -- 915
Franchise taxes 377 92 469 -- 469
Other operating 1,820 454 2,274 -- 2,274
------- ------ ------- ----- -------
Total general, administrative and
other expense 7,606 2,406 10,012 -- 10,012
------- ------ ------- ----- -------
Earnings before federal
income taxes 5,486 456 5,942 -- 5,942
Federal income taxes 1,774 164 1,938 -- 1,938
------- ------ ------- ----- -------
NET EARNINGS $ 3,712 $ 292 $ 4,004 $ -- $ 4,004
======= ====== ======= ===== =======
EARNINGS PER COMMON
SHARE $ .84 $ 1.36
======= ======
PRO FORMA EARNINGS
PER COMMON SHARE $ .76
=======
</TABLE>
- 19 -
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
(1) The Pro Forma Unaudited Condensed Combined Consolidated Financial
Information assumes that the merger is accounted for as a pooling of
interests. Accordingly, Oak Hill Financial and Towne Financial's assets,
liabilities and stockholders' equity are added together at the historical
carrying values. Both of the companies utilize the same accounting methods
and there were no intercompany transactions affected as of or for any of
the periods presented.
(2) The Pro Forma Unaudited Condensed Combined Consolidated Financial
Information assumes an exchange ratio of 4.125 Oak Hill Financial common
shares for each Towne Financial common share, based on merger consideration
which sets forth the issuance of 916,575 and 866,250 Oak Hill Financial
common shares in exchange for all 222,200 and 210,000 of Towne Financial's
$1.00 par value common shares at March 31, 1999 and December 31, 1998,
respectively. The actual exchange ratio is subject to adjustment in
accordance with the terms of the merger agreement.
(3) Merger related expenses are estimated to be $450,000. This amount has not
been reflected in the pro forma consolidated financials.
(4) Oak Hill Financial's historic diluted weighted-average shares outstanding
totaled 4,448,146 for the three month period ended March 31, 1999. Towne
Financial's historic diluted weighted-average shares outstanding totaled
230,746 for the three month period ended March 31, 1999. Oak Hill
Financial's historic diluted weighted-average common shares outstanding
totaled 4,497,989, 4,448,856 and 4,404,508 for the years ended December 31,
1998, 1997 and 1996 respectively. Towne Financial's historic diluted
weighted-average common shares outstanding totaled 220,086, 218,023 and
215,295 for each of the years ended December 31, 1998, 1997 and 1996,
respectively.
(5) Pro forma earnings per common share is based on merger consideration of
4.125 common shares of Oak Hill Financial for each outstanding Towne
Financial share and 5,399,973 diluted weighted-average pro forma shares
outstanding for the three months ended March 31, 1999. Pro forma earnings
per common share for the years ended December 31, 1998, 1997 and 1996 is
based on merger consideration of 4.125 common shares of Oak Hill Financial
for each outstanding Towne Financial share and 5,405,844, 5,348,201, and
5,292,600 diluted weighted-average pro forma shares outstanding for each of
the respective years.
- 20 -
<PAGE> 23
OAK HILL FINANCIAL, INC.
GENERAL
We are a registered bank holding company indirectly engaged in the business
of commercial banking, and other related activities, through two wholly owned
subsidiaries, Oak Hill Banks and Action Finance Company. We provide management
and similar services for Oak Hill Banks. Because we do not conduct any operating
business ourselves, we depend largely upon Oak Hill Banks for funds to pay our
business expenses and any dividends on our outstanding shares of stock.
Generally we make loans in the Ohio counties in which our branches are
located. Our principal lending activities include the origination of: (1)
conventional one- to four-family residential loans, and (2) commercial loans,
most of which are secured by real estate located in our primary market area.
These loan categories accounted for approximately 78.8% of our loan portfolio at
March 31, 1999. We also make consumer loans, including installment loans and
second mortgages, and offer credit cards.
SUBSIDIARIES
We own all of the outstanding stock of Oak Hill Banks, an Ohio
state-incorporated bank, which was founded in 1902.
Oak Hill Banks is subject to supervision and regular examination by the
Superintendent of Financial Institutions of the State of Ohio. It is insured by
the FDIC and is subject to the provisions of the Federal Deposit Insurance Act.
We also own all the outstanding stock of Action Finance Company, an Ohio
corporation that is licensed as a consumer finance company. Action Finance was
founded in 1998, and operates offices in Jackson, Ohio and in Wellston, Ohio.
DESCRIPTION OF OAK HILL FINANCIAL SECURITIES
Our authorized capital stock consists of:
o 15,000,000 shares of common stock, without par value;
o 1,500,000 shares of voting preferred stock, $.01 par value; and
o 1,500,000 shares of non-voting preferred stock, $.01 par value.
As of the date of this prospectus/proxy statement, none of our preferred
stock is issued and outstanding. In addition, 4,420,365 shares of our common
stock are issued, while 4,372,265 shares of our common stock are outstanding.
When we complete this merger, we will have approximately 5,288,427 shares of
common stock outstanding. In addition, we have previously reserved 800,000
shares of common stock for issuance upon exercise of stock options under our
stock option plan.
You should refer to the section of this prospectus/proxy statement entitled
"Comparison of Certain Rights of Shareholders of Oak Hill Financial and Towne
Financial" for more information about our securities.
COMMON STOCK. Holders of our common stock are entitled to:
o one vote per share for the election of directors and on any other matter
submitted to the vote of shareholders; and
o dividends, if our Board of Directors legally declares them.
Holders of our common stock are not entitled to:
o cumulative voting rights in the election of directors;
o preemptive rights; or
o conversion, redemption, or call rights.
VOTING PREFERRED STOCK. As of the date of this prospectus/proxy statement,
we have no outstanding voting preferred stock. At any time, however, our Board
of Directors may establish the number of shares to be issued, and fix the
attributes of the shares, including the dividend rate, the dividend payment
dates, whether the dividends will be cumulative, the redemption price, the
sinking fund requirements, liquidation preference and conversion rights.
NON-VOTING PREFERRED STOCK. As of the date of this prospectus/proxy
statement, we have no outstanding non-voting preferred stock. At any time,
however, our Board of Directors may establish the number of shares to be issued,
and fix the attributes of the shares, including the dividend rate, the dividend
payment dates, whether the dividends will be cumulative, the redemption price,
the sinking fund requirements, liquidation preference and conversion rights.
RELATED TRANSACTIONS
Some of our officers and directors, and the companies with which they are
associated, are customers of Oak Hill Banks. Any loans that we have made to such
parties were made:
- 21 -
<PAGE> 24
o in the ordinary course of business;
o on substantially the same terms, including interest and nature of
collateral, as those prevailing at the time for comparable transactions
with other persons; and
o did not involve more than the normal risk of collectibility, or present
other unfavorable features.
We expect to have in the future, banking transactions in the ordinary
course of business with directors, officers, principal shareholders, and their
associates on the terms stated above.
H. Grant Stephenson, one of our directors, is a partner in the law firm of
Porter, Wright, Morris & Arthur, which provides us legal services. C. Clayton
Johnson, director, is a partner in the law firm of C. Clayton Johnson Co.,
L.P.A., which also provides us with legal services.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following chart sets forth information regarding beneficial ownership
of our common stock as of June 30, 1999 by:
o each person whom we know beneficially owns more than 5% of the outstanding
shares of our common stock;
o each of our directors;
o our executive officers named in the summary compensation table included in
our proxy statement dated April 2, 1999 and incorporated in this
prospectus/proxy statement by reference; and
o all of our directors and executive officers as a group.
For purposes of this table, a person is deemed to "beneficially own" any shares
with respect to which the person exercises sole or shared voting or investment
power. In addition, the share amounts include shares as to which the named
person has the right to acquire beneficial ownership upon the exercise of stock
options exercisable within 60 days of June 30, 1999.
John D. Kidd's shares include: (1) 69,831 shares that he holds as Trustee
of our 401(k) Plan for which he exercises voting power; and (2) 10,532 shares
acquired under the 401(k) Plan for which he exercises investment power.
D. Bruce Knox's shares include: (1) shares held by a trust as to which he
is a trustee and partial beneficiary; and (2) 148 shares acquired under our
401(k) Plan, over which he has investment power.
Richard P. LeGrand's shares include 10,632 shares acquired under our 401(k)
Plan, over which he has investment power.
H. Timothy Bichsel's shares include 3,134 shares acquired under our 401(k)
Plan, over which he has investment power.
David G. Ratz's shares include 1,273 shares acquired under our 401(k) Plan,
over which he has investment power.
- 22 -
<PAGE> 25
<TABLE>
<CAPTION>
Name of Beneficial Shares held
------------------ -----------
Owner or subject to
-------- ----------
Identity exercisable Total Percent (%)
-------- ----------- ----- -----------
of Group options Shares of Class
-------- ------- ------ --------
<S> <C> <C> <C>
Evan E. Davis 28,875 870,725 19.9%
John D. Kidd 28,875 503,848 11.5
Richard P. LeGrand 27,625 60,232 1.4
H. Timothy Bichsel 20,750 37,884 *
David G. Ratz 26,250 29,710 *
Barry M. Dorsey 9,250 15,750 *
C. Clayton Johnson 6,750 6,750 *
D. Bruce Knox 31,250 338,921 7.8
Rick A. McNelly 9,250 23,784 *
Donald R. Seigneur 9,250 12,750 *
H. Grant Stephenson 9,250 12,625 *
All directors and
executive officers as
a group 207,375 1,912,979 43.8%
</TABLE>
* Represents less than 1% of the outstanding common stock.
- 23 -
<PAGE> 26
TOWNE FINANCIAL CORPORATION
GENERAL
Towne Financial is a unitary savings and loan holding company organized
under Ohio law. As an Ohio-incorporated unitary savings and loan holding
company, Towne Financial is subject to supervision and regulation by the OTS and
the Ohio Division of Financial Institutions. Towne Financial is a member of the
FHLB of Cincinnati and deposits at Towne Financial are insured up to applicable
limits by the FDIC through the Savings Association Insurance Fund.
Towne Financial conducts business from its main office at 4811 Cooper Road,
Blue Ash, Ohio. Its principal business is the origination of permanent mortgage
loans secured by first mortgages on one- to four-family residential real estate
located in Towne Financial's primary market area, Hamilton County, Ohio. Towne
Financial also originates mortgage loans secured by multifamily real estate and
nonresidential real estate in its market area. In addition to real estate
lending, Towne Financial originates loans to depositors on the security of their
deposit accounts and other secured consumer loans. Funds for lending and other
investment activities are obtained primarily from savings deposits and principal
repayments on loans. Advances from the FHLB of Cincinnati are utilized from time
to time when additional funds are needed to satisfy loan demand or to fund
deposit withdrawals.
DESCRIPTION OF TOWNE FINANCIAL'S SECURITIES
Towne Financial's authorized capital stock consists of:
o 2,250,000 shares of common stock, $1.00 par value per share; and
o 250,000 shares of preferred stock, $1.00 par value per share.
On the record date, July 30, 1999, there were 222,200 shares of common
stock outstanding, all of one class and each entitled to one vote, owned by
approximately 125 shareholders of record. A list of shareholders of Towne
Financial may be examined at Towne Financial's offices. There is no other class
of Towne Financial securities outstanding. The presence either in person or by
proxy of the persons entitled to vote a majority of Towne Financial's
outstanding common shares is necessary for a quorum for the transaction of
business.
You should refer to the section of this prospectus/proxy statement entitled
"Comparison of Certain Rights of Shareholders of Oak Hill Financial and Towne
Financial" for more information about Towne Financial's securities.
COMMON STOCK. Holders of Towne Financial's common stock are entitled to:
o one vote per share for the election of directors and any other matters
submitted to the vote of shareholders; and
o dividends, if Towne Financial's Board of Directors legally declares them,
in proportion to the number of shares owned.
Holders of Towne Financial's common stock are not entitled to:
o cumulative voting rights in the election of directors;
o preemptive rights; or
o conversion, redemption or call rights.
Towne Financial's Board of Directors may amend Towne Financial's articles
of incorporation, with respect to unissued or treasury shares of common stock so
as to fix or change the express terms of such shares (other than voting rights),
which may include but are not limited to:
o the division of such shares into series and the designation and authorized
number of shares of each series;
o the dividend rate;
o the dates of payment of dividends and the dates from which they are
cumulative;
o redemption rights and price;
o liquidation price;
o sinking fund requirements;
o conversion rights; and
o restrictions on issuance of shares of any class or series.
PREFERRED STOCK. As of the date of this prospectus/proxy statement, Towne
Financial has no outstanding preferred stock. The preferred stock is non-voting.
Towne Financial's Board of Directors may fix or change the express terms of such
shares (other than voting rights), which may include but are not limited to:
- 24 -
<PAGE> 27
o the division of such shares into series and the designation and authorized
number of shares of each series;
o the dividend rate;
o the dates of payment of dividends and the dates from which they are
cumulative;
o redemption rights and price;
o liquidation price;
o sinking fund requirements;
o conversion rights; and
o restrictions on issuance of shares of any class or series.
RELATED TRANSACTIONS
In the ordinary course of business, Towne Financial has previously made
loans to some of its directors, officers and their related business interests.
All related party loans have been made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons, and did not involve more than
the normal risk of collectibility. Towne Financial currently has a policy of not
originating real estate loans to any of its directors and officers. As a result,
there currently are no loans outstanding to Towne Financial's directors and
officers.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table contains information about the beneficial ownership of
Towne Financial's common stock at June 30, 1999 by:
o each person who is known by Towne Financial to own beneficially more than
5% of its common stock;
o by each Towne Financial director or director emeritus who owns common
stock;
o by the executive officers named in the Summary Compensation Table in Towne
Financial's proxy statement filed September 28, 1998; and
o by all directors and officers of Towne Financial as a group.
The amounts listed below include shares that the named shareholder owns in
an IRA account, Employee Stock Ownership Plan, and/or SEP account. Except as
indicated below, none of the persons listed shares voting or investment power
with respect to their shares of Towne Financial common stock. The ownership
percentages presented below are based on 222,200 shares outstanding at June 30,
1999.
Neil S. Strawser's shares include 6,000 shares held in his IRA account
William S. Siders' shares include: (1) 1,760 shares held in his IRA
account; (2) 532 shares in his SEP account; and (3) 3,192 allocated Employee
Stock Ownership Plan shares, which are 100% vested.
Herb L. Krombholz's shares include 6,275 shares held in his IRA account.
William T. Thornell's shares include 2,317 allocated Employee Stock
Ownership Plan shares, which are 100% vested.
Joseph L. Michel's shares include 1,237 allocated Employee Stock Ownership
Plan shares, which are 100% vested.
Thomas J. Noe's shares include 288 shares held in his IRA.
Linda L. Lovitt's shares include: (1) 3,757 shares held in her IRA account;
(2) 2,157 shares held in her husband's IRA account; and (3) 611 allocated
Employee Stock Ownership Plan shares which are 100% vested.
- 25 -
<PAGE> 28
<TABLE>
<CAPTION>
Name of Beneficial
------------------
Owner or
--------
Identity of Group Number of Shares Percent (%) of Class
----------------- ---------------- --------------------
<S> <C> <C>
Neil S. Strawser 12,450 5.6%
Ralph E. Heitmeyer 12,450 5.6%
William S. Siders 15,642 7.0%
Herb L. Krombholz 12,450 5.6%
William T. Thornell 5,390 2.4%
John M. Kuhnell 7,708 3.5%
Joseph L. Michel 3,834 1.7%
Daniel H. Hosbrook 20,700 9.3%
Thomas J. Noe 15,739 7.1%
Linda L. Lovitt 12,636 5.7%
All Directors and
Officers as a Group
(7 in number) 69,951 31.5%
</TABLE>
- 26 -
<PAGE> 29
COMPARISON OF RIGHTS OF SHAREHOLDERS OF OAK HILL FINANCIAL AND TOWNE FINANCIAL
When the merger is completed, Towne Financial's shareholders will become
shareholders of our company. Therefore, their rights will no longer be governed
and defined by the Towne Financial articles and regulations. Rather, their
rights will be defined and governed by our articles and regulations, which
provide shareholders with different rights than those that Towne Financial
currently provides. The chart below summarizes these differences.
<TABLE>
- -----------------------------------------------------------------------------------
CHARACTERISTIC OAK HILL FINANCIAL TOWNE FINANCIAL
- -----------------------------------------------------------------------------------
<S> <C> <C>
Capital stock 18 million authorized 2.5 million authorized
shares, including 1.5 shares, including 2.25
million preferred voting million common shares and
shares, and 1.5 million 250,000 preferred shares.
preferred non-voting
shares.
- -----------------------------------------------------------------------------------
Payment of Subject to the state of Subject to the Office of
dividends/distributions Ohio's limitations on Thrift Supervision's
dividend payments by state limitations on dividend
of Ohio incorporated banks. payments by a savings and
loan association.
- -----------------------------------------------------------------------------------
Shareholder meetings Special meetings called by Special meetings called
50% or more of the voting by 50% or more of the
shares; quorum requires voting shares; a majority
the presence of a majority of the shareholders
of the common stock represented at a meeting
issued, outstanding, and constitute a quorum.
entitled to vote.
- -----------------------------------------------------------------------------------
Shareholder proposals Director nominations and No applicable provision.
other business made by
written notice to Oak Hill
Financial executive offices
at least 30 days but not
more than 60 days prior to
the meeting; form and
substance requirements for
shareholder notices.
- -----------------------------------------------------------------------------------
Amendments to Articles Articles amended by No applicable provision.
and Regulations affirmative vote of 2/3 of
the voting shares; amendment
to Regulations generally
requires approval of a
majority of the voting
shares, although some
provisions require 2/3
approval.
- -----------------------------------------------------------------------------------
Board of Directors Classified board of Classified board of
directors; directors directors; directors
elected for two-year elected for three year
terms; removal of terms; removal of
directors for cause only. directors by affirmative
vote of at least 80% of
the voting shares.
- -----------------------------------------------------------------------------------
Repurchase and Repurchase permitted to Repurchase permitted to
redemption of stock the extent the extent not prohibited
not prohibited by law. by law.
- -----------------------------------------------------------------------------------
Liability/indemnification Indemnification of current Indemnification of
of officers and and former officers, current and former
directors directors, employees, officers, directors,
agents, and those serving employees and agents in
at Oak Hill Financial's threatened, pending or
request in threatened, completed action arising
pending or completed civil in connection with
or criminal action arising performance of duties for
in connection with Towne Financial.
performance of duties for
Oak Hill Financial.
- -----------------------------------------------------------------------------------
</TABLE>
- 27 -
<PAGE> 30
EXPERTS
The consolidated financial statements of Oak Hill Financial as of December
31, 1998 and 1997, and for each of the years ended December 31, 1998, 1997 and
1996 incorporated by reference in this prospectus/proxy statement have been
audited by Grant Thornton LLP, independent certified public accountants. We have
incorporated these financial statements in reliance upon Grant Thornton LLP's
report, given upon their authority as experts in accounting and auditing. We
anticipate that representatives of Grant Thornton LLP will attend our special
meeting of shareholders, respond to appropriate questions, and make a statement
if such representatives so desire.
The consolidated financial statements of Towne Financial at June 30, 1998
and 1997, and for each of the years ended June 30, 1998, 1997 and 1996 included
in this prospectus/proxy statement have been audited by Grant Thornton LLP,
independent certified public accountants, as set forth in their report included
in this prospectus/proxy statement. These consolidated financial statements have
been included in reliance upon Grant Thornton LLP's report, given upon its
authority as experts in accounting and auditing. Towne Financial anticipates
that representatives of Grant Thornton LLP will be present at its special
meeting of shareholders, respond to appropriate questions, and make a statement
if such representatives so desire.
LEGAL OPINION
Porter, Wright, Morris & Arthur, Columbus, Ohio, will pass upon legal
matters for us related to the merger, including the validity of the our common
stock to be issued to Towne Financial's shareholders. Partners of Porter,
Wright, Morris & Arthur who helped to prepare this prospectus/proxy statement
beneficially own an aggregate of 12,625 shares of our common stock. This amount
includes stock as well as options exercisable within 60 days after the date of
this prospectus/proxy statement.
- 28 -
<PAGE> 31
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AND SUPPLEMENTAL AGREEMENT
<PAGE> 32
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.
A-1
<PAGE> 33
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 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,
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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 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
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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, chooses 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, 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.
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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/ 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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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".
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";
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(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;
(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;
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(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 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;
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(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 210,500 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 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.
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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.
(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;
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(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;
(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;
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(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.
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
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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.
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;
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(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.
(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
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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.
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
(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. 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.
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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 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).
(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.
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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 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.
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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 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
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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 FilinTowne 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.
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,
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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:
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:
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(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 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.
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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;
(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:
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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:
(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.
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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.
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.
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<PAGE> 57
(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.
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.
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<PAGE> 58
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 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
with a copy to:
H. Grant Stephenson, Esq.
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215
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<PAGE> 59
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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<PAGE> 60
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 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
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<PAGE> 61
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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<PAGE> 62
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:
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.
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<PAGE> 63
(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.
THE OPTIONHOLDER: OAK HILL FINANCIAL, INC.
- -----------------
By:
- ------------------------------------------ -----------------------------
Signature
Name:
---------------------------
- ------------------------------------------
Name (please type or print) Title:
--------------------------
TOWNE FINANCIAL CORPORATION
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 64
APPENDIX B
OPINION OF RP FINANCIAL, LC.
<PAGE> 65
[RP Financial, LC. Letterhead]
August 10, 1999
Board of Directors
Towne Financial Corporation
4811 Cooper Road
Cincinnati, Ohio 45242
Members of the Board:
You have requested RP Financial, LC. ("RP Financial") to provide you
with its opinion as to the fairness from a financial point of view to the
shareholders of Towne Financial Corporation, Cincinnati, Ohio ("Towne
Financial") a corporation that is chartered under the law of Ohio, of the
Agreement and Plan of Merger (the "Merger Agreement"), dated March 11, 1999, and
the Supplemental Agreement (the "Supplemental Agreement") dated March 11, 1999
(collectively, the "Agreement"), between Oak Hill Financial, a corporation that
is chartered under the law of Ohio ("Oak Hill Financial") and Towne Financial.
The Agreement is incorporated herein by reference. Unless otherwise defined, all
capitalized terms incorporated herein have the meanings ascribed to them in the
Agreement.
Summary Description of Consideration
- ------------------------------------
All shares of the common stock of Oak Hill Financial, without par value
("Oak Hill Financial Common") that are issued and outstanding immediately prior
to the Effective Time shall continue to be issued and outstanding shares of Oak
Hill Financial Common at and after the Effective Time. At the Effective Time,
the shares of Towne Financial 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 Oak
Hill Financial Common, as follows: (i) each outstanding share of Towne Financial
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 21.71 or greater, 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 $21.71 and the
denominator is the Average Closing Price, provided that, if prior to the
Effective Time, 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 is $16.05 or
lower, Towne Financial shall have no obligation to consummate the 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 $16.05 or lower, Oak Hill
Financial, in conjunction with the Closing, shall add to the number of shares of
Oak Hill Financial Common into which Towne Financial Common shall be converted
the number of shares required to make the total dollar value of all of the
shares of Oak Hill Financial Common computed by multiplying the number of
outstanding shares of Towne Financial times the Exchange Ratio times 85% of the
Starting Price; and, (iii) no fractional shares of Oak Hill Financial Common
shall be issued, and each holder of Towne Financial 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.
RP Financial Background and Experience
- --------------------------------------
RP Financial, as part of its financial institution valuation and
consulting practice, is regularly engaged in the valuation of financial
institution securities in connection with mergers and acquisitions of commercial
banks and thrift institutions, initial and secondary stock offerings,
mutual-to-stock conversions of thrift institutions, and business valuations for
other corporate purposes for financial institutions. As specialists in the
securities of financial
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<PAGE> 66
institutions, RP Financial has experience in, and knowledge of, the Ohio and the
Mid-West U.S. markets for bank securities and financial institutions operating
in Ohio.
Materials Reviewed
- ------------------
In rendering this fairness opinion, RP Financial reviewed the following
material: (1) the Agreement; (2)the Prospectus/Proxy Statement and related
Appendixes included in the Form S-4 Registration Statement; (3) financial and
other information for Towne Financial, all with regard to balance sheet and
off-balance sheet composition, profitability, interest rates, volumes,
maturities, trends, credit risk, interest rate risk, liquidity risk and
operations including: (a) audited financial statements for the fiscal years
ended June 30, 1995 through 1998, (b) Form 10-KSB as of June 30, 1998, Form
10-QSB as of March 31, 1999, and internal unaudited financial reports for the
fiscal year ended June 30, 1999, (c) shareholder, regulatory and internal
financial and other reports through March 31, 1999, (d) the most recent proxy
statements for Towne Financial, (e) internal budgets, financial projections and
business plan forecasts prepared by management, and (f) Towne Financial's
management comments regarding past and current business, operations, financial
condition, and future prospects; and (4) financial and other information for
Oak Hill Financial including: (a) audited financial statements for the
fiscal years ended December 31, 1995 through 1998, incorporated in Annual
Reports to shareholders and Form 10-Ks; (b) Form 10-Q as of March 31, 1999 and
unaudited interim results through June 30, 1999 as released in press release
format; (c) regulatory and internal financial and other reports through March
31, 1999, (d) internal budgets and financial projections prepared by management
of Oak Hill Financial, and, (e) Oak Hill Financial's management comments
regarding past and current business, operations, financial condition, and
future prospects.
In addition, RP Financial reviewed financial, operational, market area
and stock price and trading characteristics for Oak Hill Financial and Towne
Financial relative to publicly-traded banks and bank holding companies ("BHCs")
and savings institutions, respectively, with comparable resources, financial
condition, earnings, operations and markets. RP Financial also considered the
economic and demographic characteristics in the local market area, and the
potential impact of the regulatory, legislative and economic environments on
operations for Towne Financial and Oak Hill Financial and the public perception
of the thrift and banking industries. RP Financial also considered: (a) a
transaction summary of the financial terms of the Merger, including the
aggregate consideration represented by the Exchange Ratio relative to fully
diluted book value, fully diluted earnings, fully diluted assets, and deposit
liabilities of Towne Financial; (b) the financial terms, financial condition,
operating performance, and market area of other recently completed mergers and
acquisitions of comparable financial institution entities, including evaluating
Mid-West U.S. transactions both generally and specifically and U.S. transactions
nationwide where the selling institution's financial condition and operations
were comparable to those of Towne Financial; (c) discounted cash flow analyses
for Towne Financial on a stand-alone basis, incorporating the current business
plan should Towne Financial determine to remain and operate as an independent
institution and future prospects of operating as an independent institution; and
(d) the pro forma impact of the Merger to the holders of Towne Financial Common
(incorporating the Exchange Ratio, transaction adjustments, and potential
earnings improvements resulting from consolidation), including the resulting
impact to the market value per share, tangible book value per share, earnings
per share, and dividends per share of Towne Financial Common. RP Financial also
considered the more attractive liquidity characteristics of Oak Hill Financial
Common relative to Towne Financial Common, the enhanced competitive position of
Oak Hill Financial resulting from the Merger, the greater return on equity of
the Oak Hill Financial Common relative to Towne Financial Common, and the
opportunities for Oak Hill Financial to increase earnings in the future. The
results of these analyses and the other factors considered were evaluated as a
whole, with the aggregate results indicating a range of financial parameters
utilized to assess the Exchange Ratio as described in the Agreement.
In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Towne Financial and Oak Hill Financial furnished by the respective institutions
to RP Financial for review, as well as publicly-available information regarding
other financial institutions and economic and demographic data. Neither Towne
Financial nor Oak Hill Financial restricted RP Financial as to the material it
was permitted to review. RP Financial did not perform or obtain any independent
appraisals or evaluations of the assets and liabilities and potential and/or
contingent assets of liabilities of Towne Financial or Oak Hill Financial. The
financial forecasts and budgets reviewed by RP Financial were prepared by the
managements of Towne Financial and Oak Hill Financial. Neither Towne Financial
nor Oak Hill Financial publicly discloses internal management forecasts or
budgets of the type provided to RP Financial in connection with the
B-2
<PAGE> 67
review of the Merger, and such financial forecasts were not prepared with a view
towards public disclosure. The financial forecasts and budgets were based upon
numerous variables and assumptions which are inherently uncertain, including
without limitation factors related to general economic and competitive
conditions, as well as trends in asset quality. Accordingly, actual results
could vary significantly from those set forth in such financial forecasts.
RP Financial expresses no opinion on matters of a legal, regulatory, tax
or accounting nature or the ability of the Merger as set forth in the Agreement
to be consummated. In rendering its opinion, RP Financial assumed that, in the
course of obtaining the necessary regulatory and governmental approvals for the
proposed Merger, no restriction will be imposed on Oak Hill Financial that would
have a material adverse effect on the ability of the Merger to be consummated as
set forth in the Agreement.
Opinion
- -------
It is understood that this letter is directed to the Board of Directors
of Towne Financial in its consideration of the Agreement, and does not
constitute a recommendation to any shareholder of Towne Financial as to any
action that such shareholder should take in connection with the Agreement, or
otherwise.
It is understood that this opinion is based on market conditions and
other circumstances existing on the date hereof.
It is understood that this opinion may be included in its entirety in
any communication by Towne Financial or its Board of Directors to the
stockholders of Towne Financial. It is also understood that this opinion may be
included in its entirety in any regulatory filing by Oak Hill Financial or Towne
Financial, and that RP Financial consents to the summary of the opinion in the
proxy materials of Towne Financial, and any amendments thereto. Except as
described above, this opinion may not be summarized, excerpted from or otherwise
publicly referred to without RP Financial's prior written consent.
Based upon and subject to the foregoing, and other such matters
considered relevant, it is RP Financial's opinion that, as of the date hereof,
the Exchange Ratio, as described in the Agreement, is fair to such shareholders
from a financial point of view.
Respectfully submitted,
/s/ RP FINANCIAL, LC.
B-3
<PAGE> 68
APPENDIX C
OPINION OF TRIDENT SECURITIES
<PAGE> 69
[Trident Securities Letterhead]
August 10, 1999
Board of Directors
Oak Hill Financial, Inc.
14621 State Route 93
Jackson, Ohio 45640
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of shares of common stock (the "Oak Hill Common Stock")
of Oak Hill Financial, Inc. ("Oak Hill") of the consideration to be paid by Oak
Hill in the proposed acquisition (the "Acquisition") of Towne Financial
Corporation, Ohio ("Towne") by Oak Hill, pursuant to the Agreement and Plan of
Merger (the "Agreement") dated March 11, 1999. Unless otherwise noted, all terms
used herein shall have the same meaning as defined in the Agreement.
As more specifically set forth in the Agreement, and subject to a number
of conditions and procedures described in the Agreement, each of the issued and
outstanding shares of Towne Common Stock shall be converted into the right to
receive 4.125 shares (the "Exchange Ratio") of Oak Hill Common Stock. In the
event that the Average Closing Price is greater than 115% of the Starting Price,
the Exchange Ratio will be adjusted such that the consideration to be received
by each shareholder of Towne Common Stock shall be equal to 115% of the Starting
Price. If the Average Closing Price is less than 85% of the Starting Price, the
total shares issued may be increased at Oak Hill's discretion such that the per
share consideration to be received for each share of Towne Common Stock shall be
equal to but not greater than 85% of the Starting Price times the initial
Exchange Ratio.
Trident Securities, a Division of McDonald Investments, Inc. ("Trident")
is a financial consulting and investment banking firm experienced in the
valuation of business enterprises with considerable experience in the valuation
of thrift institutions. In the past, Trident and its affiliates have provided
financial advisory services for Oak Hill and have received fees for the
rendering of these services. Trident is not affiliated with Oak Hill or Towne.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following (i) the Agreement; (ii) certain publicly
available information concerning Oak Hill, including the audited financial
statements of Oak Hill for each of the years in the three year period ended
December 31, 1998 and unaudited financial statements for the three months ended
March 31, 1999; (iii) certain publicly available information concerning Towne,
including the audited financial statements of Towne for each of the years in the
three year period ended June 30, 1998 and unaudited financial statements for the
nine months ended March 31, 1999; (iv) certain other internal information,
primarily financial in nature, concerning the business and operations of Oak
Hill and Towne furnished to us by Oak Hill and Towne for purposes of our
analysis; (v) certain publicly available information with respect to other
companies that we believe to be comparable to Towne; and (vi) certain publicly
available information concerning the nature and terms of other transactions that
we consider relevant. We have also spoken with certain officers and employees of
Oak Hill, to discuss the foregoing as well as other matters we believe relevant
to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have not attempted
independently to verify any such information. We also performed a review of the
loan portfolio, and assessed the adequacy of Towne's loan loss reserves. We have
not conducted a physical inspection of Towne's properties or facilities, nor
have we made or obtained any independent evaluations or appraisals of any of
such properties or facilities.
In conducting our analysis and arriving at our opinion as expressed
herein, we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial condition and results of operations of Oak
Hill and Towne, including interest income, interest expense, net interest
income, net interest margin, interest sensitivity, non-interest income and
expense, earnings, dividends, book value, return on assets, return on equity,
capitalization, the amount and type of non-performing assets and the reserve for
loan losses; (ii) the business prospects of Oak Hill and Towne; (iii) the
economy of Oak Hill's and Towne's market areas, and (iv) the nature and terms of
certain other acquisition transactions that we believe to be relevant. We have
also taken into account our assessment of general economic, market, financial
and regulatory conditions and trends, as well as our knowledge of the financial
services industry, our experience in connection with similar transactions, and
our knowledge of securities valuation
C-1
<PAGE> 70
generally. Our opinion necessarily is based upon conditions as they exist and
can be evaluated on the date hereof. Our opinion is, in any event, limited to
the fairness, from a financial point of view, of the consideration to be paid by
Oak Hill in the Acquisition and does not address Oak Hill's underlying business
decision to effect the Acquisition.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be paid by Oak Hill in the Acquisition is fair, as of the date
hereof, from a financial point of view, to the shareholders of Oak Hill.
This opinion is being delivered to the Board of Directors of Oak Hill for
its use and is not to be reproduced, disseminated or delivered to any third
party without the express written consent of Trident, except as required by law.
Very truly yours,
/s/ TRIDENT SECURITIES
C-2
<PAGE> 71
APPENDIX D
OHIO REVISED CODE SECTION 1701.85
<PAGE> 72
1701.85 QUALIFICATIONS OF AND PROCEDURES FOR DISSENTING SHAREHOLDERS
(A)(1) A shareholder of a domestic corporation is entitled to relief as
a dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 of the Revised Code shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date on
which the agreement of merger was adopted by the directors of that corporation.
Within twenty days after he has been sent the notice provided in section 1701.80
or 1701.801 of the Revised Code, the dissenting shareholder shall deliver to the
corporation a written demand for payment with the same information as that
provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing the
shares as to which he seeks relief, the dissenting shareholder, within fifteen
days from the date of the sending of such request, shall deliver to the
corporation the certificates requested so that the corporation may forthwith
endorse on them a legend to the effect that demand for the fair cash value of
such shares has been made. The corporation promptly shall return such endorsed
certificates to the dissenting shareholder. A dissenting shareholder's failure
to deliver such certificates terminates his rights as a dissenting shareholder,
at the option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the fifteen-day
period, unless a court for good cause shown otherwise directs. If shares
represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has been
made, acquires only such rights in the corporation as the original dissenting
holder of such shares had immediately after the service of a demand for payment
of the fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to
an agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to
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<PAGE> 73
the shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined as
of the day prior to the day on which the vote by the shareholders was taken and,
in the case of a merger pursuant to section 1701.80 or 1701.801 of the Revised
Code, fair cash value as to shareholders of a constituent subsidiary corporation
shall be determined as of the day before the adoption of the agreement of merger
by the directors of the particular subsidiary corporation. The fair cash value
of a share for the purposes of this section is the amount that a willing seller
who is under no compulsion to sell would be willing to accept and that a willing
buyer who is under no compulsion to purchase would be willing to pay, but in no
event shall the fair cash value of a share exceed the amount specified in the
demand of the particular shareholder. In computing such fair cash value, any
appreciation or depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally enjoined
or prevented from carrying it out, or the shareholders rescind their adoption of
the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent of
the corporation by its directors;
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<PAGE> 74
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder nor
the corporation has filed or joined in a complaint under division (B) of this
section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
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<PAGE> 75
Appendix E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission File Number 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
OHIO 31-1010517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14621 STATE ROUTE 93
JACKSON, OHIO 45640
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common stock, without par value
Check whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 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
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the sales price of the last trade of
such stock was $46,811,678.50 on March 16, 1999.
There were 4,367,765 shares of Registrant's Common Stock outstanding
on March 16, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
year ended December 31, 1998 are incorporated by reference into Part II and Part
IV.
Portions of the proxy statement dated April 2, 1999 for the Annual
Meeting of Stockholders to be held April 27, 1999 are incorporated by reference
into Part III.
E-1
<PAGE> 76
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 30
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 31
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
Signatures
</TABLE>
E-2
<PAGE> 77
PART I
ITEM 1. BUSINESS.
Oak Hill Financial, Inc.
- ------------------------
Oak Hill Financial, Inc., an Ohio corporation (the "Company"), is a
bank holding company that engages indirectly in the business of commercial
banking, and other permissible activities closely related to banking and
consumer finance lending, through two wholly owned subsidiaries, Oak Hill Banks
(the "Bank") and Action Finance Company ("Action"). The Company provides
management and similar services for the Bank and Action. Since it does not
itself conduct any operating businesses, the Company must depend largely upon
its subsidiaries for funds with which to pay the expenses of its operation and,
to the extent applicable, any dividends on its outstanding shares of stock. For
further information see Note A of the Notes to Consolidated Financial Statements
appearing in the Company's Annual Report to Stockholders, which is incorporated
by reference in response to this item.
The Company was formed in 1981 for the purpose of becoming the parent
holding company of the Bank. The Company is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. As such, the Company is
subject to strict regulation regarding the acquisition of additional financial
institutions and the conduct, through subsidiaries, of non -banking activities
(see "Regulation").
The Company faces strong competition from both banking and non-banking
institutions. Its banking competitors include local and regional banks and bank
holding companies, as well as some of the largest banking organizations in the
United States. In addition, other types of financial institutions, such as
savings and loan associations and credit unions, also offer a wide range of loan
and deposit services that are directly competitive with those offered by the
Bank. The consumer is also served by brokerage firms and mutual funds that
provide checking services, credit cards, and other services similar to those
offered by the Bank. Major stores compete for loans by offering credit cards and
retail installment contracts. It is anticipated that competition from non-bank
and non-savings and loan organizations will continue to grow.
The range of banking services provided by the Company's subsidiary to
their customers includes commercial lending, real estate lending, consumer
credit, credit card, and other personal loan financing. The Bank operates under
the direction of a board of directors and officers that is separate from the
Company.
The Company acquired Unity Savings Bank, a savings bank chartered
under the law of Ohio and headquartered in McArthur, Ohio, ("Unity"), on October
2, 1997. The total consideration paid by the Company for all the outstanding
common stock of Unity was approximately $12.7 million based upon the issuance of
804,612 shares of the Company common stock. The acquisition of Unity by the
Company was completed through the merger of Unity with and into the Bank with
the Bank being the surviving corporation. The acquisition of Unity was accounted
for as a pooling of interests.
In 1998, the Company formed a consumer finance company, Action Finance
Company. It operates two offices in Jackson County and at year end, had $1.93
million in assets, with net outstanding loans of $1.64 million.
On March 11, 1999, the Company and Towne Financial Corp., a
corporation chartered under the laws of Ohio, entered into an Agreement and Plan
of Merger, pursuant to which Towne will be merged with and into the Company. The
Company will exchange 4.125 shares for each share of Towne stock. Towne has
222,100 shares of common stock outstanding. Based one the average of the
Company's closing bid and asked price of $19.22, the transaction would valued at
approximately $17.6 million. The merger will be accounted for as a pooling of
interest, and is subject to shareholder approval, regulatory approval and other
customary conditions to closing. In connection with the transaction and the
accounting requirements of a pooling of interest, the Company's share repurchase
plan was indefinitely suspended.
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Lending Activities
- ------------------
GENERAL. The Company generally makes loans in the 9 counties in which
its branches are located. The Company's principal lending activities are the
origination of (i) conventional one- to four-family residential loans, and (ii)
commercial loans, most of which are secured by real estate located in the
Company's primary market area. These loan categories accounted for approximately
82% of the Company's loan portfolio at December 31, 1998. The Company also makes
consumer loans, including installment loans and second mortgages, and offers
credit cards.
LOAN PORTFOLIO COMPOSITION AND ACTIVITY. The following table sets
forth the composition of the Company's loan portfolio in dollar amounts and in
percentages for each of the last three years, along with a reconciliation to
loans receivable, net.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of loan:
1-4 family residential
loans $125,301 36.8% $115,647 40.5% $100,433 42.3% $ 84,784 42.4% $ 69,993 39.3%
Commercial and other loans 154,650 45.4 123,978 43.5 96,214 40.5 72,863 36.4 76,024 42.7
Consumer loans 63,653 18.7 48,008 16.8 42,845 18.0 43,968 21.9 33,426 18.8
Credit cards 1,405 0.4 1,360 0.5 1,111 0.5 958 0.5 788 0.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans 345,009 101.3 288,993 101.3 240,603 101.3 202,573 101.2 180,231 101.2
LESS:
Allowance for loan losses (4,316) (1.3) (3,744) (1.3) (2,934) (1.3) (2,367) (1.2) (2,186) (1.2)
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
TOTAL LOANS RECEIVABLE, NET $340,693 100.0% $285,249 100.0% $237,669 100.0% $200,206 100.0% $178,045 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following is maturity information with respect to commercial loans
at December 31, 1998.
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
LESS THAN ONE YEAR THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS
------------------ ------------------ ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------ ----- ------ ----- ------ ----- ------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$29,022 9.16% $39,206 8.67% $25,162 8.85% $61,260 8.67% $154,650
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. A significant
portion of the Company's lending activity is the origination of permanent
conventional loans secured by one- to four-family residences located within the
Company's primary market area. The Company typically makes adjustable rate
mortgage loans and holds the loans in portfolio. More than 63% of the Company's
portfolio of permanent conventional mortgage loans secured by
E-4
<PAGE> 79
one- to four-family residences are adjustable rate. The Company also underwrites
fixed rate, residential mortgage loans, and may sell those loans in the
secondary market to the FHLMC or on a servicing-released basis to another
financial institution.
The Company makes fixed rate loans on one- to four-family residences
up to 95% of the value of the real estate and improvements (the "loan-to-value"
or "LTV") substantially all of which are sold in the secondary market.
Residential real estate loans are offered by the Company for terms of up to 30
years. The Company requires private mortgage insurance for the amount of such
loans in excess of 80% of the value of the real estate securing such loans.
The aggregate amount of the Company's one-to-four-family residential
real estate loans equaled approximately $125.3 million at December 31, 1998 and
represented 36.8 % of loans at such date. At such date, loans secured by
residential real estate with outstanding balances of approximately $482,000, or
.4%, of its total one- to four-family residential real estate loan balance, were
more than 90 days delinquent or nonaccruing.
COMMERCIAL LOANS. The Company is also active in commercial lending,
primarily to smaller businesses in the Company's primary market area. These
loans are typically secured by commercial real estate and priced in relation to
the prime rate. Such loans generally have terms of up to 15 years and
loan-to-value ratios of up to 75%. To a much lesser degree, the Company will
also make unsecured commercial loans, which are also typically priced at spreads
to prime and have maturities of up to one year.
Loan officers review the financial statements, appraisals of the
collateral, and other related documents before recommending funding of a
commercial loan. The loan officer and the approving officer or committee then
determines that there is sufficient income to cover this and other loan
payments, that the collateral is of adequate liquidation value, that the
applicant has a good payment history and is capable of performing the
requirements of the loan. Other reviews and analysis are done as appropriate,
depending upon the complexity of the credit request.
Although a risk of nonpayment exists with respect to all loans,
certain specific types of risks are associated with different types of loans.
The primary risks associated with commercial loans are the quality of the
borrower's management and the impact of national and regional economic factors.
The Company mitigates these risks by maintaining a close working relationship
with its borrowers, by obtaining cross-collateralization and personal guarantees
of its loans, and by diversification within its loan portfolio.
Due to the nature of the Company's customer base, real estate is
frequently a material component of the collateral for its loans. The expected
source of repayment of these loans is generally the operations of the borrower's
business, but the real estate provides an additional measure of security. These
risks, however, are generally mitigated by the fact that real estate is
considered additional collateral on many of the Company's commercial loans and
such properties are typically owner-occupied.
Risks associated with real estate loans include fluctuating land
values, changes in tax policies, and concentration of loans within the Company's
market area. The Company mitigates these risks by generally providing loans to
experienced commercial real estate owners and developers. The risk is further
mitigated by the number of commercial real estate loans made to the user of the
property.
The aggregate amount of the Company's commercial loans without real
estate as primary or secondary collateral equaled approximately $78.3 million at
December 31, 1998, and represented 50.7% of such loans at that date. At such
date, commercial loans that were more than 90 days delinquent or nonaccruing
totaled approximately $773,000, or .5% of its commercial loan portfolio. The
aggregate amount of the Company's commercial loans with real estate as primary
or secondary collateral was approximately $76.3 million at December 31, 1998,
and at such date, approximately $402,000 in outstanding balances, or .3% of such
loans were delinquent or nonaccruing.
E-5
<PAGE> 80
CONSUMER LOANS. The Company offers several consumer loan products:
installment loans, home equity loans and credit cards.
The Company has a good relationship with several car dealerships in
its market area, and as a result is able to do some financing of new and used
cars through these relationships. The Company only finances cars up to six years
old and requires a down payment of 10.0%. These loans generally have fixed rates
and maturities of three to five years.
To a lesser degree, the Company makes small unsecured loans to
creditworthy individuals. These loans are typically between $2,000 and $5,000 at
fixed rates with maturities of less than five years. The Company also offers a
home equity loan product and, as a result of consumer demand, a credit card
product to its customers. Both products are underwritten to the same standards
as any of the Company's other consumer loan products.
Loan officers underwrite installment loan and other consumer loan
requests in such a manner to assure compliance with the various regulations and
the Company's underwriting standards. Payment history on applicants is very
important on these smaller loans, and is checked through in-house records as
well as credit bureaus. Normally, collateral, such as an automobile, is taken as
security and the value is checked through the N.A.D.A. book or another valuation
service. Income must be adequate to cover all monthly payments including the
proposed loan.
At December 31, 1998, the Company had approximately $65.1 million in
its consumer loan portfolio, which was 19.1% of the Company's total loans.
Approximately $360,000 of consumer loans were over 90 days delinquent or
nonaccruing on that date, which represented .6% of the consumer loan portfolio.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Company's lending
staff and walk-in customers.
Underwriting guidelines for all branches and loan types are set by
senior management at the home office. Loan processing and underwriting, however,
are decentralized. Loan applications are generally processed and underwritten at
the branch level. Loan officers and branch managers review the applications, as
well as credit bureau reports, appraisals, financial information, verifications
of income, and other documentation concerning the credit-worthiness of the
borrower, as applicable to each loan type.
Commercial loans are underwritten at the branch level with oversight
by area managers for each county. This decentralization of the loan underwriting
process allows loan officers and branch managers to respond more quickly to
applicants, and better serve its customers. The Company also benefits from this
decentralization in that every branch manager is well trained to originate all
types of loans, again allowing the branches to better serve their customers and
cross-sell the Company's loan products.
Branch managers have the authority to approve loans which meet the
underwriting criteria set by management up to $120,000, and area managers have
authority for amounts up to $300,000. Any loan over $300,000 must be submitted
for approval by senior management.
INCOME FROM LENDING ACTIVITIES. The Company earns interest and fee
income from its lending activities. The Company earns income from fees for
originating loans and for making commitments to originate loans and loan
participations. Certain of these fees, net of origination costs, are deferred
and amortized over the life of the respective loan. The Company also receives
loan fees related to existing loans, which include late charges. Income from
loan origination and commitment fees and discounts varies with the volume and
type of loans and commitments made and with competitive and economic conditions.
Note A-4 to the Consolidated Financial Statements contains a discussion of the
manner in which fees and income are recognized for financial reporting purposes.
E-6
<PAGE> 81
Nonperforming Loans
- -------------------
GENERAL. Late charges on residential mortgages are assessed by the
Company if a payment is not received either by the 10th day following its due
date or 15th day if the loan has been sold in the secondary market and is being
serviced by the Company. Late charges on installment loans and commercial loans
are assessed by the Company if a payment is not received by the 10th day
following its due date. Any borrower whose payment was not received by this time
is mailed a past due notice. If the loan is still delinquent after a second past
due notice is mailed (generally around the 20th day of delinquency), a branch
employee will attempt to contact the customer to resolve any problem that might
exist.
When an advanced stage of delinquency appears (generally around the
60th day of delinquency) and if repayment cannot be expected within a reasonable
amount of time or a repayment agreement has not been entered into, the Bank will
contact an attorney and request that the required 30-day prior notice of
foreclosure or repossession proceedings be prepared and delivered to the
borrower so that, if necessary, foreclosure proceedings may be initiated shortly
after the loan is 90 days delinquent. This procedure has historically aided in
achieving a low level of nonperforming loans and, as of December 31, 1998, only
$1.6 million or .5% of the Bank's total loan portfolio was 90 days or more past
due. As of December 31, 1998, the Company's level of nonperforming assets to
total assets was .37%.
If a credit card account becomes 10 days delinquent, a notice is sent
to the account holder demanding that the payment be made so that the card is
current. Another notice is sent to the cardholder if the account becomes 20 days
delinquent. If payment is not received within 30 days, authorization requests
are denied, a message appears on the cardholder's account statement and a
follow-up telephone call is made. These telephone collection efforts and
statement messages continue until the account is deemed uncollectible. Legal
action is considered during this time. As of December 31, 1998, approximately
$22,000 in outstanding balances, or 1.6% of credit card loans were
nonperforming.
On December 31, 1998, the Bank held no real estate and other
repossessed collateral acquired as a result of foreclosure, voluntary deed, or
other means. When the Bank has such real estate, it is classified as "other real
estate owned" until it is sold. When property is so acquired, it is recorded at
the lower of cost (the unpaid principal balance at the date of acquisition plus
foreclosure and other related costs) or fair value less estimated selling
expenses. Any subsequent write-down resulting therefrom is charged to expense.
Generally, unless the property is a one- to four-family residential dwelling and
well-collateralized, interest accrual ceases in 90 days but no later than the
date of acquisition. All costs incurred from that date in maintaining the
property are expensed. Other real estate owned is appraised during the
foreclosure process prior to the time of acquisition, and losses are recognized
for the amount by which the book value of the related mortgage loan exceeds the
estimated net realizable value of the property.
Not categorized as nonperforming loans are certain potential problem
loans that management believes are adequately secured and for which no material
loss is expected, but as to which certain circumstances may cause the borrowers
to be unable to comply with the present loan repayment terms at some future
date. At December 31, 1998, there were no such potential problem loans.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
E-7
<PAGE> 82
The following is a summary of the Company's loan loss experience and
selected ratios for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
(beginning of period) ............................ $ 3,744 $ 2,934 $ 2,367 $ 2,186 $ 1,922
Loans charged off:
1-4 family residential real estate ............... 122 22 46 -- --
Multi-family and commercial
real estate .................................... -- -- -- 5 --
Commercial and industrial loans .................. 180 68 79 225 60
Consumer loans ................................... 510 402 323 352 178
-------- -------- -------- -------- --------
Total loans charged off ........................ 812 492 448 582 238
-------- -------- -------- -------- --------
Recoveries of loans previously
charged off:
1-4 family residential real estate ............... 1 45 20 -- 2
Multi-family and commercial
real estate .................................... -- -- -- 33 1
Commercial and industrial loans .................. 15 5 -- 1 2
Consumer loans ................................... 130 102 136 148 134
-------- -------- -------- -------- --------
Total recoveries ............................... 146 152 156 182 139
-------- -------- -------- -------- --------
Net loans charged off ................................. 666 340 292 400 99
Provision for loan losses ............................. 1,238 1,150 859 581 363
-------- -------- -------- -------- --------
Allowance for loan losses
(end of period) .................................. $ 4,316 $ 3,744 $ 2,934 $ 2,367 $ 2,186
======== ======== ======== ======== ========
Loans outstanding:
Average, net ..................................... $314,973 $255,294 $213,031 $190,868 $169,800
End of period .................................... $345,009 $288,993 $240,603 $202,573 $180,231
Ratio of allowance for loan losses to loans
outstanding at end of period ........................ 1.25% 1.30% 1.22% 1.17% 1.21%
Ratio of net charge-offs to average
loans outstanding ................................... 0.21% 0.12% 0.14% 0.21% 0.06%
</TABLE>
At December 31, 1998, 1997, and 1996 the Company had nonaccrual loans
totaling $550,000, $795,000, and $808,000, respectively. Interest income that
would have been recognized if such loans had performed in accordance with
contractual terms totaled approximately $113,600, $71,000, and $15,000, for the
years ended December 31, 1998, 1997, and 1996. There was no interest income
recognized on such loans during any of the periods.
ALLOWANCE FOR LOAN LOSSES. The amount of the allowance for loan losses
is based on management's analysis of risks inherent in the various segments of
the loan portfolio, management's assessment of known or potential problem
credits which have come to management's attention during the ongoing analysis of
credit quality, historical loss experience, current and anticipated economic
conditions and other factors. If actual circumstances and losses differ
substantially from management's assumptions and estimates, such allowance for
loan losses may not be sufficient to absorb all future losses, and net earnings
could be adversely affected. Loan loss estimates are reviewed periodically, and
adjustments, if any, are reported in earnings in the period in which they become
known. In addition, the Company maintains a portion of the allowance to cover
potential losses inherent in the portfolio which have not been specifically
identified.
Although management believes that it uses the best information
available to make such determinations and that the allowance for loan losses is
adequate at December 31, 1998, future adjustments to the allowance may be
E-8
<PAGE> 83
necessary, and net earnings could be affected, if circumstances and/or economic
conditions differ substantially from the assumptions used in making the initial
determinations. A downturn in the Southeastern Ohio economy and employment
levels could result in the Company experiencing increased levels of
nonperforming assets and charge-offs, increased provisions for loan losses and
reductions in income. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgment of information available to them at the time
of their examination.
The following table summarizes nonperforming assets by category.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate:
Nonaccrual ................................. $ 234 $ 505 $ 320 $ 115 $ 209
Past due 90 days or more (1) ............... 248 109 142 295 208
Commercial and industrial:
Nonaccrual ................................. 251 143 267 -- 150
Past due 90 days or more (1) ............... 522 -- -- 681 --
Consumer and other:
Nonaccrual ................................. 65 147 221 70 37
Past due 90 days or more(1) ................ 295 135 52 159 19
-------- -------- -------- -------- --------
Total nonperforming loans .............. 1,615 1,039 1,002 1,320 623
Other real estate owned ......................... -- -- -- 64 147
-------- -------- -------- -------- --------
Total nonperforming assets ............. $ 1,615 $ 1,039 $ 1,002 $ 1,384 $ 770
======== ======== ======== ======== ========
Loans outstanding ............................... $345,009 $288,993 $240,603 $202,573 $180,231
Allowance for possible loan losses
to total loans ................................ 1.25% 1.30% 1.22% 1.17% 1.21%
Nonperforming loans to total
loans ......................................... 0.47 0.36 0.42 0.65 0.35
Nonperforming assets to total assets ............ 0.37 0.29 0.32 0.52 0.32
Allowance for possible loan losses to
nonperforming loans ........................... 267.2% 360.4% 292.8% 179.3% 350.9%
</TABLE>
- ----------
(1) Represents accruing loans delinquent greater than 90 days which are
considered by management to be well secured and in the process of
collection.
As of December 31, 1998, the Company had no loans that were not
included in the nonaccrual, past due 90 days or more or restructured categories
where the borrowers were experiencing potential credit problems that raised
doubts as to the ability of the borrowers to comply with the present loan
repayment terms.
CLASSIFIED ASSETS. The FDIC regulations on classification of assets
require commercial banks to classify their own assets and to establish
appropriate general and specific allowances for losses, subject to FDIC review.
These regulations are designed to encourage management to evaluate assets on a
case-by-case basis and to discourage automatic classifications. Assets
classified as substandard or doubtful must be evaluated by management to
determine a reasonable general loss reserve which is included in total capital
for purposes of the bank's risk-based capital requirement, but which is not
included in core capital or tangible capital or in capital under generally
accepted accounting principles. Assets classified as loss must either be written
off or reserved for by a specific allowance which is not counted toward capital
for purposes of any of the regulatory capital requirements.
INVESTMENTS. Investment securities primarily satisfy the Company's
liquidity needs and provide a return on residual funds after lending activities.
Pursuant to the Company's written investment policy, investments may be in
E-9
<PAGE> 84
interest-bearing deposits, U.S. Government and agency obligations, state and
local government obligations and government-guaranteed mortgage-backed
securities. The Company does not make any investments in securities which are
rated less than investment grade by a nationally recognized statistical rating
organization. A goal of the Company's investment policy is to limit interest
rate risk wherever possible.
All securities-related activity is reported to the Board. General
changes in investment strategy are required to be reviewed and approved by the
Board. The Company's senior management can purchase and sell securities on
behalf of the Company in accordance with the Company's stated investment policy.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated and includes investments designated
as available for sale.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations ........................ $ -- $ -- $ -- $ --
State and local government obligations ........................ -- -- -- --
------- ------- ------- -------
Total investment securities held to maturity ......... -- -- -- --
Investment securities designated as available for sale ........ 50,584 47,839 41,419 29,754
------- ------- ------- -------
Total investment securities .......................... $50,584 $47,839 $41,419 $29,754
======= ======= ======= =======
</TABLE>
The following table reflects the maturities of the Company's
investment securities at December 31, 1998.
<TABLE>
<CAPTION>
DUE AFTER FIVE
DUE IN ONE YEAR DUE AFTER ONE YEAR YEARS THROUGH
OR LESS THROUGH FIVE YEARS TEN YEARS DUE AFTER TEN YEARS
--------------- ------------------ --------------- -------------------
INVESTMENT SECURITIES AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE TOTAL
--------------------- ------ ---- ------ ---- ------ ---- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
U.S. Government and
agency obligations ......... $5,030 7.30% $8,125 6.26% $34,210 6.50% $749 7.61% $48,114
Municipal obligations ........ 141 3.98 1,728 4.96 601 4.41 -- -- 2,470
------ ---- ------ ---- ------- ---- ---- ---- -------
Total investment securities .... $5,171 7.15% $9,853 6.03% $34,811 6.47% $749 7.61% $50,584
====== ==== ====== ==== ======= ==== ==== ==== =======
</TABLE>
The following table sets forth the carrying value of the Company's
mortgage-backed securities portfolio, including securities designated as
available for sale, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------------------
1998 1997 1996 1995
------ ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal National Mortgage
Association (FNMA) ............................ $2,792 $1,292 $3,418 $ 4,082
Federal Home Loan Mortgage
Corporation (FHLMC) ........................... 1,990 1,731 4,937 5,355
Government National Mortgage Association (GNMA) ......... 1,777 1,127 1,397 1,706
Collateralized mortgage obligations ..................... -- -- -- --
------ ------ ------ -------
Total mortgage-backed securities ........................ $6,559 $4,150 $9,752 $11,143
====== ====== ====== =======
</TABLE>
E-10
<PAGE> 85
The following table sets forth the amount of the Company's
mortgage-backed securities portfolio having fixed rates and the amount having
adjustable rates at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate ...................... $4,144 63.2% $1,954 47.1% $3,268 33.5% $ 3,309 29.7%
Adjustable rate ................. 2,415 36.8 2,196 52.9 6,484 66.5 7,834 70.3
------ ----- ------ ----- ------ ----- ------- -----
Total mortgage-backed
securities .................... $6,559 100.0% $4,150 100.0% $9,752 100.0% $11,143 100.0%
====== ===== ====== ===== ====== ===== ======= =====
</TABLE>
The following table reflects the estimated principal repayments or
repricing of the Company's mortgage-backed securities at December 31, 1998.
<TABLE>
<CAPTION>
DUE AFTER FIVE
DUE IN ONE YEAR DUE AFTER ONE YEAR YEARS THROUGH
OR LESS THROUGH FIVE YEARS TEN YEARS DUE AFTER TEN YEARS
--------------- ------------------ ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
MORTGAGE-BACKED SECURITIES AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE TOTAL
- -------------------------- ------ ---- ------ ---- ------ ---- ------ ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Fixed rate ................. $-- -- $346 7.00% $1,610 7.66% $2,188 6.70% $4,144
Variable rate ............ -- -- -- -- -- -- 2,415 6.99 2,415
--- --- ---- ---- ------ ---- ------ ---- ------
Total mortgage-backed
securities ............... $-- -- $346 7.00% $1,610 7.66% $4,603 6.85% $6,559
=== === ==== ==== ====== ==== ====== ==== ======
</TABLE>
Source of Funds
- ---------------
DEPOSIT ACCOUNTS. Savings deposits are a major source of the Company's
funds. The Company offers a number of alternatives for depositors designed to
attract both commercial and regular consumer checking and savings including
regular and money market savings accounts, NOW accounts, and a variety of
fixed-maturity, fixed-rate certificates with maturities ranging from seven days
to 120 months. The Company also provides travelers' checks, official checks,
money orders, ATM services and IRA accounts.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
E-11
<PAGE> 86
The distribution of the Company's deposit accounts by type and rate is
set forth in the following table.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------
TYPE OF ACCOUNT 1998 1997 1996 1995
AND ------------------ ------------------ ------------------ ------------------
INTEREST RATE AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposit accounts ............ $ 38,258 10.5% $ 30,369 10.1% $ 22,673 8.7% $ 19,392 8.4%
Savings accounts ................... 42,423 11.6 41,259 13.7 40,618 15.7 40,823 17.7
NOW accounts ....................... 25,604 7.0 24,143 8.0 22,725 8.8 20,753 9.0
Money market deposit accounts ...... 6,333 1.7 6,911 2.3 6,690 2.6 7,281 3.1
Premium investment accounts ........ 21,012 5.7 19,161 6.3 22,696 8.8 14,198 6.2
Select investment accounts ......... 16,456 4.5 7,234 2.4 1,267 0.5 -- --
-------- ----- -------- ----- -------- ----- -------- -----
Total transaction accounts ......... 150,086 41.0 129,077 42.8 116,669 45.1 102,447 44.4
CERTIFICATES:
2.00 - 4.99% .................. 27,941 7.6 14,606 4.8 20,853 8.1 21,081 9.1
5.00 - 6.99% .................. 187,875 51.3 157,835 52.3 113,267 43.8 89,260 38.7
7.00 - 9.00% .................. 188 0.1 447 0.1 7,833 3.0 17,890 7.8
-------- ----- -------- ----- -------- ----- -------- -----
Total certificates of deposit ...... 216,004 59.0 172,888 57.2 141,953 54.9 128,231 55.6
-------- ----- -------- ----- -------- ----- -------- -----
Total deposits ..................... $366,090 100.0% $301,965 100.0% $258,622 100.0% $230,678 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table presents, by various interest rate categories,
certain information concerning maturities of the Company's certificates of
deposit as of December 31, 1998.
<TABLE>
<CAPTION>
WITHIN ONE TO OVER
CERTIFICATE OF DEPOSIT ACCOUNTS ONE YEAR THREE YEARS THREE YEARS TOTAL
- ------------------------------- -------- ----------- ----------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
4.00% and less ................. $ 1,332 $ 633 $ -- $ 1,965
4.01% to 5.00% ................. 46,115 19,448 409 65,972
5.01% to 6.00% ................. 102,781 33,737 2,360 138,878
6.01% to 7.00% ................. 7,509 1,150 342 9,001
7.01% to 8.00% ................. 138 1 49 188
-------- ------- ------ --------
Total .......................... $157,875 $54,969 $3,160 $216,004
======== ======= ====== ========
</TABLE>
The following table sets forth the amount of the Company's
certificates of deposit that are $100,000 or greater by time remaining until
maturity as of December 31, 1998.
E-12
<PAGE> 87
<TABLE>
<CAPTION>
AMOUNT
------
MATURITY PERIOD (IN THOUSANDS)
---------------
<S> <C>
Three months or less $18,667
Over three through six months 20,912
Over six through 12 months 20,518
Over 12 months 12,860
-------
Total $72,957
=======
</TABLE>
BORROWINGS. Deposits and repayment of loan principal are the primary
source of funds for the Company's lending activities and other general business
purposes. However, during periods when the supply of lendable funds cannot meet
the demand for loans, the Company can obtain funds necessary through loans
(advances) from the FHLB of Cincinnati. Advances from the FHLB may be on a
secured or unsecured basis depending upon a number of factors, including the
purpose for which the funds are being borrowed and existing advances
outstanding. The Company typically utilizes FHLB advances to fund long-term
fixed rate commercial loans and to meet short-term liquidity needs. As of
December 31, 1998, the Bank had outstanding FHLB advances totaling $23.8
million. See Note F to the consolidated financial statements for additional
information regarding FHLB advances. The Company also has arrangements to borrow
funds from commercial banks. The Company does not solicit brokered deposits.
The following table sets forth the maximum amount of the Company's
FHLB advances and other borrowings outstanding at any month end during the
periods shown and the average aggregate balances of FHLB advances and other
borrowings for such periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount outstanding:
FHLB advances $24,033 $28,868 $21,447
Average amount of FHLB advances and
other borrowings outstanding 18,904 25,820 15,006
Weighted average interest rate of total
borrowings based on quarter end balances 5.91% 6.39% 6.57%
</TABLE>
E-13
<PAGE> 88
The following table sets forth certain information as to the Company's
FHLB advances and other borrowings at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances $23,784 $24,705 $21,437
Other borrowings -- -- --
Total borrowings $23,784 $24,705 $21,437
======= ======= =======
</TABLE>
Personnel
- ---------
At December 31, 1998, the Company and its subsidiaries employed 178
persons on a full-time basis and 28 persons on a part-time basis.
Executive Offices
- -----------------
The Company's executive office is located at 14621 State Route 93,
Jackson, Ohio 45640 and its telephone number is (740) 286-3283.
Subsidiaries
- ------------
The Company owns all of the outstanding stock of Oak Hill Banks, an
Ohio state-chartered bank, which was founded in 1902. The Company owns all of
the outstanding stock of Action Finance Company, a consumer finance company
which was formed in 1998.
Regulation
- ----------
Oak Hill Banks, as an Ohio state-chartered bank, is subject to
supervision and regular examination by the Superintendent of Financial
Institutions of the State of Ohio. It is insured by the Federal Deposit
Insurance Corporation and is subject to the provisions of the Federal Deposit
Insurance Act. To the extent that the information below consists of summaries of
certain statutes or regulations, it is qualified in its entirety by reference to
the statutory or regulatory provisions described.
The Company is subject to the provisions of the Bank Holding Company
Act of 1956, as amended (the "Act"), which requires a bank holding company to
register under the Act and to be subject to supervision and examination by the
Board of Governors of the Federal Reserve System. As a bank holding company, the
Company is required to file with the Board of Governors an annual report and
such additional information as the Board of Governors may require pursuant to
the Act. The Act requires prior approval by the Board of Governors of the
acquisition by a bank holding company, or any subsidiary thereof, of 5% or more
of the voting stock or substantially all the assets of any bank within the
United States.
As a bank holding company located in the State of Ohio, the Company is
not permitted to acquire a bank or other financial institution located in
another state unless such acquisition is specifically authorized by the statutes
of such state. The Act further provides that the Board of Governors shall not
approve any such acquisition that would result in a monopoly or would be in
furtherance of any combination or conspiracy to monopolize or attempt to
monopolize the business of banking in any part of the United States, or the
effect of which may be to substantially lessen competition or to create a
monopoly in any section of the country, or that in any other manner would be in
restraint of trade, unless the anti-competitive effects of the proposed
transaction are clearly outweighed in the public interest by the probable effect
of the transaction in meeting the convenience and needs of the community to be
served.
The Act also prohibits a bank holding company, with certain
exceptions, from acquiring 5% or more of the voting stock of any company that is
not a bank and from engaging in any business other than banking or performing
services for its banking subsidiary without the approval of the Board of
Governors. In addition, the acquisition of a
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<PAGE> 89
thrift institution must be approved by the Office of Thrift Supervision pursuant
to the savings and loan holding company provisions of the Home Owners' Loan Act
of 1933, as amended by FIRREA. The Board of Governors is also authorized to
approve, among other things, the ownership of shares by a bank holding company
in any company the activities of which the Board of Governors has determined to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. The Board of Governors has, by regulation, determined
that certain activities, including mortgage banking, operating small loan
companies, factoring, furnishing certain data processing operations, holding or
operating properties used by banking subsidiaries or acquired for such future
use, providing certain investment and financial advice, leasing (subject to
certain conditions) real or personal property, providing management consulting
advice to certain depository institutions, providing securities brokerage
services, arranging commercial real estate equity financing, underwriting and
dealing in government obligations and money market instruments, providing
consumer financial counseling, operating a collection agency, owning and
operating a savings association, operating a credit bureau and conducting
certain real estate investment activities and acting as insurance agent for
certain types of insurance, are closely related to banking within the meaning of
the Act. It also has determined that certain other activities, including real
estate brokerage and syndication, land development, and property management are
not related to credit transactions and are not permissible. The Act and the
regulations of the Board of Governors prohibit a bank holding company and its
subsidiaries from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property, or furnishing of services. The
Act also imposes certain restrictions upon dealing by affiliated banks with the
holding company and among themselves including restrictions on interbank
borrowing and upon dealings in respect to the securities or obligations of the
holding company or other affiliates.
The earnings of banks and consumer finance companies, and therefore
the earnings of the Company (and its subsidiaries), are affected by the policies
of regulatory authorities, including the Board of Governors of the Federal
Reserve System. An important function of the Federal Reserve Board is to
regulate the national supply of bank credit in an effort to prevent recession
and to restrain inflation. Among the procedures used to implement these
objectives are open market operations in U.S. Government securities, changes in
the discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits. These procedures are used in varying combinations
to influence overall growth and distribution of bank loans, investments and
deposits, and their use also may affect interest rates charged on loans or paid
for deposits. Monetary policies of the Federal Reserve Board have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. The effect, if any, of such
policies upon the future business and earnings of the Company cannot accurately
be predicted. The Company makes no attempt to predict the effect on its revenues
and earnings of changes in general economic, industrial, and international
conditions or in legislation and governmental regulations.
Business Risks
- --------------
Except for the historical information contained herein, the matters
discussed in this Form 10-K include certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate. Therefore, there can be
no assurance that the forward-looking statements contained herein are
reasonable, and any of the assumptions could be inaccurate. Therefore, there can
be no assurance that the forward-looking statements included in this Form 10-K
will prove to be accurate, and in light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a presentation by the Company or any
other person that the objectives and plans of the Company will be achieved.
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<PAGE> 90
Growth Strategy. The Company has pursued and continues to pursue a
strategy of growth. The success of the Company's growth strategy will depend
largely upon its ability to manage its credit risk and control its costs while
providing competitive products and services. This growth strategy may present
special risks, such as the risk that the Company will not efficiently handle
growth with its present operations, the risk of dilution of book value and
earnings per share as a result of an acquisition, the risk that earnings will be
adversely affected by the start-up costs associated with establishing new
products and services, the risk that the Company will not be able to attract and
retain qualified personnel needed for expanded operations, and the risk that its
internal monitoring and control systems may prove inadequate.
Potential Impact of Changes In Interest Rates. The Company's results
of operations are dependent to a large degree on net interest income, the
difference between interest income from loans and investments and interest
expense on deposits and borrowings. One common measurement of interest rate
risk, known as the interest rate gap, is the difference between interest-earning
assets and interest-bearing liabilities repricing or maturing within various
time frames, expressed as a percentage of total assets. At December 31, 1998,
the Company had a cumulative interest rate gap of 2.22% of total assets for one
year.
Control by Management; Anti-Takeover Provisions. Evan E. Davis, John
D. Kidd and D. Bruce Knox (the "Principal Stockholders") own in the aggregate
approximately 35.3% of the outstanding shares of Common Stock of the Company. In
addition to Ohio and federal laws and regulations governing changes in control
of insured depository institutions, the Company's Articles of Incorporation and
Code of Regulations contain certain provisions which may delay or make more
difficult an acquisition of control of the Company. For example, the Company's
Articles of Incorporation do not exempt the Company from the provisions of
Ohio's "control share acquisition" and "merger moratorium" statutes. Assuming
that the Principal Stockholders continue to retain at least a majority of the
outstanding voting shares of the Company, such ownership position could be
expected to deter any prospective acquiror from seeking to acquire ownership or
control of the Company, and the Principal Stockholders would be able to defeat
any acquisition proposal that requires approval of the Company's stockholders,
if the Principal Stockholders chose to do so. In addition, the Principal
Stockholders may make a private sale of shares of common stock of the Company
which they own, including to a person seeking to acquire ownership or control of
the Company. The Company has 3,000,000 shares of authorized but unissued
preferred stock, par value $ .01 per share, which may be issued in the future
with such rights, privileges and preferences as are determined by the Board of
Directors of the Company. In December 1997, the Board of Directors of the
Company approved and adopted a stockholder rights plan that contemplates the
issuance of rights to purchase preferred stock of the Company to the Company's
common stockholders of record as of February 17, 1998, as set forth in the
Rights Agreement entered into between the Company and Fifth Third Bank on
January 23, 1998.
Limited Trading Market; Shares Eligible for Future Sale; Possible
Volatility of Stock Price. The Common Stock is traded on the Nasdaq National
Market under the symbol "OAKF." During the 12 months ending March 12, 1998, the
average weekly trading volume in the Common Stock has been less than 23,400
shares per week. There can be no assurance given as to the liquidity of the
market for the Common Stock or the price at which any sales may occur, which
price will depend upon, among other things, the number of holders thereof, the
interest of securities dealers in maintaining a market in the Common Stock and
other factors beyond the control of the Company. The market price of the Common
Stock could be adversely affected by the sale of additional shares of Common
Stock owned by the Company's current shareholders. The Principal Shareholders
are permitted to sell certain limited amounts of Common Stock without
registration, pursuant to Rule 144 under the Securities Act. The market price
for the Common Stock could be subject to significant fluctuations in response to
variations in quarterly and yearly operating results, general trends in the
banking industry and other factors. In addition, the stock market can experience
price and volume fluctuations that may be unrelated or disproportionate to the
operating performance of affected companies. These broad fluctuations may
adversely affect the market price of the Common Stock.
Dependence on Management. The Company's success depends to a great
extent on its senior management, including its Chairman, Evan E. Davis;
President, John D. Kidd; Executive Vice President, Richard P. LeGrand; and
Secretary/Treasurer, H. Tim Bichsel. The loss of their individual services could
have a material adverse impact
E-16
<PAGE> 91
on the Company's financial stability and its operations. In addition, the
Company's future performance depends on its ability to attract and retain key
personnel and skilled employees, particularly at the senior management level.
The Company's financial stability and its operations could be adversely affected
if, for any reason, one or more key executive officers ceased to be active in
the Company's management. The Company does not own or currently plan to acquire
"key man" life insurance on the lives of any of its key employees.
Competition. Banking institutions operate in a highly competitive
environment. The Company competes with other commercial banks, credit unions,
savings institutions, finance companies, mortgage companies, mutual funds, and
other financial institutions, many of which have substantially greater financial
resources than the Company. Certain of these competitors offer products and
services that are not offered by the Company and certain competitors are not
subject to the same extensive laws and regulations as the Company. Additionally,
consolidation of the financial services industry in Ohio and in the Midwest in
recent years has increased the level of competition. Recent and proposed
regulatory changes may further intensify competition in the Company's market
area.
Holding Company Structure; Government Regulations and Policies. The
Company is a single-bank holding company, the profitability of which is entirely
dependent on the profitability of the Bank and the upstream payment of dividends
from the Bank to the Company. Under state and federal banking law, the payment
of dividends by the Company and the Bank is subject to capital adequacy
requirements. The inability of the Bank to generate profits and pay such
dividends to the Company, or regulator restrictions on the payment of such
dividends to the Company even if earned, would have an adverse effect on the
financial condition and results of operations of the Company and the Company's
ability to pay dividends to the shareholders.
ITEM 2. PROPERTIES.
The registrant and its subsidiaries operate from 17 full-service
banking offices, 2 full-service consumer financing offices, and one loan
production office in Ohio. In addition, the Company operates two executive
offices in Jackson, Ohio. The offices are located in the following counties:
Jackson - Oak Hill, Jackson, Ironmakers, Jackson Walmart, Wellston,
both executive offices, Action Finance Jackson, and Action
Finance Wellston
Ross - Richmond Dale, Chillicothe, and Chillicothe K-Mart
Scioto - Wheelersburg, Portsmouth, and West Portsmouth
Gallia - Gallipolis and loan production office
Pickaway - Circleville
Warren - Franklin
Butler - Trenton
Vinton - McArthur
Athens - Athens
The following table indicates which properties are leased by the
Company, the term of the lease, and end of lease options. All leases are
comparable to other leases in the respective market areas and do not contain
provisions detrimental to the registrant or its subsidiaries.
<TABLE>
<CAPTION>
BEGINNING & LENGTH END OF LEASE FIVE YEAR RENEWAL
BRANCH OF TERM ONE TWO THREE
<S> <C> <C> <C> <C> <C>
Chillicothe 11/1/98 5 years X
Chillicothe K-Mart 6/28/94 5 years X
West Portsmouth 2/18/97 8 years X
Jackson Walmart 10/28/98 5 years X
</TABLE>
E-17
<PAGE> 92
<TABLE>
<S> <C> <C> <C> <C> <C>
Administrative Offices II 10/1/98 5 years X
Action Finance Jackson 1/14/98 5 years X
Action Finance Wellston 1/3/98 5 years X
Gallipolis loan office 8/1/98 1 year Lease can be extended on a
month to month basis.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
Except for routine litigation incident to their business, the
registrant and its subsidiaries are not a party to any material pending legal
proceedings and none of their property is the subject of any such proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
SHAREHOLDER INFORMATION
The common stock of the Company is traded on the Nasdaq National
Market System under the symbol "OAKF."
The high and low sales prices for the Company common stock during each
quarter of 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
QUARTER
ENDED HIGH LOW
<S> <C> <C>
3/31/97 11.40 9.80
6/30/97 16.80 10.80
9/30/97 16.80 15.40
12/31/97 18.80 15.40
3/31/98 23.20 17.60
6/30/98 24.00 17.76
9/30/98 27.00 16.00
12/31/98 20.67 15.38
</TABLE>
At March 16, 1999, the Company had approximately 2,200 stockholders of
record and 4,367,765 shares of common stock outstanding.
Dividends. The ability of the Company to pay cash dividends to
stockholders is limited by its ability to receive dividends from its subsidiary.
The State of Ohio places certain limitations on the payment of dividends by Ohio
state-chartered banks.
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<PAGE> 93
The Company declared the following quarterly cash dividends in 1997
and 1998:
<TABLE>
<CAPTION>
QUARTER DIVIDEND
ENDED DECLARED
- ----- --------
<S> <C>
3/31/97 0.05
6/30/97 0.05
9/30/97 0.05
12/31/97 0.06
3/31/98 0.06
6/30/98 0.07
9/30/98 0.07
12/31/98 0.09
</TABLE>
Future cash and stock dividends will be subject to determination and declaration
by the Board of Directors and will consider, among other factors, the Company's
financial condition and results of operations, investment opportunities, capital
requirements, and regulatory limitations.
Stock Transfer Agent. Inquiries regarding stock transfer,
registration, lost certificates, or changes in name and address should be
directed in writing to the Company's stock transfer agent:
Fifth Third Bank
Stock Transfer Department
38 Fountain Square Plaza, MD 1090F5
Cincinnati, OH 45263
(513) 579-5320
(800) 837-2755
Annual Meeting of Shareholders. The Annual Meeting of Shareholders of
Oak Hill Financial, Inc. will be held on April 27, 1999, at 1:00 p.m. at the
Ohio State University Extension South District Office, 17 Standpipe Road,
Jackson, Ohio (the Extension Office is located just off State Route 93, 1.7
miles south of Jackson).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 94
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION (1)
Total assets $429,979 $361,917 $311,854 $268,322 $238,806
Interest-bearing deposits
and federal funds sold 9,687 3,773 4,135 10,956 1,514
Investment securities (2) 57,143 51,989 51,171 40,987 43,708
Loans receivable --- net (3) 340,693 285,249 237,669 200,206 178,045
Deposits 366,090 301,965 258,622 230,678 209,805
Federal Home Loan Bank (FHLB)
advances and other borrowings (4) 24,724 24,963 21,437 8,905 8,161
Stockholders' equity 37,470 33,349 30,349 27,502 19,734
SUMMARY OF OPERATIONS (1)
Interest income $ 32,953 $ 28,254 $ 24,169 $ 21,097 $ 17,529
Interest expense 15,731 13,707 11,619 10,844 7,817
-------- -------- -------- -------- --------
Net interest income 17,222 14,547 12,550 10,253 9,712
Provision for loan losses 1,238 1,150 859 581 363
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 15,984 13,397 11,691 9,672 9,349
Gain on sale of loans 855 163 85 57 28
Gain (loss) on sale of assets 240 (60) 25 (77) (67)
Other non-interest income 1,483 1,310 1,291 1,119 858
General, administrative and other expense (5) 9,603 9,050 7,606 6,567 6,504
-------- -------- -------- -------- --------
Earnings before federal income
taxes 8,959 5,760 5,486 4,204 3,664
Federal income taxes 2,918 2,052 1,774 1,425 1,229
-------- -------- -------- -------- --------
Net earnings $ 6,041 $ 3,708 $ 3,712 $ 2,779 $ 2,435
======== ======== ======== ======== ========
PER SHARE INFORMATION (6)
Basic earnings per share $ 1.37 $ .84 $ .84 $ .72 $ .66
Book value 8.58 7.58 6.90 6.26 5.17
</TABLE>
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<PAGE> 95
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
OTHER STATISTICAL AND
OPERATING DATA
Return on average assets 1.53% 1.09% 1.29% 1.08% 1.05%
Return on average equity 16.91 11.70 12.88 11.64 12.84
Net interest margin 4.51 4.54 4.56 4.12 4.40
Interest rate spread during period 3.76 3.95 3.91 3.43 3.88
Non-interest expense to average assets 2.43 2.67 2.64 2.55 2.80
Total allowance for loan losses
to nonperforming loans 268.9 360.4 292.8 144.8 350.9
Total allowance for loan losses
to total loans 1.25 1.30 1.22 1.17 1.21
Nonperforming loans to total loans 0.47 0.36 0.42 0.81 0.35
Nonperforming assets to total assets 0.37 0.29 0.32 0.63 0.32
Net charge-offs to average loans 0.21 0.12 0.14 0.21 0.06
Equity to assets at period end 8.71 9.21 6.87 10.25 8.26
Dividend payout ratio 21.46 25.48 21.43 9.29 5.31
</TABLE>
- -------------------
(1) The Company merged Unity Savings Bank with and into its Oak Hill Banks
subsidiary on October 2, 1997. The merger was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial
statements as of and for the years ended December 31, 1994 through
1996, inclusive, have previously been restated as if the merger had
occurred on January 1, 1994.
(2) Includes investment securities designated as held to maturity at
December 31, 1994. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" as of January 1, 1994.
Since December 1995, all investment securities have been classified as
available for sale. See Notes A-2 and B of Notes to Consolidated
Financial Statements for additional information regarding the
composition and classification of investment securities pursuant to
this Statement.
(3) Includes loans held for sale.
(4) FHLB advances and other borrowings at December 31, 1994, included $2.1
million of notes payable to principal shareholders.
(5) Non-interest expense for 1997 includes $920,000 in pre-tax expenses
incurred pursuant to the merger with Unity Savings Bank.
(6) Per share information gives retroactive effect to the 700-for-1 stock
split effected October 11, 1995, the issuance of 643,690 shares in the
Unity transaction, and the 5-for-4 stock split effected June 1, 1998.
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<PAGE> 96
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The principal asset of Oak Hill Financial, Inc. (the "Company") is its
ownership of Oak Hill Banks (the "Bank") and Action Finance Company ("Action").
Accordingly, the Company's results of operations are primarily dependent upon
the results of operations of the Bank and Action. The Bank conducts a general
commercial banking business that consists of attracting deposits from the
general public and using those funds to originate loans for commercial,
consumer, and residential purposes.
The Bank's and Action's profitability depends primarily on their net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) less the interest expense
incurred on interest-bearing liabilities (i.e., deposits and borrowed funds).
Net interest income is affected by the relative amounts of interest-earning
assets and interest-bearing liabilities, and the interest rates paid on these
balances. Additionally, and to a lesser extent, profitability is affected by
such factors as the level of non-interest income and expenses, the provision for
loan losses, and the effective tax rate. Non-interest income consists primarily
of service charges and other fees and income from the sale of loans.
Non-interest expenses consist of compensation and benefits, occupancy related
expenses, FDIC deposit insurance premiums, and other operating expenses.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in understanding the consolidated
financial condition and results of operations of the Company as of and for the
years ended December 31, 1998 and 1997. This discussion should be read in
conjunction with the consolidated financial statements and related footnotes
presented elsewhere in this report.
FORWARD-LOOKING STATEMENTS
In the following pages, management presents an analysis of the
Company's financial condition as of December 31, 1998, and the results of
operations for the year ended December 31, 1998 as compared to prior periods. In
addition to this historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties. Economic
circumstances, the Company's operations and the Company'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 the Company's general market area.
Without limiting the foregoing, some of the forward-looking statements
include the following:
Management's establishment of an allowance for loan losses, and its
statements regarding the adequacy of such allowance for loan losses.
Management's belief that the allowance for loan losses is adequate.
FINANCIAL CONDITION
The Company's total assets amounted to $430.0 million as of December
31, 1998, an increase of $68.1 million, or 18.8%, over the $361.9 million total
at December 31, 1997. The increase was funded primarily through growth in
deposits of $64.1 million and an increase in stockholders' equity of $4.1
million, which were partially offset by a decrease in borrowings of $921,000.
Cash and due from banks, federal funds sold, and investment securities
increased by $11.3 million, or 17.3%, to a total of $76.9 million at December
31, 1998, compared to $65.6 million at December 31, 1997. Investment securities
increased by $5.2 million, as purchases of $45.5 million exceeded maturities of
$35.5 million and sales of $5.0 million. Federal funds sold also increased by
$5.9 million during 1998.
Loans receivable totaled $340.7 million at December 31, 1998, an
increase of $55.4 million, or 19.4%, over the $285.2 million total at December
31, 1997. Loan disbursements totaled $273.2 million during 1998, which were
partially offset by loan sales of $48.9 million and principal repayments of
$167.3 million. Loan origination volume during 1998 exceeded that of 1997 by
$88.8 million and sales volume increased by $39.7 million. The Company's
allowance for loan losses amounted to $4.3 million at December 31, 1998, an
increase of $572,000, or 15.3%, over the total at December 31, 1997. The
allowance for loan losses represented 1.25% of the total loan portfolio at
December 31, 1998, as compared to 1.30% at December 31, 1997. The Company's
allowance represented 268.9% and 360.4% of nonperforming loans, which totaled
$1.6 million and $1.0 million at December 31, 1998
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<PAGE> 97
and 1997, respectively. The decline in the percentage of the allowance to total
loans at December 31, 1998, generally reflects the fact that one half of the
Company's 1998 loan growth was comprised of residential real estate. This loan
type requires the lowest percentage reserve requirement in the Company's
portfolio due to the negligible loan losses in this category over the last five
years.
Deposits totaled $366.1 million at December 31, 1998, an increase of
$64.1 million, or 21.2%, over the $302.0 million total at December 31, 1997. The
increase resulted primarily from management's continuing marketing efforts and
competitive pricing with respect to mid-term certificate of deposit products
throughout the Bank's branch network.
The Company's stockholders' equity amounted to $37.5 million at
December 31, 1998, an increase of $4.1 million, or 12.4%, over the balance at
December 31, 1997. The increase resulted primarily from net earnings of $6.0
million, which were partially offset by dividends to stockholders of $1.3
million and purchases of treasury shares totaling $727,000.
SUMMARY OF EARNINGS
The table on page 29 shows for each category of interest-earning
assets and interest-bearing liabilities, the average amount outstanding, the
interest earned or paid on such amount, and the average rate earned or paid for
the years ended December 31, 1998, 1997, and 1996. The table also shows the
average rate earned on all interest-earning assets, the average rate paid on all
interest-bearing liabilities, the interest rate spread, and the net interest
margin for the same periods.
Changes in net interest income are attributed to either changes in
average balances (volume change) or changes in average rates (rate change) for
interest-earning assets and interest-bearing liabilities. Volume change is
calculated as change in volume times the old rate, while rate change is the
change in rate times the old volume. The table on page 26 indicates the dollar
amount of the change attributable to each factor. The rate/volume change, the
change in rate times the change in volume, is allocated between the volume
change and rate change at the ratio each of the components bears to the absolute
value of their total.
COMPARISON OF RESULTS OF OPERATIONS FOR 1998 AND 1997 FISCAL YEARS
General. Net earnings for the year ended December 31, 1998 totaled
$6.0 million, a $2.3 million, or 62.9% increase over the amount reported in
1997. The increase in earnings resulted primarily from a $2.7 million increase
in net interest income and a $1.2 million increase in other income, which were
partially offset by a $553,000 increase in general, administrative, and other
expenses, an $88,000 increase in the provision for loan losses, and an $866,000
increase in provision for federal income taxes.
Net Interest Income. Total interest income for the year ended December
31, 1998, amounted to $33.0 million, an increase of $4.7 million, or 16.6%, over
the $28.3 million recorded for 1997. Interest income on loans totaled $28.8
million, an increase of $4.7 million, or 19.5%, over the 1997 period. This
increase resulted primarily from a $59.7 million, or 23.4%, increase in the
average portfolio balance outstanding year-to-year, which was partially offset
by a 30 basis point decrease in the average yield, from 9.46% in 1997 to 9.16%
in 1998. Interest income on investment securities and other interest-earning
assets decreased by $7,000, or 0.2%. The decrease resulted primarily from a 22
basis point decrease in the average yield, from 6.32% in 1997 to 6.10% in 1998,
which was partially offset by a $2.2 million, or 3.5% increase in the average
portfolio balance outstanding year-to-year.
Total interest expense amounted to $15.7 million for the year ended
December 31, 1998, an increase of $2.0 million, or 14.8%, over the $13.7 million
recorded in 1997. Interest expense on deposits increased by $2.4 million, or
20.2%, to a total of $14.5 million in 1998. The increase resulted primarily from
a $49.2 million, or 19.3%, increase in the average portfolio balance outstanding
year-to-year, combined with a 4 basis point increase in the average cost of
deposits, from 4.73% in 1997 to 4.77% in 1998. Interest expense on borrowings
decreased by $416,000, or 25.9% during 1998. This decrease was due to a $6.9
million decrease in average borrowings
E-23
<PAGE> 98
outstanding, which was partially offset by a 7 basis point increase in the
average cost of borrowings, from 6.21% in 1997 to 6.28% in 1998.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $2.7 million, or 18.4%, for the year
ended December 31, 1998, as compared to 1997. The interest rate spread decreased
by 19 basis points from 3.95% in 1997 to 3.76% in 1998, while the net interest
margin decreased by 3 basis points from 4.54% in 1997 to 4.51% in 1998.
Provision for Loan Losses. The provision for loan losses represents a
charge to earnings to maintain the allowance at a level management believes is
adequate to absorb losses in the loan portfolio. The Company's provision for
loan losses amounted to $1.2 million for the year ended December 31, 1998, an
increase of $88,000, or 7.7%, for the same period in 1997. The provision for
loan losses in 1998 generally reflects the $55.4 million of growth in the loan
portfolio over the year. As stated previously, the majority of the Company's
loan growth in 1998 relates to the residential loan portfolio. Net loan
charge-offs amounted to $666,000 in 1998, as compared to $340,000 in 1997.
Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at December 31, 1998, future adjustments to 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.
Other Income. Other income totaled $2.6 million for the year ended
December 31, 1998, an increase of $1.2 million, or 82.4%, over the amount
recorded in 1997. This increase resulted primarily from a $173,000, or 13.2%,
increase in service fees, charges, and other operating income, a $692,000
increase in gain on sale of loans, and a $300,000 gain in sale of assets.
General, Administrative and Other Expense. General, administrative,
and other expenses totaled $9.6 million for the year ended December 31, 1998, an
increase of $553,000, or 6.1%, over the $9.1 million recorded in 1997. The
increase resulted primarily from a $928,000, or 21.4%, increase in employee
compensation and benefits, a $99,000, or 8.3%, increase in occupancy and
equipment, a $298,000, or 13.5%, increase in other operating expenses, and
increases of $3,000 and $145,000 in Federal deposit insurance premiums and
franchise taxes, respectively, which were partially offset by a $920,000
decrease in merger related expenses.
The increase in employee compensation and benefits resulted primarily
from increased staffing levels required in connection with the establishment of
new branch locations combined with normal merit increases. Additionally, the
opening of new branch facilities was responsible for the increase in occupancy
and equipment. The increase in other operating expense resulted primarily from
costs attendant to the continued reporting requirements of a public company, as
well as, increases in expenses related to the Company's overall growth
year-to-year.
Federal Income Taxes. The provision for federal income taxes amounted
to $2.9 million for the year ended December 31, 1998, an increase of $866,000,
or 42.2%, over the $2.1 million recorded in 1997. The increase resulted
primarily from a $3.2 million, or 55.5%, increase in earnings before taxes. The
effective tax rates were 32.6% and 35.6% for December 31, 1998 and 1997,
respectively.
E-24
<PAGE> 99
COMPARISON OF RESULTS OF OPERATIONS FOR 1997 AND 1996 FISCAL YEARS
General. Net earnings for the year ended December 31, 1997 totaled
$3.7 million, a decrease of $4,000, or 0.1%, from the amount reported in 1996.
The decrease in earnings resulted primarily from a $1.4 million increase in
general, administrative, and other expenses, a $291,000 increase in provision
for loan losses, and a $278,000 increase in provision for federal income taxes,
which were partially offset by a $2.0 million increase in net interest income
and a $12,000 increase in other income.
Net Interest Income. Total interest income for the year ended December
31, 1997, amounted to $28.3 million, an increase of $4.1 million, or 16.9%, over
the $24.2 million recorded for 1996. Interest income on loans totaled $24.1
million, an increase of $3.7 million, or 18.2%, over the 1996 period. This
increase resulted primarily from a $42.3 million, or 19.8%, increase in the
average portfolio balance outstanding year-to-year, which was partially offset
by a 13 basis point decrease in the average yield, from 9.59% in 1996 to 9.46%
in 1997. Interest income on investment securities and other interest-earning
assets increased by $362,000, or 9.7%, to a total of $4.1 million in 1997, as
compared to $3.7 million in 1996. The increase resulted primarily from a $2.8
million increase in the average portfolio balance outstanding year-to-year,
combined with a 29 basis point increase in the average yield from, 6.03% in 1996
to 6.32% in 1997.
Total interest expense amounted to $13.7 million for the year ended
December 31, 1997, an increase of $2.1 million, or 18.0%, over the $11.6 million
recorded in 1996. Interest expense on deposits increased by $1.5 million, or
14.0%, to a total of $12.1 million in 1997. The increase resulted primarily from
a $32.1 million, or 14.4%, increase in the average portfolio balance outstanding
year-to-year, which was partially offset by a 2 basis point decrease in the
average costs of deposits, from 4.75% in 1996 to 4.73% in 1997. Interest expense
on borrowings increased by $601,000, or 59.9% during 1997. This increase was due
to a $10.8 million increase in average borrowings outstanding, which was
partially offset by a 47 basis point decrease in the average cost of borrowings,
from 6.68% in 1996 to 6.21% in 1997.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $2.0 million, or 15.9%, for the year
ended December 31, 1997, as compared to 1996. The interest rate spread increased
by 4 basis points to 3.95% in 1997 from 3.91% in 1996, while the net interest
margin decreased by 2 basis points to 4.54% in 1997 from 4.56% in 1996.
Provision For Loan Losses. The provision for loan losses represents a
charge to earnings to maintain the allowance at a level management believes is
adequate to absorb losses in the loan portfolio. The Company's provision for
loan losses amounted to $1.2 million for the year ended December 31, 1997, as
compared to $859,000 for the same period in 1996, an increase of $291,000, or
33.9%. The provision for loan losses in 1997 increased primarily as a result of
the $47.6 million of growth in the loan portfolio over the year. Net loan
charge-offs amounted to $340,000 in 1997, as compared to $292,000 in 1996.
Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at December 31, 1997, future adjustments to 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.
Other Income. Other income totaled $1.4 million for the year ended
December 31, 1997, an increase of $12,000, or 0.9%, over the amount recorded in
1996. This increase resulted primarily from a $19,000, or 1.5%, increase in
service fees, charges, and other operating income, coupled with a $78,000
increase in gain on sale of loans, which were partially offset by net losses on
sale of investments and other assets of $60,000, as compared to a $25,000 net
gain recorded on such sales during the 1996 period.
General, Administrative and Other Expense. General, administrative,
and other expenses totaled $9.1 million for the year ended December 31, 1997, an
increase of $1.4 million, or 19.0%, over the $7.6 million recorded in 1996. The
increase resulted primarily from expenses of $920,000 incurred in connection
with the previously described Unity merger, combined with a $364,000, or 9.2%,
increase in employee compensation and benefits, a
E-25
<PAGE> 100
$153,000, or 14.8%, increase in occupancy and equipment, and a $394,000, or
21.7%, increase in other operating expenses, which were partially offset by a
$337,000, or 85.3%, reduction in Federal deposit insurance premiums from
year-to-year.
The increase in employee compensation and benefits resulted primarily
from increased staffing levels required in connection with the establishment of
new branch locations in 1997 and late 1996 combined with normal merit increases.
Additionally, the opening of new branch facilities was responsible for the
increase in occupancy and equipment expense. The decline in Federal deposit
insurance premiums was due to the absence in 1997 of the one-time SAIF
recapitalization assessment that was paid by Unity in 1996 with respect to its
operations as a thrift institution. The increase in other operating expense
resulted primarily from costs attendant to the continued reporting requirements
of a public company, as well as increases in expenses related to the Company's
growth year-to-year.
Federal Income Taxes. The provision for federal income taxes amounted
to $2.1 million for the year ended December 31, 1997, an increase of $278,000,
or 15.7%, over the $1.8 million recorded in 1996. The increase resulted
primarily from the nondeductible merger expenses that were incurred in 1997 as
compared to 1996. The effective tax rates were 35.6% and 32.3% for December 31,
1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Like other financial institutions, the Company must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments,
and expenses. Control of the Company's cash flow requires the anticipation of
deposit flows and loan payments. The Company's primary sources of funds are
deposits and principal and interest payments on loans. The Company uses funds
from deposit inflows and principal and interest payments on loans primarily to
originate loans, and to purchase short-term investment securities and
interest-bearing deposits.
At December 31, 1998, the Company had $157.9 million of certificates
of deposit maturing within one year. It has been the Company's historic
experience that such certificates of deposit will be renewed at market rates of
interest. It is management's belief that maturing certificates of deposit over
the next year will similarly be renewed at market rates of interest without a
material adverse effect on results of operations.
In the event that certificates of deposit cannot be renewed at
prevalent market rates, the Company can obtain up to $40.0 million in advances
from the Federal Home Loan Bank of Cincinnati (FHLB). Also, as an operational
philosophy, the Company seeks to obtain advances to help with asset/liability
management and liquidity. At December 31, 1998, the Company had $23.8 million of
outstanding FHLB advances.
As of December 31, 1998, loan commitments, or loans committed but not
closed, totaled $6.9 million. Additionally, the Bank had unused lines of credit
and letters of credit totaling $40.9 and $523,000, respectively. Funding for
these amounts is expected to be provided by the sources described above.
Management believes the Company has adequate resources to meet its normal
funding requirements.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights, and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides
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<PAGE> 101
criteria for determining whether control of assets has been relinquished and
whether a sale has occurred. If the transfer does not qualify as a sale, it is
accounted for as a secured borrowing. Transactions subject to the provisions of
SFAS No. 125 include among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations, factoring arrangements
and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No.125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1997, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management adopted SFAS No. 125 effective January 1, 1998, as
required, without material effect on the Company's consolidated financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. 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 (a) classify items of other
comprehensive income by their nature in a financial statement and (b) 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 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes in required. SFAS No. 130 is not expected to
have a material impact on the Company's financial statements.
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.
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 is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131 is
not expected to have a material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging activities,
E-27
<PAGE> 102
prescribes the items and transactions that may be hedged, and specifies detailed
criteria to be met to qualify for hedging 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. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. On adoption, entities are permitted
to transfer held-to-maturity debt securities to an available-for-sale or trading
category without calling into question their intent to hold other debt
securities to maturity in the future. SFAS No. 133 is not expected to have a
material impact on the Company's financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data herein have
been prepared in accordance with generally accepted accounting principles, which
require measurement of financial condition and results of operations in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Since the primary assets and liabilities of the Company are monetary
in nature, changes in the general level of prices for goods and services have a
relatively minor impact on the Company's total expenses. Increases in operating
expenses such as salaries and maintenance are in part attributable to inflation.
However, interest rates have a far more significant effect than inflation on the
performance of financial institutions, including the Company.
OTHER MATTERS/YEAR 2000 ISSUES
As with all providers of financial services, the Company's operations
are heavily dependent on information technology systems. The Bank and Action are
addressing the potential problems associated with the possibility that the
computers that control or operate their information technology system and
infrastructure may not be programmed to read four-digit dates codes and upon
arrival of the year 2000, may recognize the two-digit code "00" as the year
1900, causing systems to fail to function or to generate erroneous data. The
Bank and Action are working with the companies that supply or service its
information technology systems to identify and remedy any year 2000 related
problems.
In 1997, the Company developed a three phase program within the
guidelines of the Federal Financial Institutions Examination Council (the
"FFIEC"). Phase I Awareness and Assessment was to define the problem, to
establish a committee to oversee the project, to develop an overall strategy, to
identify all aspects that could be affected by the year 2000, to recognize
vendor responsibilities, and to formulate contingency plans. Phase II Renovation
is to upgrade and replace equipment as necessary. Phase I and Phase II were
largely completed by December 31, 1998. During the phases, the following systems
were considered to be mission critical: Peerless 21 software, ISBO Link, and
Fedline. Peerless 21 is the Bank's main processing system, while the ISBO Link
is the Bank's connection with the Independent State Bank of Ohio. The ISBO link
processes wires, credit card applications, and fed funds. Fedline is the Bank's
connection with the Federal Reserve Bank. Wires, automated clearing house (ACH),
treasury tax and loan, and payer services are mission critical applications
processed on the Fedline. The Company is in the process of upgrading these
systems as necessary. However, should any of these mission critical systems fail
to be year 2000 ready, contingency plans to warehouse transactions, to
correspond with ISBO and the Federal Reserve via telephone and fax, and to
manually process payer services and ACH are in place and to be used until such
time that the year 2000 errors can be corrected. Phase III Validation began
during the fourth quarter of 1998 and is scheduled to be completed by early
1999. In this phase, systems and equipment will be tested to ensure year 2000
readiness.
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<PAGE> 103
The Company believes that to ensure year 2000 readiness, approximately
$120,000 in costs will be incurred. Approximately 25% of the costs were incurred
during 1998, while the remaining amount is expected to be incurred during 1999.
Although the Company believes that this estimate is reasonable at this time, if
the Bank and/or Action is ultimately required to purchase replacement computer
systems, programs and/or equipment, or incur substantial expense to make their
systems, programs, and/or equipment year 2000 ready, the Company's net earnings
and financial condition could be adversely affected.
In addition to possible expense related to its own systems, the Bank
and/or Action could incur losses if loan payments are delayed due to year 2000
problems affecting any major borrowers in their primary market areas. Because
their loan portfolios are highly diversified with regard to individual borrowers
and types of businesses, and their primary market areas are not significantly
dependent upon any one employer or industry, they do not expect any significant
or prolonged difficulties that will affect net earnings or cash flow.
<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate mortgage $113,494 $ 9,434 8.31% $102,882 $ 9,038 8.78% $ 91,249 $ 8,243 9.03%
Commercial and other 146,505 13,688 9.34 108,125 10,499 9.71 84,840 8,157 9.61
Installment loans 53,701 5,566 10.37 43,159 4,465 10.35 36,012 3,882 10.78
Credit card 1,273 161 12.65 1,128 141 12.50 930 138 14.84
Investment securities 58,058 3,617 6.23 56,682 3,666 6.47 50,862 3,180 6.25
Federal funds sold 9,079 478 5.27 7,998 428 5.35 7,950 428 5.38
Interest-earning deposits 125 9 7.20 334 17 5.09 3,368 141 4.19
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets 382,235 32,953 8.62 320,308 28,254 8.82 275,211 24,169 8.78
Non-interest-earning assets 12,388 19,064 13,129
-------- -------- --------
Total assets $394,623 $339,372 $288,340
======== ======== ========
Interest-bearing liabilities:
Deposits:
Savings accounts $ 41,218 1,234 2.99 $ 40,863 1,271 3.11 $ 41,195 1,381 3.35
NOW accounts 25,738 515 2.00 25,110 529 2.11 25,622 492 1.92
Money market deposits 6,433 198 3.08 6,582 196 2.98 4,267 134 3.14
Premium investment accounts 35,285 1,618 4.59 26,390 1,275 4.83 23,034 1,131 4.91
Certificates of deposit 196,110 10,978 5.60 156,870 8,832 5.63 129,574 7,478 5.77
Borrowings 18,904 1,188 6.28 25,820 1,604 6.21 15,006 1,003 6.68
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 323,688 15,731 4.86 281,635 13,707 4.87 238,698 11,619 4.87
-------- ------- ------ -------- ------- ------ -------- ------- ------
Non-interest-bearing liabilities 35,214 26,030 20,811
Stockholders' equity 35,721 31,707 28,831
-------- -------- --------
Total liabilities and
stockholders' equity $394,623 $339,372 $288,340
======== ======== ========
Net interest income and interest
rate spread $17,222 3.76% $14,547 3.95% $12,550 3.91%
======= ====== ======= ====== ======= ======
Net interest margin(1) 4.51% 4.54% 4.56%
====== ====== ======
Average interest-earning assets to
average interest-bearing liabilities 118.09% 113.73% 115.30%
====== ====== ======
</TABLE>
(1) The net interest margin is the net interest income divided by average
interest-earning assets.
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<PAGE> 104
<TABLE>
<CAPTION>
1998 vs 1997 1997 vs 1996
------------ ------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Change in interest income attributable to:
Loans receivable $5,416 $(710) $4,706 $3,947 $(224) $3,723
Investment securities 84 (133) (49) 374 112 486
Federal funds sold 57 (7) 50 3 (3) --
Interest earning deposits with banks (41) 33 (8) (180) 56 (124)
------ ----- ------ ------ ----- ------
Total interest income $5,516 $(817) $4,699 $4,144 $ (59) $4,085
====== ===== ====== ====== ===== ======
Change in interest expense attributable to:
Deposits $2,332 $ 108 $2,440 $1,515 $ (28) $1,487
Borrowings (437) 21 (416) 670 (69) 601
------ ----- ------ ------ ----- ------
Total interest expense $1,895 $ 129 $2,024 $2,185 $ (97) $2,088
====== ===== ====== ====== ===== ======
Increase in net interest income $2,675 $1,997
====== ======
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company, together with the
reports thereon of Grant Thornton LLP (dated February 3, 1999) are set forth on
pages F-1 hereof (see Item 14 of this Annual Report for Index).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information contained under "Ownership of Common Stock by
Principal Shareholders" and "Ownership of Common Stock by Management" in the
Company's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Exchange Act within 120
days after the end of the fiscal year covered by this Form 10-K is incorporated
herein by reference in response to this item.
The information contained under "Compliance With Section 16(a) of the
Securities Exchange Act" in the Company's Definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A of the
Exchange Act within 120 days after the end of the fiscal year covered by this
Form 10-K is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under "Executive Compensation" in the
Company's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Exchange Act within 120
days after the end of the fiscal year covered by this Form 10-K is incorporated
herein by reference in response to this item.
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<PAGE> 105
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under "Ownership of Common Stock by
Principal Shareholders" and "Ownership of Common Stock By Management" in the
Company's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Exchange Act within 120
days after the end of the fiscal year covered by this Form 10-K is incorporated
herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under "Certain Transactions" in the
Company's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Exchange Act within 120
days after the end of the fiscal year covered by this Form 10-K is incorporated
herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the Report:
(1) Report of Grant Thornton LLP, Independent Auditors
Consolidated Statements of Financial Condition as of December 31,
1998 and 1997
Consolidated Statements of Earnings for years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholder's Equity for years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements for years ended
December 31, 1998, 1997 and 1996
(2) Financial Statement Schedules:
The information is contained in the Company's Annual Report to
Stockholders for the year ended December 31, 1998 is incorporated
herein by reference in response to this item.
(3) The following are filed as exhibits to this Annual Report on Form
10-K:
Exhibit
Number
------
* 3(a).....................Second Amended and Restated Articles of
Incorporation (reference is made to Form
SB-2, Exhibit 3(i), File No. 33-096216 and
incorporated herein by reference).
* 3(b).....................Restated Code of Regulations (reference is
made to Form SB-2, Exhibit 3(ii), File No.
33-96216 and incorporated herein by
reference).
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<PAGE> 106
* 4(a).....................Reference is made to Articles FOURTH,
FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH
of the Registrant's Restated Articles of
Incorporation (contained in the
Registrant's Restated Articles of
Incorporation filed as Exhibit 3(a) hereto)
and Articles II, III, IV, VI and VIII of
the Registrant's Amended and Restated Code
of Regulations (contained in the
Registrant's Amended and Restated Code of
Regulations filed as Exhibit 3(b) hereto).
* 4(b).....................Rights Plan, dated January 23, 1998,
between Oak Hill Financial, Inc., and Fifth
Third Bank, (reference is made to Exhibit
4.1 to the Form 8-A, filed with the
Securities and Exchange Commission on
January 23, 1998 and incorporated herein by
reference).
*10(a).....................Oak Hill Financial, Inc. Amended and
Restated 1995 Stock Option Plan (reference
is made to Form SB-2, Exhibit 10(a), File
No. 33-96216 and incorporated herein by
reference).
*10(b).....................Employment Agreement between D. Bruce Knox
and the Registrant, dated April 28, 1997,
(reference is made to Form S-4, Exhibit
10(b), file No. 333-30349, and incorporated
herein by reference).
*10(c).....................Executive Salary Continuation Agreement
between D. Bruce Knox and Unity Savings
Bank, dated December 7, 1994, (reference is
made to Form S-4, Exhibit 10(c), file No.
333-30349, and incorporated herein by
reference).
*10(d).....................Executive Salary Continuation Agreement
between George Knox and Unity Savings Bank,
dated December 7, 1994, (reference is made
to Form S-4, Exhibit 10(d), file No.
333-30349, and incorporated herein by
reference).
*10(e).....................Amendment, dated September 18, 1995 to the
Executive Salary Continuation Agreement
between George Knox and Unity Savings Bank,
(reference is made to Form S-4, Exhibit
10(e), file No. 333-30349, and incorporated
herein by reference).
13........................Annual Report (Selected Portions).
*21........................Subsidiaries of the Registrant (reference
is made to Form SB-2, Exhibit 21, File No.
33-96216 and incorporated herein by
reference).
23........................Consent of Grant Thornton LLP.
24........................Powers of Attorney.
27........................Financial Data Schedule.
*Incorporated by reference as indicated.
(b) Form 8-K's Filed in the Fourth Quarter
1. Form 8-K, dated October 20, 1998, filed with the Securities
and Exchange Commission on October 21, 1998.
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<PAGE> 107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
OAK HILL FINANCIAL, INC.
By: /s/ John D. Kidd
-------------------------------
John D. Kidd, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Evan E. Davis Chairman of the Board ) March 29, 1999
- ---------------------------- )
Evan E. Davis )
)
)
/s/ John D. Kidd President, Chief Executive ) March 29, 1999
- ---------------------------- Officer, and Director )
John D. Kidd (Principal Executive Officer) )
)
)
* Richard P. LeGrand Executive Vice President ) March 29, 1999
- ---------------------------- and Director )
Richard P. LeGrand )
)
)
* H. Tim Bichsel Secretary and Treasurer ) March 29, 1999
- ---------------------------- (Principal Financial and )
H. Tim Bichsel Accounting Officer) )
)
)
* Barry M. Dorsey Director ) March 29, 1999
- ---------------------------- )
Barry M. Dorsey )
)
* C. Clayton Johnson Director ) March 29, 1999
- ---------------------------- )
C. Clayton Johnson )
)
)
* Rick A. McNelly Director ) March 29, 1999
- ---------------------------- )
Rick A. McNelly )
)
)
* Donald R. Seigneur Director ) March 29, 1999
- ---------------------------- )
Donald R. Seigneur )
)
)
/s/ H. Grant Stephenson Director ) March 29, 1999
- ---------------------------- )
H. Grant Stephenson )
E-33
<PAGE> 108
SIGNATURE TITLE DATE
--------- ----- ----
* D. Bruce Knox Director ) March 29, 1999
- ---------------------------- )
D. Bruce Knox )
)
)
By: /s/ H. Grant Stephenson ) March 29, 1999
----------------------------------- )
H. Grant Stephenson, attorney-in-fact )
for each of the persons indicated )
E-34
<PAGE> 109
OAK HILL FINANCIAL, INC.
FORM 10-K FOR
THE YEAR END
DECEMBER 31, 1998
EXHIBIT INDEX
E-35
<PAGE> 110
EXHIBIT
Number
------
* 3(a).....................Second Amended and Restated Articles of
Incorporation (reference is made to Form
SB-2, Exhibit 3(i), File No. 33-096216 and
incorporated herein by reference).
* 3(b).....................Restated Code of Regulations (reference is
made to Form SB-2, Exhibit 3(ii), File No.
33-96216 and incorporated herein by
reference).
* 4(a).....................Reference is made to Articles FOURTH,
FIFTH, SEVENTH, EIGHTH, TENTH AND ELEVENTH
of the Registrant's Restated Articles of
Incorporation (contained in the
Registrant's Restated Articles of
Incorporation filed as Exhibit 3(a) hereto)
and Articles II, III, IV, VI and VIII of
the Registrant's Amended and Restated Code
of Regulations (contained in the
Registrant's Amended and Restated Code of
Regulations filed as Exhibit 3(b) hereto).
* 4(b).....................Rights Plan, dated January 23, 1998,
between Oak Hill Financial, Inc., and Fifth
Third Bank, (reference is made to Exhibit
4.1 to the Form 8-A, filed with the
Securities and Exchange Commission on
January 23, 1998 and incorporated herein by
reference).
*10(a).....................Oak Hill Financial, Inc. Amended and
Restated 1995 Stock Option Plan (reference
is made to Form SB-2, Exhibit 10(a), File
No. 33-96216 and incorporated herein by
reference).
*10(b).....................Employment Agreement between D. Bruce Knox
and the Registrant, dated April 28, 1997,
(reference is made to Form S-4, Exhibit
10(b), file No. 333-30349, and incorporated
herein by reference).
*10(c).....................Executive Salary Continuation Agreement
between D. Bruce Knox and Unity Savings
Bank, dated December 7, 1994, (reference is
made to Form S-4, Exhibit 10(c), file No.
333-30349, and incorporated herein by
reference).
*10(d).....................Executive Salary Continuation Agreement
between George Knox and Unity Savings Bank,
dated December 7, 1994, (reference is made
to Form S-4, Exhibit 10(d), file No.
333-30349, and incorporated herein by
reference).
*10(e).....................Amendment, dated September 18, 1995 to the
Executive Salary Continuation Agreement
between George Knox and Unity Savings Bank,
(reference is made to Form S-4, Exhibit
10(e), file No. 333-30349, and incorporated
herein by reference).
13........................Annual Report (Selected Portions).
*21........................Subsidiaries of the Registrant (reference
is made to Form SB-2, Exhibit 21, File No.
33-96216 and incorporated herein by
reference).
23........................Consent of Grant Thornton LLP.
24........................Powers of Attorney.
27........................Financial Data Schedule.
*Incorporated by reference as indicated.
E-36
<PAGE> 111
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 13
TABLE OF CONTENTS
Financial Condition
Earnings
Stockholders' Equity
Comprehensive Income
Cash Flows
Notes
E-37
<PAGE> 112
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,100 $ 9,840
Federal funds sold 9,687 3,773
Investment securities designated as available for sale -- at market 57,143 51,989
Loans receivable -- net 340,143 285,249
Loans held for sale -- at lower of cost or market 550 --
Office premises and equipment -- net 5,717 4,608
Federal Home Loan Bank stock -- at cost 2,855 2,659
Accrued interest receivable on loans 1,852 1,491
Accrued interest receivable on investment securities 853 855
Prepaid expenses and other assets 176 180
Cash surrender value of life insurance -- 591
Prepaid federal income tax 152 --
Deferred federal income tax asset 751 682
-------- --------
TOTAL ASSETS $429,979 $361,917
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand $ 38,258 $ 30,369
Savings and time deposits 327,832 271,596
-------- --------
Total deposits 366,090 301,965
Securities sold under agreement to repurchase 940 258
Advances from the Federal Home Loan Bank 23,784 24,705
Accrued interest payable and other liabilities 1,695 1,530
Accrued federal income taxes -- 110
-------- --------
Total liabilities 392,509 328,568
Stockholders' equity
Common stock -- $.50 stated value; authorized 5,000,000 shares,
4,415,865 and 3,529,390 shares issued at
December 31, 1998 and 1997 2,208 1,765
Additional paid-in capital 4,106 4,012
Retained earnings 31,718 27,410
Treasury stock (48,100 and 11,200 shares at cost
at December 31, 1998 and 1997) (755) (28)
Unrealized gains on securities designated as available
for sale, net of related tax effects 193 190
-------- --------
Total stockholders' equity 37,470 33,349
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $429,979 $361,917
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
E-38
<PAGE> 113
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands, except share data)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Loans $28,849 $24,143 $20,420
Investments
U.S. Government and agency securities 3,501 3,530 3,078
Obligations of state and political subdivisions 116 136 102
Federal funds sold 478 428 428
Interest-bearing deposits 9 17 141
------- ------- -------
Total interest income 32,953 28,254 24,169
INTEREST EXPENSE
Deposits 14,543 12,103 10,616
Borrowings 1,188 1,604 1,003
------- ------- -------
Total interest expense 15,731 13,707 11,619
------- ------- -------
Net interest income 17,222 14,547 12,550
Less provision for losses on loans 1,238 1,150 859
------- ------- -------
Net interest income after provision for losses on loans 15,984 13,397 11,691
OTHER INCOME
Service fees, charges and other operating 1,483 1,310 1,291
Gain on sale of loans 855 163 85
Gain (loss) on sale of assets 240 (60) 25
------- ------- -------
Total other income 2,578 1,413 1,401
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 5,270 4,342 3,978
Occupancy and equipment 1,288 1,189 1,036
Federal deposit insurance premiums 61 58 395
Franchise taxes 472 327 377
Other operating 2,512 2,214 1,820
Merger-related expenses -- 920 --
------- ------- -------
Total general, administrative and other expense 9,603 9,050 7,606
------- ------- -------
Earnings before federal income taxes 8,959 5,760 5,486
FEDERAL INCOME TAXES
Current 2,989 2,104 1,901
Deferred (71) (52) (127)
------- ------- -------
Total federal income taxes 2,918 2,052 1,774
------- ------- -------
NET EARNINGS $ 6,041 $ 3,708 $ 3,712
======= ======= =======
EARNINGS PER SHARE
BASIC $ 1.37 $ .84 $ .84
======= ======= =======
DILUTED $ 1.34 $ .83 $ .84
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
E-39
<PAGE> 114
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
(In thousands, except share data)
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
ADDITIONAL DESIGNATED AS
COMMON PAID-IN RETAINED TREASURY AVAILABLE
STOCK CAPITAL EARNINGS STOCK FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $1,764 $3,988 $21,720 $ (28) $ 58 $27,502
Issuance of 1,250 shares under stock
option plan -- 10 -- -- -- 10
Dividends declared of $.168 per share -- -- (790) -- -- (790)
Unrealized losses on securities designated as
available for sale, net of related tax effects -- -- -- -- (85) (85)
Net earnings for the year -- -- 3,712 -- -- 3,712
------ ------ ------- ----- ---- -------
BALANCE AT DECEMBER 31, 1996 1,764 3,998 24,642 (28) (27) 30,349
Issuance of 1,250 shares under stock
option plan 1 14 -- -- -- 15
Dividends declared of $.208 per share -- -- (940) -- -- (940)
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- 217 217
Net earnings for the year -- -- 3,708 -- -- 3,708
------ ------ ------- ----- ---- -------
BALANCE AT DECEMBER 31, 1997 1,765 4,012 27,410 (28) 190 33,349
Stock dividend effected in the form
of a 5-for-4 stock split 440 -- (440) -- -- --
Issuance of 6,100 shares under stock
option plan 3 94 -- -- -- 97
Dividends declared of $.294 per share -- -- (1,293) -- -- (1,293)
Repurchase of 36,900 shares -- -- -- (727) -- (727)
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- 3 3
Net earnings for the year -- -- 6,041 -- -- 6,041
------ ------ ------- ----- ---- -------
BALANCE AT DECEMBER 31, 1998 $2,208 $4,106 $31,718 $(755) $193 $37,470
====== ====== ======= ===== ==== =======
</TABLE>
The accompanying notes are an integral part of these statements.
E-40
<PAGE> 115
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 1998, 1997, and 1996
(In thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net earnings $6,041 $3,708 $3,712
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
designated as available for sale 159 153 (67)
Reclassification adjustment for realized
(gains) losses included in net earnings (156) 64 (18)
------ ------ ------
Comprehensive income $6,044 $3,925 $3,627
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
E-41
<PAGE> 116
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings for the year $ 6,041 $ 3,708 $ 3,712
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 673 600 508
(Gain) loss on sale of securities (236) 97 (27)
Amortization (accretion) of premiums and
discounts on investment securities -- net 131 (10) (72)
Proceeds from sale of loans in secondary market 49,403 9,835 7,970
Loans disbursed for sale in secondary market (49,450) (9,610) (7,848)
Gain on sale of loans (478) (85) (85)
Gain on sale of other assets (4) (22) (7)
Amortization of deferred loan origination costs 377 266 177
Federal Home Loan Bank stock dividends (196) (160) (124)
Provision for losses on loans 1,238 1,150 859
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 4 15 77
Accrued interest receivable (359) (401) (313)
Accrued interest payable and other liabilities 165 304 73
Federal income taxes
Current (262) 20 37
Deferred (71) (52) (127)
--------- --------- ---------
Net cash provided by operating activities 6,976 5,655 4,810
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Loan disbursements (223,814) (174,756) (100,983)
Principal repayments on loans 167,304 125,760 62,467
Principal repayments on mortgage-backed securities 2,579 2,083 2,438
Proceeds from sale of investment securities designated
as available for sale 5,046 5,120 4,599
Proceeds from maturity of investment securities 32,875 25,820 15,261
Proceeds from sale of other assets 4 50 69
Purchase of investment securities designated as
available for sale (45,543) (33,602) (32,601)
(Increase) decrease in federal funds sold -- net (5,914) 362 6,422
Purchase of Federal Home Loan Bank stock -- (426) (580)
Purchase of office premises and equipment (1,807) (675) (1,090)
Redemption of cash surrender value of life insurance -- net 591 -- --
--------- --------- ---------
Net cash used in investing activities (68,679) (50,264) (43,998)
--------- --------- ---------
Net cash used in operating and investing
activities (balance carried forward) (61,703) (44,609) (39,188)
--------- --------- ---------
</TABLE>
E-42
<PAGE> 117
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
(In thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $ (61,703) $ (44,609) $ (39,188)
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Proceeds from securities sold under agreement to repurchase 682 128 130
Net increase in deposit accounts 64,125 43,343 27,977
Proceeds from Federal Home Loan Bank advances 17,000 36,850 21,975
Repayment of Federal Home Loan Bank advances (17,921) (33,582) (9,443)
Net decrease in mortgage escrow funds -- -- (4)
Dividends on common shares (1,293) (940) (790)
Purchase of treasury stock (727) -- --
Proceeds from issuance of shares under stock option plan 97 15 10
--------- --------- ---------
Net cash provided by financing activities 61,963 45,814 39,855
--------- --------- ---------
Net increase in cash and cash equivalents 260 1,205 667
Cash and cash equivalents at beginning of year 9,840 8,635 7,968
--------- --------- ---------
Cash and cash equivalents at end of year $ 10,100 $ 9,840 $ 8,635
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Federal income taxes $ 3,081 $ 1,946 $ 1,863
========= ========= =========
Interest on deposits and borrowings $ 15,667 $ 13,593 $ 11,344
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ 3 $ 217 $ (85)
========= ========= =========
Recognition of mortgage servicing rights in
accordance with SFAS No. 125 $ 377 $ 78 $ --
========= ========= =========
Transfers from loans to real estate acquired
through foreclosure $ 33 $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
E-43
<PAGE> 118
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1998, 1997, and 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
The business activities of Oak Hill Financial, Inc. (the "Company")
have been limited primarily to holding the common shares of Oak Hill Banks (the
"Bank"). Accordingly, the Company's results of operations are dependent upon the
results of the Bank's operations. The Bank conducts a general commercial banking
business in southeastern and south central Ohio which consists of attracting
deposits from the general public and applying those funds to the origination of
loans for commercial, consumer and residential purposes. The Bank's
profitability is significantly dependent on net interest income, which is the
difference between interest income generated from interest-earning assets (i.e.,
loans and investments) and the interest expense paid on interest-bearing
liabilities (i.e., customer deposits and borrowed funds). Net interest income is
affected by the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level of
interest rates paid or received by the Bank can be significantly influenced by a
number of competitive factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been
prepared in accordance with generally accepted accounting principles ("GAAP")
and general accounting practices within the financial services industry. In
preparing financial statements in accordance with GAAP, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
On October 2, 1997, the Company merged Unity Savings Bank with and
into its subsidiary, the Bank, in a transaction that was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements have
been previously restated to reflect the effects of the business combination as
of January 1, 1996. Pursuant to the merger agreement, the Company issued 804,612
split-adjusted shares of common stock.
The following is a summary of the Company's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Bank and Action Finance Company
("Action"). Action was incorporated for the purpose of conducting consumer
finance lending operations. Action began such operations during 1998 using two
separate office locations. All significant intercompany balances and
transactions have been eliminated.
2. INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that
investments be categorized as held to maturity, trading, or available for sale.
Securities classified as held to maturity are carried at cost only if the
Company has the positive intent and ability to hold these securities to
maturity. Trading securities and securities available for sale are carried at
fair value with resulting unrealized gains or losses charged to operations or
stockholders' equity, respectively. At December 31, 1998 and 1997, the Company's
stockholders' equity reflected net unrealized gains on securities designated as
available for sale, net of applicable tax effects, totaling $193,000 and
$190,000, respectively.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
E-44
<PAGE> 119
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
3. LOANS RECEIVABLE
Loans held in portfolio are stated at the principal amount
outstanding, adjusted for premiums and discounts on loans purchased and sold and
the allowance for loan losses. Premiums and discounts on loans purchased and
sold are amortized and accreted to operations using the interest method over the
average life of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is
in doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
Loans held for sale are carried at the lower of cost or market,
determined in the aggregate. Loans held for sale are identified at the point of
origination. In computing lower of cost or market, deferred loan origination
fees are deducted from the principal balance of the related loan. All loan sales
are made without further recourse to the Company. The Company had not identified
any loans held for sale at December 31, 1997. At December 31, 1998, loans held
for sale were carried at cost.
The Bank generally retains the servicing on loans sold and agrees to
remit to the investor loan principal and interest at agreed-upon rates. The Bank
accounts for mortgage servicing rights pursuant to the provisions of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which requires that the Bank recognize as
separate assets, right to service mortgage loans for others, regardless of how
those servicing rights are acquired. An institution that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells those loans with servicing rights retained would allocate some of the
cost of the loans to the mortgage servicing rights.
SFAS No. 125 requires that securitization of mortgage loans be
accounted for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 125 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed for
impairment. Impairment is based on fair value.
The mortgage servicing rights recorded by the Bank, calculated in
accordance with the provisions of SFAS No. 125, were segregated into pools for
valuation purposes, using as pooling criteria the loan term and coupon rate.
Once pooled, each grouping of loans was evaluated on a discounted earnings basis
to determine the present value of future earnings that a purchaser could expect
to realize from each portfolio. Earnings were projected from a variety of
sources including loan servicing fees, interest earned on float, net interest
earned on escrows, miscellaneous income, and costs to service the loans. The
present value of future earnings is the "economic" value of the pool, i.e., the
net realizable present value to an acquirer of the acquired servicing.
The Bank recorded amortization related to mortgage servicing rights
totaling approximately $25,000 for the year ended December 31, 1998. No
amortization of mortgage servicing rights was recorded for the year ended
December 31, 1997. At December 31, 1998 and 1997, the fair value of the Bank's
mortgage servicing rights totaled approximately $430,000 and $78,000,
respectively.
4. LOAN ORIGINATION AND COMMITMENT FEES
The Company accounts for loan origination fees and costs in accordance
with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant to
the provisions of SFAS No. 91, all loan origination fees received, net of
certain direct origination costs, are deferred on a loan-by-loan basis and
amortized to interest income using the interest method, giving effect to actual
loan prepayments. Additionally, SFAS No. 91 generally limits the definition of
loan origination costs to the direct costs attributable to originating a loan,
i.e., principally actual personnel costs.
E-45
<PAGE> 120
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
Fees received for loan commitments are deferred and amortized over the
life of the related loan using the interest method.
5. ALLOWANCE FOR LOAN LOSSES
It is the Company's policy to provide valuation allowances for
estimated losses on loans based upon past loss experience, trends in the level
of delinquent and specific problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current and anticipated economic conditions in the primary market area. When
the collection of a loan becomes doubtful, or otherwise troubled, the Company
records a loan loss provision equal to the difference between the fair value of
the property securing the loan and the loan's carrying value. Major loans and
major lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
The Company accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". This Statement requires
that impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loans observable market price or fair value of the
collateral.
A loan is defined under SFAS No. 114 as impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company considers its
investment in one-to-four family residential loans, consumer installment loans
and credit card loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Company's
investment in commercial loans and its evaluation of impairment thereof, such
loans are collateral dependent and as a result are carried as a practical
expedient at the lower of cost or fair value.
It is the Company's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans which
are more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
At December 31, 1998 and 1997, the Company had no loans that would be
defined as impaired under SFAS No. 114.
6. OFFICE PREMISES AND EQUIPMENT
Depreciation and amortization are provided on the straight-line and
accelerated methods over the estimated useful lives of the assets, estimated to
be ten to fifty years for buildings and improvements and three to twenty-five
years for furniture, fixtures and equipment.
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure is carried at the lower of
the loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. The loan loss allowance is charged for any
write down in the loan's carrying value to fair value at the date of
acquisition. Real estate loss provisions are recorded if the properties' fair
value subsequently declines below the value determined at the recording date. In
determining the lower of cost or fair value at acquisition, costs relating to
development and improvement of property are considered. Costs relating to
holding real estate acquired through foreclosure, net of rental income, are
charged against earnings as incurred.
8. FEDERAL INCOME TAXES
The Company accounts for federal income taxes pursuant to SFAS No.
109, "Accounting for Income Taxes."
E-46
<PAGE> 121
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
Pursuant to the provisions of SFAS No. 109, a deferred tax liability
or deferred tax asset is computed by applying the current statutory tax rates to
net taxable or deductible temporary differences between the tax basis of an
asset or liability and its reported amount in the consolidated financial
statements that will result in taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of net
deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Company's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees and costs, Federal Home Loan Bank
stock dividends, capitalized mortgage servicing rights, certain components of
retirement expense and the allowance for loan losses. A temporary difference is
also recognized for depreciation expense computed using accelerated methods for
federal income tax purposes.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value of financial instruments, both assets and
liabilities whether or not recognized in the consolidated statement of financial
condition, for which it is practicable to estimate that value. For financial
instruments where quoted market prices are not available, fair values are based
on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied,
including the discount rate and estimates of future cash flows. Therefore, the
fair values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at December 31,
1998 and 1997.
CASH AND CASH EQUIVALENTS. The carrying amounts presented in the
consolidated statements of financial condition for cash and cash equivalents are
deemed to approximate fair value.
FEDERAL FUNDS SOLD. The carrying amounts presented in the consolidated
statements of financial condition for federal funds sold are deemed to
approximate fair value.
INVESTMENT SECURITIES. For investment securities, fair value is deemed
to equal the quoted market price.
LOANS RECEIVABLE. The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four family residential
real estate, multi-family residential real estate, commercial and installment
and other. These loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan categories were
computed via discounted cash flow analysis, using current interest rates offered
for loans with similar terms to borrowers of similar credit quality. The
historical carrying amount of accrued interest on loans is deemed to approximate
fair value.
FEDERAL HOME LOAN BANK STOCK. The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate fair
value.
E-47
<PAGE> 122
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
DEPOSITS. The fair value of NOW accounts, savings accounts, demand
deposits, money market deposits and other transaction accounts is deemed to
approximate the amount payable on demand at December 31, 1998 and 1997. Fair
values for fixed-rate certificates of deposit have been estimated using a
discounted cash flow calculation using the interest rates currently offered for
deposits of similar remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK. The fair value of advances
from the Federal Home Loan Bank has been estimated using discounted cash flow
analysis, based on the interest rates currently offered for advances of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE. The fair value of
securities sold under agreements to repurchase is deemed to approximate fair
value.
COMMITMENTS TO EXTEND CREDIT. For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between current
levels of interest rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at December 31, 1998
and 1997, was not material.
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 10,100 $ 10,100 $ 9,840 $ 9,840
Federal funds sold 9,687 9,687 3,773 3,773
Investment securities 57,143 57,143 51,989 51,989
Loans receivable 340,693 339,201 285,249 289,826
Federal Home Loan Bank stock 2,855 2,855 2,659 2,659
-------- -------- -------- --------
$420,478 $418,986 $353,510 $358,087
======== ======== ======== ========
Financial liabilities
Deposits $366,090 $367,052 $301,965 $301,329
Advances from the Federal
Home Loan Bank 23,784 23,798 24,705 24,781
Securities sold under agreement to repurchase 940 940 258 258
-------- -------- -------- --------
$390,814 $391,790 $326,928 $326,368
======== ======== ======== ========
</TABLE>
10. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted-average
shares outstanding during the year. Weighted-average common shares outstanding
totaled 4,397,524, 4,396,519, and 4,395,866 for the years ended December 31,
1998, 1997, and 1996, respectively. Diluted earnings per share is computed
taking into consideration common shares outstanding and dilutive potential
common shares to be issued under the Company's stock option plan. Weighted
average common shares deemed to be outstanding for purposes of computing diluted
earnings per share totaled 4,497,989, 4,448,856, and 4,404,508 for the years
ended December 31, 1998, 1997, and 1996, respectively.
E-48
<PAGE> 123
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
There were 100,465, 52,337 and 8,642 incremental shares related to the
assumed exercise of stock options in the computation of diluted earnings per
share for the years ended December 31, 1998, 1997 and 1996, respectively.
Options to purchase 110,625 and 67,500 shares of common stock with a
weighted-average exercise price of $18.00 and $10.00 were outstanding at
December 31, 1997 and 1996, but were excluded from the computation of common
share equivalents because their exercise prices were greater than the average
market price of the common shares.
Weighted-average shares outstanding and all other share and per share
references herein, for the years ended December 31, 1997 and 1996, have been
restated to give effect to the Company's 5-for-4 stock split effected during
1998.
11. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents are
comprised of cash and due from banks.
12. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1998 consolidated financial statement presentation.
NOTE B -- INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses
and estimated fair value of investment securities at December 31 are shown
below.
<TABLE>
<CAPTION>
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S Government and agency obligations $54,443 $375 $146 $54,672
Obligations of state and political subdivisions 2,408 65 2 2,471
------- ---- ---- -------
Total investment securities $56,851 $440 $148 $57,143
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S Government and agency obligations $49,338 $316 $ 32 $49,622
Obligations of state and political subdivisions 2,364 20 17 2,367
------- ---- ---- -------
Total investment securities $51,702 $336 $ 49 $51,989
======= ==== ==== =======
</TABLE>
E-49
<PAGE> 124
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
The amortized cost and estimated fair value of investment securities
by term to maturity at December 31 are shown below.
<TABLE>
<CAPTION>
1998 1997
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
Due in three years or less $ 9,481 $ 9,604 $17,326 $17,332
Due after three years through five years 5,746 5,767 15,249 15,371
Due after five years through ten years 36,293 36,420 12,792 12,897
Due after ten years 5,331 5,352 6,335 6,389
------- ------- ------- -------
$56,851 $57,143 $51,702 $51,989
======= ======= ======= =======
</TABLE>
Proceeds from sale of investment securities designated as available
for sale during the year ended December 31, 1998, totaled $5.0 million,
resulting in a realized gain of $236,000 on such sales.
Proceeds from sales of investment securities designated as available
for sale during the year ended December 31, 1997, totaled $5.1 million,
resulting in a realized loss of $97,000 on such sales.
Proceeds from sales of investment securities designated as available
for sale during the year ended December 31, 1996, totaled $4.6 million,
resulting in a realized gain of $27,000 on such sales.
At December 31, 1998 and 1997, investment securities with an aggregate
book value of $46.3 million and $41.6 million, respectively, were pledged as
collateral for public deposits.
NOTE C -- LOANS RECEIVABLE
The composition of the loan portfolio, including loans held for sale, is
as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
(IN THOUSANDS)
<S> <C> <C>
Real estate mortgage (primarily residential) $192,908 $169,316
Installment, net of unearned interest of $2,729 and $3,243 59,177 47,771
Commercial and other 91,519 70,546
Credit card 1,405 1,360
-------- --------
345,009 288,993
Less:
Allowance for loan losses 4,316 3,744
-------- --------
$340,693 $285,249
======== ========
</TABLE>
The Company's lending efforts have historically focused on real estate
mortgages and consumer installment loans, which comprised approximately $252.1
million, or 74%, of the total loan portfolio at December 31, 1998, and
approximately $217.1 million, or 76%, of the total loan portfolio at December
31, 1997. Historically, such loans have been conservatively underwritten with
sufficient collateral or cash down payments to provide the Company with adequate
collateral coverage in the event of default. Nevertheless, the Company, as with
any lending institution, is subject to the risk that real
E-50
<PAGE> 125
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
estate values or economic conditions could deteriorate in its primary lending
areas within Ohio, thereby impairing collateral values. However, management is
of the belief that real estate values and economic conditions in the Company's
primary lending areas are presently stable.
As stated previously, the Company has sold whole loans and
participating interests in loans in the secondary market, retaining servicing on
the loans sold. Loans sold and serviced for others totaled approximately $60.1
million, $33.3 million, and $28.8 million at December 31, 1998, 1997, and 1996,
respectively.
The activity in the allowance for loan losses is summarized as follows
for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $3,744 $2,934 $2,367
Provision charged to operations 1,238 1,150 859
Charge-offs (812) (492) (448)
Recoveries 146 152 156
------ ------ ------
Balance at end of period $4,316 $3,744 $2,934
====== ====== ======
</TABLE>
At December 31, 1998, 1997, and 1996, the Company had nonaccrual and
nonperforming loans totaling approximately $1.6 million, $1.0 million, and $1.0
million, respectively. Interest that would have been recognized had nonaccraual
loans performed pursuant to contractual terms totaled approximately $113,600,
$71,000, and $15,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.
NOTE D -- OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are summarized at December 31 as
follows:
<TABLE>
<CAPTION>
1998 1997
(IN THOUSANDS)
<S> <C> <C>
Land and buildings $ 6,460 $ 5,442
Furniture and equipment 3,677 3,184
Leasehold improvements 194 --
------- -------
10,331 8,626
Less accumulated depreciation and amortization (4,614) (4,018)
------- -------
$ 5,717 $ 4,608
======= =======
</TABLE>
E-51
<PAGE> 126
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
NOTE E -- DEPOSITS
Deposit balances at December 31 are summarized as follows:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND 1998 1997
INTEREST RATE RANGE AMOUNT RATE AMOUNT RATE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand deposit accounts $ 38,258 -- $ 30,369 --
Savings accounts 42,423 2.65% 41,259 3.06%
NOW accounts 25,604 1.88% 24,143 1.78%
Money market deposit accounts 6,333 3.11% 6,911 3.14%
Premium investment accounts 21,012 4.34% 19,161 4.82%
Select investment accounts 16,456 4.19% 7,234 4.82%
-------- --------
Total transaction accounts 150,086 129,077
Certificates of deposit
3.00 -- 4.99% 27,941 14,606
5.00 -- 6.99% 187,875 157,835
7.00 -- 9.00% 188 447
-------- --------
Total certificates of deposit 216,004 5.46% 172,888 5.63%
-------- --------
Total deposits $366,090 4.15% $301,965 4.28%
======== ==== ======== ====
</TABLE>
The Bank had deposit accounts with balances in excess of $100,000
totaling $118.6 million and $87.5 million at December 31, 1998 and 1997,
respectively.
Interest expense on deposits is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
(IN THOUSANDS)
<S> <C> <C> <C>
NOW accounts $ 515 $ 529 $ 492
Savings accounts 1,234 1,271 1,381
Money market deposit accounts 198 196 120
Premium investment accounts 993 1,027 1,131
Select investment accounts 625 247 14
Certificates of deposit 10,978 8,833 7,478
------- ------- -------
$14,543 $12,103 $10,616
======= ======= =======
</TABLE>
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
(IN THOUSANDS)
<S> <C> <C>
Less than one year $157,875 $118,824
One year through three years 54,969 49,582
More than three years 3,160 4,482
-------- --------
$216,004 $172,888
======== ========
</TABLE>
E-52
<PAGE> 127
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
NOTE F -- ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1998 and 1997 by pledges of certain residential mortgage loans totaling $35.7
million and $37.1 million, respectively, and the Bank's investment in Federal
Home Loan Bank stock, are summarized as follows:
<TABLE>
<CAPTION>
MATURING IN
YEAR ENDED DECEMBER 31,
INTEREST RATE DECEMBER 31, 1998 1997
<S> <C> <C> <C>
5.78% to 6.20% 1998 $ -- $ 9,825
5.90% to 7.25% 1999 2,168 2,598
5.75% to 6.50% 2000 863 1,429
4.87% to 6.35% 2001 6,147 3,195
6.50% 2002 1,000 1,000
8.20% 2004 1,223 1,629
5.14% 2005 4,000 --
6.50% 2006 621 758
7.40% 2010 1,310 1,542
6.95% 2011 1,476 1,717
6.70% 2017 986 1,012
4.87% 2018 3,990 --
------- -------
$23,784 $24,705
Weighted-average interest rate 5.91% 6.39%
======= =======
</TABLE>
NOTE G -- FEDERAL INCOME TAXES
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate for the year ended December 31 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $3,046 $1,958 $1,865
Increase (decrease) in taxes resulting from:
Interest income on municipal loans and obligations
of state and political subdivisions (69) (83) (70)
Nondeductible merger-related expenses -- 159 --
Other (59) 18 (21)
------ ------ ------
Federal income tax provision per consolidated
financial statements $2,918 $2,052 $1,774
====== ====== ======
</TABLE>
E-53
<PAGE> 128
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
The composition of the Company's net deferred tax asset at December 31
is as follows:
<TABLE>
<CAPTION>
1998 1997
(IN THOUSANDS)
<S> <C> <C>
Taxes (payable) refundable on temporary
differences at statutory rate:
Deferred tax assets:
Book/tax difference of loan loss allowance $1,462 $1,273
Retirement expense 97 --
------ ------
Total deferred tax assets 1,559 1,273
Deferred tax liabilities:
Deferred loan origination costs (271) (242)
Federal Home Loan Bank stock dividends (292) (225)
Unrealized gains on securities designated as available for sale (99) (97)
Mortgage servicing rights (146) (27)
------ ------
Total deferred tax liabilities (808) (591)
------ ------
Net deferred tax asset $ 751 $ 682
====== ======
</TABLE>
The Company has not recorded a valuation allowance for any portion of
the net deferred tax asset at December 31, 1998 and 1997. Such estimate was
based on the amount of income taxes subject to recovery in carryback years.
NOTE H -- RELATED PARTY TRANSACTIONS
In the normal course of business, the Company has made loans to its
directors, officers, and their related business interests. In the opinion of
management, such loans are consistent with sound banking practices and are
within applicable regulatory lending limitations. The balance of such loans
outstanding at December 31, 1998, 1997, and 1996 totaled approximately $2.2
million, $1.7 million, and $2.0 million, respectively.
The Company had also received demand and time deposits of
approximately $16.9 million, $3.7 million, and $5.8 million at December 31,
1998, 1997, and 1996 from directors, officers and their related business
interests.
NOTE I -- EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing and 401(k) plan covering all
employees who have attained the age of twenty-one and completed one full year of
service. The profit-sharing plan is non-contributory and contributions to the
plan are at the discretion of the Board of Directors. The Company contributed
$165,000, $123,000, and $125,000 to the plan for the years ended December 31,
1998, 1997, and 1996, respectively.
The 401(k) plan allows employees to make voluntary, tax-deferred
contributions up to 15% of their base annual compensation. The Company provides,
at its discretion, a 25% matching of funds for each participant's contribution,
subject to a maximum of 6% of base compensation. For 1998, 1997, and 1996, if
the participant elected to invest their contributions in the common stock of Oak
Hill Financial, Inc., the Company provided a 100% matching of each participant's
contribution. The Company's matching contributions under the 401(k) plan totaled
$175,000, $122,000, and $100,000 for the years ended December 31, 1998, 1997,
and 1996, respectively.
E-54
<PAGE> 129
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
NOTE J -- LOAN COMMITMENTS
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of the commitments reflect the extent of the Company's
involvement in such financial instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At December 31, 1998, the Company had outstanding commitments of
approximately $6.9 million to originate variable rate residential and commercial
loans. Also, the Company had unused lines of credit and letters of credit
totaling approximately $40.9 million and $523,000, respectively, as of December
31, 1998. In the opinion of management, outstanding loan commitments equaled or
exceeded prevalent market interest rates as of December 31, 1998, such
commitments were underwritten in accordance with normal loan underwriting
policies, and all disbursements will be funded via cash flow from operations and
existing excess liquidity.
NOTE K -- REGULATORY CAPITAL
The Bank is subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital accounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
The FDIC has adopted risk-based capital guidelines to which the Bank
is subject. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. Risk-based capital ratios are determined
by allocating assets and specified off-balance-sheet commitments to four
risk-weighting categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier
("Tier 1") includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier 2") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt, and the allowance for loan losses, subject to certain
limitations, less required deductions. Banks are required to maintain a total
risk-based capital (the sum of Tier 1 and Tier 2 capital) ratio of 8%, of which
4% must be Tier 1 capital. The FDIC may, however, set higher capital
requirements when particular circumstances warrant. Banks experiencing or
anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above minimum required levels.
E-55
<PAGE> 130
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
In addition, the FDIC established guidelines prescribing a minimum
Tier 1 leverage ratio (Tier 1 capital adjusted to total assets as specified in
the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest regulatory rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier 1 leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.
During the years ended December 31, 1998 and 1997, the Bank was
notified by its primary federal regulator that it was categorized as
"well-capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well-capitalized" the Bank must maintain minimum Tier 1
capital, total risk-based capital, and Tier 1 leverage ratios of 6%, 10%, and
5%, respectively.
As of December 31, 1998 and 1997, management believes that the Bank
has met all of the capital adequacy requirements to which it is subject. The
Bank's Tier 1 capital, total risk-based capital, and Tier 1 leverage ratios at
December 31, 1998 and 1997 are set forth in the following table.
<TABLE>
<CAPTION>
1998:
AMOUNT RATIO
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total capital (to risk-weighted assets) $41,074 13.4%
Tier 1 capital (to risk weighted assets) $37,234 12.1%
Tier 1 leverage $37,234 8.7%
<CAPTION>
1997:
AMOUNT RATIO
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total capital (to risk-weighted assets) $36,297 14.5%
Tier 1 capital (to risk-weighted assets) $33,159 13.2%
Tier 1 leverage $33,159 9.2%
</TABLE>
The Bank's management believes, that under the current regulatory
capital regulations, the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control of
the Bank, such as increased interest rates or a downturn in the economy in the
primary market areas, could adversely affect future earnings and consequently,
the ability to meet future minimum regulatory capital requirements.
NOTE L -- STOCK OPTION PLAN
The Company initiated a Stock Option Plan in August 1995 (the "1995
Plan") that provided for the issuance of 500,000 shares of authorized, but
unissued shares of common stock. In 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied.
E-56
<PAGE> 131
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for awards under
the plan consistent with the accounting method utilized in SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $6,041 $3,708 $3,712
====== ====== ======
Pro forma $5,868 $3,429 $3,681
====== ====== ======
Basic earnings per share As reported $ 1.37 $ .84 $ .84
====== ====== ======
Pro forma $ 1.33 $ .78 $ .84
====== ====== ======
Diluted earnings per share As reported $ 1.34 $ .83 $ .84
====== ====== ======
Pro forma $ 1.30 $ .77 $ .84
====== ====== ======
</TABLE>
The fair value of each option granted is estimated on the date of
grant using the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997, and 1996,
respectively: dividend yield of 4.0% and expected volatility of 10.0% for all
years, risk-free interest rates of 5.50%, 5.50%, and 6.15%, and expected lives
of six years.
A summary of the status of the Company's 1995 Plan as of December 31,
1998, 1997, and 1996 and changes during the periods ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 279,875 $13.58 131,125 $ 8.98 50,500 $7.62
Granted 120,750 17.25 151,250 17.48 81,875 9.81
Exercise (7,000) 9.27 (1,250) 7.80 (1,250) 7.80
Forfeited -- 9.75 (1,250) 7.80 -- --
------- ------- -------
Outstanding at end of year 393,625 $14.83 279,875 $13.58 131,125 $8.98
======= ======= =======
Options exercisable at year-end 375,400 248,625 116,750
======= ======= =======
Weighted-average fair value of
options granted during the year $ 2.23 $ 1.66 $1.15
====== ====== =====
</TABLE>
The following information applies to options outstanding at December
31, 1998:
<TABLE>
<S> <C>
Number outstanding 393,625
Range of exercise prices $7.40 - $18.05
Weighted-average exercise price $14.83
Weighted-average remaining contractual life 8.8 years
</TABLE>
E-57
<PAGE> 132
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
NOTE M -- OAK HILL FINANCIAL, INC. CONDENSED FINANCIAL INFORMATION
The following condensed financial statements summarize the financial
position of Oak Hill Financial, Inc. as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the years ended
December 31, 1998, 1997, and 1996.
<TABLE>
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 28 $ 966
Interest-bearing deposits in Oak Hill Banks 1,572 1,004
Investment in Oak Hill Banks 34,217 31,536
Investment in Action Finance Co. 1,929 --
Prepaid expenses and other assets 117 124
------- -------
Total assets $37,863 $33,630
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 393 $ 281
Stockholders' equity
Common stock 2,208 1,765
Additional paid-in capital 4,106 4,012
Retained earnings 31,718 27,410
Less cost of treasury stock (755) (28)
Unrealized gains on securities designated as
available for sale, net of related tax effects 193 190
------- -------
Total stockholders' equity 37,470 33,349
------- -------
Total liabilities and stockholders' equity $37,863 $33,630
======= =======
</TABLE>
E-58
<PAGE> 133
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUE
Interest income $ 41 $ 71 $ 103
Equity in earnings of subsidiaries 6,206 4,030 3,704
------ ------ ------
Total income 6,247 4,101 3,807
EXPENSES
General and administrative 292 448 133
Federal income tax credits (86) (55) (38)
------ ------ ------
Total expenses 206 393 95
------ ------ ------
NET EARNINGS $6,041 $3,708 $3,712
====== ====== ======
</TABLE>
E-59
<PAGE> 134
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
OAK HILL FINANCIAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
December 31,
(In thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net earnings for the year $ 6,041 $ 3,708 $ 3,712
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiaries (2,607) (3,030) (3,704)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 7 (87) 334
Other liabilities 112 109 58
------- ------- -------
Net cash provided by operating activities 3,553 700 400
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investment in Action Finance Company (2,000) -- --
Proceeds from maturity of investment securities -- -- 1,001
(Increase) decrease in interest-bearing deposits (568) 1,040 (1,041)
Net cash provided by (used in) investing activities (2,568) 1,040 (40)
------- ------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from exercise of stock options 97 15 10
Purchase of treasury stock (727) -- --
Dividends on common shares (1,293) (799) (604)
------- ------- -------
Net cash used in financing activities (1,923) (784) (594)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (938) 956 (234)
Cash and cash equivalents at beginning of year 966 10 244
------- ------- -------
Cash and cash equivalents at end of year $ 28 $ 966 $ 10
======= ======= =======
</TABLE>
E-60
<PAGE> 135
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
NOTE N -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company's quarterly results for the
years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998:
Total interest income $7,634 $7,978 $8,569 $8,772
Total interest expense 3,654 3,796 4,065 4,216
Net interest income 3,980 4,182 4,504 4,556
Provision for losses on loans 277 312 331 318
Other income 516 675 654 733
General, administrative and other expense 2,298 2,244 2,470 2,591
Earnings before income taxes 1,921 2,301 2,357 2,380
Federal income taxes 615 751 772 780
Net earnings $1,306 $1,550 $1,585 $1,600
====== ====== ====== ======
Basic earnings per share $ .30 $ .35 $ .36 $ .36
====== ====== ====== ======
Diluted earnings per share $ .29 $ .34 $ .35 $ .36
====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997:
Total interest income $6,575 $6,849 $7,270 $7,560
Total interest expense 3,245 3,308 3,556 3,598
------ ------ ------ ------
Net interest income 3,330 3,541 3,714 3,962
Provision for losses on loans 106 236 455 353
Other income 342 361 296 414
General, administrative and other expense 1,920 2,091 3,037 2,002
------ ------ ------ ------
Earnings before income taxes 1,646 1,575 518 2,021
Federal income taxes 548 516 472 516
------ ------ ------ ------
Net earnings $1,098 $1,059 $ 46 $1,505
====== ====== ====== ======
Basic earnings per share $ .25 $ .24 $ .01 $ .34
====== ====== ====== ======
Diluted earnings per share $ .25 $ .24 $ .01 $ .34
====== ====== ====== ======
</TABLE>
E-61
<PAGE> 136
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1998, 1997, and 1996
NOTE O -- SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Obligations for securities sold under agreements to repurchase were
collateralized at December 31, 1998 and 1997 by investment securities with a
book value including accrued interest of approximately $3.0 million and $4.0
million and a market value of approximately $3.1 million and $4.1 million. The
maximum balance of repurchase agreements outstanding at any month-end during the
years ended December 31, 1998 and 1997 was $3.1 million and $2.8 million, and
the average month-end balance outstanding for the years was approximately $1.1
million and $622,000, respectively.
E-62
<PAGE> 137
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Oak Hill Financial, Inc.
We have audited the accompanying consolidated statements of financial
condition of Oak Hill Financial, Inc. as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, comprehensive
income, and cash flows for the years ended December 31, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Oak
Hill Financial, Inc. as of December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1998 and 1997, in conformity with generally accepted accounting principles.
Cincinnati, Ohio
February 3, 1999
E-63
<PAGE> 138
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-8, File No. 333-27401, of our report dated February 3, 1999 contained in
the 1998 Annual Report to Shareholders of Oak Hill Financial, Inc., which is
incorporated by reference in this Form 10-K.
/s/ Grant Thornton LLP
Cincinnati, Ohio
March 29, 1999
E-64
<PAGE> 139
EXHIBIT 24
POWER OF ATTORNEY
-----------------
Each of the undersigned directors and officers of Oak Hill Financial,
Inc. (the "Corporation") whose signature appears below hereby appoints John D.
Kidd or H. Grant Stephenson, or either of them, as his attorney-in-fact to sign,
in his name and behalf and in any and all capacities stated below, and to cause
to be filed with the Securities and Exchange Commission, the Corporation's
Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended
December 31, 1998, and likewise to sign and file any amendments, including
post-effective amendments, to the Annual Report, hereby granting unto such
attorneys and each of them full power and authority to do and perform in the
name and on behalf off the undersigned, and in any and all such capacities,
every act and thing whatsoever necessary to be done in and about the premises as
fully as the undersigned could or might do in person, hereby granting to such
attorney-in-fact full power of substitution and revocation, and hereby ratifying
all that such attorney-in-fact or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of
Attorney in counterparts if necessary, effective as of March 26, 1998.
SIGNATURE TITLE
/s/John D. Kidd President, Chief Executive Officer, Director
- ---------------------------- (Principal Executive Officer)
John D. Kidd
/s/Evan E. Davis
- ---------------------------- Chairman of the Board
Evan E. Davis
/s/Richard P. LeGrand
- ---------------------------- Executive Vice President and Director
Richard P. LeGrand
/s/H. Tim Bichsel Secretary and Treasurer
- ---------------------------- (Principal Accounting Officer)
H. Tim Bichsel
/s/Barry M. Dorsey
- ----------------------------
Barry M. Dorsey Director
/s/Rick A. McNelly
- ----------------------------
Rick A. McNelly Director
/s/Donald R. Seigneur
- ----------------------------
Donald R. Seigneur Director
/s/H. Grant Stephenson
- ----------------------------
H. Grant Stephenson Director
/s/C. Clayton Johnson
- ----------------------------
C. Clayton Johnson Director
/s/D. Bruce Knox
- ----------------------------
D. Bruce Knox Director
E-65
<PAGE> 140
Appendix F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999
Commission File Number: 0-26876
OAK HILL FINANCIAL, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-1010517
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14621 STATE ROUTE 93
JACKSON, OHIO 45640
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (740) 286-3283
Check whether the issuer (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, 4,369,015 shares of the
registrant's common stock, $.50 stated value, were issued and outstanding.
F-1
<PAGE> 141
<TABLE>
Oak Hill Financial, Inc.
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 2: Changes in Securities and Use of Proceeds 14
Item 3: Default Upon Senior Securities 14
Item 4: Submission of Matters to a Vote of Security Holders 14
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures
</TABLE>
F-2
<PAGE> 142
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 9,011 $ 10,100
Federal funds sold 11,871 9,687
Investment securities designated as available for sale - at market 54,606 57,143
Loans receivable - net 346,839 340,143
Loans held for sale - at lower of cost or market 86 550
Office premises and equipment - net 5,790 5,717
Federal Home Loan Bank stock - at cost 2,904 2,855
Accrued interest receivable 2,701 2,705
Prepaid expenses and other assets 478 176
Prepaid federal income tax - 152
Deferred federal income tax asset 878 751
-------- --------
Total assets $435,164 $429,979
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $370,933 $366,090
Securities sold under agreements to repurchase 979 940
Advances from the Federal Home Loan Bank 22,389 23,784
Accrued interest payable and other liabilities 1,854 1,695
Federal income taxes payable 636 -
-------- --------
Total liabilities 396,791 392,509
Stockholders' equity
Common stock - $.50 stated value; authorized 5,000,000 shares,
4,415,865 shares issued 2,208 2,208
Additional paid-in capital 4,106 4,106
Retained earnings 32,896 31,718
Treasury stock (48,100 shares at cost) (755) (755)
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects (82) 193
-------- --------
Total stockholders' equity 38,373 37,470
-------- --------
Total liabilities and stockholders' equity $435,164 $429,979
======== ========
</TABLE>
F-3
<PAGE> 143
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31,
(In thousands, except share data)
<CAPTION>
1999 1998
<S> <C> <C>
Interest income
Loans $7,717 $6,672
Investment securities 871 802
Interest-bearing deposits and other 160 160
------ ------
Total interest income 8,748 7,634
Interest expense
Deposits 3,706 3,343
Borrowings 352 311
------ ------
Total interest expense 4,058 3,654
------ ------
Net interest income 4,690 3,980
Provision for losses on loans 303 277
------ ------
Net interest income after
provision for losses on loans 4,387 3,703
Other income
Gain on sale of loans 159 144
Gain on investment securities transactions 5 14
Service fees, charges and other operating 422 358
------ ------
Total other income 586 516
General, administrative and other expense
Employee compensation and benefits 1,534 1,288
Occupancy and equipment 317 309
Federal deposit insurance premiums 18 15
Franchise taxes 123 127
Other operating 606 559
------ ------
Total general, administrative
and other expense 2,598 2,298
------ ------
Earnings before income taxes 2,375 1,921
Federal income taxes
Current 788 521
Deferred 15 94
------ ------
Total federal income taxes 803 615
------ ------
NET EARNINGS $1,572 $1,306
====== ======
EARNINGS PER SHARE
Basic $ .36 $ .30
====== ======
Diluted $ .35 $ .29
====== ======
</TABLE>
F-4
<PAGE> 144
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31,
(In thousands)
<CAPTION>
1999 1998
<S> <C> <C>
Net earnings $1,572 $1,306
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
designated as available for sale (272) 77
Reclassification adjustment for realized
(gains) losses included in net earnings (3) (9)
------ ------
Comprehensive income $1,297 $1,374
====== ======
</TABLE>
F-5
<PAGE> 145
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(In thousands)
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 1,572 $ 1,306
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 129 136
Amortization of premiums and discounts
on investment securities - net 34 17
Amortization of deferred loan origination costs 105 101
Federal Home Loan Bank stock dividends (49) (47)
Loans originated for sale in secondary market (7,873) (9,520)
Proceeds from sale of loans in the secondary market 8,425 9,048
Gain on sale of loans (88) (96)
Provision for losses on loans 303 277
Gain on investment securities transactions (5) (14)
Gain on sale of office equipment - (4)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 4 191
Prepaid expenses and other assets (302) (270)
Accrued expenses and other liabilities 159 742
Federal income taxes
Current 788 (188)
Deferred 15 94
-------- --------
Net cash provided by operating activities 3,217 1,773
Cash flows provided by (used in) investing activities:
Loan principal repayments 39,936 38,386
Loan disbursements (47,040) (44,683)
Principal repayments on mortgage-backed securities 628 306
Proceeds from maturity and redemption of investment securities 10,745 6,000
Purchase of office premises and equipment (202) (83)
Proceeds from sale of office equipment - 4
Purchase of investment securities
designated as available for sale (9,282) (6,385)
Increase in federal funds sold - net (2,184) (8,380)
-------- --------
Net cash used in investing activities (7,399) (14,835)
-------- --------
Net cash used in operating and investing
activities (balance carried forward) (4,182) (13,062)
-------- --------
</TABLE>
F-6
<PAGE> 146
<TABLE>
OAK HILL FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended March 31,
(In thousands)
<CAPTION>
1999 1998
<S> <C> <C>
Net cash used in operating and investing
activities (balance brought forward) $(4,182) $(13,062)
Cash flows provided by (used in) financing activities:
Proceeds from securities sold under agreement to repurchase 39 671
Net increase in deposit accounts 4,843 19,201
Proceeds from Federal Home Loan Bank advances 540 975
Repayment of Federal Home Loan Bank advances (1,935) (9,156)
Proceeds from issuance of shares under stock option plan - 10
Dividends paid on common shares (394) (282)
------- --------
Net cash provided by financing activities 3,093 11,419
------- --------
Net decrease in cash and cash equivalents (1,089) (1,643)
Cash and cash equivalents at beginning of period 10,100 9,840
------- --------
Cash and cash equivalents at end of period $ 9,011 $ 8,197
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ - $ -
======= ========
Interest on deposits and borrowed money $ 4,170 $ 3,662
======= ========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (275) $ 68
======= ========
Recognition of mortgage servicing rights in
accordance with SFAS No. 125 $ 71 $ 48
======= ========
</TABLE>
F-7
<PAGE> 147
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements
were prepared in accordance with instructions for Form 10-Q 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.
Accordingly, these financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of the
Company included in the Annual Report on Form 10-K for the year ended
December 31, 1998. However, all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial statements have
been included. The results of operations for the three month periods
ended March 31, 1999 and 1998, are not necessarily indicative of the
results which may be expected for the entire year.
2. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries the Bank and Action
Finance Company ("Action"). Action was incorporated during 1997 for the
purpose of conducting consumer finance lending operations. Action began
such operations during 1998 using two separate office locations. All
significant intercompany balances and transactions have been
eliminated.
3. Earnings Per Share
------------------
Basic earnings per share is computed based upon the
weighted-average shares outstanding during the period, adjusted for a 5
for 4 stock dividend which was declared on April 28, 1998.
Weighted-average common shares outstanding totaled 4,367,765 and
4,398,418 for the three month periods ended March 31, 1999 and 1998,
respectively. Diluted earnings per share is computed taking into
consideration common shares outstanding and dilutive potential common
shares to be issued under the Company's stock option plan.
Weighted-average common shares deemed outstanding for purposes of
computing diluted earnings per share totaled 4,448,146 and 4,477,867
for the three month periods ended March 31, 1999 and 1998,
respectively. There were 80,381 and 79,449 incremental shares related
to the assumed exercise of stock options in the computation of diluted
earnings per share for the three month periods ended March 31, 1999 and
1998, respectively.
4. Effects of Recent Accounting Pronouncements
-------------------------------------------
In June 1998, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which requires entities to recognize all derivatives in
their financial statements as either assets or liabilities measured at
fair value. SFAS No. 133 also specifies new methods of accounting for
hedging activities, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for
hedging accounting.
The definition of derivative financial instruments is complex,
but in general, it is an instrument with one or more underlyings, such
as 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 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
F-8
<PAGE> 148
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
contracts, unless the underling of the embedded derivative is clearly
and closely related to the host contract. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. On adoption, entities are
permitted to transfer held-to-maturity debt securities to an
available-for-sale or trading category without calling into question
their intent to hold other debt securities to maturity in the future.
SFAS No. 133 is not expected to have a material impact on the Company's
financial statements.
5. Year 2000 Compliance Matters
----------------------------
As with all providers of financial services, the Company's
operations are heavily dependent on information technology systems. The
Bank and Action are addressing the potential problems associated with
the possibility that the computers that control or operate the Bank's
and Action's information technology system and infrastructure may not
be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900,
causing systems to fail to function or to generate erroneous data. The
Bank and Action are working with the companies that supply or service
its information technology systems to identify and remedy any year 2000
related problems.
In 1997, the Company developed a three phase program within
the guidelines of the Federal Financial Institutions Examination
Council (the "FFIEC"). Phase I Awareness and Assessment was to define
the problem, to establish a committee to oversee the project, to
develop an overall strategy, to identify all aspects that could be
affected by the year 2000, to recognize vendor responsibilities, and to
formulate contingency plans. Phase II Renovation is to upgrade and
replace equipment as necessary. Phase I and Phase II were largely
completed by December 31, 1998. During the phases the following systems
were considered to be mission critical: Peerless 21 software, ISBO
Link, and Fedline. Peerless 21 is the Bank's main processing system,
while ISBO Link is the Bank's connection with the Independent State
Bank of Ohio. The ISBO Link processes wires, credit card applications,
and fed funds. Fedline is the Bank's connection with the Federal
Reserve Bank. Wires, automated clearing house (ACH), treasury tax and
loan, and payer services are mission critical applications processed on
the Fedline. The Company is in the process of upgrading these systems
as necessary. However, should any of these mission critical systems
fail to be year 2000 ready, contingency plans to warehouse
transactions, to correspond with ISBO and the Federal Reserve via
telephone and fax, and to manually process payer services and ACH are
in place and to be used until such time that the year 2000 errors can
be corrected. Phase III Validation, which began during the fourth
quarter of 1998 was substantially completed at March 31, 1999. In this
phase, systems and equipment were tested to ensure year 2000 readiness.
The Company believes to ensure year 2000 readiness,
approximately $120,000 in costs will be incurred. Approximately 25% of
the costs were incurred as of March 31, 1999, while the remaining
amount is expected to be incurred during the remainder of 1999.
Although the Company believes the estimate is reasonable at this time,
if the Bank and/or Action is ultimately required to purchase
replacement computer systems, programs and/or equipment, or incur
substantial expense to make their systems, programs, and/or equipment
year 2000 ready, the Company's net earnings and financial condition
could be adversely affected.
F-9
<PAGE> 149
OAK HILL FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Year 2000 Compliance Matters (continued)
----------------------------------------
In addition to possible expense related to its own systems,
the Bank and/or Action could incur losses if loan payments are delayed
due to year 2000 problems affecting any major borrowers in their
primary market areas. Because their loan portfolios are highly
diversified with regard to individual borrowers and types of
businesses, and their primary market areas are not significantly
dependent upon any one employer or industry, they do not expect any
significant or prolonged difficulties that will affect net earnings or
cash flow.
6. Other Events
------------
On March 11, 1999, the Company announced the signing of a
definitive agreement for the acquisition of Towne Financial Corporation
("Towne"). Under terms of the agreement, the Company will exchange
4.125 shares of its common stock for each of the 222,100 shares of
Towne stock , resulting in a transaction valued at approximately $17.6
million. The combination will be accounted for as a
pooling-of-interests. At March 31, 1999, Towne reported total assets of
$122.3 million, total deposits of $98.4 million, and stockholders'
equity of $9.5 million. The transaction is expected to be completed
during the third quarter of 1999, subject to the approval of both the
Company's and Towne's shareholders and subject to regulatory approval.
F-10
<PAGE> 150
OAK HILL FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from December 31, 1998 to March 31,
- -----------------------------------------------------------------------------
1999
- ----
At March 31, 1999, the Company had total assets of $435.2 million, an
increase of approximately $5.2 million, or 1.2%, over December 31, 1998 levels.
The increase in total assets was funded primarily by growth in the deposit
portfolio of $4.8 million and undistributed net earnings of $1.2 million, which
were partially offset by a decrease in Federal Home Loan Bank advances of $1.4
million.
Cash, federal funds sold and investment securities totaled $75.5
million at March 31, 1999, a decrease of $1.4 million, or 1.9%, from December
31, 1998 levels. During the three months ended March 31, 1999, management
purchased $9.3 million of investment securities, while $11.4 million of
securities matured or were called. Securities purchased consisted primarily of
U.S. treasury notes and U.S. government agency securities. The increase reflects
management's efforts to maintain adequate levels of liquidity while maximizing
yield on short-term investments.
Loans receivable and loans held for sale totaled $346.9 million at
March 31, 1999, an increase of $6.2 million, or 1.8%, over the total at December
31, 1998. Loan disbursements totaled approximately $54.9 million during the 1999
three month period, while principal repayments and sales amounted to $39.9
million and $8.3 million, respectively. Loan disbursements increased by
$710,000, or 1.3%, during the 1999 period, as compared to the three month period
in 1998. Loans originated in 1999 were primarily comprised of commercial loans
and 1-4 family residential loans.
The Company's allowance for loan losses amounted to $4.4 million at
March 31, 1999, an increase of $76,000 or 1.8% over the total at December 31,
1998. The allowance for loan losses represented 1.25% of the total loan
portfolio at March 31, 1999 and December 31, 1998. The Company's allowance
represented 287.5% and 272.8% of non-performing loans, which totaled $1.5
million and $1.6 million at March 31, 1999 and December 31, 1998, respectively.
The deposit portfolio totaled $370.9 million at March 31, 1999, an
increase of $4.8 million, or 1.3%, over December 31, 1998 levels. Proceeds from
deposit growth were utilized to fund loan originations and to repay advances
from the Federal Home Loan Bank. The increase resulted primarily from
management's marketing efforts and continued growth at newer branch facilities.
The Bank is required to maintain minimum regulatory capital pursuant to
federal regulations. At March 31, 1999, the Bank's regulatory capital
substantially exceeded all regulatory capital requirements.
F-11
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OAK HILL FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three month periods ended March 31, 1999 and 1998
Comparison of Results of Operations for the Three Month Periods Ended March 31,
- -------------------------------------------------------------------------------
1999 and 1998
- -------------
General
- -------
Net earnings for the three months ended March 31, 1999 totaled $1.6
million, an increase of $266,000, or 20.4%, over the $1.3 million in net
earnings reported in the comparable 1998 period. The increase in earnings in the
1999 period is primarily attributable to a $684,000 increase in net interest
income after provision for losses on loans and a $70,000 increase in other
income, which were partially offset by a $300,000 increase in general,
administrative and other expenses and an increase in the federal income tax
provision of $188,000.
Net Interest Income
- -------------------
Total interest income for the three months ended March 31, 1999
increased by $1.1 million, or 14.6%, generally reflecting the effects of growth
in average interest-earning assets from $353.0 million to $417.6 million for the
three month periods ending March 31, 1998 and 1999, respectively, which was
partially offset by a decrease in weighted-average yield from 8.77% in the 1998
period to 8.50% in the 1999 period. Similarly, total interest expense increased
for the three months ended March 31, 1999 by $404,000, or 11.1%, also reflecting
the growth in average interest-bearing liabilities from $306.9 million to $354.7
million; however, the weighted-average cost of funds decreased from 4.94% in the
1998 period to 4.64% in the 1999 period.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $710,000, or 17.8%, for the three
months ended March 31, 1999, as compared to the comparable quarter in 1998. The
interest rate spread amounted to 3.86% and 3.83% for the three months ended
March 31, 1999 and 1998, while the net interest margin totaled 4.56% and 4.57%
for the three months ended March 31, 1999 and 1998, respectively.
Provision for Losses on Loans
- -----------------------------
The provision for losses on loans totaled $303,000 for the three months
ended March 31, 1999, an increase of $26,000 over the comparable 1998 period.
The provision was primarily attributable to growth in the loan portfolio
year-to-year.
Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at March 31, 1999, future adjustments to 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three month periods ended March 31, 1999 and 1998
Comparison of Results of Operations for the Three Month Periods Ended March 31,
- -------------------------------------------------------------------------------
1999 and 1998 (continued)
- -------------------------
Other Income
- ------------
Other income for the three months ended March 31, 1999, totaled
$586,000, an increase of $70,000, or 13.6%, over the $516,000 reported in the
comparable 1998 period. The increase resulted from a $64,000, or 17.9% increase
in service fees, charges and other operating income and an increase of $15,000,
or 10.4% in gain on sale of loans, which were partially offset by a $9,000
decrease in gain on sale of investments.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense increased for the three
months ended March 31, 1999 by $300,000, or 13.1%. The increase was due
primarily to a $246,000, or 19.1%, increase in employee compensation and
benefits, an increase in occupancy and equipment expense of $8,000, or 2.6%, and
an increase in federal deposit insurance premiums of $3,000, or 20.0%, which
were partially offset by a $4,000, or 3.1% decrease in franchise taxes. Other
operating expenses also increased year-to-year by $47,000, or 8.4%.
The increase in employee compensation and benefits is due primarily to
additional staffing levels, primarily related to the start-up of the Action
subsidiary, coupled with normal merit increases, which were partially offset by
an increase in deferred costs related to greater lending volume year-to-year.
The increase in occupancy and equipment expense resulted primarily from expenses
related to the addition of new branch facilities. The increase in other
operating expenses is primarily attributable to costs incurred in connection
with the inception of the Action subsidiary, coupled with the Company's overall
growth year to year.
Federal Income Taxes
- --------------------
The provision for federal income taxes increased by $188,000, or 30.6%,
during the three months ended March 31, 1999, as compared to the same period in
1998. The effective tax rates for the three month periods ended March 31, 1999
and 1998 were 33.8% and 32.0%, respectively.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Not applicable.
F-13
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OAK HILL FINANCIAL, INC.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Changes in Securities
---------------------
Not applicable
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Company held its 1999 Annual Meeting of Stockholders
April 27, 1999. Holders of 3,812,803 Common Shares of the
Company were present representing 87.29% of the Company's
4,367,765 Common Shares outstanding.
(b) and (c) The following persons were elected Class I members of the
Company's Board of Directors to serve until the 2001 Annual
Meeting or until their successors are duly elected and
qualified. Each person received the number of votes for or
the number of votes with authority withheld indicated
below.
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Evan E. Davis 3,774,877 37,926
John D. Kidd 3,774,702 38,101
Richard P. LeGrand 3,774,877 37,926
D. Bruce Knox 3,774,627 38,176
C. Clayton Johnson 3,772,752 40,051
</TABLE>
The continuing Class II Directors, whose terms expire at the
2000 Annual Meeting are: Barry M. Dorsey, Ph.D., Rick A.
McNelly, Donald R. Seigneur, and H. Grant Stephenson.
The proposal for the amendment to the Company's Third Amended
and Restated Articles of Incorporation, which increases the
authorized Common Stock of the Company from 5,000,000 to
15,000,000 shares, was approved with 3,721,468 votes FOR,
75,533 votes AGAINST, and 15,802 votes ABSTAIN.
The proposal for the amendment to the Company's 1995 Stock
Option Plan, which increases the number of shares of the
Company's Common Stock issuable upon exercise of stock options
under the Company's 1995 Stock Option Plan from 500,000 to
800,000 shares, was approved with 2,818,579 votes FOR, 93,038
votes AGAINST, and 20,827 votes ABSTAIN.
The proposal for the ratification of the appointment of Grant
Thornton, LLP as independent auditors for the Company for the
fiscal year ending December 31, 1999, was approved with
3,797,650 votes FOR, 3,551 votes AGAINST, and 11,602 votes
ABSTAIN.
F-14
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ITEM 5. Other Information
-----------------
None
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
The Company has filed the following current reports on Form 8-K with
the Securities and Exchange Commission:
(a) Form 8-K, dated March 11, 1999, filed with the Securities and
Exchange Commission on March 15, 1999, filed, as amended, on
March 18,1999.
(b) Form 8-K, dated April 6, 1999, filed with the Securities and
Exchange Commission on April 12, 1999.
Exhibits: Financial Data Schedule for the three months ended March 31,
1999.
F-15
<PAGE> 155
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.
Date: May 7, 1999 By: /s/ John D. Kidd
----------- ----------------------------
John D. Kidd
President
Date: May 7, 1999 By: /s/ H. Tim Bichsel
----------- ----------------------------
H. Tim Bichsel
Chief Financial Officer
F-16
<PAGE> 156
Appendix G
EXHIBIT 13 TO 10-KSB
TOWNE FINANCIAL CORPORATION
Parent Company of
The Blue Ash Building and Loan Company
1998
ANNUAL REPORT
G-1
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TO OUR SHAREHOLDERS
On behalf of the directors, officers and employees of Towne Financial
Corporation ("Towne Financial") and The Blue Ash Building and Loan Company
("Blue Ash"), we would like to express our thanks and gratitude for your
continuing support and investment in Towne Financial. Since 1908, great
efforts have been made to make Blue Ash a safe, sound and profitable mutual
savings and loan. As a publicly-owned savings and loan holding company, whose
primary investment is Blue Ash, Towne Financial is still positioned to build on
the strong foundation laid by those past efforts.
In celebrating 90 years in business of providing a wide array of quality
financial products and services to our customers, fiscal 1998 was marked by a
record year in earnings, continued growth in assets and solid performances
within the lending and savings operations. The strength and vitality of Towne
Financial continues, as evidenced by the consolidated financial reports and
information as of and for the year ended June 30, 1998, included in our Seventh
Annual Report.
Towne Financial closed fiscal 1998 with assets totaling an unprecedented
$117.8 million, an increase of $15.2 million, or 14.9%, from fiscal 1997 asset
levels. This represents the fourth consecutive year of double-digit asset
growth for the Corporation. Since 1992, Towne Financial has doubled in asset
size, as the Board of Directors and management continue to aggressively grow
the business in all facets to insure continued strong operating performance and
enhanced shareholder value in the years ahead. The increase in asset size
during fiscal 1998 was primarily due to an increase in the loan portfolio of
$5.6 million, or 8.3%, and an increase in the mortgage-backed securities
portfolio of $6.3 million, or 23.4%. These increases were primarily funded by
deposits, which grew to an all time high of $95.0 million at June 30, 1998, an
increase of $13.2 million, or 16.1%, over deposit levels at June 30, 1997. The
growth in assets during fiscal 1998 gave rise to a healthy increase of
$335,000, or 12.3%, in net interest income. It is important to stress that the
growth in assets experienced during fiscal 1998, as well as over the last few
years, can be tangibly measured and is symbolic of the increasing consumer
preference for transacting business with a community-based financial
institution. It should also be noted that such growth in the asset base has
been consistent with our short-term and long-term goals and objectives, as we
continue expanding our customer base within existing and new market areas.
Our operating results were fueled by a record setting performance in net
earnings. Consolidated net earnings during the
G-2
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year ended June 30, 1998 totaled a record $938,000, an increase of $573,000, or
157.0%, over the $365,000 in net earnings recorded in fiscal 1997. As a
result, diluted earnings per share rose from $1.69 per share during fiscal 1997
to $4.28 per share during fiscal 1998, an increase in diluted earnings per
share of $2.59, or 153.3%. Included in fiscal 1997 consolidated net earnings
was the negative impact from an after-tax charge of $242,000 for a special
assessment levied on all financial institutions insured by the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation
(FDIC). Without the one-time special charge for the SAIF assessment, fiscal
1997 consolidated net earnings would have been reported at $607,000, or $2.81
per diluted share. If this SAIF charge is not included in fiscal 1997
consolidated net earnings, Towne Financial's consolidated net earnings for
fiscal 1998 were $331,000, or 54.5%, greater than fiscal 1997 net earnings and
$1.47, or 52.3%, greater on a diluted per share basis. The components fueling
the significant 54.5% increase in fiscal 1998 net earnings, exclusive of the
effects of the SAIF charge in fiscal 1997, were the increase in net interest
income of $335,000, or 12.3%, an increase in other income of $288,000, or
135.8%, primarily from gains on sale of loans and mortgage-backed securities,
and to reduced federal deposit insurance premiums resulting from the one-time
special SAIF assessment levied in fiscal 1997 and stringent expense control of
operating costs. Notwithstanding a fourth straight year of double-digit asset
growth, our cost of operations increased by less than 6% year-to-year. In
point of fact, our annual operating costs have increased by only 13% over the
last three years while assets have grown by 48%.
Indicative of our strong earnings were the improvements made in two of our
key financial ratios. Return on equity, which is net earnings divided by
average equity, was 11.54% during the year ended June 30, 1998, as compared to
a SAIF-adjusted 8.29% during the year ended June 30, 1997. Return on assets,
which is net earnings divided by average total assets, was 0.84% during the
year ended June 30, 1998, as compared to a SAIF-adjusted 0.63% during the year
ended June 30, 1997. During fiscal 1998, both of these key financial ratios
exceeded fiscal 1997 levels by 39% and 33%, respectively.
Even though we achieved strong earnings, 1998 was not without its
difficulties. Significant pressure was placed on our interest rate spread from
the combination of a declining interest rate environment and a flattening yield
curve. Simply put, our interest rate spread, the difference between what we
pay our depositors and what we receive from our borrowers, declined from 2.80%
in fiscal 1997 to 2.68% in fiscal 1998. In order to remain profitable under
less than ideal conditions, we found it necessary to compensate for
G-3
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this decline in spread by continuing our strategy of sustained loan portfolio
growth to the extent practicable, placing a greater emphasis during fiscal 1998
on increasing other income by originating mortgage loans for sale in the
secondary market in order to meet the demand for fixed-rate loans in a
declining interest rate environment, restructuring the securities portfolio by
taking profits on certain securities and acquiring additional securities for
sale in order to take advantage of the declining interest rate environment and
driving down our overall cost of funds by continuing to push transaction
accounts and implementing more stringent pricing on certificate of deposit
accounts. Despite this decline in interest rate spread during fiscal 1998,
core earnings still increased. Specifically, net interest income, which is the
interest income generated by interest-earning assets after the deduction of
interest expense associated with deposits and borrowed money, increased by
$335,000, or 12.3%, from $2.7 million during fiscal 1997 to $3.0 million during
fiscal 1998, primarily from the growth in interest-earning assets.
Our primary business activity, mortgage lending, had another extremely
strong growth year in fiscal 1998, as demand for mortgage loans to finance home
sales and construction in our lending area remained relatively strong. Loan
originations and purchases in fiscal 1998 totaled approximately $48.5 million,
an increase of $19.6 million, or 67.6%, over the $28.9 million loan origination
level in fiscal 1997. Attributing to the significant increase in loan volume
was loans originated for sale in the secondary market. During fiscal 1998,
loans originated for sale in the secondary market totaled $18.9 million, as
compared to only $1.7 million in fiscal 1997, and loan sales increased from
$1.9 million in fiscal 1997 to $18.9 million in fiscal 1998. During fiscal
1998 while market rates of interest were declining, loan originations and loan
sales were at higher levels than in fiscal 1997. In order to accommodate the
increased consumer demand for fixed-rate loans, loan sales were utilized more
heavily in fiscal 1998 resulting in increased gains and origination activity.
In addition to loans originated for sale, loans originated and purchased for
the portfolio also increased during fiscal 1998 by $2.4 million, or 8.7%, from
$27.2 million during fiscal 1997 to $29.6 million during fiscal 1998. As a
result of this strong loan origination volume for the portfolio, the loan
portfolio grew a robust 8.3%, from $66.8 million at June 30, 1997 to $72.4
million at June 30, 1998. Since 1992, the loan portfolio has grown by over $45
million, or 168%. Such growth in loans can be attributed to our strong lending
operation, to an aggressive marketing and selling effort of our lending
products and services to the communities we lend to and to the continual
development and refinement of new and innovative lending programs that give us
a more competitive advantage.
G-4
<PAGE> 160
Residential mortgage lending will continue to be a major area of
opportunity for the Company. Looking ahead, we see opportunities to continue
to grow our loan portfolio and to grow it at attractive spreads; however, such
growth may be slowed somewhat if interest rates remain at historical lows and
loan prepayments accelerate. If such a low interest rate scenario exists in
the months ahead, selling residential mortgage loans in the secondary market
will continue to be a major part of the Company's future plans. This practice
enables the Company to enhance the management of its liquidity position, as
well as effect changes in its asset and liability mix. As we move forward into
fiscal 1999 and beyond, we expect to continue concentrating our efforts at
increasing our lending presence into newer market areas, much like we did
during the past twelve months. During fiscal 1998, we hired two new loan
officers to help further our lending presence in Northern Kentucky and the west
side of Cincinnati. In addition to expanding into newer markets, we also want
to focus on further developing the rapidly growing Mason area, as there is much
new home construction occurring in and around our branch facility. It is our
continued goal to increase loan production and the level of loan retention,
obtaining such goal mainly through customer deposit growth.
The key to our growth is how well we manage it. With every new branch and
every new product come new opportunities and new challenges. Changing
technology continues to require investment to ensure that we are both efficient
and cost effective. Our ability and willingness to accept and adopt new
technologies and to quickly adapt to the ever-changing needs of our customers
regarding our products and services will determine how successful we are in
growing our business as we head into the next century. Keeping this in mind,
we are not complacent with the current year's growth rate, as we continue to
explore new branching possibilities and additional services to provide to our
customers. During fiscal 1997, we invested in new loan origination software
which gave us the capability of directly interfacing with the Federal Home Loan
Mortgage Corporation (FHLMC), our primary source for selling loans. As loans
originated for sale in the secondary market intensified during fiscal 1998, we
began processing a significant amount of these loans through FHLMC's "Loan
Prospector" system which gave us faster loan processing time and qualified
potential borrowers who may not have normally qualified for low fixed-rate
mortgage loans. Since we are one of the first companies to have this new
secondary market technology in our local area, it gives us a distinct
competitive advantage in marketing these types of loans. During fiscal 1998,
we hired a Federal Housing Administration (FHA) Direct-Endorsed (DE)
Underwriter and were approved by the Housing Urban Development (HUD) as a
direct-endorsed lender to originate FHA loans. We also streamlined our entire
underwriting process in order to obtain better efficiencies in delivering
quality loan products and services to our customers. In the area of new
deposit
G-5
<PAGE> 161
offerings, we extended our "free checking" program in fiscal 1998 to all of our
branch offices as we continued placing a stronger emphasis on obtaining new
checking customers. The goals for increasing checking accounts are to attract
new core deposit customers, lower the average cost of funds and provide a
strong volume of cross-selling opportunities for other company products.
Finally, the Board of Directors and management made a commitment in fiscal 1998
to upgrade most of the teller terminals in our offices with an eye towards
having all of the Company's internal computer systems fully functional for the
year 2000. The upgrades were completed in July 1998 and will enhance our
ability to offer better service to our customers. We are very excited about
these advancements in technology and look forward to providing better service
to our customers in the future. We believe that branching out into new markets
and expanding and improving current services to our customers is essential so
that Blue Ash can compete and grow amidst the ever-increasing technology of the
financial services industry. Continued reinvestment of our earnings will help
sustain this growth and maximize shareholder value.
Additional efforts to improve shareholder value were initiated in fiscal
1998 by paying out for the first time ever quarterly cash dividends. In
addition to realizing an annual return from net earnings of $4.28 per diluted
share during fiscal 1998, quarterly cash dividends for the year of $.40 were
paid out to each shareholder, bringing the total rate of return on each
shareholder's initial investment of $10.00 per share to approximately 47% for
the year ended June 30, 1998. As long as we continue to be successful in the
years ahead, we will continue looking to enhance our shareholder value through
the payment of quarterly cash dividends and increase the expected payout of
such dividends in relation to our earnings growth.
We are pleased to report that shareholders' equity totaled $8.7 million at
June 30, 1998, or $41.55 per common share. As of June 30, 1998, Blue Ash's
regulatory capital position has been built to a level that considerably exceeds
all current federally-mandated minimum capital requirements. Blue Ash's
regulatory capital at that date was almost two times greater than the most
stringent of the minimum regulatory capital requirements.
Our vision of the future sees an industry where not only competition, but
ever-continuing change creates daily challenges and opportunities. Also of
great importance is the ability to effectively compete with other financial
services providers, an area where Towne Financial continues to be at somewhat
of a disadvantage. With outdated, inequitable legislation, financial
institutions continue to pay a regulatory price while credit unions, insurance
companies and other financial entities face no such restrictions. We accept
the fact that we will always have competitors; what we ask for is to compete as
equals. We encourage
G-6
<PAGE> 162
our customers and shareholders to support fair and reasonable financial reform
legislation as we approach the next century.
Our strong growth and earnings performance in fiscal 1998 was achieved
against a backdrop of an industry in flux, with continuing consolidation and
new competitors on the horizon. In today's volatile environment, we are
competing for customers not only with other financial institutions, but also
with the major mutual fund companies, brokerage houses, credit card companies
and insurers. In fiscal 1998, the blurring of the lines in the financial
services industry began accelerating more rapidly. Not only did banks join
together, but also numerous mergers of banks and brokerage houses, insurance
companies and brokerages, and banks and credit card companies were announced or
completed. We believe this trend will continue, and ultimately a dozen or so
companies will hold a dominant share of the financial services business. The
leaders in this new financial services industry will be those companies that
find the most innovative ways to help customers simplify their financial lives.
The industry, the consumer and the economy have changed and we will continue
to do so as well. Operating efficiently and containing costs will be a key
ingredient in our future success. We believe that Towne Financial's strength
and prudent business approach enable us to compete successfully in today's
business, regulatory and economic environment, as well as tomorrow's. To know
where you are going, you have to have some idea where you have been. Over the
years we have had the good fortune to grow and succeed. With the solid
foundation established by Blue Ash's growth through operations and branch
expansion, we feel confident looking toward the opportunities and challenges of
the future.
Our future remains challenging and quite exciting. We are encouraged by
the opportunities that lie before us - new communities, new products, new
customers and a new commitment to community banking. As always, we remain
committed to greater service and greater achievement, as being part of a
growing, successful company is extremely rewarding. We hope that you will
continue to be a part of our success, and we truly thank you for your support,
loyalty and trust in Towne Financial.
Sincerely,
/s/ William S. Siders
William S. Siders
Executive Vice President
and Managing Officer
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<PAGE> 163
BUSINESS OF TOWNE FINANCIAL CORPORATION
Towne Financial Corporation ("Towne Financial", or the "Corporation"), an
Ohio corporation, is a unitary savings and loan holding company which owns all
of the issued and outstanding common shares of The Blue Ash Building and Loan
Company ("Blue Ash", or the "Company"), a savings and loan association
incorporated under the laws of the State of Ohio. In 1992, Towne Financial
acquired all of the common shares issued by Blue Ash upon its conversion from a
mutual savings and loan association to a stock savings and loan association
(the "Conversion"). Since the completion of this transaction, Towne
Financial's activities have been limited primarily to holding the common shares
of Blue Ash. Future references to the Corporation or the Company are utilized
herein as the context requires.
Blue Ash's overall operating philosophy has evolved from the fundamental
goal of providing affordable home ownership for the communities it serves and
providing a safe, competitive return for its depositors. Serving the
Cincinnati, Ohio, area since 1908, Blue Ash conducts business from its main
office at 4811 Cooper Road in Blue Ash, Ohio, and from three full-service
branch offices located in Mason, Cherry Grove and Amelia. Specifically, Blue
Ash considers its principal market areas to be the northeastern and eastern
areas of Cincinnati, Ohio. During fiscal 1998, Blue Ash increased its lending
presence in Northern Kentucky and the western side of Cincinnati by increasing
its advertising and marketing efforts in those areas and by hiring two new loan
officers for purpose of originating loans there. In addition to the Company's
efforts to continue expanding operations into new markets and increasing the
Company's assets and profitability, Blue Ash continued to expand and improve
its customer retail services during fiscal 1998 in order to successfully
compete in today's ever-changing business and economic environment. Blue Ash
actively utilized the Federal Home Loan Mortgage Corporation "Loan Prospector"
system for processing secondary market loans, which it had invested in during
fiscal 1997. By utilizing this system, more potential loan borrowers qualified
for low fixed-rate mortgage loans and greater time efficiencies were realized
for the benefit of the loan customer, both of which gave Blue Ash a distinct
competitive advantage. Blue Ash also extended its "free checking" program to
all its offices during fiscal 1998 in order to continue attracting new
customers and obtain a greater volume of lower cost core deposits.
As a community-oriented financial institution, Blue Ash offers a range of
retail banking services to residents of the Greater Cincinnati area through its
four offices. Blue Ash is principally
G-8
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engaged in the business of attracting deposits from the general public and
using such deposits, together with borrowings and other funds, to originate
first mortgage loans secured by one-to-four family residential real estate
located in Blue Ash's lending area. Blue Ash also originates loans for the
construction of one-to-four family residential real estate, loans secured by
multi-family (over four units) real estate, nonresidential real estate, land,
home equity line of credit loans secured by residential real estate, passbook
and secured consumer loans. Blue Ash also invests in U.S. Government and
agency obligations, corporate debt securities, municipal obligations,
interest-bearing deposits and certificates of deposit in other financial
institutions, federal funds sold, government guaranteed mortgage-backed and
related securities and other investments permitted by applicable law. Funds
for lending and other investments are obtained primarily from savings deposits,
borrowings, loan repayments and proceeds from the sale of loans in the
secondary market. Blue Ash's revenues are primarily derived from interest
income on real estate loans, interest income on mortgage-backed and related
securities, gain on sale of loans in the secondary market, and to a lesser
extent, interest income on investments and interest-bearing deposits, servicing
fee income on loans sold, fees from lending and deposit activities, gain on
sale of securities designated as available for sale, and gain on sale of real
estate acquired through foreclosure and other assets. Blue Ash's most
significant expenses are interest on deposits and borrowings and administrative
expenses related to personnel, occupancy and equipment, federal deposit
insurance premiums, data processing services, franchise taxes, advertising and
federal income taxes.
As a savings and loan holding company, Towne Financial is subject to
regulation, supervision and examination by the Office of Thrift Supervision of
the United States Department of the Treasury (the "OTS"). As a savings and
loan association incorporated under the laws of the State of Ohio, Blue Ash is
subject to regulation, supervision and examination by the OTS, the Federal
Deposit Insurance Corporation (the "FDIC") and the Ohio Division of Financial
Institutions (the "Division"). Deposits in Blue Ash are insured up to the
applicable limits by the Savings Association Insurance Fund (the "SAIF") of the
FDIC. Blue Ash is also a member of the Federal Home Loan Bank of Cincinnati
(the "FHLB") and is further subject to certain regulations of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") governing
reserves required to be maintained against deposits and certain other matters.
The business and regulation of Blue Ash are also subject to legislative changes
from time to time.
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MARKET FOR TOWNE FINANCIAL'S COMMON
SHARES AND RELATED SECURITY HOLDER MATTERS
There were 208,500 common shares of Towne Financial outstanding on
September 9, 1998, held of record by approximately 125 shareholders. At the
present time, there is no active public trading market for the Corporation's
common shares. The common shares are listed over-the-counter through the
National Daily Quotation Bureau, Inc.
Towne Financial had not declared or paid any cash dividends through June
30, 1997. On August 20, 1997, however, Towne Financial declared its first ever
quarterly cash dividend of $.10 per share. During fiscal 1998, there were a
total of four quarterly cash dividends of $.10 per share declared and paid on
208,500 outstanding common shares totaling $.40 per share, or $84,000.
Dividends are paid based upon the determination of the Board of Directors of
the Corporation that such payments are consistent with the short-term and
long-term interests of Towne Financial. The factors affecting this
determination include Towne Financial's current and projected earnings,
operating results, financial condition, regulatory restrictions, future growth
plans and other relevant factors.
The principal source of earnings to Towne Financial on an unconsolidated
basis consists of dividends, if any, on Blue Ash's stock paid to Towne
Financial. Consequently, declarations of cash dividends by Towne Financial
will depend upon dividend payments by Blue Ash to Towne Financial, which
payments are subject to various restrictions. During fiscal 1998, Blue Ash
declared capital distributions in the form of dividends of $150,000 to be
distributed to Towne Financial for the payment by Towne Financial of cash
dividends to its shareholders and for other general corporate purposes.
In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings and loan associations. Under OTS regulations applicable to
converted savings associations, Blue Ash is not permitted to pay a cash
dividend on its common shares if Blue Ash's regulatory capital would, as a
result of the payment of such dividend, be reduced below the amount required
for the Liquidation Account (the account established for the purpose of
granting a limited priority claim on the assets of Blue Ash in the event of a
complete liquidation to those members of Blue Ash before the conversion who
maintain a savings account at Blue Ash after the
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conversion) or applicable regulatory capital requirements prescribed by the
OTS.
As a condition to regulatory approval of the stock conversion and
reorganization to the holding company form of organization, Blue Ash agreed to
limit the amount of dividends payable to Towne Financial. Regulations of the
OTS impose limitations on the payment of dividends and other capital
distributions by savings associations. Under such regulations, a savings
association that, immediately prior to, and on a pro forma basis after giving
effect to a proposed capital distribution (including a dividend) has total
capital (as defined by OTS regulations) that is equal to or greater than the
amount of its fully phased-in capital requirement is generally permitted
without OTS approval (but subsequent to 30 days prior notice to the OTS of the
planned dividend) to make capital distributions, including dividends, during a
calendar year in an amount not to exceed the sum of (i) 100% of its net
earnings to date during the calendar year, plus an amount equal to one-half of
the amount by which its total capital-to-assets ratio exceeded its fully
phased-in capital-to-assets ratio at the beginning of the calendar year or (ii)
75% of its net earnings for the most recent four quarters. Savings
associations with total capital in excess of the fully phased-in capital
requirement that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A
savings association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
Blue Ash currently meets its fully phased-in capital requirement and,
unless the OTS determines that Blue Ash is an institution requiring more than
normal supervision, Blue Ash may pay dividends in accordance with the foregoing
provisions of the OTS regulations. Unrestricted retained earnings of Blue Ash
at June 30, 1998, available for payment of dividends to Towne Financial under
the foregoing regulations, were at least $2.3 million.
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SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
The following tables set forth certain information concerning the
consolidated financial condition, earnings and other data regarding Towne
Financial at the dates and for the years indicated. The consolidated financial
information should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere herein. For additional
information about the Corporation, reference is also made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Selected consolidated financial
condition and other data:
At June 30,
------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total Amount of:
Assets $117,790 $102,558 $92,214 $79,484 $69,405
Interest-bearing deposits (1) 5,485 1,613 2,756 2,477 1,367
Investment securities
designated as available for
sale - at market 809 --- --- --- ---
Investment securities held to
maturity - at amortized cost 809 1,399 1,300 500 1,228
Mortgage-backed securities
designated as available
for sale - at market 18,354 15,269 15,680 11,803 8,959
Mortgage-backed securities
held to maturity - at
amortized cost 14,641 11,463 11,948 13,173 14,607
Loans receivable - net (2) 72,358 66,817 55,071 45,783 38,771
Deposits 94,988 81,794 75,618 59,784 52,031
Advances from the Federal
Home Loan Bank 12,674 12,000 8,424 8,318 10,000
Obligations for securities
sold under agreements to
repurchase --- --- --- 3,504 ---
Shareholders' equity - net,
restricted (3) 8,663 7,638 7,157 6,883 6,357
Number of:
Real estate loans
outstanding (4)(5) 1,007 960 853 749 644
Deposit accounts 8,198 7,521 7,609 6,772 6,239
Full-service offices 4 4 4 4 3
</TABLE>
_________________________
Footnotes on page 13
G-12
<PAGE> 168
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of earnings:
Interest income $8,462 $7,192 $6,410 $5,090 $4,564
Interest expense 5,396 4,461 4,063 2,859 2,593
------ ------ ------ ------ ------
Net interest income 3,066 2,731 2,347 2,231 1,971
Provision for losses on loans 24 18 11 -- 30
------ ------ ------ ------ ------
Net interest income after
provision for losses on loans 3,042 2,713 2,336 2,231 1,941
Other income 500 212 470 262 207
General, administrative and
other expense 2,108 2,359 2,001 1,873 1,673
------ ------ ------ ------ ------
Earnings before federal income
taxes and cumulative effect of
changes in accounting methods 1,434 566 805 620 475
Federal income taxes 496 201 284 229 142
------ ------ ------ ------ ------
Earnings before cumulative effect
of changes in accounting methods 938 365 521 391 333
Cumulative effect of changes in
accounting methods (6) -- -- -- -- 299
------ ------ ------ ------ ------
Net earnings $ 938 $ 365 $ 521 $ 391 $ 632
====== ====== ====== ====== ======
Basic earnings per share (7):
Earnings before cumulative
effect of changes in
accounting methods $ 4.50 $ 1.75 $ 2.51 $ 1.89 $ 1.61
Cumulative effect of changes
in accounting methods -- -- -- -- 1.44
------ ------ ------ ------ ------
Net earnings $ 4.50 $ 1.75 $ 2.51 $ 1.89 $ 3.05
====== ====== ====== ====== ======
Diluted earnings per share (7):
Earnings before cumulative
effect of changes in
accounting methods $ 4.28 $ 1.69 $ 2.44 $ 1.86 $ 1.61
Cumulative effect of changes
in accounting methods -- -- -- -- 1.44
------ ------ ------ ------ ------
Net earnings $ 4.28 $ 1.69 $ 2.44 $ 1.86 $ 3.05
====== ====== ====== ====== ======
</TABLE>
________________________________
Footnotes on page 13
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(1) Includes federal funds sold, interest-bearing deposits in other financial
institutions, certificates of deposit in other financial institutions and
Federal Home Loan Bank stock.
(2) Includes loans held for sale, which are recorded at the lower of cost or
market value.
(3) See Notes I and K of Notes to Consolidated Financial Statements regarding
restrictions on equity.
(4) Includes home equity line of credit loans.
(5) Whole mortgage loans serviced by Blue Ash and sold in the secondary
market are not included.
(6) Includes cumulative effect of changes in accounting for income taxes
(SFAS No. 109) and investments in certain debt and equity securities (SFAS
No. 115).
(7) All earnings per share amounts reflect the implementation of Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share,"
which establishes new standards for computing and presenting earnings per
share. SFAS No. 128 requires institutions to present basic earnings per
share and, if applicable, diluted earnings per share, respectively.
Effective during the year ended June 30, 1998, the Corporation began
presenting earnings per share pursuant to the provisions of SFAS No. 128.
All earnings per share data relating to prior years have been restated to
conform to the provisions of the Statement. For additional information,
see Note A-13 of Notes to Consolidated Financial Statements.
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<PAGE> 170
<TABLE>
<CAPTION>
At or for the Year ended June 30,
------------------------------------------
Selected Financial Ratios (1): 1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest rate spread (2):
Average during year 2.68% 2.80% 2.66% 3.16% 2.72%
End of year 2.48 2.75 2.52 2.73 2.91
Net yield on average
interest-earning assets 2.89 2.99 2.86 3.30 2.85
Average interest-earning assets
as a percentage of average
interest-bearing liabilities 104.06 103.86 104.04 103.21 103.58
Return on equity (net earnings
divided by average equity) (3) 11.54 4.99 7.28 6.03 10.42
Return on assets (net earnings
divided by average total
assets) (3) 0.84 0.38 0.60 0.54 0.85
Equity-to-assets ratio (average
equity divided by average
total assets) 7.27 7.57 8.19 8.89 8.18
Allowance for loan losses as a
percentage of non-performing
loans at end of year 29.83 60.55 34.22 72.85 36.85
Allowance for loan losses as a
percentage of total loans
at end of year 0.36 0.37 0.42 0.48 0.57
Non-performing loans as a
percentage of total loans
at end of year (4) 1.22 0.60 1.23 0.66 1.54
Non-performing assets as a
percentage of total assets
at end of year (4) 0.75 0.39 0.73 0.38 1.10
General, administrative and other
expense as a percentage of
average total assets (3) 1.88 2.44 2.29 2.56 2.26
Overhead efficiency ratio (3)(5) 59.51 80.65 71.31 75.13 77.89
</TABLE>
________________________________
Footnotes on page 15
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(1) With the exception of end of year ratios, all ratios are based on average
monthly balances during the years presented.
(2) Interest rate spread represents the difference between the weighted-
average yield earned on interest-earning assets and the weighted-average
rate paid on interest-bearing liabilities.
(3) Before consideration of the non-recurring charge incurred in fiscal 1997
for the SAIF recapitalization assessment, the ratios set forth above would
have been as follows for the year ended June 30, 1997:
Return on equity 8.29%
Return on assets 0.63%
General, administrative and
other expense as a percentage
of average total assets 2.06%
Overhead efficiency ratio 68.14%
(4) Non-performing loans consist of nonaccrual loans and accruing loans that
are contractually past due 90 days or more, and non-performing assets
consist of non-performing loans and real estate acquired by foreclosure or
deed-in-lieu thereof.
(5) The overhead efficiency ratio is equal to general, administrative and
other expense as a percentage of the sum of net interest income after
provision for losses on loans and other income.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Towne Financial's activities have been limited primarily to holding the
common shares of Blue Ash since acquiring such common shares in connection with
the Conversion. Prior to completion of the Conversion, the Corporation did not
own any material assets or transact any material business. At June 30, 1998,
on an unconsolidated basis, Towne Financial had no significant assets other
than the capital stock of Blue Ash and had no significant liabilities.
Consequently, the following discussion and analysis focuses primarily on the
financial condition and results of operations of Blue Ash.
FORWARD-LOOKING STATEMENTS
In the following pages, management presents an analysis of Towne
Financial's consolidated financial condition as of June 30, 1998, and the
consolidated results of operations for the year ended June 30, 1998, as
compared to prior years. In addition to the historical information contained
herein, the following discussion contains forward-looking statements that
involve risks and uncertainties. Economic circumstances, Towne Financial's
operations and Towne Financial's actual results could differ significantly from
those discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences are discussed herein but also
include changes in the economy and interest rates in the nation and in Towne
Financial's general market area. The forward-looking statements contained
herein include, but are not limited to, those with respect to the following
matters:
1. Management's analysis of the interest rate risk of Blue Ash as
set forth under "Asset and Liability Management;"
2. Management's discussion of the liquidity of Blue Ash's assets
and the regulatory capital of Blue Ash as set forth under "Liquidity
and Capital Resources;"
3. The discussion of the anticipated effect of legislation that
has or may be enacted as set forth under "Potential Impact on Future
Results of Operations of Current and Pending Legislation;"
4. 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 as set forth under "Year 2000 Compliance
Issues;"
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<PAGE> 173
5. Management's opinion as to the effects of recent accounting
pronouncements on Towne Financial's consolidated financial statements
as set forth under "Effect of Recent Accounting Pronouncements;" and
6. Management's determination of the amount and adequacy of the
allowance for loan losses as set forth under "Comparison of Financial
Condition at June 30, 1998 and 1997," and "Comparison of Results of
Operations for the Years Ended June 30, 1998 and 1997."
GENERAL
Blue Ash is primarily engaged in the business of attracting savings
deposits from the general public and investing such funds in real estate loans.
Blue Ash offers a full range of real estate lending, including construction
and permanent financing for residential, multi-family and nonresidential
properties. Additional real estate loans for second mortgages and home equity
lines of credit are marketed as well. To attract loan customers, Blue Ash
aggressively pursues relationships with realtors serving its lending area to
communicate the various lending programs and rates currently being offered.
Blue Ash also stresses its ability to quickly approve and close loans.
Advertisements in local newspapers and promotions to savings customers are also
used to generate loan activity. Management feels it is offering a variety of
innovative loan programs designed to fit the needs of the community. Programs
designed to meet the credit needs of its lending area include: (i)
conventional mortgage loans for the purchase and refinancing of single and
multi-family dwellings which include 15 and 30-year fixed-rate loans and one,
two, three and five-year adjustable-rate loans; (ii) one-year adjustable-rate
mortgage loans secured by one-to-four family residential real estate that can
be converted to fixed-rate mortgages; (iii) one, two, three and five-year
adjustable and fixed-rate conventional mortgage loans for the purchase of
developed building lots by individuals and builders; (iv) 30-year fixed-rate
loans on nonowner-occupied one-to-four family residential investment
properties; (v) short-term (six months to one year) construction loans for the
construction of single and multi-family dwellings and nonresidential
properties; (vi) permanent adjustable-rate mortgage loans on nonresidential
properties, including a ten-year/one-year adjustable rate mortgage loan; (vii)
15-year fixed-rate mortgage loans with a twenty year amortization period on
multi-family and nonresidential properties; (viii) monthly adjustable-rate line
of credit loans secured by residential and nonresidential property; and (ix)
loans to individuals with deposit instruments and securities as collateral. In
addition to investing in real estate loans, Blue Ash also invests in U.S.
Government and agency obligations, corporate debt securities, municipal
obligations, interest-bearing deposits and certificates of deposit in other
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financial institutions, federal funds sold, government guaranteed
mortgage-backed and related securities and other investments permitted by
applicable law.
Blue Ash faces strong competition both in making real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers who also make loans secured by real estate located in Blue Ash's
lending area. Blue Ash competes for real estate loans principally on the basis
of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers. Blue Ash
faces substantial competition in attracting deposits from other savings
institutions, commercial banks, money market and mutual funds, and credit
unions in its lending area, including many large institutions which have
greater financial and marketing resources available to them. The ability of
Blue Ash to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. Blue Ash competes for these
deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours, convenient branch locations with inter-branch
deposit and withdrawal privileges and 24-hour ATM drive-up services.
Blue Ash's profitability is primarily dependent upon its net interest
income, which is the difference between interest income on its loan,
mortgage-backed and investment portfolios and interest paid on deposits and
other borrowed funds. Net interest income is directly affected by the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on such amounts. Blue Ash's profitability is
also affected by the provision for loan losses as well as the level of other
income and other expense. Other income consists primarily of service charges
and gains on the sale of loans and other assets. General, administrative and
other expense includes salaries and employee benefits, occupancy and equipment
expenses, federal deposit insurance premiums, state franchise taxes, data
processing expenses, advertising expenses and miscellaneous other operating
expenses.
The operating results of Blue Ash are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
regulatory policies of agencies that regulate financial institutions. Blue
Ash's cost of funds is influenced by interest rates on competing investments
and general market rates of interest. Lending activities are influenced by the
demand for real estate loans and other types of loans, which, in turn, is
affected by the interest rates at which such loans are made, general economic
conditions and the availability of funds for lending activities.
G-19
<PAGE> 175
Blue Ash's current business strategy is to operate as a well-capitalized,
profitable and independent community-oriented savings association dedicated to
financing home ownership and providing quality service to its customers. Blue
Ash has sought to implement this strategy in recent years by: (i) closely
monitoring the needs of customers and providing personal, quality customer
service; (ii) emphasizing the origination of both one-to-four and multi-family
residential mortgage loans in the Company's lending area; (iii) prudently
growing and expanding its earnings base through branch expansion and
acquisitions; (iv) minimizing interest rate risk exposure through the constant
matching of asset and liability maturities and rates; (v) increasing
residential and non-residential lending while maintaining high asset quality in
the loan portfolio; (vi) maintaining a strong retail deposit base; and (vii)
maintaining capital in excess of regulatory requirements.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Blue Ash's interest rate spread,
which is the difference between the rates received on assets and the rates paid
on liabilities, is the principal determinant of income. The interest rate
spread, and therefore net interest income, can vary considerably over time
because asset and liability repricing do not coincide. Moreover, the long-term
or cumulative effect of interest rate changes can be substantial. Interest
rate risk is defined as the sensitivity of an institution's earnings and net
asset value to changes in interest rates. In general, financial institutions
are vulnerable to an increase in interest rates to the extent that
interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets.
The measurement and analysis of Blue Ash's exposure to changes in the
interest rate environment is referred to as asset and liability management.
Blue Ash's Board of Directors has formulated and implemented asset and
liability management policies designed to better match the maturities and
repricing terms of Blue Ash's interest-earning assets and interest-bearing
liabilities in order to minimize the adverse effects on Blue Ash's results of
operations of material and prolonged increases in interest rates. Such
management policies are designed to accomplish Blue Ash's principal financial
objective of enhancing long-term profitability while reducing its interest rate
risk. The principal elements of such policies are to: (i) emphasize the
origination and purchase of adjustable-rate mortgage loans subject to market
conditions; (ii)
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maintain excess liquidity in relatively short-term, interest-bearing
instruments; (iii) maintain a substantial portion of its investments and
mortgage-backed securities in instruments having adjustable interest rates;
(iv) sell fixed-rate mortgage loans to the extent practicable; (v) maintain
high levels of capital and strong asset quality; (vi) attract transaction
accounts which are considered to be more resistant to changes in interest rates
than certificate of deposit accounts; and (vii) lengthen the maturity of its
liabilities by seeking longer-term deposits and borrowings when practicable.
As a result of implementing these asset and liability initiatives and
managing its exposure to changes in interest rates, Blue Ash has generally
acquired for its portfolio adjustable-rate assets; however, during fiscal 1997
and 1998, Blue Ash's loan portfolio has shifted more towards fixed-rate loans
in the portfolio as a result of a change in strategy adopted by the Board of
Directors and management to hold fixed-rate loans in the loan portfolio to the
extent practicable. At June 30, 1998, $36.4 million, or 50.3%, of Blue Ash's
loan portfolio consisted of adjustable-rate loans and $30.0 million, or 89.9%,
of Blue Ash's mortgage-backed securities portfolio consisted of adjustable-rate
mortgage-backed and related securities. At June 30, 1997, $41.3 million, or
61.9%, of Blue Ash's loan portfolio consisted of adjustable-rate loans and
$24.8 million, or 92.9%, of Blue Ash's mortgage-backed securities portfolio
consisted of adjustable-rate mortgage-backed and related securities. As market
conditions and exposure to interest rate changes dictate, Blue Ash will
continue to originate for sale in the future certain fixed-rate residential
loans it deems necessary in order to minimize its interest rate risk exposure.
The Board of Directors and management regularly re-evaluate market conditions
as well as relevant regulatory considerations with a view to establishing a
desired level of interest rate sensitivity and identifying methods of achieving
such desired levels. As a result of these efforts, Blue Ash's one year "gap"
(the difference between interest-earning assets deemed to mature or reprice in
one year and the amount of interest-bearing liabilities deemed to reprice
during such year) was a negative 1.7% of total assets at June 30, 1998. Thus,
decreases in interest rates during this time period would generally increase
Blue Ash's net interest income, while increases in interest rates would
generally decrease Blue Ash's net interest income.
A negative gap leaves Blue Ash's earnings vulnerable to rising interest
rates because when interest rates are rising the interest income earned on
assets may increase more slowly than the interest expense paid on Blue Ash's
liabilities as interest-bearing liabilities reprice at a faster pace than
interest-earning assets. A decrease in interest rates would be expected to
cause interest
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income to decline more slowly than interest expense. However, despite Blue
Ash's negative gap, certain limitations are inherent when analyzing its gap
position. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in the market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets such as adjustable-rate mortgage
loans have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of changes in
interest rates, prepayment and decay rates would likely deviate significantly
from those assumed in calculating the gap. Finally, the ability of many
borrowers to afford the payments on their adjustable-rate mortgage loans may
decrease in the event of an interest rate increase.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. One method utilized by
Blue Ash to monitor its interest rate risk has been the analytical review of
interest rate risk reports prepared by the OTS. Such reports provide a
detailed evaluation of Blue Ash's net portfolio value within different interest
rate scenarios and analyze Blue Ash's interest rate sensitivity gap, which is
defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities
anticipated, based upon certain assumptions, to mature or reprice within that
same period. A positive gap occurs when interest-earning assets exceed
interest-bearing liabilities repricing during a designated time period.
Conversely, a negative gap occurs when interest-bearing liabilities exceed
interest-earning assets repricing within a designated time period. During a
period of falling interest rates therefore, the net interest income of an
institution with a positive gap may be adversely affected due to its
interest-earning assets repricing to a greater extent than its interest-bearing
liabilities, while an institution with a negative gap would likely have an
opposite result. Conversely, during a period of rising interest rates, the net
interest income of an institution with a positive gap position may increase
since it is able to increase the yield on its interest-earning assets more
rapidly than the cost of its interest-bearing liabilities, while an institution
with a negative gap would likely have an opposite result.
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<PAGE> 178
Management presently monitors and evaluates the potential impact of
interest rate changes upon the market value of Blue Ash's portfolio equity and
the level of net interest income on a quarterly basis. The OTS adopted a final
rule in August 1993 incorporating an interest rate risk component into the
risk-based capital rules. Under the rule, an institution with a greater than
"normal" level of interest rate risk will be subject to a deduction of its
interest rate risk component from total capital for purposes of calculating the
risk-based capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value ("NPV") exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease in interest
rates. NPV is the difference between incoming and outgoing discounted cash
flows from assets, liabilities and off-balance sheet contracts. A resulting
change in NPV of more than 2% of the estimated market value of an institution's
assets will require the institution to deduct from its capital 50% of that
excess change. The rule provides that the OTS will calculate the interest rate
risk component quarterly for each institution. The OTS has indicated that no
institution will be required to deduct an interest rate risk component from
capital for purposes of computing the risk-based capital requirement until
further notice. In general, institutions which have risk-based capital in
excess of 12% and assets under $300 million are exempt from the new requirement
unless the OTS requires otherwise. The OTS will continue, however, to closely
monitor the level of interest rate risk at individual institutions and retains
the authority, on a case-by-case basis, to impose a higher individual minimum
capital requirement for individual institutions with significant interest rate
risk. At June 30, 1998, Blue Ash had total assets of $117.8 million and
risk-based capital in excess of 14.8% which would have qualified Blue Ash for
this exemption had the new requirements been in effect at such date.
At June 30, 1998, 2% of the present value of Blue Ash's assets was
approximately $2.4 million. Because the interest rate risk of a 200 basis
point increase in market interest rates (which was greater than the interest
rate risk of a 200 basis point decrease) was $2.9 million at June 30, 1998,
Blue Ash would have been required to deduct $230,000 (50% of the $459,000
difference) from its capital in determining whether Blue Ash met its risk-based
capital requirement. Despite such reduction, however, Blue Ash's risk-based
capital at June 30, 1998, if the new interest rate risk requirements were in
effect, would still have exceeded the regulatory requirement by approximately
$3.7 million, or 6.4%.
G-23
<PAGE> 179
The following table presents Blue Ash's NPV as of June 30, 1998 as
calculated by the OTS, based on information provided to the OTS by Blue Ash.
NET PORTFOLIO VALUE
<TABLE>
Estimated
Change in NPV as a
interest rates Estimated percentage Amount
(basis points) NPV of assets of change Percent
<S> <C> <C> <C> <C>
+400 $ 4,757 4.35% $(7,446) (61)%
+300 7,242 6.42 (4,961) (41)
+200 9,326 8.04 (2,877) (24)
+100 11,072 9.33 (1,131) ( 9)
-- 12,203 10.09 -- --
-100 12,744 10.40 541 4
-200 12,916 10.43 713 6
-300 13,210 10.55 1,007 8
-400 13,709 10.81 1,506 12
</TABLE>
In managing its asset and liability mix, Blue Ash may, at times --
depending on the relationship between long and short-term interest rates, market
conditions and consumer preference -- place somewhat greater emphasis on
maximizing its interest rate spread than on strictly matching the interest rate
sensitivity of its assets and liabilities. The Board of Directors believes that
the increased net earnings resulting from a modest mismatch in the maturity of
its asset and liability portfolios can, during periods of stable interest rates,
provide high enough returns to justify the increased exposure which can result
from such a mismatch. In view of its positive gap position at the time and
other factors previously discussed, Blue Ash changed its strategy with respect
to fixed-rate mortgage loans in fiscal 1996. Instead of originating for sale
all residential fixed-rate loans, management elected to portfolio fixed-rate
loans subject to certain interest rate risk limitations. This change in strategy
was largely due in part to the Board of Directors' and management's desire to
maximize, to the extent practicable, Blue Ash's interest rate spread and core
earnings. As a result of originating fixed-rate loans for the portfolio in
fiscal 1996 and continuing so in fiscal 1997 and 1998, Blue Ash's overall
sensitivity to changes in interest rates increased from fiscal 1996 to fiscal
1998, and its overall one year gap went from a positive 3.9% at June 30, 1996 to
a negative 1.7% at June 30, 1998; however, during fiscal 1998, Blue Ash's
overall one year gap position improved from a negative 9.5% at June 30, 1997 to
a negative 1.7% at June 30, 1998. By adopting a strategy of holding fixed-rate
loans for the portfolio to the extent practicable, the Board of Directors and
management anticipated such
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an increase in interest rate exposure ratios and a negative one year gap
position and were willing to accept those things in exchange for improving Blue
Ash's interest rate spread and overall profitability in fiscal 1997 and 1998.
At June 30, 1998 there would have been a decrease in Blue Ash's NPV of
approximately 24% of the present value of its assets, assuming a 200 basis
point increase in interest rates. At June 30, 1997, a 200 basis point increase
in interest rates would have produced a decline of approximately 30% in the
present value of its assets. The reduced risks at June 30, 1998 associated
with interest rate sensitivity was attributed to management's strong efforts in
lengthening the maturities of its certificate of deposit accounts and
borrowings from the FHLB during a low interest rate environment. While
interest-bearing liabilities increased by $13.8 million, or 14.7%, during
fiscal 1998, those liabilities repricing or maturing in the one year or less
categories actually declined by $1.1 million, or 1.7%. At June 30, 1998, the
Board of Directors had a mandated target range for Blue Ash's interest rate
sensitivity gap for a 200 basis point increase in interest rates of (30%). As
indicated in the table above, Blue Ash operated within this target range during
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings withdrawals and pay
operating expenses. All financial institutions must manage their liquidity to
meet anticipated funding needs at a reasonable cost, and have contingency plans
to meet unanticipated funding needs or the loss of a funding source.
Blue Ash's liquidity is a product of its operating, investing and
financing activities. These activities are summarized below for the years
ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
For the Years ended
June 30,
------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net earnings for the year $ 938 $ 365 $ 521
Adjustments to reconcile
net earnings to net cash
provided by (used in)
operating activities (232) 350 ( 1,245)
------- ------- -------
Net cash provided by (used in)
operating activities 706 715 ( 724)
Net cash used in
investing activities (11,731) (11,428) (11,713)
Net cash provided by
financing activities 13,948 9,817 12,535
------- ------- -------
Net increase (decrease) in
cash and cash equivalents 2,923 (896) 98
Cash and cash equivalents
at beginning of year 2,715 3,611 3,513
------- ------- -------
Cash and cash equivalents
at end of year $ 5,638 $ 2,715 $ 3,611
======= ======= =======
</TABLE>
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The primary investing activities of Blue Ash include investing in loans
and mortgage-backed securities. The origination of loans and purchases of
mortgage-backed securities have recently been funded primarily from loan and
mortgage-backed securities repayments, sales of loans and mortgage-backed
securities, maturities of investment securities and proceeds from deposits and
borrowings. During the year ended June 30, 1998, purchases of mortgage-backed
securities totaled $17.6 million, loans receivable and loans held for sale
increased by $5.6 million, customer deposits increased by $13.2 million and
borrowings increased by $644,000. During the year ended June 30, 1997,
purchases of mortgage-backed securities totaled $2.0 million, loans receivable
and loans held for sale increased by $11.7 million, customer deposits increased
by $6.2 million and borrowings increased by $3.6 million. During the year
ended June 30, 1996, purchases of mortgage-backed securities totaled $16.5
million, loans receivable and loans held for sale increased by $9.3 million and
customer deposits increased by $15.8 million, while borrowings declined by $3.4
million.
Blue Ash's primary sources of funds are deposits, borrowings, sales of
mortgage loans, sales of investments and mortgage-backed securities, maturities
of investment securities, amortization, prepayments and maturities of
outstanding loans and mortgage-backed securities and funds provided by
operations. While scheduled loan and mortgage-backed securities amortization
and maturing interest-bearing deposits and investment securities are relatively
predictable sources of funds, deposit flows and loan and mortgage-backed
securities prepayments are greatly influenced by economic conditions, the
general level of interest rates and competition. Blue Ash manages the pricing
of its deposits to maintain a deposit base deemed appropriate and desirable.
Blue Ash invests excess funds in FHLB overnight deposits, federal funds sold
and other short-term interest-earning assets which provide liquidity to meet
lending requirements. The particular sources of funds utilized by Blue Ash
from time to time are selected based on comparative costs and availability.
Blue Ash has at various times decided not to pay rates on deposits as high as
the rates paid by its thrift and bank competitors. As a result, Blue Ash has
borrowed funds from the FHLB of Cincinnati and from other commercial banks. In
addition, Blue Ash has selectively obtained brokered deposits and other
out-of-state monies as a supplement to its local deposits when such funds are
attractively priced in relation to the local market. At June 30, 1998, Blue
Ash had outstanding $12.7 million in advances from the FHLB, $30,000
outstanding on a loan for the Employee Stock Ownership Plan ("ESOP") from an
independent third party and $5.8 million in outstanding brokered deposits and
other out-of-state funds. During fiscal 1995, as another alternative funding
source,
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Blue Ash entered into reverse repurchase agreements, or collateralized
borrowings, with the Federal National Mortgage Association ("Fannie Mae"). A
reverse repurchase agreement (or "repo") is defined as a transaction involving
the sale of securities with an agreement to repurchase the exact same
securities at a pre-negotiated price on a predetermined future date. In
practice, repos allow Blue Ash to borrow funds at a fixed or floating rate
using its investments and mortgage-backed securities as collateral. Liquidity
can be added to Blue Ash's portfolio without parting with the specific assets.
At June 30, 1995, Blue Ash had outstanding borrowings under reverse repurchase
agreements of $3.5 million. During fiscal 1996, all outstanding borrowings
under reverse repurchase agreements were repaid in full.
The OTS requires minimum levels of liquid assets. OTS regulations
presently require Blue Ash to maintain specified levels of "liquid" investments
in qualifying types of United States Government and agency obligations and
other permissible investments having certain maturity limitations and
marketability requirements. Such minimum requirement, which was revised by the
OTS in fiscal 1998, is an amount equal to 4% of the sum of Blue Ash's average
daily balance of net withdrawable deposit accounts and borrowings payable in
one year or less. The liquidity requirement, which may be changed from time to
time by the OTS to reflect changing economic conditions, is intended to provide
a source of relatively liquid funds upon which Blue Ash may rely if necessary
to fund deposit withdrawals and other short-term funding needs.
The liquidity of Blue Ash, as measured by the ratio of cash, cash
equivalents (not committed, pledged or required to liquidate specific
liabilities) and qualifying investments, mortgage-backed securities and loans
to the sum of net withdrawable savings plus borrowings payable within one year,
was 52.9% at June 30, 1998. At June 30, 1998, Blue Ash's "liquid" assets
totaled approximately $40.0 million, which was approximately $37.0 million in
excess of the current $3.0 million OTS minimum requirement at such date. Blue
Ash believes that the Company's liquidity posture at June 30, 1998 was adequate
to meet outstanding loan commitments and other cash requirements.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as FHLB of
Cincinnati overnight deposits, time deposits or federal funds sold. On a
longer-term basis, Blue Ash maintains a strategy of investing in various
mortgage-backed and related securities and lending products. During the year
ended June 30, 1998, Blue Ash used its sources of funds primarily to meet its
ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain its
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portfolio of investments and mortgage-backed and related securities. At June
30, 1998, Blue Ash had total outstanding commitments of approximately $1.8
million to originate residential one-to-four family real estate loans, $565,000
to originate a land development loan, $252,000 to originate a residential
multi-family loan and $71,000 to originate a nonresidential real estate loan.
At the same date, commitments under unused lines of credit secured by
one-to-four family residential property amounted to $2.9 million, commitments
under unused lines of credit secured by nonresidential real estate totaled
$37,000 and the unadvanced portion of loans in process and undisbursed loans
approximated $2.6 million. Blue Ash also had $2.0 million in loans committed
to be sold in the secondary market at June 30, 1998. Of these loans, $882,000
were originated on or prior to June 30, 1998 and classified as held for sale.
Additionally, Blue Ash committed to purchase approximately $1.8 million in
investment securities designated as available for sale at June 30, 1998. As an
additional liquidity source, Blue Ash has a $5.0 million line of credit
facility with the FHLB of Cincinnati, which it renewed for another year during
fiscal 1998. There were no amounts outstanding under such facility at June 30,
1998. Certificates of deposit scheduled to mature in one year or less at June
30, 1998 totaled $53.4 million. Management of Blue Ash believes that the
Company has adequate resources, including principal prepayments, repayments of
loans and mortgage-backed securities and other funding sources such as FHLB
advances and repos, to fund all of its commitments to the extent required and
to meet and exceed its foreseeable short-term and long-term liquidity needs.
Blue Ash could also decide to raise funds through the sale of loan products or
available for sale securities. In addition, although Blue Ash has extended
commitments to fund loans or lines of credit, historically, Blue Ash has not
been required to fund all of its outstanding commitments. Management believes
that a significant portion of maturing deposits will remain with Blue Ash as it
can adjust the rates of certificates of deposit in order to retain such
deposits in changing interest rate environments; however, there can be no
assurance that Blue Ash can retain all such deposits.
Blue Ash is subject to minimum regulatory capital standards promulgated by
the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on Blue Ash's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Blue Ash must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
Blue Ash's capital amounts and classifications are also subject to qualitative
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judgments by the regulators about components, risk weightings and other
factors. The minimum capital standards of the OTS generally require the
maintenance of regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement mandates maintenance of shareholders' equity less all intangible
assets equal to 1.5% of adjusted total assets. The core capital requirement
provides for the maintenance of tangible capital plus certain forms of
supervisory goodwill and other qualifying intangible assets equal to 3.0% of
adjusted total assets, while the risk-based capital requirement currently
provides for the maintenance of core capital plus general loan loss allowances
equal to 8.0% of risk-weighted assets, as defined by OTS regulations.
Management has determined that Blue Ash is in compliance with each of the
three capital requirements at June 30, 1998. Specifically, Blue Ash's tangible
and core capital of $8.3 million, or 7.1% of total adjusted assets, exceeded
the respective minimum requirements of $1.8 million and $3.5 million at that
date by approximately $6.5 million, or 5.6% of total adjusted assets, and $4.8
million, or 4.1% of total adjusted assets. Additionally, Blue Ash's risk-based
capital of approximately $8.6 million at June 30, 1998, or 14.8% of
risk-weighted assets (including a general loan loss allowance of $264,000),
exceeded the current 8.0% requirement of $4.7 million by approximately $3.9
million, or 6.8% of risk-weighted assets.
The OTS has proposed an amendment to the core capital requirement that
would increase the minimum requirement to a range of 4.0% - 5.0% of adjusted
total assets for substantially all savings associations. Management
anticipates no material change to Blue Ash's excess regulatory capital position
if the proposal is adopted in its present form.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of Towne Financial and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in relative purchasing power of money over time due to
inflation. The impact of inflation is reflected in the increased cost of Towne
Financial's operations.
Unlike most industrial companies, virtually all of the assets and
liabilities of Towne Financial are monetary in nature. As a
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result, interest rates generally have a more significant impact on Towne
Financial's performance than do the effect of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, the liquidity and maturity structures of Towne Financial's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
POTENTIAL IMPACT ON FUTURE RESULTS OF OPERATIONS
OF CURRENT AND PENDING LEGISLATION
Legislation repealing the percentage of earnings bad debt reserve
provisions of the Internal Revenue Code previously applicable to qualifying
thrift institutions was enacted into law in fiscal 1997. The legislation,
which is part of The Small Business Job Protection Act of 1996 (the "Jobs
Act"), requires all thrift institutions to pay tax on or recapture their excess
bad debt reserves accumulated since 1988. The legislation substantially
equalizes the taxation of banks and thrift institutions, but it protects
thrifts from taxes on "bad debt reserves" established prior to 1988. The Jobs
Act eliminates the percentage of taxable income method for deducting bad debt
reserves for all thrifts for tax years beginning after December 31, 1995 (July
1, 1996, as to Towne Financial). Under the legislation, Towne Financial is
required to recapture approximately $487,000 of its bad debt reserves as
taxable income, which represents the post-1987 additions to the reserves, and
is unable to utilize the percentage of earnings method to compute its reserves
in the future. Towne Financial has provided deferred taxes for this amount and
will be permitted to amortize the recapture of its bad debt reserves over six
years, beginning in fiscal 1999.
Legislation has been introduced in Congress to eliminate the federal
regulation of savings and loan associations and to develop a common charter for
all financial institutions. As a result, Towne Financial might become subject
to a different form of holding company regulation, which may limit the
activities in which it may engage and subject it to other additional regulatory
requirements, including separate capital requirements. In addition, Congress
may eliminate the OTS, and Blue Ash may be regulated under federal law as a
bank or may be required to change its charter. Such change in regulation or
charter would likely change the range of activities in which Blue Ash may
engage and would probably subject Blue Ash to more regulation by the FDIC.
Towne Financial and Blue Ash cannot predict when or whether Congress may
actually pass such legislation or whether such legislation will actually change
the regulation and permissible activities of Towne Financial and Blue Ash.
Although
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such legislation may change the activities in which both Towne Financial and
Blue Ash may engage, it is not anticipated that current activities will be
materially affected by those activity limits.
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 six-digit date fields (YYMMDD) with the YY two-digit
field for the year 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 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
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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 indicates that the greatest potential impact upon
Blue Ash is the risk related to vendors used by Blue Ash, particularly Blue
Ash's data processing service bureau. Quarterly progress reports from the
service bureau indicate levels of manpower and expertise sufficient to amend
and test the adequacy of their computer programming and systems prior to the
arrival of the year 2000. All other vendors used by Blue Ash have been
identified and requests for year 2000 certifications have been forwarded.
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 is expected to be minimal. The Action Team estimates that the
impact upon Blue Ash's results of operations, liquidity and capital resources
will be immaterial.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," that provides accounting guidance on transfers of financial
assets, servicing of financial assets and extinguishment of liabilities. SFAS
No. 125 introduces an approach to accounting for transfers of financial assets
that provides a means of dealing with more complex transactions in which the
seller disposes of only a partial interest in the assets, retains rights or
obligations, makes use of special purpose entities in the transaction, or
otherwise has continuing involvement with the transferred assets. The new
accounting method, referred to as the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No.
125 provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of
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financial assets, loan participations, factoring arrangements and transfers of
receivables with recourse. An entity that undertakes an obligation to service
financial assets recognizes either a servicing asset or liability for the
servicing contract (unless related to a securitization of assets, and all the
securitized assets are retained and classified as held to maturity). A
servicing asset or liability that is purchased or assumed is initially
recognized at its fair value. Servicing assets and liabilities are amortized
in proportion to and over the period of estimated net servicing income or net
servicing loss and are subject to subsequent assessments for impairment based
on fair value. SFAS No. 125 provides that a liability is removed from the
balance sheet only if the debtor either pays the creditor and is relieved of
its obligations for the liability or is legally released from being the primary
obligor. SFAS No. 125 supersedes SFAS No. 122 and was effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1997, and was to be applied prospectively. Earlier or
retroactive application was not permitted. The adoption of SFAS No. 125 did
not have a material impact on Towne Financial's consolidated financial position
or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which requires institutions to present basic earnings per share and, if
applicable, diluted earnings per share, instead of primary and fully-diluted
earnings per share, respectively. Basic earnings per share is computed without
including potential common shares, i.e., no dilutive effect. Diluted earnings
per share is computed taking into consideration common shares outstanding and
dilutive potential common shares, including options, warrants, convertible
securities and contingent stock agreements. SFAS No. 128, which superseded
Accounting Principles Board ("APB") Opinion No. 15, was effective for interim
and annual periods ending after December 15, 1997, and prior year earnings per
share disclosures presented for comparative purposes (including those in
interim financial statements, summaries of earnings and selected financial
data) were to be restated. Early application of SFAS No. 128 was not
permitted, although institutions could disclose pro forma earnings per share
amounts computed using SFAS No. 128 in financial statement notes in years
before the effective date. Effective during the year ended June 30, 1998,
Towne Financial began presenting earnings per share pursuant to the provisions
of SFAS No. 128. In accordance with the Statement, all prior year earnings per
share presentations for comparative purposes have been revised to conform to
SFAS No. 128.
Simultaneously with the issuance of SFAS No. 128, the FASB issued SFAS No.
129, "Disclosure of Information About Capital Structure," which establishes
standards for disclosing information
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about an institution's capital structure. This Statement consolidated existing
accounting guidance relating to disclosure about an institution's capital
structure and contained no changes in disclosure requirements for institutions
that were subject to the previously existing requirements. SFAS No. 129
applied to all institutions, public and nonpublic, and was effective for
financial statements issued for periods ending after December 15, 1997. Public
companies generally have been required to make disclosures now required by SFAS
No. 129 and, therefore, it had no impact on Towne Financial.
In June 1997, the FASB issued 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. 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 is effective
for fiscal years beginning after December 15, 1997, and requires restatement of
prior year financial statements presented for comparative purposes. The
adoption of SFAS No. 130 relates solely to the disclosure provisions, and
therefore, will not have a material effect on Towne Financial's consolidated
financial position or results of operations.
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. For many
enterprises, the management approach will likely result in more segments being
reported. In addition, SFAS No. 131 requires significantly more
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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 is
effective for fiscal years beginning after December 15, 1997, but earlier
application is encouraged. Segment information reported in earlier years is to
be restated to conform to the requirements of SFAS No. 131. Enterprises will
not be required to report segment information in interim financial statements
in the year of adoption, but comparative financial information is required
beginning with the second year after adoption. SFAS No. 131 is not expected to
have a material impact on Towne Financial's consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pension and other post-retirement 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 is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged. Restatement of
disclosures for earlier periods is required unless the information is not
readily available, in which case the notes to the financial statements shall
include all available information and a description of the information not
available. Management does not expect the adoption of SFAS No. 132 to have a
material effect 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 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
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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.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND 1997
At June 30, 1998, Towne Financial's consolidated assets totaled $117.8
million, representing an increase of $15.2 million, or 14.9%, over the $102.6
million asset level at June 30, 1997. The increase in asset size experienced
during the year ended June 30, 1998 was funded principally through an increase
in deposits of $13.2 million, or 16.1%, and to a lesser extent, an increase in
borrowings of $644,000, or 5.3%, an increase in shareholders' equity of $1.1
million, or 13.4%, and an increase realized in all noninterest-bearing
liabilities of $369,000, or 34.6%. Such increase in total assets was primarily
due to an increase in loans receivable and loans held for sale of $5.6 million,
or 8.3%, an increase in mortgage-backed securities of $6.3 million, or 23.4%,
and an increase in cash and cash equivalents of $2.9 million, or 107.7%. The
current year's growth in assets followed an increase of $10.4 million, or
11.2%, during fiscal 1997. Towne Financial's growth 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.
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Cash and due from banks, federal funds sold, interest-bearing deposits and
certificates of deposit in other financial institutions totaled approximately
$6.1 million at June 30, 1998, an increase of $2.9 million, or 92.0%, from June
30 1997 levels of $3.2 million. The significant increase during fiscal 1998 in
cash, cash equivalents and certificates of deposit in other financial
institutions was largely driven by growth in deposits, which was coupled with
a slowdown in the growth in the loan portfolio during the second half of fiscal
1998 as loan prepayments accelerated. The increase in deposits of $13.2
million, or 16.1%, was primarily used to fund an increase of $5.6 million, or
8.3%, in loans receivable and loans held for sale and an increase of $6.3
million, or 23.4%, in mortgage-backed securities, while the remaining inflows
from an increased deposit base and, to a lesser extent, borrowed funds from the
Federal Home Loan Bank were invested into federal funds sold. Growth in
deposits and borrowings outpaced growth in the loan and investment portfolios,
causing the buildup in cash and cash equivalents at June 30, 1998.
Investment securities designated as available for sale and held to
maturity totaled $1.6 million at June 30, 1998, an increase of $219,000, or
15.7%, over June 30, 1997 levels of $1.4 million. This increase in investment
securities reflected the purchase of U.S. Government agency obligations and
municipal obligations of $2.8 million, which was partially offset by proceeds
received from the maturity and call of U.S. Government agency obligations of
$2.1 million and proceeds received from sale of municipal obligations of
$496,000. With interest rates declining during fiscal 1998, management elected
for the most part not to replace all of its called U.S. Government agency
obligations with newer ones, as yields on newer fixed-rate short-term callable
securities were not as attractive without further extending out the maturities
on these securities. As a result, the excess funds 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, while in the meantime during the holding period
earning an attractive tax equivalent yield in a declining interest rate
environment. The overall increase in investment securities during fiscal 1998
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 increased by approximately $6.3
million, or 23.4%, during the year ended June 30, 1998. This increase in the
mortgage-backed securities portfolio was attributed to purchases of $12.7
million in collateralized mortgage obligations and adjustable-rate
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participation certificates designated by management as available for sale,
purchases of $4.9 million in collateralized mortgage obligations designated as
held to maturity and a net decrease in unrealized market losses on securities
designated as available for sale of $210,000, all of which were partially
offset by proceeds from the sale of securities designated as available for
sale, net of gains, of $8.8 million, principal repayments and calls on
securities of $2.7 million and amortization of premiums and accretion of
discounts on securities, net, of $7,000. Management elected to increase the
level of its mortgage-backed securities, especially during the last six months
of fiscal 1998 when 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. Funding the growth in the mortgage-backed securities
portfolio was provided primarily from increased deposits, proceeds from the
sale of certain securities, principal repayment cash flows on existing
securities in the portfolio and utilization from time to time of advances from
the Federal Home Loan Bank. During fiscal 1998, management elected to sell for
profit, due to favorable market conditions and improved pricing on securities
from a lower interest rate environment, certain of its floating-rate
collateralized mortgage obligations which the Corporation had a heavy
concentration in. In addition, the Corporation sold an adjustable-rate
mortgage backed security in order to alleviate the greater prepayment risk
exposure inherent in the security resulting from a decline in long-term
interest rates throughout fiscal 1998. The sale strategies employed during
fiscal 1998 had an additional benefit of allowing management to better
diversify its investment positions by reinvesting the proceeds from the sale of
securities into short to intermediate-term fixed-rate securities and other
floating-rate securities not previously emphasized, adjusting monthly, which
were primarily indexed to either the composite prime rate of 75% of the thirty
largest U.S. banks, as reported by The Wall Street Journal, or the 10-year U.S.
treasury rate. By investing in short to intermediate-term fixed-rate
securities, specifically collateralized mortgage obligations, management
intended to capitalize if the Federal Reserve began cutting short-term interest
rates, which appear artificially high in relation to long-term interest rates.
The floating-rate securities tied to the composite prime rate were 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 fiscal 1998. The floating-rate
securities tied to the 10-year treasury index were acquired to take advantage
of a future steepening yield curve environment. As a result of these
acquisitions, management wanted to be in position to not only improve its
current overall
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yield on mortgage-backed securities, but to more favorably capitalize in
differing interest rate environments.
Loans receivable and loans held for sale increased in the aggregate by
approximately $5.6 million, or 8.3%, during the year ended June 30, 1998. This
increase was largely attributed to loan disbursements, loan purchases and loans
originated for sale in the secondary market of $48.5 million, which were
partially offset by loan sales, net of gains, of $18.8 million and principal
repayments on loans of $24.2 million. Growth in the loan portfolio was
primarily due to an increase of $4.3 million, or 8.5%, in one-to-four family
residential real estate and construction loans, an increase of $1.0 million, or
35.1%, in multi-family residential real estate loans and an increase of
$374,000, or 3.4%, in nonresidential real estate and land loans, all of which
were partially offset by a decrease of $72,000, or 2.7%, in home equity line of
credit loans and a decrease of $58,000, or 22.9%, in passbook loans to deposit
customers and other secured consumer loans. Blue Ash's growth in the loan
portfolio has been the 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-deposits ratio.
During the second half of fiscal 1998, however, due to a decline in long-term
interest rates toward historical lows, management redirected its efforts and
strategies on originating for sale in the secondary market all conforming
single-family residential mortgage loans in order to reduce its exposure to
interest rate risk. From January 1, 1998 to June 30, 1998, the loan portfolio
actually decreased by $3.2 million, or 4.2%, as loan sales of $14.5 million and
principal repayments on loans of $14.8 million exceeded loan disbursements,
purchases and loans originated for sale of $26.1 million. During this six
month 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. 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.
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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 change in strategy of holding all loans in the portfolio
which was dictated by a declining interest rate environment, overall loan
portfolio growth and loan volume remained strong during the year ended June 30,
1998 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.
At June 30, 1998, the Corporation's allowance for loan losses totaled
$264,000, an increase of $20,000, or 8.2%, over the $244,000 level represented
at June 30, 1997. During the year ended June 30, 1998, the Corporation
increased its allowance for general loan losses by $20,000 and allowance for
specific loan losses by $4,000, which were partially offset by loan charge-offs
of $4,000. The Corporation's internally-classified assets totaled
approximately $885,000 at June 30, 1998, as compared to $478,000 at June 30,
1997. Non-performing and nonaccrual loans totaled $885,000, or 1.22% of loans
receivable and loans held for sale, at June 30, 1998, and $403,000, or 0.60% of
loans receivable and loans held for sale, at June 30, 1997. The increase in
internally-classified and non-performing and nonaccrual loans during fiscal
1998 was solely due to an increase in delinquencies of single-family
residential mortgage loans. Minimizing the effects of this increase in
internally-classified assets and non-performing and nonaccrual loans during
fiscal 1998 was the payoff in full of a delinquent single-family loan in the
amount of $187,000 subsequent to June 30, 1998. 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 June 30,
1998 and were deemed adequately secured in the event of default by the
borrowers. Because the loan loss allowance is based on estimates, it is
monitored regularly on an ongoing basis and adjusted as necessary to provide an
adequate allowance. The Corporation reviews on a monthly basis its loan
portfolio, including problem loans, to determine whether any loans require
classification and/or the establishment of appropriate allowances. The
allowance for loan losses is determined by management based upon past loss
experience, trends in the level of delinquent and problem loans, adverse
situations that may effect the borrowers' ability to repay, the estimated value
of any underlying collateral and current and anticipated economic conditions in
Blue Ash's lending area. The provision for general loan losses of $20,000 and
specific loan losses of $4,000 recorded during the year ended June 30, 1998 was
attributed to the overall growth of 8.3% in the loan
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portfolio and to the increase in internally-classified and non-performing and
nonaccrual loans at June 30, 1998. Management believed that the loan loss
allowance existing at June 30, 1998 was adequate to cover unforeseen loan
losses based upon the ongoing review of such internally-classified assets and
non-performing and nonaccrual loans. Although management believed that its
allowance for loan losses at June 30, 1998 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 June 30, 1998, the
Corporation's allowance for loan losses consisted entirely of general valuation
allowances, as defined by the regulations of the OTS, and represented 0.36% of
the total amount of loans outstanding, including those loans designated as held
for sale, and 30% of internally-classified assets.
Deposits totaled $95.0 million at June 30, 1998, an increase of $13.2
million, or 16.1%, over the $81.8 million in deposits outstanding at June 30,
1997. The increase in total overall deposits was primarily the result of an
increase in certificates of deposit of $13.5 million, or 21.5%, which was
partially offset by a decrease in transaction accounts (NOW accounts, money
market deposit accounts, passbook accounts and Christmas club accounts) of
$268,000, or 1.4%. The increase in certificates of deposit (primarily
certificates of deposit with original terms to maturity of two years or less)
during the year ended June 30, 1998 was attributed to an increase in
certificate of deposit balances obtained from the local market area of $12.5
million, or 21.6%, and an increase in brokered deposits of $985,000, or 20.4%.
In an effort to sustain deposit growth during the year ended June 30, 1998,
Blue Ash continued its strategy of selectively obtaining brokered deposits and
out-of-state funds to supplement its local deposit base. These deposits were
typically obtained at interest rates at or below local market interest rates
and had terms to maturity of two years or less. Given its other available
funding alternatives, Blue Ash has the ability to suspend brokered deposit
activity at any time and has the ability to repay its maturities on all
brokered deposits without placing any undue risk on its liquidity position or
cost of funds. However, as long as demand for new loan production remains
strong, 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
certificates of deposit from its local market area during the year ended June
30, 1998 was attributed to the influx of new accounts resulting from continued
strong marketing efforts and competitive pricing on certificate of deposit
accounts. The decrease in transaction accounts, primarily from money market
deposit accounts and NOW accounts, which are subject to daily
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repricing, was primarily due to the decline of $687,000 in the outstanding
balance of attorney loan closing checking accounts and the transfer of funds
from money market accounts into higher yielding certificate of deposit
investments and other investment alternatives such as mutual funds or the stock
market, which were both partially offset by an increase in customer checking
accounts. As part of its efforts to increase the deposit base, management made
a more assertive effort over the last two years in its attempts to minimize the
outflow of funds from transaction accounts and to reacquire these deposit
balances by placing a stronger emphasis on the cross-selling of deposit
products (i.e. checking accounts) at the branch level and developing specific
advertising campaigns aimed at transaction account customers. Specifically, in
order to better market checking accounts to its customers, Blue Ash introduced
a new "free checking" account program in June 1997 at its Mason office. This
program was set up to attract a greater volume of checking accounts at that
office and to lower deposit costs. During the year ended June 30, 1998, this
new checking program helped increase the outstanding balance of checking
accounts by 56.8% and the number of checking accounts at the Mason office by
101.1%. Due to the initial success of the program at the Mason office, the
"free checking" program was extended to all the offices during the year ended
June 30, 1998. As a result of this "free checking" program and all other
marketing and selling efforts to date, the outstanding balance of all checking
accounts increased by $568,000, or 19.4%, the number of overall checking
accounts increased by 17.4% and the outstanding balance of passbook and club
accounts increased by $144,000, or 1.8%, during the year ended June 30, 1998.
The overall growth in deposits during the year ended June 30, 1998 reflected
management's continuing efforts to maintain steady growth and was consistent
with management's short-term and long-term goals. From time to time, however,
in an attempt to closely control its overall cost of funds and based on the
current interest rate environment, management may temporarily elect to use
alternative funding sources, such as brokered deposits. It is the continued
goal of management to increase loan production and the level of loan retention,
thereby increasing the need for overall deposits and available liquid assets.
Management expects to continue meeting the need for deposits, for the most
part, through increased marketing and competitive pricing of the Company's
deposit products, which could result in additional operating expenses and
interest expense.
Total borrowings, which consisted principally of Federal Home Loan Bank
advances at June 30, 1998, increased by $644,000, or 5.3%, from $12.1 million
at June 30, 1997 to $12.7 million at June 30, 1998. This increase in
borrowings during the year ended June 30, 1998 was primarily due to proceeds of
$10.0 million received from advances from the Federal Home Loan Bank, which was
partially
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offset by repayments of $9.3 million from advances from the Federal Home Loan
Bank. During the year ended June 30, 1998, Blue Ash repaid the remaining
$800,000 outstanding balance on its line-of-credit facility with the Federal
Home Loan Bank by obtaining an $800,000 one-year LIBOR-based advance, adjusting
monthly. An additional $700,000 one-year LIBOR-based advance, adjusting
monthly, was also utilized for short-term funding of the asset growth versus
offering special rates on short-term deposits. In attempts to restructure its
borrowings by extending out its maturities and lowering its overall cost of
borrowings, management elected to take advantage of special borrowing offerings
from the Federal Home Loan Bank during fiscal 1998. Blue Ash obtained a $3.5
million convertible fixed-rate ten-year/one-year advance with an interest rate
of 5.15% in March 1998 and a $2.5 million convertible fixed-rate
ten-year/one-year advance with an interest rate of 5.24% in June 1998. These
rates were below the treasury rates of comparable final maturities because Blue
Ash was allowing the Federal Home Loan Bank at its option to convert these
fixed-rate advances on a quarterly basis to LIBOR-based adjustable-rate
advances after the first year of the advances. If the Federal Home Loan Bank
does not convert the advances to LIBOR floating rates on the initial option
date, the advances will remain at the original fixed rates until final maturity
in ten years or the next quarterly option date. If the Federal Home Loan Bank
does convert the advances to LIBOR, then Blue Ash may pay off the advances in
whole or in part on any of the quarterly repricing dates with no fee. By
obtaining these convertible fixed-rate advance offerings at interest rates of
5.15% and 5.24%, respectively, approximately $2.9 million in one-year
LIBOR-based advances were repaid in March 1998, $600,000 in one-year
LIBOR-based advances were repaid in April 1998 and $2.5 million in maturing
five-year fixed-rate advances were repaid in June 1998, enabling Blue Ash to
lower its overall cost of funds on borrowings. The adjustable-rate LIBOR-based
advances which were repaid had an average cost of approximately 5.63% and the
maturing five-year fixed-rate advances had an average cost of 5.55%. 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. In future periods,
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management may acquire additional Federal Home Loan Bank advances to fund loan
production, to acquire investments and mortgage-backed securities, or as a tool
to manage the interest rate risk of Blue Ash.
Shareholders' equity totaled $8.7 million at June 30, 1998, an increase of
$1.1 million, or 13.4%, over the total of $7.6 million at June 30, 1997. The
increase in shareholders' equity was due primarily to net earnings for the year
of $938,000, a reduction in required contributions of the Employee Stock
Ownership Plan of $30,000 and a decrease in unrealized market losses on
securities designated as available for sale, net of related tax effects, of
$141,000, all of which were partially offset by the payment of dividends to
shareholders of $84,000. At June 30, 1998, shareholders' equity as a
percentage of total assets was 7.4%.
COMPARISON OF THE RESULTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
General
Net earnings amounted to $938,000 for the year ended June 30, 1998,
representing an increase of $573,000, or 157.0%, over the $365,000 in net
earnings recorded for the year ended June 30, 1997. The improvement in earnings
level for the year ended June 30, 1998 was primarily attributable to an
increase in net interest income after provision for losses on loans of
$329,000, or 12.1%, an increase in other income of $288,000, or 135.8%, and a
decrease in general, administrative and other expense of $251,000, or 10.6%.
The increase in earnings level before federal income taxes of $868,000, or
153.4%, resulted in an increase in the provision for federal income taxes of
$295,000, or 146.8%. The Corporation's net earnings for the year ended June
30, 1997 were negatively impacted by a special assessment levied on all savings
institutions insured by SAIF of the FDIC to recapitalize the SAIF to the
required statutory level in accordance with legislation enacted into law in
fiscal 1997. Excluding the nonrecurring after-tax charge of $242,000 due to
the special assessment, the Corporation would have shown net earnings of
$607,000, or $2.81 per share on a diluted basis, for the year ended June 30,
1997. Excluding the SAIF charge in fiscal 1997, net earnings for the year
ended June 30, 1998 still would have represented an increase in net earnings of
$331,000, or 54.5%, and an increase in diluted earnings per share of $1.47, or
52.3%, over fiscal 1997.
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Net Interest Income and Provision for Losses on Loans
The Corporation's net interest income increased by $335,000, or 12.3%,
during the year ended June 30, 1998, as compared to the year ended June 30,
1997. The increase in net interest income during fiscal 1998 was primarily the
result of an increase in total interest income, due to increases in the average
outstanding balances of all the Corporation's interest-earning assets (loans,
mortgage-backed securities, investment securities and other interest-earning
assets), and to increases in the weighted-average rates earned on loans and
other interest-earning assets, which were partially offset by declines in the
weighted-average rates earned on mortgage-backed securities and investment
securities. Total interest income on the Corporation's interest-earning assets
increased by $1.3 million, or 17.7%, during fiscal 1998 due to overall
increases of $14.9 million, or 16.3%, in the average outstanding balances of
such assets, which were coupled with overall increases of 9 basis points (100
basis points equals 1%), or 1.1%, in the weighted-average yields earned on such
assets. The increase in total interest income during fiscal 1998 was partially
offset by an increase in total interest expense, primarily due to increases in
the average outstanding balances of deposits and borrowings and to an increase
in the weighted-average rate paid on deposits, which were partially offset by a
decrease in the weighted-average rate paid on borrowings. Total interest
expense on the Corporation's interest-bearing liabilities for fiscal 1998, as
compared to fiscal 1997, increased by $935,000, or 21.0%, due to overall
increases of $14.1 million, or 16.1%, in the average outstanding balances of
such liabilities, which were coupled with overall increases of 21 basis points,
or 4.1%, in the weighted- average yields paid on the Corporation's
interest-bearing liabilities. The upward movement in the average yields earned
on the Corporation's interest-earning assets compared to the average yields
paid on the Corporation's interest-bearing liabilities reflected liabilities
repricing upward more rapidly than assets. Such changes in yields earned and
paid were reflected in the interest rate spread, which had decreased from 2.80%
during fiscal 1997 to 2.68% during fiscal year 1998, and the net yield (net
interest income as a percentage of average interest-earning assets), which had
decreased from 2.99% during fiscal 1997 to 2.89% during fiscal 1998. The major
factors contributing to the decreases in the interest rate spread and the net
yield year-to-year were the decline in long-term interest rates toward
historical lows and the extremely flat yield curve which developed toward the
second half of fiscal 1998, which made it more difficult for the Corporation to
earn a significant positive spread on new deposit and new borrowing activity.
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Interest income on loans increased by $1.1 million, or 20.4%, during the
year ended June 30, 1998, as compared to the year ended June 30, 1997. The
increase in interest income on loans during fiscal 1998 was due to an increase
of $11.6 million, or 19.1%, in the average balance of loans outstanding, which
was coupled with an increase of 10 basis points, or 1.2%, in the
weighted-average rate earned on loans. The increase in the average outstanding
balance of loans year-to-year reflected a continuation of loan demand in which
loan originations and purchases exceeded loan principal repayments, sales and
payoffs. The growth in the loan portfolio was also attributed to management's
ongoing strategy to portfolio fixed-rate mortgage loans subject to certain
interest rate risk limitations. The increase in the average yield earned on
loans was principally the result of management's strategy to hold fixed-rate
mortgage loans to the extent practicable, so as to improve interest rate spread
and overall net earnings. The greater percentage of outstanding fixed-rate
mortgage loans in the loan portfolio during fiscal 1998, the greater volume of
originations of multi-family and nonresidential loans, the upward repricing of
existing adjustable-rate ("teaser") mortgage loans and strong consumer
preferences toward originating fixed-rate mortgages as opposed to lower rate
adjustable mortgages in a relatively stable but lower interest rate environment
are other contributing factors leading to overall higher loan yields during
fiscal 1998, all of which were partially offset by the acceleration of
prepayments on higher yielding fixed-rate mortgage loans held in the portfolio
during the second half of fiscal 1998.
Interest income on mortgage-backed securities designated as available for
sale and held to maturity increased by $76,000, or 4.3%, during the year ended
June 30, 1998, as compared to the year ended June 30, 1997. The increase in
interest income on mortgage-backed securities during fiscal 1998 was the result
of a increase in the average outstanding balance of mortgage-backed securities
of $1.6 million, or 5.9%, which was partially offset by a decline in the
weighted-average rate earned on such assets of 10 basis points, or 1.6%. The
increase in the average outstanding balance of mortgage-backed securities
reflected the purchases of fixed-rate and floating-rate collateralized mortgage
obligations, 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 second half of
fiscal 1998, 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
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using deposits and repayment cash flows to fund purchases of such assets. From
time to time when circumstances dictate and opportunities exist, purchases of
mortgage-backed securities are leveraged against advances from the Federal Home
Loan Bank to obtain a particular interest rate spread. The increased volume of
mortgage-backed securities, which supplemented the growth in the loan
portfolio, helped improve the Corporation's overall interest rate spread and
net earnings level as well as achieve better diversification of securities
within the portfolio. The decrease in the weighted-average yield earned on
mortgage-backed securities year-to-year generally reflected the greater
principal repayments on higher yielding securities due to a declining interest
rate environment in fiscal 1998 and the downward movement in the U.S. treasury
rates which a certain segment of the Corporation's adjustable-rate and
floating-rate mortgage-backed securities and collateralized mortgage
obligations are tied to in determining interest rate changes. Such decreases
in the U.S. treasury indexes were partially offset by an increase in the
eleventh district cost of funds index on which a large part of the
Corporation's adjustable-rate and floating-rate securities portfolio are tied
to in determining interest rate changes.
Interest and dividend income on investment securities and other
interest-earning assets increased in the aggregate by $125,000, or 61.6%,
during the year ended June 30, 1998, as compared to the year ended June 30,
1997. The increase during fiscal 1998 was primarily due to increases of
$275,000, or 22.2%, and $1.4 million, or 75.3%, in the average outstanding
balances of investment securities and other interest-earning assets (primarily
interest-bearing deposits in other financial institutions), respectively, and
to an increase in the weighted-average rate earned on other interest-earning
assets of 86 basis points, or 14.2%, all of which were partially offset by a
decline of 48 basis points, or 6.5%, in the weighted-average rate earned on
investment securities. The increase in the average outstanding balance of
investment securities was principally due to the purchase of callable U.S.
Government agency obligations and municipal obligations. U.S. Government
agency obligations were generally acquired for liquidity purposes as well as to
provide the Corporation with attractive, above market interest rates to
compensate for the call feature inherent in these securities. Such callable
securities were principally viewed by management as "yield enhancers,"
especially during a flat yield curve environment that predominately existed at
the time of many of these purchases, and helped improve the Corporation's
overall yield on investment securities from past levels. During the second
half of fiscal 1998 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
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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 yields 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 year-to-year,
as newer securities' purchases were obtained at lower rates than those
securities previously purchased. The increase in other interest-earning assets
was attributed in part to increased liquidity needs resulting from significant
asset growth year-to-year and growth in deposits and borrowings outpacing
growth in loans and investments. The increase in the weighted-average rate
earned on such assets year-to-year was the direct result of an increase in
short-term interest rates by the Federal Reserve in March 1997 and the purchase
of high yielding short-term certificate of deposit investments for the
portfolio which were primarily acquired in fiscal 1997. These certificate of
deposit investments were primarily adjustable in nature and interest rate
changes moved in the opposite direction of market interest rates.
Interest expense on deposits, the largest component of the Corporation's
interest-bearing liabilities, increased by $847,000, or 22.3%, during the year
ended June 30, 1998, as compared to the year ended June 30, 1997. The increase
in interest expense on deposits during fiscal 1998 was due to an increase of
$12.7 million, or 16.5%, in the average balance of deposits outstanding, which
was coupled with an increase of 25 basis points, or 5.1%, in the
weighted-average rate paid on deposits. The increase in the average balance of
deposits outstanding during the years presented reflected a significant
increase in term certificates of deposit (primarily certificates of deposit
with original terms to maturity of two years or less) of $13.1 million, or
22.7%, which was partially offset by a decline of $437,000, or 2.3%, in deposit
balances subject to daily repricing (passbook, money market deposit and NOW
accounts). Such increase in certificates of deposit emanated from depositors'
preference for shifting funds from deposits subject to daily repricing to
higher yielding term certificates of deposit and from an influx of new deposits
due to increased marketing and selling efforts by management and competitive
pricing strategies. In addition, during fiscal 1998, management 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 the average
outstanding balance of deposits was necessary to predominately fund the growth
in the loan and mortgage-backed securities portfolios.
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The increase in the weighted-average rate paid on deposit accounts year-to-year
reflected higher market rates of interest. Specifically, the weighted-average
rate paid on certificates of deposit increased from 5.68% during fiscal 1997 to
5.86% during fiscal 1998, while the weighted-average rate paid on transaction
accounts decreased slightly from 2.70% during fiscal 1997 to 2.64% during
fiscal 1998.
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, increased by $88,000, or
13.2%, during the year ended June 30, 1998, as compared to the year ended June
30, 1997. The increase in interest expense on borrowings during fiscal 1998
was attributed to an increase of $1.5 million, or 13.3%, in the average
outstanding balance of borrowings, which was partially offset by a decline of 1
basis point, or 0.2%, in the weighted-average rate paid on borrowings. Such
increase in the average outstanding balance of borrowings year-to-year was the
result of management utilizing new borrowings from the Federal Home Loan Bank
to assist, in part, in funding the Corporation's lending and investment
activities. 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 fiscal 1998, the
weighted-average rate paid on borrowings declined to 6.05%, a reduction of 1
basis point, or 0.2%, from 6.06% during fiscal 1997. This decline in the
weighted-average rate paid year-to-year generally reflected management's
restructuring efforts of its borrowing mix by lengthening out maturities in a
lower interest rate environment that prevailed throughout fiscal 1998.
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 Blue Ash the opportunity to reduce its costs of funds
on $6.0 million of borrowings by approximately 43 basis points. Reducing the
weighted-average rate paid on borrowings through restructuring was partially
offset by the maturity of $2.5 million in low fixed-rate advances in fiscal
1997 and the higher costs associated with certain adjustable-rate advances
acquired in fiscal 1998 in comparison to those acquired in past years.
The Corporation's provision for losses on loans increased by $6,000, or
33.3%, during the year ended June 30, 1998, as compared to the year ended June
30, 1997. The provision for losses on
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loans, which was comprised of discretionary additions to the general loan loss
allowance and specific loan losses, 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 fiscal 1998 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 have resulted in minimal loan losses (charge-offs) over the past five
years. The Corporation's provision for losses on loans during the year ended
June 30, 1998 was principally attributable to loan portfolio growth of 8.3%,
and to increases in internally-classified assets and non-performing and
nonaccrual loans. 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 June 30, 1998. However, future
adjustments to 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 increased during the year ended June 30, 1998 by $329,000, or
12.1%, as compared to the year ended June 30, 1997.
Other Income
Total other income increased by $288,000, or 135.8%, from $212,000 during
the year ended June 30, 1997 to $500,000 during the year ended June 30, 1998.
The primary reasons for this rise in other income during fiscal 1998 were an
increase in gain on sale of mortgage loans of $301,000, or 470.3%, an increase
in gain on sale of mortgage-backed securities designated as available for sale
of $14,000, or 100.0%, an increase in gain on sale of investment securities of
$3,000, an increase in service fees, charges and other operating income of
$14,000, or 40.0%, and a decrease in loss on sale of real estate acquired
through foreclosure of $1,000, all of which were partially offset by a decrease
in loan servicing fees of $45,000, or 45.0%.
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The increase in gain on sale of mortgage loans of $301,000, or 470.3%,
year-to-year was the result of an increase of $328,000 in gains (including
mortgage servicing rights pursuant to SFAS No. 125) on the sale of mortgage
loans in the secondary market, which was partially offset by the absence in
fiscal 1998 of $27,000 in unrealized market gains on loans identified as held
for sale during fiscal 1997. The Corporation recognized gains on the sale of
mortgage loans in the secondary market of $365,000 and $37,000 during the years
ended June 30, 1998 and 1997, 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 dramatically during
fiscal 1998, as the demand for fixed-rate single-family residential mortgage
loans was stronger within Blue Ash's lending area than during fiscal 1997 due
to a lower interest rate environment prevailing during fiscal 1998. As a
result, proceeds from the sale of loans in the secondary market increased from
$1.9 million during fiscal 1997 to $18.9 million during fiscal 1998, an
increase of $17.0 million, or 870.7%, and loans originated for sale in the
secondary market increased from $1.7 million during fiscal 1997 to $18.9
million during fiscal 1998, an increase of $17.2 million, or 996.1%. 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 fiscal
1998, management began placing 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 two 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 increases in gain on sale of mortgage-backed securities of $14,000, or
100.0%, and investment securities of $3,000 during the year ended June 30, 1998
were due to increased sales activity. During fiscal 1998, there were proceeds
of $8.9 million from the sale of mortgage-backed securities and $496,000 from
the sale of investment securities, while there was only $1.1 million in total
sales proceeds from securities during fiscal 1997. Such sales activity in
fiscal 1998 was predicated upon the declining interest rate environment that
prevailed and better diversifying the mortgage-backed securities portfolio so
as to improve the Corporation's overall yield and market performance to varying
interest rate environments. The decrease in loan servicing fees of $45,000, or
45.0%, during fiscal 1998 was principally attributed to a decline of
approximately $480,000, or 1.1%, in the average outstanding balance of loans
sold in the secondary market and to
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other financial institutions, which was coupled with an increase of $39,000 in
expenses for amortization and impairment of originated mortgage servicing
rights under SFAS No. 125 due to a greater mortgage servicing rights portfolio
during fiscal 1998 and to accelerated prepayments of mortgages associated with
a declining interest rate environment. The increase in service fees, charges
and other operating income of $14,000, or 40.0%, reflected increased fees
generated year-to-year from NOW accounts, construction loan draws, mortgage
loan modifications and conversions of adjustable-rate mortgage loans to fixed,
which were partially offset by a reduction in fee income received from
correspondent lenders for nonconforming loans.
General, Administrative and Other Expense
Total general, administrative and other expense decreased by $251,000, or
10.6%, during the year ended June 30, 1998, as compared to the year ended June
30, 1997. The components of this decrease in total general, administrative and
other expense during fiscal 1998 were comprised of a decrease in federal
deposit insurance premiums of $414,000, or 88.7%, a decrease in amortization of
goodwill of $4,000, or 10.5%, and a decrease in data processing expense of
$1,000, or 1.0%, all of which were partially offset by an increase in employee
compensation and benefits of $129,000, or 12.9%, an increase in occupancy and
equipment expense of $22,000, or 6.2%, an increase in advertising expense of
$6,000, or 6.7%, an increase in state franchise tax expense of $4,000, or 4.3%,
and an increase in other operating expense of $7,000, or 3.2%.
The driving factor behind the significant decline in total general,
administrative and other expense during fiscal 1998 was the decrease in federal
deposit insurance premiums of $414,000, or 88.7%, which was due to the one-time
special assessment of $366,000 to recapitalize the SAIF to federally-mandated
levels and to reduced deposit insurance premiums of $48,000 following the
September 1996 SAIF recapitalization. Excluding the SAIF special assessment,
however, total general, administrative and other expense would have only
increased from $2.0 million during fiscal 1997 to $2.1 million during fiscal
1998, an increase of $115,000, or 5.8%.
The principal category of the Corporation's general, administrative and
other expense is employee compensation and benefits. The increase in this
expense category of $129,000, or 12.9%, during fiscal 1998, as compared to
fiscal 1997, was primarily due to normal merit increases, increases in loan
officer salaries due to a restructuring in the method of compensating these
employees, increases in employee group health insurance premiums,
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increases in expenses related to the ESOP due to the payout of benefits to
terminated employees, increases in loan officer bonus expense as a result of a
greater lending volume, increases in annual bonus expense to employees and
officers stemming from a higher earnings level and increases in certain
payroll-related taxes such as social security taxes, all of which were
partially offset by a decrease in director medical reimbursement expenses and
an increase of $87,000, or 82.9%, in deferred loan origination costs in
accordance with SFAS No. 91 as a result of an approximate $19.6 million, or
67.6%, increase in total lending volume year-to-year and increased loan
personnel costs per loan during fiscal 1998.
The increase in occupancy and equipment expense of $22,000, or 6.2%, was
largely due to increases in office building repair and maintenance, furniture
and fixture expenses, telephone expense, postage and expenses associated with
ATM processing. The increase in advertising expense of $6,000, or 6.7%, was
principally attributable to a continuation of intensified marketing and selling
efforts by management, which were directed toward the loan origination function
and attracting new deposits. The decrease of $1,000, or 1.0%, 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 Ash's contract with its third party provider of data processing
services during fiscal 1998, which was partially offset by an increased average
deposit base as well as growth in lending operations. The increase in state
franchise tax expense of $4,000, or 4.3%, was primarily attributed to an
enhanced equity capital position year-to-year. The increase in other operating
expense of $7,000, or 3.2%, was primarily due to increases in supervisory
assessments, directors' and officers' insurance, organizational dues and
subscriptions, charitable contributions, NOW accounts, filing fees of public
documents, printing expenses of annual report to shareholders, office supplies
as a result of an expanded loan and savings operation and legal expenses
pertaining to problem loans and adoption of the Corporation's 1997 Stock Option
Plan, all of which were partially offset by a reduction in outside consulting
services, real estate owned expenses and nonrecurring miscellaneous expenses.
Federal Income Taxes
The provision for federal income taxes totaled $496,000 for the year ended
June 30, 1998, as compared to $201,000 for the year ended June 30, 1997, an
increase of $295,000, or 146.8%. The increase in the provision for federal
income taxes reflected the higher level of pre-tax earnings for the year ended
June 30, 1998, an increase of $868,000, or 153.4%, from $566,000 during the
year
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ended June 30, 1997 to $1.4 million during the year ended June 30, 1998. As
previously discussed, the one-time charge to replenish the SAIF had a
detrimental impact on net earnings for the year ended June 30, 1997. As a
result, the level of federal income tax expense for each of the years ended
June 30, 1998 and 1997 generally reflected the level of pre-tax earnings for
such years. The Corporation's effective tax rates amounted to 34.6% and 35.5%
for the years ended June 30, 1998 and 1997, respectively.
COMPARISON OF THE RESULTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
General
Net earnings amounted to $365,000 for the year ended June 30, 1997, a
decrease of $156,000, or 29.9%, from the $521,000 in net earnings recorded for
the year ended June 30, 1996. The decrease in net earnings was primarily
attributable to an increase in general, administrative and other expense of
$358,000, or 17.9%, and a decrease in other income of $258,000, or 54.9%, which
were partially offset by an increase in net interest income after provision for
losses on loans of $377,000, or 16.1%. The decrease in earnings level before
federal income taxes of $239,000, or 29.7%, resulted in a decrease in the
provision for federal income taxes of $83,000, or 29.2%. As previously
discussed, the earnings level of $365,000 for the year ended June 30, 1997 was
greatly affected by a nonrecurring $242,000 after-tax charge to net earnings,
or $1.12 per diluted share, for the FDIC special assessment to recapitalize the
SAIF to the required statutory level in accordance with the legislation enacted
into law during fiscal 1997. Excluding the detrimental effects on net earnings
of the one-time SAIF recapitalization charge, net earnings for the year ended
June 30, 1997 would have been recorded at $607,000, as compared to $521,000 for
the year ended June 30, 1996, an increase of $86,000, or 16.5%.
Net Interest Income and Provision for Losses on Loans
The Corporation's net interest income increased by $384,000, or 16.4%,
during the year ended June 30, 1997, as compared to the year ended June 30,
1996. The increase in net interest income during fiscal 1997 was primarily the
result of an increase in total interest income, due to increases in the average
outstanding balances of loans, mortgage-backed securities and investment
securities, and to increases in the weighted-average rates earned on loans and
investment securities, which were partially offset by a decrease in the average
outstanding balance of other interest-
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earning assets and to declines in the weighted-average rates earned on
mortgage-backed securities and other interest-earning assets. Total interest
income on the Corporation's interest-earning assets increased by $782,000, or
12.2%, during fiscal 1997 due to overall increases of $9.2 million, or 11.3%,
in the average outstanding balances of such assets, which were coupled with
overall increases of 7 basis points, or 0.9%, in the weighted-average yields
earned on such assets. The increase in total interest income during fiscal
1997 was partially offset by an increase in total interest expense, primarily
due to increases in the average outstanding balance of deposits and borrowings,
which were partially offset by declines in the weighted-average rates paid on
deposits and borrowings. Total interest expense on the Corporation's
interest-bearing liabilities for fiscal 1997, as compared to fiscal 1996,
increased by $398,000, or 9.8%, due to overall increases of $9.0 million, or
11.4%, in the average outstanding balances of such liabilities, which were
partially offset by overall declines of 7 basis points, or 1.4%, in the
weighted-average rates paid on the Corporation's interest-bearing liabilities.
The upward movement in the average yields earned on the Corporation's
interest-earning assets compared to the downward movement in the average yields
paid on the Corporation's interest-bearing liabilities reflected a widening of
the interest rate spread during fiscal 1997, which correlated into increased
core earnings. Such positive movement in yields earned and paid was reflected
in the interest rate spread, which had increased from 2.66% in fiscal 1996 to
2.80% in fiscal 1997, while the net yield (net interest income as a percentage
of average interest-earning assets) increased from 2.86% in fiscal 1996 to
2.99% in fiscal 1997. The major factor contributing to the increases in the
interest rate spread and net yield year-to-year was believed to be management's
concerted efforts in growing the loan portfolio by holding in the portfolio the
majority of fixed-rate loans originated in the fiscal 1997 interest rate
environment.
Interest income on loans increased by $811,000, or 18.3%, during the year
ended June 30, 1997, as compared to the year ended June 30, 1996. The increase
in interest income on loans during fiscal 1997 was due to an increase of $9.2
million, or 17.9%, in the average balance of loans outstanding, which was
coupled with an increase 3 basis points, or 0.3%, in the weighted-average rate
earned on loans. The increase in the average outstanding balance of loans
year-to-year reflected a continuation of loan demand in which loan originations
and purchases exceeded loan principal repayments, sales and payoffs. The
growth in the loan portfolio was also attributed to management's decision to
portfolio fixed-rate loans in the fiscal 1997 interest rate environment subject
to certain interest rate risk limitations. The increase in the average yield
earned on loans was principally the result of management's strategy to hold
fixed-rate mortgage loans, so as to
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improve interest rate spread and overall net earnings. The greater percentage
of outstanding fixed-rate mortgage loans in the loan portfolio in fiscal 1997,
the upward repricing of existing adjustable-rate ("teaser") mortgage loans and
strong consumer preferences toward originating fixed-rate mortgages as opposed
to lower rate adjustable mortgages in a relatively stable interest rate
environment are other contributing factors leading to overall higher loan
yields in fiscal 1997. All these factors were coupled with a generally higher
interest rate environment prevailing during fiscal 1997.
Interest income on mortgage-backed securities designated as available for
sale and held to maturity decreased by $10,000, or 0.6%, during the year ended
June 30, 1997, as compared to the year ended June 30, 1996. The decrease in
interest income on mortgage-backed securities was the result of a decrease in
the weighted-average rate earned on such assets of 9 basis points, or 1.4%,
which was partially offset by an increase in the average outstanding balance of
mortgage-backed securities of $238,000, or 0.9%. The increase in the average
balance of mortgage-backed securities outstanding during fiscal 1997 reflected
the purchase of floating-rate collateralized mortgage obligations designated as
available for sale, the purchase of collateralized mortgage obligations
designated as held to maturity for liquidity and diversification purposes, the
purchase of an adjustable-rate participation certificate and the sale of
securities in fiscal 1996, all of which were partially offset by principal
repayments on securities with respect to the underlying loans and the sale of
securities in fiscal 1997. Such increase in the average balance of
mortgage-backed securities outstanding was attributable in part to a strategy
adopted by management to sustain continued growth in asset levels by primarily
using deposits and repayment cash flows to fund purchases of such assets. The
increased volume of mortgage-backed securities, which supplemented the growth
in the loan portfolio, helped improve the Corporation's overall interest rate
spread and net earnings level. The increase in the average balance of
mortgage-backed securities outstanding, however, began shrinking during the
second half of fiscal 1997 as management shifted more proceeds from sales of
securities and principal repayments towards the origination of loans.
Management's primary objective during fiscal 1997 was to grow the loan
portfolio by shifting funds from other asset categories to the extent
practicable. The decline in the weighted-average yield earned on
mortgage-backed securities generally reflected the downward movement of
interest rate changes on the Corporation's adjustable-rate and floating-rate
mortgage-backed securities and collateralized mortgage obligations.
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Interest and dividend income on investment securities held to maturity and
other interest-earning assets decreased in the aggregate by $19,000, or 8.6%,
during the year ended June 30, 1997, as compared to the year ended June 30,
1996. The decrease during fiscal 1997 was due primarily to a decrease of
$657,000, or 26.2%, in the average balance outstanding of other
interest-earning assets and a decline of 53 basis points, or 8.0%, in the
weighted-average rate earned on other interest-earning assets, which were
partially offset by an increase of $446,000, or 56.3%, in the average balance
outstanding of investment securities and an increase of 15 basis points, or
2.1%, in the weighted-average rate earned on investment securities. The
increase in the average outstanding balance of investment securities during
fiscal 1997 was largely attributable to the purchase of callable U.S.
Government agency obligations in both fiscal 1997 and 1996, which was partially
offset by the call of some of these securities and the maturities of other
investment securities during fiscal 1997. Such callable obligations were
generally offered at attractive, above-market rates in order to compensate the
buyer for the call feature and helped improve the Corporation's overall yield
on investment securities and interest rate spread. The increase in the
weighted-average rate earned on investment securities during fiscal 1997 was
due to the purchase of callable U.S. Government agency obligations at rates
generally higher than those securities called or matured in fiscal 1997,
resulting from a generally higher interest rate environment. The reduction in
other interest-earning assets was the function of a steadily growing lending
operation, while the decline in yield earned on such short-term liquid assets
was due in part to two interest rate reductions by the Federal Reserve in
fiscal 1996, which was partially offset by one interest rate increase in fiscal
1997.
Interest expense on deposits increased by $356,000, or 10.4%, during the
year ended June 30, 1997, as compared to the year ended June 30, 1996. The
increase in interest expense on deposits during fiscal 1997 was due to an
increase of $8.2 million, or 12.0%, in the average balance of deposits
outstanding, which was partially offset by a decrease of 8 basis points, or
1.6%, in the weighted- average rate paid on deposits. The increase in the
average balance of deposits outstanding during the fiscal years presented
reflected a significant increase in term certificates of deposit (primarily
certificates of deposit with original terms to maturity of two years or less)
of $8.7 million, or 17.8%, which was partially offset by a decline of $461,000,
or 2.3%, in deposit balances subject to daily repricing (passbook, money market
deposit and NOW accounts). Such increase in certificates of deposit emanated
from depositors' preference for shifting funds from deposits subject to daily
repricing to higher yielding term certificates of deposit and from an influx of
new deposits due to increased marketing and
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selling efforts by management and competitive pricing strategies. In addition,
during fiscal 1997, management began utilizing more frequently brokered
deposits and other out-of-state funds as an alternative source of funds in an
effort to continue the growth in certificates of deposit. In many cases,
interest rates paid on brokered deposits were actually the same or lower than
interest rates paid on local deposits. The increase in the average outstanding
balance of deposits was necessary to predominately fund the growth in the loan
portfolio. The decrease in the weighted- average rate paid on deposit accounts
year-to-year reflected lower market rates of interest during fiscal 1997, as
compared to fiscal 1996. Specifically, the weighted-average rate paid on
certificates of deposit decreased from 5.88% in fiscal 1996 to 5.68% in fiscal
1997, which was coupled with a decrease in the weighted-average rate paid on
transaction accounts from 2.84% in fiscal 1996 to 2.70% in fiscal 1997.
Interest expense on borrowings, consisting primarily of fixed-rate Federal
Home Loan Bank advances, adjustable-rate LIBOR-based advances and line of
credit advances and, to a lesser extent, an adjustable-rate loan of the ESOP,
increased by $42,000, or 6.7%, during the year ended June 30, 1997, as compared
to the year ended June 30, 1996. The increase in interest expense on
borrowings during fiscal 1997 was attributed to an increase of $785,000, or
7.7%, in the average outstanding balance of borrowings, which was partially
offset by a decrease of 5 basis points, or 0.8%, in the weighted-average rate
paid on borrowings. The increase in the average outstanding balance of
borrowings year-to-year was the result of management utilizing new borrowings
from the Federal Home Loan Bank to assist, in part, in funding the
Corporation's lending and investment activities. Such increase in the average
outstanding balance of borrowings was partially offset by significant principal
repayments on Federal Home Loan Bank advances and other short-term borrowings
in fiscal 1996. These repayments in fiscal 1996 were funded with excess
liquidity and deposit inflows, as it was management's intent of principally
growing the Corporation through an increased deposit base. During fiscal 1997,
however, advances from the Federal Home Loan Bank were utilized by management
as an alternative funding source to provide additional liquidity and sources of
funds to the lending function during periods of cash outflows, as well as to
pursue its lending and investment programs as previously discussed. During
fiscal 1997, the weighted-average rate paid on borrowings declined to 6.06%, a
decrease of 5 basis points, or 0.8%, from 6.11% in fiscal 1996. This decrease
in the weighted-average rate paid year-to-year generally reflected the lower
costs of new borrowings in comparison to borrowings obtained in prior years.
Additionally, the interest rates paid on the adjustable rate portion of Federal
Home Loan Bank advances in fiscal 1997 were generally lower than the interest
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rates paid on that portion in fiscal 1996, as management utilized such advances
during periods of lower interest rates.
The Corporation's provision for losses on loans increased by $7,000, or
63.6%, during the year ended June 30, 1997, as compared to the year ended June
30, 1996. The provision for losses on loans was comprised solely of
discretionary additions to the general loan loss allowance. 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 fiscal 1997 was predicated upon the
overall loan portfolio growth and management's review of non-performing and
nonaccrual loans and anticipated losses on loans for the year.
As a result of the foregoing changes in interest income, interest expense
and provision for losses on loans, net interest income after provision for
losses on loans increased during the year ended June 30, 1997 by $377,000, or
16.1%, as compared to the year ended June 30, 1996.
Other Income
Total other income decreased by $258,000, or 54.9%, from $470,000 during
the year ended June 30, 1997 to $212,000 during the year ended June 30, 1996.
The principal causes for this decline in other income were a decrease in gain
on sale of mortgage loans of $97,000, or 60.2%, a decrease in gain on sale of
mortgage-backed securities designated as available for sale of $135,000, or
90.6%, a decrease in loan servicing fees of $13,000, or 11.5%, an increase in
loss on sale of real estate acquired through foreclosure of $1,000 and a
decrease in service fees, charges and other operating income of $12,000, or
25.5%.
The decrease in gain on sale of mortgage loans was the result of a
reduction in secondary market activities during fiscal 1997, as compared to
fiscal 1996, due to management's strategy of holding in the loan portfolio
certain fixed-rate mortgage loans subject to certain interest rate risk
limitations. The Corporation recognized cash gains on the sale of mortgage
loans in the secondary market of $17,000 and $125,000 during fiscal 1997 and
1996, respectively. As a result, proceeds from the sale of loans in the
secondary market declined from $8.2 million in fiscal 1996 to $1.9 million in
fiscal 1997, and loans originated for sale in the secondary market decreased
from $9.4 million in fiscal 1996 to $1.7 million in fiscal 1997. Prior to
management's change in strategy of
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originating fixed-rate mortgage loans in fiscal 1996, loan sales were
frequently utilized as a means of minimizing interest rate risk as well as
generating additional funds for lending and other purposes.
The decrease in gain on sale of mortgage-backed securities of $135,000, or
90.6%, was due to the significant decline in sales activity during fiscal 1997,
as compared to fiscal 1996. Proceeds from the sale of mortgaged-backed
securities were $1.1 million and $10.8 million during fiscal 1997 and 1996,
resulting in gains of $14,000 and $149,000, respectively. Such greater sales
activity in fiscal 1996 was undertaken by management for diversification
purposes and to realize profits, arising from a favorable interest rate
environment, that had accumulated on certain floating-rate collateralized
mortgage obligations which were tied to a particular lagging market index. The
decrease in loan servicing fees of $13,000, or 11.5%, during fiscal 1997 was
principally attributed to a decline of approximately $3.6 million, or 7.6%,
year-to-year in the average outstanding balance of loans sold in the secondary
market and to other financial institutions, which was coupled with an increase
of $4,000, or 66.7%, in expense for amortization and impairment of originated
mortgage servicing rights under SFAS No. 125. The decline in service fees,
charges and other operating income of $12,000, or 25.5%, reflected the
increased costs incurred by the Corporation in the origination of no-cost line
of credit loans which were more prevalent in fiscal 1997 and the reduction in
fees received from correspondent lenders, which were partially offset by
increased fees generated year-to-year from NOW accounts. In addition, the
Corporation recognized a loss of $1,000 during fiscal 1997 on the sale of real
estate acquired through foreclosure (single-family residence).
General, Administrative and Other Expense
Total general, administrative and other expense increased by $358,000, or
17.9%, during the year ended June 30, 1997, as compared to the year ended June
30, 1996. The components of this increase in total general, administrative and
other expense during fiscal 1997 were comprised of an increase in employee
compensation and benefits of $36,000, or 3.7%, an increase in federal deposit
insurance premiums of $323,000, or 224.3%, an increase in state franchise tax
expense of $9,000, or 10.7%, an increase in data processing expense of $6,000,
or 6.5%, and an increase in advertising expense of $3,000, or 3.5%, all of
which were partially offset by a decrease in occupancy and equipment expense of
$14,000, or 3.8%, and a decrease in other operating expense of $5,000, or 2.2%.
The increase in employee compensation and benefits of $36,000, or 3.7%,
during fiscal 1997, as compared to fiscal 1996, was
G-60
<PAGE> 216
primarily due to normal merit increases, increases in employee group health
insurance premiums and decreases in deferred loan origination costs in
accordance with SFAS No. 91 as a result of an approximate $568,000, or 1.9%,
decrease in total lending volume year-to-year, all of which were partially
offset by decreases in employee salaries due to a temporary reduction in the
work staff in the savings and mortgage operations, decreases in contributions
to the ESOP plan and decreases in certain payroll-related taxes such as workers
compensation premiums and state unemployment taxes.
The increase of $323,000 in federal deposit insurance premiums was due to
the one-time special assessment of $366,000 to recapitalize the SAIF to
federally-mandated levels and to an increased average deposit base
year-to-year, which were partially offset by a reduction of $72,000 in regular
SAIF premium assessments after enactment of the SAIF legislation as previously
discussed. The increase in data processing expense of $6,000, or 6.5%, also
reflected an increased average deposit base as well as growth in lending
operations. The increase in state franchise tax expense of $9,000, or 10.7%,
was primarily attributed to an enhanced equity capital position year-to-year.
The increase of $3,000, or 3.5%, in advertising expense was principally
attributable to a continuation of intensified marketing and selling efforts by
management, which were directed toward the loan origination function and
attracting new deposits. The decrease in occupancy and equipment expense of
$14,000, or 3.8%, was largely due to the reduction in office building repair
and maintenance expenses and expenses associated with ATM processing, which
were partially offset by higher light, heat and utilities costs and furniture,
fixtures and equipment expenses. The decrease in other operating expense of
$5,000, or 2.2%, during fiscal 1997 was due in part to a decrease in NOW
processing expenses and a decrease in office supplies and stationery costs,
which were partially offset by an increase in supervisory assessments resulting
from a greater asset base and an increase in consulting fees associated with
analyzing new loan origination software and upgrading the Corporation's
computer system.
Federal Income Taxes
The provision for federal income taxes totaled $201,000 for the year ended
June 30, 1997, compared to $284,000 for the year ended June 30, 1996, a
decrease of $83,000, or 29.2%. The decrease in the provision for federal
income taxes reflected the lower level of pre-tax earnings for the year ended
June 30, 1997, a decrease of $239,000, or 29.7%. As previously discussed, the
one-time charge to replenish the SAIF had a detrimental impact on net earnings
for the year ended June 30, 1997. As a result, the level of federal income tax
expense for each of the years ended June 30, 1997 and 1996 generally reflected
the level of pre-tax earnings for such years.
G-61
<PAGE> 217
[ LOGO ]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Towne Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Towne Financial Corporation and Subsidiary as of June 30, 1998 and 1997, and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the three years ended June 30, 1998, 1997 and 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Towne
Financial Corporation and Subsidiary as of June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years ended June 30, 1998, 1997 and 1996, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
September 4, 1998
G-62
<PAGE> 218
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 1,419 $ 2,310
Federal funds sold 3,900 200
Interest-bearing deposits in other financial institutions 319 205
-------- --------
Cash and cash equivalents 5,638 2,715
Certificates of deposit in other financial institutions 469 466
Investment securities designated as available for sale - at market 809 -
Investment securities held to maturity - at amortized cost, approximate
market value of $812 and $1,399 at June 30, 1998 and 1997 809 1,399
Mortgage-backed securities designated as available for sale - at market 18,354 15,269
Mortgage-backed securities held to maturity - at amortized cost,
approximate market value of $14,592 and $11,267 at June 30,
1998 and 1997 14,641 11,463
Loans held for sale - at lower of cost or market 882 -
Loans receivable - net 71,476 66,817
Office premises and equipment - at depreciated cost 2,250 2,335
Federal Home Loan Bank stock - at cost 797 742
Accrued interest receivable on loans 678 562
Accrued interest receivable on mortgage-backed securities 189 166
Accrued interest receivable on investments and interest-
bearing deposits 25 31
Goodwill - net of accumulated amortization 333 367
Prepaid expenses and other assets 425 226
Prepaid federal income taxes 15 -
-------- --------
Total assets $117,790 $102,558
======== ========
</TABLE>
G-63
<PAGE> 219
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
<S> <C> <C>
Deposits $ 94,988 $ 81,794
Advances from the Federal Home Loan Bank 12,674 12,000
Loan of Employee Stock Ownership Plan 30 60
Advances by borrowers for taxes and insurance 300 260
Accounts payable on mortgage loans serviced for others 492 368
Accrued interest payable 38 28
Other liabilities 175 138
Accrued federal income taxes - 9
Deferred federal income taxes 430 263
-------- --------
Total liabilities 109,127 94,920
Commitments - -
Shareholders' equity
Preferred shares - 250,000 shares of $1.00 par value authorized;
no shares issued - -
Common shares - 2,250,000 shares of $1.00 par value authorized;
208,500 shares issued and outstanding at June 30, 1998 and 1997 209 209
Additional paid-in capital 1,680 1,680
Retained earnings - substantially restricted 6,841 5,987
Less required contributions for shares acquired by
Employee Stock Ownership Plan (ESOP) (30) (60)
Unrealized losses on securities designated as available for
sale - net of related tax effects (37) (178)
-------- --------
Total shareholders' equity 8,663 7,638
-------- --------
Total liabilities and shareholders' equity $117,790 $102,558
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
G-64
<PAGE> 220
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $6,301 $5,232 $4,421
Mortgage-backed securities 1,833 1,757 1,767
Investment securities 104 91 57
Interest-bearing deposits and other 224 112 165
------ ------ ------
Total interest income 8,462 7,192 6,410
Interest expense
Deposits 4,639 3,792 3,436
Borrowings 757 669 627
------ ------ ------
Total interest expense 5,396 4,461 4,063
------ ------ ------
Net interest income 3,066 2,731 2,347
Provision for losses on loans 24 18 11
------ ------ ------
Net interest income after provision for losses on loans 3,042 2,713 2,336
Other income (loss)
Loan servicing fees 55 100 113
Gain on sale of mortgage loans 365 64 161
Gain on sale of mortgage-backed securities 28 14 149
Gain on sale of investment securities 3 - -
Loss on sale of real estate acquired through foreclosure - (1) -
Service fees, charges and other operating 49 35 47
------ ------ ------
Total other income 500 212 470
General, administrative and other expense
Employee compensation and benefits 1,131 1,002 966
Occupancy and equipment 375 353 367
Data processing 98 99 93
Federal deposit insurance premiums 53 467 144
Franchise taxes 97 93 84
Advertising 95 89 86
Amortization of goodwill 34 38 38
Other operating 225 218 223
------ ------ ------
Total general, administrative and other expense 2,108 2,359 2,001
------ ------ ------
Earnings before federal income taxes 1,434 566 805
Federal income taxes
Current 401 163 210
Deferred 95 38 74
------ ------ ------
Total federal income taxes 496 201 284
------ ------ ------
NET EARNINGS $ 938 $ 365 $ 521
====== ====== ======
EARNINGS PER SHARE
Basic $ 4.50 $ 1.75 $ 2.51
====== ====== ======
Diluted $ 4.28 $ 1.69 $ 2.44
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
G-65
<PAGE> 221
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1998, 1997 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
REQUIRED (LOSSES) ON
CONTRIBUTIONS SECURITIES
ADDITIONAL FOR SHARES DESIGNATED AS
COMMON PAID-IN RETAINED ACQUIRED AVAILABLE
SHARES CAPITAL EARNINGS BY ESOP FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995 $208 $1,669 $5,101 $(118) $ 23 $6,883
Stock options exercised - 6 - - - 6
Principal repayments on loan of ESOP - - - 29 - 29
Net earnings for the year ended June 30, 1996 - - 521 - - 521
Unrealized losses on securities designated as
available for sale - net of related tax effects - - - - (282) (282)
------ ---------- -------- ------------- ------------- ------
Balance at June 30, 1996 208 1,675 5,622 (89) (259) 7,157
Stock options exercised 1 5 - - - 6
Principal repayments on loan of ESOP - - - 29 - 29
Net earnings for the year ended June 30, 1997 - - 365 - - 365
Unrealized gains on securities designated as
available for sale - net of related tax effects - - - - 81 81
------ ---------- -------- ------------- ------------- ------
Balance at June 30, 1997 209 1,680 5,987 (60) (178) 7,638
Principal repayments on loan of ESOP - - - 30 - 30
Net earnings for the year ended June 30, 1998 - - 938 - - 938
Cash dividends of $.40 per share - - (84) - - (84)
Unrealized gains on securities designated as
available for sale - net of related tax effects - - - - 141 141
------ ---------- -------- ------------- ------------- ------
Balance at June 30, 1998 $209 $1,680 $6,841 $(30) $(37) $8,663
====== ========== ======== ============= ============= ======
</TABLE>
The accompanying notes are an integral part of these statements.
G-66
<PAGE> 222
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 938 $ 365 $ 521
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of premiums and accretion of discounts
on mortgage-backed securities, net 7 11 28
Gain on sale of investment securities (3) - -
Gain on sale of mortgage-backed securities (28) (14) (149)
Provision for losses on loans 24 18 11
Gain on sale of mortgage loans (136) (44) (73)
Accretion of discounts on loans (2) - -
Amortization of deferred loan origination fees (39) (42) (37)
Loans originated for sale in the secondary market (18,897) (1,724) (9,374)
Proceeds from sale of loans in the secondary market 18,918 1,949 8,201
Depreciation and amortization 159 153 152
Loss on sale of real estate acquired through foreclosure - 1 -
Federal Home Loan Bank stock dividends (55) (50) (46)
Amortization of goodwill 34 38 38
Increases (decreases) in cash due to changes in:
Accrued interest receivable on loans (116) (19) (91)
Accrued interest receivable on mortgage-backed securities (23) 9 (12)
Accrued interest receivable on investments and
interest-bearing deposits 6 (11) (6)
Prepaid expenses and other assets (199) 18 27
Accrued interest payable 10 (8) -
Other liabilities 37 (1) 27
Federal income taxes
Current (24) 28 (15)
Deferred 95 38 74
-------- ------- -------
Net cash provided by (used in) operating activities 706 715 (724)
-------- ------- -------
</TABLE>
G-67
<PAGE> 223
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by (used in) investing activities:
Proceeds from sale of investment securities designated as
available for sale $ 496 $ - $ -
Proceeds from maturities of investment securities held to maturity 250 410 -
Proceeds from called investment securities held to maturity 1,850 400 400
Purchase of investment securities designated as available for sale (1,299) - -
Purchase of investment securities held to maturity (1,510) (909) (1,200)
Proceeds from sale of mortgage-backed securities designated
as available for sale 8,884 1,148 10,803
Proceeds from called mortgage-backed securities held to maturity 500 - -
Purchase of mortgage-backed securities designated as available
for sale (12,674) (1,672) (14,045)
Purchase of mortgage-backed securities held to maturity (4,926) (349) (2,430)
Principal repayments on mortgage-backed securities designated as:
Available for sale 959 1,081 1,468
Held to maturity 1,225 815 1,246
Loan disbursements (28,908) (26,835) (20,069)
Purchase of loans (671) (258) (49)
Loan principal repayments 24,170 15,189 12,102
Purchase of office premises and equipment (74) (80) (39)
(Increase) decrease in certificates of deposit in other financial
institutions - net (3) (368) 100
------- -------- --------
Net cash used in investing activities (11,731) (11,428) (11,713)
Cash flows provided by (used in) financing activities:
Issuance of and credits to deposit accounts 88,782 83,717 72,257
Withdrawals from deposit accounts (75,588) (77,541) (56,423)
Proceeds from Federal Home Loan Bank advances 10,000 3,776 9,706
Repayments of Federal Home Loan Bank advances (9,326) (200) (9,600)
Repayments of obligations for securities sold under
agreements to repurchase - - (3,504)
Advances by borrowers for taxes and insurance 40 31 89
Accounts payable on mortgage loans serviced for others 124 28 4
Proceeds from the exercise of stock options - 6 6
Dividends paid on common shares (84) - -
------- -------- --------
Net cash provided by financing activities 13,948 9,817 12,535
------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,923 (896) 98
Cash and cash equivalents at beginning of year 2,715 3,611 3,513
------- -------- --------
Cash and cash equivalents at end of year $ 5,638 $ 2,715 $ 3,611
======= ======== ========
</TABLE>
G-68
<PAGE> 224
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 425 $ 135 $ 225
====== ====== ======
Interest on deposits and borrowings $5,386 $4,469 $4,063
====== ====== ======
Supplemental disclosure of noncash investing activities:
Foreclosed mortgage loans transferred to real estate acquired
through foreclosure $ - $ 108 $ -
====== ====== ======
Loans disbursed to finance the sale of real estate acquired
through foreclosure $ - $ 107 $ -
====== ====== ======
Transfers of loans from held for sale to held for investment
classification $ - $1,755 $ -
====== ====== ======
Transfers of loans held for investment to held for sale
classification $ 766 $ 59 $ 210
====== ====== ======
Recognition of mortgage servicing rights in accordance
with Statement of Financial Accounting Standards No. 125 $ 229 $ 20 $ 88
====== ====== ======
Loan charge-offs $ 4 $ 5 $ -
====== ====== ======
Transfers of mortgage-backed securities from held to maturity
to available for sale classification $ - $ - $2,371
====== ====== ======
Unrealized gains (losses) on securities designated
as available for sale - net of related tax effects $ 141 $ 81 $ (282)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
G-69
<PAGE> 225
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Towne Financial Corporation ("Towne Financial", or the "Corporation")
conducts a general banking business in southwestern Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes.
The Corporation's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated
from interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Corporation can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside
of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing consolidated
financial statements in accordance with GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and revenues and expenses
during the reporting period. Actual results could differ from such
estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
Towne Financial is a unitary savings and loan holding company. Since the
date of incorporation, Towne Financial's activities have been limited
primarily to holding the common stock of its subsidiary, The Blue Ash
Building and Loan Company ("Blue Ash", or the "Company").
The consolidated financial statements include the accounts of the Corporation
and the Company. Condensed financial statements of the Corporation as of
June 30, 1998 and 1997 and for the years ended June 30, 1998, 1997 and 1996
are presented in Note M. Future references are made to either the
Corporation or the Company as the context requires. All significant
intercompany balances and transactions have been eliminated in the
accompanying consolidated financial statements.
G-70
<PAGE> 226
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investment securities and mortgage-backed
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires the classification of certain debt and
equity securities as held to maturity, trading or available for sale. SFAS
No. 115 also addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values (market value) and for
all investments in debt securities. Such investments are classified in three
categories and accounted for as follows: (i) debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost; (ii) debt and
equity securities that are held for current resale are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings, and (iii) debt and equity securities not classified as
either securities held to maturity or trading securities are classified as
securities available for sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of shareholders' equity. Under SFAS No. 115, securities that could be sold
in the future because of changes in interest rates or other factors are not
classified as held to maturity. As required by SFAS No. 115, management
determines the appropriate classification of investment securities and
mortgage-backed securities at the time of purchase.
The Corporation's investment securities are classified as either held to
maturity or available for sale. Investment securities which are classified
as held to maturity are recorded at cost, with any premium or discount
amortized or accreted to maturity of the security. It is management's
positive intent to hold such securities until maturity, and the Corporation
has the ability to hold the securities until maturity. Investment securities
which are classified as available for sale are stated at fair value, with
unrealized gains and losses excluded from earnings and reported net of tax as
a separate component of shareholders' equity until realized. This
classification includes securities that may be sold in response to changes in
interest rates, the securities prepayment risk, liquidity needs, the
availability of and the yield on alternative investments and funding sources.
The Corporation's investment securities are comprised of U.S. Government
agency obligations, municipal obligations and corporate equity securities at
June 30, 1998, and solely of U.S. Government agency obligations at June 30,
1997. Amortization and accretion of premiums and discounts on investment
securities are recorded using the interest method. Gains and losses on the
sale of securities are recognized using the specific identification method.
G-71
<PAGE> 227
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
The Corporation classifies its mortgage-backed securities into two
classifications depending on certain underlying characteristics of the
securities. Mortgage-backed securities classified as held to maturity are
stated at the unpaid principal amount outstanding (cost), adjusted for
unamortized premiums and unaccreted discounts. Premiums and discounts are
amortized and accreted into operations using the interest method over the
estimated average life of the underlying loans collateralizing the
securities. The mortgage-backed securities classified as held to maturity
are carried at cost, as it is management's intent, and the Corporation has
the ability to hold the securities until maturity. In considering the
Corporation's ability to hold securities, collateralized mortgage obligations
are reviewed for possible regulatory mandated divestiture under existing
banking regulations. Mortgage-backed securities classified as available for
sale are stated at fair value, with unrealized gains and losses excluded from
earnings and reported net of tax as a separate component of shareholders'
equity until realized. Mortgage-backed securities classified as available
for sale are those that management intends to sell or that would be sold for
liquidity purposes, changes in interest rates, prepayment risk and
asset/liability management reasons, even if there is not a present intention
of such a sale. At June 30, 1998 and 1997, the Corporation's shareholders'
equity reflected unrealized losses on securities designated as available for
sale, net of applicable tax effects, of $37,000 and $178,000, respectively.
Realized gains and losses on the sale of mortgage-backed securities are
recognized using the specific identification method.
Trading account securities are held for resale in anticipation of short-term
market movements and are carried at fair value, with unrealized holding gains
and losses reflected in earnings. There were no investment securities and
mortgage-backed securities designated as trading securities at June 30, 1998
and 1997.
3. Mortgage Banking Activities
The Company conducts mortgage banking operations via the sale of certain
loans or participating interests in loans in order to generate servicing
income and to provide additional funds for lending. Loans held for sale are
identified at the point of origination and are carried at the lower of cost
or market, determined in the aggregate. Market is determined on the basis of
rates quoted in the secondary mortgage market. Net unrealized losses are
recognized through a valuation allowance by charges against income. In
computing cost, deferred loan origination costs (fees) are added to (deducted
from) the principal balances of the related loans. Gains and losses on the
sale of loans are based on the carrying amount of the loans sold under the
specific identification method. At June 30, 1998, loans held for sale were
carried at cost. At June 30, 1997, there were no loans identified as held
for sale.
During fiscal 1997, the Company transferred approximately $1.8 million in
fixed-rate loans from a held for sale to a held for investment classification
to better serve its objectives of sustaining loan portfolio growth and
improving its overall yield on loans. These loans were valued at the lower
of cost or market, determined in the aggregate, at the date of transfer.
G-72
<PAGE> 228
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Mortgage Banking Activities (continued)
The Company retains the servicing on loans sold and agrees to remit to the
investor loan principal and interest at agreed-upon rates. These rates can
differ from the loan's contractual interest rate resulting in a "yield
differential". In addition to previously deferred loan origination fees and
cash gains, gains on sale of loans can represent the present value of the
future yield differential less a normal servicing fee, capitalized over the
estimated life of the loans sold. Normal servicing fees are determined by
reference to the stipulated minimum servicing fee set forth by the government
agencies to which the loans are sold. Such servicing fees are representative
of the Company's normal servicing costs. The resulting capitalized excess
servicing fee is amortized to operations over the life of the loans using the
interest method. If prepayments are higher than expected, an immediate
charge to operations is made. If prepayments are lower, then the related
adjustments are made prospectively.
The Company accounts for mortgage servicing rights in accordance with SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which requires that the Company recognize as
separate assets, rights to service mortgage loans for others, regardless of
how those servicing rights are acquired. An institution that acquires
mortgage servicing rights through either the purchase or origination of
mortgage loans and sells those loans with servicing rights retained allocates
some of the cost of the loans to the mortgage servicing rights. SFAS No. 125
eliminates the accounting distinction between servicing rights acquired
through purchase transactions and those acquired through loan originations.
Pursuant to the provisions of SFAS No. 125, the relative fair value of
mortgage servicing rights (normal servicing fee income less applicable
servicing costs) is allocated to the cost of loans sold for purposes of
determining gain or loss. SFAS No. 125 also requires that an institution
allocate the cost of purchasing or originating the mortgage loans between the
mortgage servicing rights and the loans when mortgage loans are securitized,
if it is practicable to estimate the fair value of mortgage servicing rights.
Additionally, SFAS No. 125 requires that capitalized mortgage servicing
rights and capitalized excess servicing receivables be assessed for
impairment. Impairment is measured based on fair value. In determining fair
value, and the amount of impairment, if any, an institution would stratify
mortgage servicing rights based on the predominant risk characteristics of
the underlying loans serviced, such as loan type, loan size and note rate.
During the years ended June 30, 1998, 1997 and 1996, approximately $229,000,
$20,000 and $88,000 of mortgage servicing rights were capitalized in
connection with SFAS No. 125. Mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net servicing income over
the estimated life of the servicing portfolio. Amortization expense totaled
$36,000, $8,000 and $5,000 for the years ended June 30, 1998, 1997 and 1996,
respectively. The estimated fair value of capitalized mortgage servicing
rights was approximately $274,000 and $93,000 at June 30, 1998 and 1997.
G-73
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
3. Mortgage Banking Activities (continued)
The mortgage servicing rights recorded by the Company, calculated in
accordance with the provisions of SFAS No. 125, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees, interest
earned on float, net interest earned on escrows, miscellaneous income, and
costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net present value to an acquirer of
the acquired servicing.
The carrying amount of the mortgage servicing rights is measured for
impairment each quarter. If the carrying value of an individual pool exceeds
its fair value, a valuation allowance is established. At June 30, 1998 and
1997, there was a total valuation allowance established for impairment of
$14,000 and $2,000, respectively.
4. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees and costs, the allowance for
losses on loans and discounts arising from the reclassification of loans from
held for sale to held for investment. Discounts on loans are accreted to
operations using the interest method over the average life of the underlying
loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is returned
to accrual status. If the ultimate collectibility of the loan is in doubt,
in whole or in part, all payments received on nonaccrual loans are applied to
reduce principal until such doubt is eliminated.
G-74
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
5. Loan Origination and Commitment Fees
The Company accounts for loan origination fees in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of
certain direct origination costs, are deferred and amortized to interest
income using the interest method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan origination
costs to the direct costs attributable to originating a loan, i.e.,
principally actual personnel costs. Fees received for loan commitments that
are expected to be drawn upon, based on the Company's experience with similar
commitments, are deferred and amortized over the life of the related loan
using the interest method. Fees for other loan commitments are deferred and
amortized over the loan commitment period on a straight-line basis.
6. Allowance for Losses on Loans
It is the Company's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, changes in the composition of
the loan portfolio, current trends in the level of delinquent and specific
problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in its primary lending areas. When the
collection of a loan becomes doubtful, or otherwise troubled, the Company
records a loan loss provision equal to the difference between the fair value
of the property securing the loan and the loan's carrying value, although
collection efforts continue and future recoveries may occur. In providing
valuation allowances, costs of holding real estate, including the cost of
capital, are considered. Major loans, including development projects, and
major lending areas are reviewed periodically to determine potential problems
at an early date. The allowance for loan losses is increased by charges to
earnings and decreased by charge-offs (net of recoveries).
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." SFAS No. 114 amends SFAS
Nos. 5 and 15 to clarify that a creditor should evaluate the collectibility
of both contractual interest and contractual principal on all loans when
assessing the need for loan loss reserves. In October 1994, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure,"
which amends SFAS No. 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans. SFAS No. 114, as amended by
SFAS No. 118 as to certain income recognition provisions and financial
statement disclosure requirements, is applicable to all creditors and to all
loans that are individually and specifically evaluated for impairment,
uncollateralized as well as collateralized, except those loans that are
accounted for at fair value or at the lower of cost or fair value. SFAS No.
114 requires that the expected loss of interest income on nonperforming loans
be taken into account when calculating loan loss reserves and that specified
impaired loans be measured based upon the present value of
G-75
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
6. Allowance for Losses on Loans (continued)
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loan's observable market price or fair value of
the collateral if the loan is collateral dependent. SFAS No. 114 does not
apply to large groups of small balance, homogeneous loans that are
collectively evaluated for impairment, leases or debt securities as defined
under SFAS No. 115. A loan is defined under SFAS No. 114 as impaired when,
based on current information and events, it is probable that a creditor will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. In applying the provisions of SFAS No. 114, the Company
considers its investment in one-to-four family and multi-family residential
loans, home equity lines of credit loans and passbook loans to be homogeneous
and therefore excluded from separate identification for evaluation of
impairment. With respect to the Company's investment in nonresidential
loans, and its evaluation of any impairment thereon, such loans are
collateral dependent and as a result are carried as a practical expedient at
the lower of cost or fair value. Collateral dependent loans which are more
than ninety days delinquent are considered to constitute more than a minimum
delay in repayment and are evaluated for impairment under SFAS No. 114 at
that time. SFAS No. 114 also requires an institution to account for a
troubled debt restructuring involving a modification of terms at fair value
as of the date of restructuring.
The carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows and increases in the
present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash
payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the
passage of time are reported as provision for loan losses expense.
For impairment recognized in accordance with SFAS No. 114, as amended, the
entire change in present value of expected cash flows is reported as
provision for loan losses expense in the same manner in which impairment
initially was recognized or as a reduction in the amount of bad debt expense
that otherwise would be reported. Interest on impaired loans is reported on
the cash basis. Impaired loans are loans that are considered to be
permanently impaired in relation to principal or interest based on the
original contract. Impaired loans are charged off in the same manner as all
loans subject to charge off. At June 30, 1998 and 1997, the Company did not
have any loans that would be defined under SFAS No. 114 as impaired.
G-76
<PAGE> 232
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
7. Office Premises and Equipment
Office premises and equipment are carried at cost less accumulated
depreciation and include expenditures which extend the useful lives of
existing assets. Maintenance, repairs and minor renewals are expensed as
incurred.
For financial reporting, depreciation and amortization are provided for in
amounts sufficient to relate the cost of depreciable assets to operations,
principally on the straight-line and accelerated methods over the useful
lives of the assets, estimated to be thirty to forty years for buildings, ten
to fifteen years for building improvements, fifteen to twenty years for land
improvements and five to ten years for furniture, fixtures and equipment.
An accelerated depreciation method is used for tax reporting purposes.
8. Real Estate Acquired through Foreclosure
Real estate properties acquired through loan foreclosure are initially
recorded at fair value at the date of foreclosure establishing a new cost
basis. An increase in the loan valuation allowance is recorded for any write
down in the loan's carrying value to fair value at the date of foreclosure.
After foreclosure, valuations are periodically performed by management and
the real estate acquired through foreclosure is carried at the lower of cost
or fair value. Real estate loss provisions are recorded if the properties'
fair value subsequently declines below the value determined at the recording
date. In determining the lower of cost or fair value after foreclosure,
costs relating to development and improvement of property are capitalized.
Costs relating to holding real estate acquired through foreclosure, net of
rental income, are charged against earnings as incurred. The specific
identification method is used to determine gain or loss on the sale of real
estate acquired through foreclosure. There was no real estate acquired
through foreclosure at June 30, 1998 and 1997.
9. Amortization of Goodwill
Goodwill arising from an acquisition is being amortized to operations using
the straight-line method over a fifteen year period.
At June 30, 1998, goodwill consisted of the following:
<TABLE>
<CAPTION>
ORIGINAL UNAMORTIZED
BALANCE BALANCE
<S> <C> <C>
(In thousands)
Goodwill $504 $333
==== ====
</TABLE>
G-77
<PAGE> 233
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. Amortization of Goodwill (continued)
The approximate scheduled amortization with respect to goodwill is as
follows:
<TABLE>
<CAPTION>
FUTURE
FISCAL YEAR ENDING JUNE 30, AMORTIZATION
(In thousands)
<S> <C>
1999 $ 34
2000 34
2001 34
2002 34
2003 34
2004 and years thereafter 163
----
$333
====
</TABLE>
Management periodically evaluates the carrying value of goodwill in relation
to the continuing earnings capacity of the acquired assets and assumed
liabilities.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 121
provides guidance on when to recognize and how to measure impairment losses
of long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The Corporation adopted SFAS No. 121
effective July 1, 1996, as required, without material effect on consolidated
financial condition or results of operations.
10. Federal Income Taxes
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the current
and previous years. Pursuant to the provisions of SFAS No. 109, a deferred
tax liability or deferred tax asset is computed by applying the current
statutory tax rates to net taxable or deductible temporary differences
between the tax basis of an asset or liability and its reported amount in the
consolidated financial statements that will result in taxable or deductible
amounts in future periods. Deferred tax assets are recorded only to the
extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current year earnings,
carried back against prior years' earnings, offset
G-78
<PAGE> 234
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Federal Income Taxes (continued)
against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimates of taxes payable on future
taxable income. A valuation allowance is provided for deferred tax assets to
the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total
amount of net temporary differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the past practice of
preparing the federal income tax return on the cash basis of accounting,
while the consolidated financial statements are prepared on the accrual basis
of accounting, and from different methods of accounting for deferred loan
origination fees and costs, Federal Home Loan Bank stock dividends, book and
tax bad debt deductions, the general loan loss allowance, capitalized
mortgage servicing rights, deferred compensation and gains on the sale of
mortgage loans utilizing the net yield method. Additionally, a temporary
difference is also recognized for depreciation expense utilizing accelerated
methods for federal income tax purposes.
The Corporation and the Company file a consolidated federal income tax
return. There is a tax allocation agreement in effect between the
Corporation and the Company.
11. Employee Benefits and Retirement Plan
Coincident with conversion to the stock form of organization, Towne Financial
established an Employee Stock Ownership Plan ("ESOP") which provides
retirement benefits for substantially all employees who have completed six
months of service and have attained the age of 21. The Corporation
recognized expense totaling $50,000, $28,000 and $32,000 related to the ESOP
for the years ended June 30, 1998, 1997 and 1996, respectively.
The Company provides incentive compensation through a discretionary bonus
plan to substantially all employees. Bonus compensation is determined
annually solely at the discretion of the Board of Directors. The provision
for bonus compensation under this plan totaled approximately $167,000,
$109,000 and $103,000 for the years ended June 30, 1998, 1997 and 1996,
respectively.
G-79
<PAGE> 235
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Employee Benefits and Retirement Plan (continued)
In addition to providing employees with access to a discretionary bonus plan,
the Company provides a medical reimbursement plan to all outside directors.
The Company's obligation under the medical reimbursement plan is for the
payment or reimbursement of qualifying medical care expenses incurred in any
plan year by a director up to a maximum amount of $4,000 each per year.
Qualifying medical care expenses are defined under the plan as those expenses
not covered by the director's primary health plan. Expense under the medical
reimbursement plan totaled approximately $4,000, $5,000 and $6,000 for the
years ended June 30, 1998, 1997 and 1996, respectively.
12. Stock Option and Incentive Plans
The Corporation has a Stock Option and Incentive Plan (the "Plan"), which was
adopted and approved in fiscal 1993, that provides for the issuance of 20,000
shares of authorized, but unissued shares of common stock to management and
the Board, at an option price of not less than the fair market value of such
shares at the date of grant of each option. The Board of Directors granted
all of the available options under the Plan within four months upon
completion of the Company's conversion to the stock form of organization at
an exercise price of $11.50 per share. Each option granted under the Plan is
exercisable within a ten year period according to a prescribed schedule. No
option is exercisable after the expiration of ten years from the date it is
granted. During fiscal 1994, options for 2,500 shares were surrendered,
while options for 2,500 shares were reissued at an exercise price of $12.00
per share. Options for 500 shares were exercised in each of the three years
ended June 30, 1997, 1996 and 1995. During fiscal 1998, there were no
options exercised, leaving 18,500 unexercised shares outstanding under the
Plan at June 30, 1998.
On August 20, 1997, the Board of Directors of the Corporation approved and
adopted the Towne Financial Corporation 1997 Stock Option Plan (the "1997
Plan") which was approved by a majority of the shareholders of the
Corporation. The objective of the 1997 Plan was to enable the Corporation to
compete successfully in attracting, retaining and providing incentives to the
directors, officers and key employees of the Corporation and its subsidiary,
thereby encouraging them to acquire a proprietary and vested interest in the
growth and performance of the Corporation, and, in general, to generate an
increased incentive to contribute to the Corporation's future success and
prosperity, thus enhancing the value of the Corporation for the benefit of
the shareholders. Pursuant to the 1997 Plan, a maximum of 20,000 shares of
common stock was reserved for issuance by the Corporation upon the granting
of options to certain directors, officers and key employees of the
Corporation or its subsidiary from time to time under the 1997 Plan. Any
shares of common stock issued under the 1997 Plan will be authorized but
unissued shares or issued shares which have been reacquired by the
Corporation. On January 28, 1998, all 20,000 shares of authorized, but
G-80
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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Stock Option and Incentive Plans (continued)
unissued shares of common stock under the 1997 Plan were granted to
directors, officers and certain key employees at an exercise price as
determined by the Board of Directors of $27.50, representing the fair market
value of the common shares of the Corporation at the date of grant. The
options granted are exercisable (i) as to not more than 20% of the total
number of shares which may be purchased under the options, during the first
year after the grant of the options; (ii) as to not more than 40% during the
first two years of the grant of the options; (iii) as to not more than 60%
during the first three years after the grant of the options; (iv) as to not
more than 80% during the first four years after the grant of the options; and
(v) the total number of shares not previously exercised during the remaining
term of the options. The right of cumulation does exist in that, to the
extent not previously exercised or terminated, option installments can
accumulate and be exercisable, in whole or in part, in any subsequent period,
but no installment of the options will be exercisable later than ten years
from the date the options are granted. At June 30, 1998, none of the options
granted under the 1997 Plan were eligible to be exercised by the
participants.
13. Earnings Per Share and Dividends 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. SFAS No.
128, which superseded Accounting Principles Board ("APB") Opinion No. 15, was
effective for interim and annual periods ending after December 15, 1997, and
prior period earnings per share disclosures presented for comparative
purposes (including those in interim financial statements, summaries of
earnings and selected financial data) were required to be restated.
Effective during the year ended June 30, 1998, the Corporation began
presenting earnings per share pursuant to the provisions of SFAS No. 128. In
accordance with the Statement, the fiscal 1997 and 1996 earnings per share
presentations have been revised to conform to SFAS No. 128.
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 years
presented. Basic earnings per share for each of the three years ended June
30, 1998, 1997 and 1996 has been computed based on 208,500, 208,232 and
207,538 weighted-average shares of common stock outstanding, respectively.
Unlike the primary earnings per share calculation of 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.
G-81
<PAGE> 237
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Earnings Per Share and Dividends Per Share (continued)
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 219,218, 216,189 and 213,738 for each of
the three years ended June 30, 1998, 1997 and 1996, respectively.
On August 20, 1997, the Board of Directors of the Corporation declared a
first ever quarterly cash dividend of $.10 per share. During fiscal 1998,
there were a total of four quarterly cash dividends of $.10 per share
declared and paid on 208,500 outstanding common shares totaling $84,000.
14. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash
and due from banks, federal funds sold and interest-bearing deposits due from
other financial institutions with original maturities of less than ninety
days.
15. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Because of the
judgment and subjective considerations required in determining appropriate
and reasonable assumptions, the derived fair value estimates cannot be
substantiated by comparison to independent markets. Further, the amounts
which could be realized in immediate settlement of the instrument could vary
significantly from the fair value estimate depending upon bulk versus
individual settlements or sales as well as other factors. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate net fair value
amounts presented do not represent the underlying value of the Corporation.
G-82
<PAGE> 238
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at June 30,
1998 and 1997:
Cash and Cash Equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value due to the frequency
of repricing of these items.
Certificates of Deposit in Other Financial Institutions: The
carrying amounts presented in the consolidated statements of
financial condition for certificates of deposit in other financial
institutions are deemed to approximate fair value.
Investment Securities Designated as Available for Sale, Investment
Securities Held to Maturity, Mortgage-Backed Securities Designated as
Available for Sale and Mortgage-Backed Securities Held to Maturity:
For investments and mortgage-backed securities, fair value is deemed
to equal the quoted market price or dealer quote.
Loans Held for Sale: For loans designated as held for sale, fair
value is determined on the basis of rates quoted in the secondary
mortgage market.
Loans Receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four family
residential, home equity lines of credit, multi-family residential,
nonresidential real estate and land. These loan categories were
further delineated into fixed-rate and adjustable-rate loans. The
fair values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates offered
for loans with similar terms to borrowers of similar credit quality.
For loans on deposit accounts and consumer and other loans, fair
values were deemed to equal the historic carrying values. The
historical carrying amount of accrued interest on loans is deemed to
approximate fair value.
Federal Home Loan Bank Stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to
approximate fair value since a quoted market price is not available
on Federal Home Loan Bank stock.
G-83
<PAGE> 239
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Value of Financial Instruments (continued)
Deposits: The fair value of NOW accounts, passbook and club accounts
and money market deposits is deemed to approximate the amount payable
on demand at June 30, 1998 and 1997. Fair values for fixed-rate
certificates of deposit have been estimated using a discounted cash
flow calculation using the interest rates currently offered for
deposits of similar remaining maturities.
Advances from the Federal Home Loan Bank: The fair value of Federal
Home Loan Bank advances has been estimated using discounted cash flow
analysis, based on the interest rates currently offered for advances
of similar remaining maturities or, when available, quoted market
prices.
Loan of Employee Stock Ownership Plan (ESOP): The fair value of the
ESOP loan is deemed to approximate the historical carrying value due
to the daily repricing of the loan's interest rate.
Escrow Deposits and Amounts Due on Loans Serviced for Others: The
carrying value of advances by borrowers and amounts due on loans
serviced for others is deemed to approximate fair value.
Commitments to Extend Credit: For fixed-rate and adjustable-rate
loan commitments, the fair value estimate considers the difference
between current levels of interest rates and committed rates.
G-84
<PAGE> 240
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Value of Financial Instruments (continued)
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Corporation's financial instruments are as follows at June
30:
<TABLE>
<CAPTION>
1998 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,638 $ 5,638 $ 2,715 $ 2,715
Certificates of deposit in other financial institutions 469 469 466 466
Investment securities designated as available
for sale 809 809 - -
Investment securities held to maturity 809 812 1,399 1,399
Mortgage-backed securities designated as available
for sale 18,354 18,354 15,269 15,269
Mortgage-backed securities held to maturity 14,641 14,592 11,463 11,267
Loans held for sale 882 888 - -
Loans receivable - net 71,476 73,723 66,817 68,625
Federal Home Loan Bank stock 797 797 742 742
-------- -------- -------- --------
$113,875 $116,082 $ 98,871 $100,483
======== ======== ======== ========
Financial liabilities:
Deposits $ 94,988 $ 95,263 $ 81,794 $ 81,838
Advances from the Federal Home Loan Bank 12,674 12,550 12,000 11,840
Loan of Employee Stock Ownership Plan 30 30 60 60
Advances by borrowers and amounts due on loans
serviced for others 792 792 628 628
-------- -------- -------- --------
$108,484 $108,635 $ 94,482 $ 94,366
======== ======== ======== ========
Off-balance sheet commitments:
Commitments to extend credit (notional amount of
$2,715 and $3,849 at June 30, 1998 and 1997) $ - $ 2,757 $ - $ 3,884
======== ======== ======== ========
</TABLE>
16. Reclassifications
Certain prior year amounts have been reclassified to conform to the June 30,
1998 consolidated financial statement presentation.
G-85
<PAGE> 241
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of investment securities at June
30, including those designated as available for sale, are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U. S. Government agency obligations $247 $249 $ - $ -
Municipal obligations 559 559 - -
Corporate equity securities - 1 - -
---- ---- ------ ------
$806 $809 $ - $ -
==== ==== ====== ======
INVESTMENT SECURITIES HELD TO MATURITY:
U.S. Government agency obligations $809 $812 $1,399 $1,399
==== ==== ====== ======
</TABLE>
At June 30, 1998, the estimated fair value appreciation of the Corporation's
investment securities designated as available for sale in excess of cost
totaled $3,000, which was comprised solely of gross unrealized gains. The
estimated fair value appreciation of the Corporation's investment securities
held to maturity in excess of cost totaled $3,000, which was comprised of
gross unrealized gains of $5,000 and gross unrealized losses of $2,000. At
June 30, 1997, the Corporation's estimated fair value of investment
securities held to maturity was equal to the cost carrying value, consisting
of gross unrealized gains of $5,000 and gross unrealized losses of $5,000.
The amortized cost and estimated fair values of U.S. Government agency
obligations and municipal obligations, including those designated as
available for sale, at June 30, 1998, by term to maturity, are shown below.
Expected maturities on certain U.S. Government agency obligations and
municipal bonds may differ from contractual maturities because the issuer may
have the right to call the obligations without prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Due after five years through ten years $247 $249
Due after ten years through twenty years 312 312
Due after twenty years 247 247
---- ----
$806 $808
==== ====
INVESTMENT SECURITIES HELD TO MATURITY:
Due within five years or less $210 $211
Due after five years through ten years 199 203
Due after ten years through twenty years 400 398
---- ----
$809 $812
==== ====
</TABLE>
G-86
<PAGE> 242
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
Proceeds from the sale of investment securities designated as available for
sale during the year ended June 30, 1998 totaled $496,000, resulting solely
in gross realized gains of $3,000 on such sales.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at June 30, 1998 and 1997
(including those designated as available for sale), are shown below.
<TABLE>
<CAPTION>
1998
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Federal Home Loan Mortgage Corporation
Participation certificates $ 1,649 $ 5 $(21) $ 1,633
Collateralized mortgage obligations 8,894 10 (22) 8,882
Federal National Mortgage Association
Participation certificates 1,936 - (14) 1,922
Collateralized mortgage obligations 5,934 3 (20) 5,917
------- --- ----- -------
$18,413 $18 $(77) $18,354
======= === ===== =======
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
Federal Home Loan Mortgage Corporation
Participation certificates $ 932 $ - $ (9) $ 923
Collateralized mortgage obligations 5,633 31 (14) 5,650
Federal National Mortgage Association
Participation certificates 706 3 (3) 706
Collateralized mortgage obligations 5,987 1 (46) 5,942
Small Business Administration
Participation certificates 867 - (11) 856
Residential Funding Corporation
Collateralized mortgage obligations 189 - - 189
Salomon Brothers, Inc.
Collateralized mortgage obligations 19 - - 19
Guardian Savings and Loan Association
Collateralized mortgage obligations 308 - (1) 307
------- --- ----- -------
$14,641 $35 $(84) $14,592
======= === ===== =======
</TABLE>
G-87
<PAGE> 243
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Federal Home Loan Mortgage Corporation
Participation certificates $ 1,881 $11 $ (27) $ 1,865
Collateralized mortgage obligations 2,363 - (24) 2,339
Federal National Mortgage Association
Participation certificates 679 8 (7) 680
Collateralized mortgage obligations 9,504 13 (245) 9,272
Santa Barbara Savings and Loan
REMIC participation certificates 737 - (6) 731
The Prudential Home Mortgage Securities
Company, Inc.
Collateralized mortgage obligations 374 8 - 382
------- --- ------ -------
$15,538 $40 $(309) $15,269
======= === ====== =======
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
Federal Home Loan Mortgage Corporation
Participation certificates $ 1,106 $ 9 $ (4) $ 1,111
Collateralized mortgage obligations 3,987 - (57) 3,930
Federal National Mortgage Association
Participation certificates 854 5 (6) 853
Collateralized mortgage obligations 4,173 14 (141) 4,046
Government National Mortgage Association
Collateralized mortgage obligations 80 1 - 81
Small Business Administration
Participation certificates 1,046 1 (9) 1,038
Residential Funding Corporation
Collateralized mortgage obligations 189 - (9) 180
Salomon Brothers, Inc.
Collateralized mortgage obligations 28 - - 28
------- --- ------ -------
$11,463 $30 $(226) $11,267
======= === ====== =======
</TABLE>
G-88
<PAGE> 244
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The carrying values of mortgage-backed securities at June 30, 1998, including
those designated as available for sale, are shown below by contractual terms
to maturity. Expected maturities will differ from contractual maturities
because borrowers may generally prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
CARRYING
VALUE
(In thousands)
<S> <C>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:
Due within one year $ 205
Due after one year through three years 1,600
Due after three years through five years 1,385
Due after five years through ten years 4,932
Due after ten years through twenty years 8,319
Due after twenty years 1,913
-------
$18,354
=======
</TABLE>
<TABLE>
<S> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY:
Due within one year $ 2,204
Due after one year through three years 1,425
Due after three years through five years 1,026
Due after five years through ten years 2,792
Due after ten years through twenty years 6,002
Due after twenty years 1,192
------
$14,641
=======
</TABLE>
Proceeds from the sale of mortgage-backed securities designated as available
for sale during the years ended June 30, 1998, 1997 and 1996 totaled $8.9
million, $1.1 million and $10.8 million, respectively, resulting in gross
realized gains of $40,000, $14,000 and $175,000 during the years ended June
30, 1998, 1997 and 1996, respectively, and gross realized losses of $12,000
and $26,000 during the years ended June 30, 1998 and 1996.
G-89
<PAGE> 245
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
In fiscal 1996, a one-time reassessment of the Corporation's mortgage-backed
securities designated as held to maturity was undertaken, as permitted by the
FASB's "Special Report" related to implementation of SFAS No. 115. This
special report allowed the Corporation to reclassify any of its securities,
including held to maturity debt securities, without calling into question the
intent of the Corporation to hold debt securities to maturity in the future.
Any transfers from the held to maturity category to an available for sale
classification resulted in unrealized gains or losses being recognized as a
separate component of shareholders' equity, net of related tax effects. In
connection with this special report, management elected to restructure the
Corporation's securities portfolio, and transferred mortgage-backed
securities held to maturity with an amortized cost of $2.4 million to
mortgage-backed securities designated as available for sale in order to
permit more responsiveness to changes in interest rates and other balance
sheet management factors. At the date of transfer, the mortgage-backed
securities transferred from a held to maturity classification had net
unrealized market losses of $36,000.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Residential real estate
One-to-four family residential $51,790 $49,549
Home equity lines of credit 2,627 2,699
Multi-family residential 4,215 3,009
Construction 3,802 2,277
Nonresidential real estate 10,797 10,437
Land 659 631
Deposit account 111 250
Consumer and other 84 3
------- -------
74,085 68,855
Less:
Undisbursed portion of loans in
process (2,186) (1,632)
Deferred loan origination fees (159) (162)
Allowance for loan losses (264) (244)
------- -------
$71,476 $66,817
======= =======
</TABLE>
G-90
<PAGE> 246
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE (continued)
As depicted above, the Company's lending efforts have historically focused on
one-to-four family residential and multi-family residential real estate
loans, which comprise approximately $60.0 million, or 84%, of the total loan
portfolio at June 30, 1998, and approximately $55.7 million, or 83%, of the
total loan portfolio at June 30, 1997. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio, which
has historically provided the Company with more than adequate collateral
coverage in the event of default. Nevertheless, the Company, as with any
lending institution, is subject to the risk that residential real estate
values could deteriorate in its primary lending area of southwestern Ohio,
thereby impairing collateral values. However, management is of the belief
that residential real estate values in the Company's primary lending area are
presently stable.
As discussed previously, the Company has sold whole loans and participating
interests in loans in the secondary market, retaining servicing on the loans
sold. Loans sold and serviced for others totaled approximately $48.8
million, $41.6 million and $47.6 million at June 30, 1998, 1997 and 1996,
respectively.
In the ordinary course of business, the Company has made loans to some of its
directors, officers and their related business interests. All related party
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than the normal risk of
collectibility. There were no loans outstanding to officers and directors at
June 30, 1998. The aggregate dollar amount of loans outstanding to officers
and directors was approximately $3,000 and $8,000 at June 30, 1997 and 1996,
respectively. During the year ended June 30, 1998, there were no loans
disbursed to officers and directors, while principal repayments of $3,000
were received from officers and directors.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $244 $231 $220
Provision for losses on loans 24 18 11
Charge-off of loans (4) (5) -
---- ---- ----
Balance at end of year $264 $244 $231
==== ==== ====
</TABLE>
G-91
<PAGE> 247
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
At June 30, 1998, the Company's allowance for loan losses was comprised
solely of a general loan loss allowance, which is includible as a component
of regulatory risk-based capital.
At June 30, 1998, 1997 and 1996, the Company had nonaccrual and
non-performing loans totaling $885,000, $403,000 and $675,000, respectively.
Interest income which would have been recognized if such nonaccrual loans had
performed pursuant to contractual terms totaled approximately $3,000, $1,000
and $4,000 for the years ended June 30, 1998, 1997 and 1996.
The Company had no loans designated as impaired as described in SFAS No. 114
at June 30, 1998 and 1997, nor were any loans so designated during the years
ended June 30, 1998 and 1997.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Office buildings and improvements $1,908 $1,884
Furniture, fixtures and equipment 959 909
------- -------
2,867 2,793
Less accumulated depreciation and amortization (1,173) (1,014)
------- -------
1,694 1,779
Land 556 556
------- -------
$2,250 $2,335
======= =======
</TABLE>
G-92
<PAGE> 248
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at June 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE 1998 1997
AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook and club accounts
1998 - 2.78% $ 8,232 8.7%
1997 - 2.78% $ 8,088 9.9%
NOW accounts, including noninterest-
bearing deposits of $956 in 1998 and
$1,514 in 1997
1998 - 2.08% 4,109 4.3
1997 - 2.06% 4,228 5.2
Money market deposit accounts
1998 - 3.17% 6,673 7.0
1997 - 3.10% 6,966 8.5
------- ----- ------- -----
Total demand, transaction and passbook deposits 19,014 20.0 19,282 23.6
Certificates of deposit
Original maturities of
Less than 12 months
1998 - 5.46% 11,618 12.2
1997 - 5.60% 12,711 15.6
12 months
1998 - 5.71% 12,683 13.4
1997 - 5.75% 8,832 10.8
15 months
1998 - 5.85% 24,237 25.5
1997 - 5.88% 20,934 25.6
18 months
1998 - 5.80% 4,211 4.4
1997 - 5.62% 1,972 2.4
24 months
1998 - 5.89% 5,119 5.4
1997 - 5.77% 4,095 5.0
30 months
1998 - 5.86% 1,585 1.7
1997 - 6.06% 1,745 2.1
35 months
1998 - 5.93% 4,026 4.2
1997 - 5.93% 1,177 1.4
48 months
1998 - 6.16% 288 0.3
1997 - 5.82% 316 0.4
60 months
1998 - 5.77% 2,193 2.3
1997 - 5.62% 1,706 2.1
Individual retirement accounts
1998 - 5.95% 10,014 10.6
1997 - 5.96% 9,024 11.0
------- ----- ------- -----
Total certificates of deposit 75,974 80.0 62,512 76.4
------- ----- ------- -----
Total deposits $94,988 100.0% $81,794 100.0%
======= ===== ======= =====
</TABLE>
G-93
<PAGE> 249
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $7.1 million and $6.3 million at June
30, 1998 and 1997, respectively. Deposit amounts within individual deposit
accounts exceeding $100,000 are not federally insured.
During fiscal 1998 and 1997, the Company received and accepted brokered
deposits, which amounted to $5.8 million, or 6.1% of total deposits at June 30,
1998, and $4.8 million, or 5.9% of total deposits at June 30, 1997.
Interest expense on deposit accounts for the years ended June 30 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 221 $ 228 $ 245
NOW accounts 61 66 62
Money market deposit accounts 215 227 254
Certificates of deposit 4,142 3,271 2,875
------ ------ ------
$4,639 $3,792 $3,436
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows at
June 30:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Less than three months $12,785 $11,309
Three months to six months 15,097 12,536
Six months to one year 25,537 25,026
One to two years 15,754 8,921
Two to three years 4,286 3,410
Three to four years 284 1,119
Over four years 2,231 191
------- -------
$75,974 $62,512
======= =======
</TABLE>
G-94
<PAGE> 250
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 1998 and
1997 by pledges of certain residential mortgage loans totaling $19.0 million
and $18.0 million, and the Company's investment in Federal Home Loan Bank
stock are summarized as follows at June 30:
<TABLE>
<CAPTION>
INTEREST MATURING IN FISCAL
RATE YEAR ENDING IN 1998 1997
(In thousands)
<S> <C> <C> <C>
5.55% - 5.75% 1998 $ - $ 5,326
5.80% 2001 2,600 2,600
6.20% - 8.05% 2002 828 828
6.50% 2003 2,500 2,500
7.85% - 8.30% 2005 740 740
8.10% 2006 6 6
5.15% - 5.24% 2008 6,000 -
------- -------
$12,674 $12,000
======= =======
Weighted-average interest rate 5.82% 6.05%
======= =======
</TABLE>
During fiscal 1998, the Company restructured its outstanding borrowings by
paying off monthly adjustable short-term borrowings and obtaining $6.0
million in convertible fixed-rate ten-year/one-year Federal Home Loan Bank
advances with a weighted-average interest rate of 5.19% and final maturity of
ten years. The interest rates on these convertible fixed-rate advances are
guaranteed for a minimum of one year. Thereafter, for the remaining nine
years, the Federal Home Loan Bank has quarterly options to convert the
interest rates on these advances to the floating 3-month LIBOR rate in effect
at the time. If and when the Federal Home Loan Bank exercises the conversion
to LIBOR, the Company can then pay off the advances without penalty. If the
Federal Home Loan Bank does not convert any of the advances to the LIBOR
rate, the advances will remain at the original fixed rates until final
maturity in ten years.
NOTE H - LOAN OF EMPLOYEE STOCK OWNERSHIP PLAN
As discussed previously in Note A-11, the Corporation established an ESOP
which initially acquired 20,700 shares of common stock in the conversion
offering. In order to fund the acquisition of stock, the ESOP borrowed
$207,000 from an independent third-party lender, payable over a seven year
period. The sole security for the loan is the acquired stock and, while
neither the Company nor the Corporation have guaranteed the loan, future
contributions to retire the loan will be paid to the ESOP from current or
retained earnings. Accordingly, the Corporation has deducted the remaining
unpaid amount of the loan of the ESOP from shareholders' equity with the
corresponding future payments reflected as a liability. At June 30, 1998,
the ESOP held 20,048 shares of the Corporation's common stock, of which
approximately 3,779 shares had not been allocated to participants as of that
date.
G-95
<PAGE> 251
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE I - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings differs from that computed at
the statutory corporate tax rate for the years ended June 30 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at the statutory rate $488 $192 $274
Increase (decrease) in taxes resulting from:
Amortization of goodwill 11 11 11
Tax-exempt interest (1) (1) (1)
Exercise of nonqualified stock options (3) (2) -
Other 1 1 -
---- ---- ----
Federal income tax provision per consolidated
financial statements $496 $201 $284
==== ==== ====
</TABLE>
Deferred federal income tax expense results from temporary differences between
the financial reporting and tax basis of assets and liabilities. A
reconciliation of the sources of the Corporation's temporary differences at the
statutory corporate tax rate to the amount of deferred federal income tax
expense is as follows for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
EFFECT OF TEMPORARY DIFFERENCES AT STATUTORY CORPORATE TAX RATE:
Loan origination fees and costs deferred for financial
reporting but recognized currently for tax purposes $36 $30 $28
Federal Home Loan Bank stock dividends 18 17 16
Differences between book and tax depreciation 1 6 16
Effect of change from cash to accrual method for tax purposes - (1) (18)
Deferred compensation, accrued for financial reporting,
deductible for tax purposes when paid (12) (3) (18)
Capitalized mortgage servicing rights 61 4 28
Unrealized gains and losses on loans held for sale (2) (9) 10
General loan losses, deductible for financial reporting,
recognized when finalized for tax purposes (7) (6) (2)
Percentage of earnings bad debt deduction - - 14
--- --- ---
Deferred federal income tax expense per
consolidated financial statements $95 $38 $74
=== === ===
</TABLE>
G-96
<PAGE> 252
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE I - FEDERAL INCOME TAXES (continued)
The composition of the Corporation's net deferred tax liability at June 30 is
as follows:
<TABLE>
<CAPTION>
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY 1998 1997
DIFFERENCES AT STATUTORY CORPORATE TAX RATE: (In thousands)
<S> <C> <C>
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $ (140) $ (122)
Deferred loan origination costs (55) (19)
Book/tax depreciation differences (118) (117)
Capitalized interest (1) (1)
Deferred premium on loans sold (1) (1)
Capitalized mortgage servicing rights (93) (32)
Percentage of earnings bad debt deduction (165) (165)
------- -------
Total deferred tax liabilities (573) (457)
Deferred tax assets:
Deferred compensation 32 20
Unrealized gains on loans held for sale 2 -
Unrealized losses on securities designated as
available for sale 19 91
General loan loss allowance 90 83
------- -------
Total deferred tax assets 143 194
------- -------
Net deferred tax liability $ (430) $ (263)
======= =======
</TABLE>
The Company was allowed a special bad debt deduction based on a percentage of
earnings, generally limited to 8% of otherwise taxable income, or the amount of
qualifying and nonqualifying loans outstanding and subject to certain
limitations based on aggregate loans and deposit account balances at the end of
the year. The cumulative tax bad debt reserve in excess of book allowance for
loan losses for which a tax liability had not been recorded totaled
approximately $1.1 million at June 30, 1998. If the amounts that qualify as
deductions for federal income taxes are later used for purposes other than bad
debt losses, including distributions in liquidation, such distributions will be
subject to federal income taxes at the then current corporate income tax rate.
The approximate amount of the unrecognized deferred tax liability relating to
the cumulative bad debt deduction is $377,000 at June 30, 1998.
Legislation repealing the percentage of earnings bad debt reserve provisions of
the Internal Revenue Code previously applicable to qualifying thrift
institutions was enacted into law in fiscal 1997. The legislation, which is
part of The Small Business Job Protection Act of 1996 (the "Jobs Act"), requires
all thrift institutions to pay tax on or recapture their excess bad debt
reserves accumulated since 1988. The legislation substantially equalizes the
taxation of banks and thrift institutions, but it protects thrifts from taxes on
bad debt reserves established prior to 1988. Under the law in effect prior to
the enactment of the Jobs Act, a thrift institution annually could elect to
deduct bad debts under either (i) the percentage of taxable
G-97
<PAGE> 253
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE I - FEDERAL INCOME TAXES (continued)
income method applicable only to thrift institutions, or (ii) the experience
method that was also available to small banks. For tax years beginning
before July 1, 1996, the Company used the percentage of taxable income method
because that method provided a higher bad debt deduction than the experience
method. The Jobs Act eliminates the percentage of taxable income method for
deducting bad debt reserves for all thrifts for tax years beginning after
December 31, 1995 (July 1, 1996, as to the Corporation). All thrifts are
required to recapture or pay tax on all or a portion of their bad debt
reserves added since the base year (i.e., the last taxable year beginning
before January 1, 1988). The amount of reserves to be recaptured is
dependent upon whether or not an institution is a "large institution" (i.e.,
assets exceed $500 million) under the bad debt rules for commercial banks.
Large institutions have to switch to the specific charge-off method.
Institutions with assets of $500 million or less, such as the Company, are
permitted to use the experience method to compute their bad debt deduction.
An institution is required to recapture the excess of its bad debt reserves
over the balance of the bad debt reserves outstanding at the end of the base
year ratably over a six year period beginning with the first taxable year
after December 31, 1995. Institutions can postpone the payment of these
taxes for up to two years if they meet a residential loan requirement during
tax years beginning before January 1, 1998. Generally, to meet the
residential loan requirement, an institution's mortgage lending activity must
equal or exceed its average mortgage lending activity for the six taxable
years preceding 1996, adjusted for inflation.
SFAS No. 109 requires thrift institutions to maintain a deferred tax
liability for the excess of the bad debt reserves at year end over the bad
debt reserves outstanding at the end of the base year. As a result, there
will be no impact on the Corporation's provision for federal income taxes
resulting from the recapture of the excess reserves. As the tax on the
recapture is paid, the Corporation will reduce its deferred tax liability
accordingly. For the Corporation, this excess bad debt reserve amounts to
approximately $487,000 at June 30, 1998. The approximate amount of the
deferred tax liability relating to the excess cumulative bad debt reserve is
$165,000 at June 30, 1998. This amount will have to be ratably paid out over
a six year period beginning in fiscal 1999, as the Corporation met the
residential loan requirement so as to exclude itself from recapturing its
excess bad debt reserves in fiscal 1997 and 1998.
The repeal of the thrift bad debt reserve provisions also means that the
merger of a thrift into a commercial bank will not trigger the recapture of
the base year reserve. As a result, it will no longer be necessary to
recognize additional financial statement income tax expense related to the
recapture of the base year reserve. Recapture of pre-1988 reserves resulting
from certain distributions, such as dividends and stock repurchases, or
because an institution ceases to qualify as a bank, are not exempt under the
new legislation.
G-98
<PAGE> 254
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated statement of financial condition. The
contract or notional amounts of the commitments reflect the extent of the
Company's involvement in such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. In extending commitments,
the Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if it is deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral on loans may vary but the preponderance of
loans granted generally include a mortgage interest in real estate as
collateral.
At June 30, 1998, the Company had total outstanding commitments of
approximately $1.8 million to originate residential one-to-four family real
estate loans on the basis of at least an 80% loan-to-value ratio, of which
$198,000 were comprised of adjustable-rate loans at interest rates ranging
from 8.50% to 11.00%, and $1.6 million were comprised of fixed-rate loans at
interest rates ranging from 7.00% to 8.88%. The Company also had total
outstanding commitments of approximately $565,000 to originate a land
development loan, $252,000 to originate a residential multi-family loan
secured by a ten-unit apartment building and $71,000 to originate a
nonresidential real estate loan secured by an office building. Such loan
commitments consisted of adjustable-rate loans with interest rates ranging
from 8.75% to 9.50%. Additionally, the Company had unused lines of credit
under home equity loans of approximately $2.9 million at June 30, 1998 and
unused collateralized lines of credit secured by nonresidential real estate
of $37,000. In the opinion of management, all loan commitments equaled or
exceeded prevalent market interest rates as of June 30, 1998, and such
commitments have been underwritten on the same basis as that of the existing
loan portfolio. Management believes that all loan commitments are able to be
funded through cash flow from operations and existing excess liquidity. Fees
received in connection with these commitments have not been recognized in
earnings.
G-99
<PAGE> 255
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The Company has $2.0 million in loans committed to be sold in the secondary
market at June 30, 1998. Of these loans, approximately $882,000 were
originated on or prior to June 30, 1998 and classified as held for sale.
Additionally, the Company committed to purchase approximately $1.8 million in
investment securities designated as available for sale at June 30, 1998.
The Company has a $5.0 million line of credit facility with the Federal Home
Loan Bank of Cincinnati, which the Company entered into during fiscal 1998.
There were no amounts outstanding under such facility at June 30, 1998.
The Company was committed under a data processing services agreement in the
aggregate amount of approximately $423,000 at June 30, 1998. During fiscal
1998, the Company renewed its contract with its third party provider for data
processing services for an additional five year term expiring in May 2003.
The future minimum annual payments expected to be incurred under the renewed
contract are as follows:
<TABLE>
YEAR ENDING JUNE 30, (In thousands)
<S> <C>
1999 $ 86
2000 86
2001 86
2002 86
2003 79
----
Total future minimum payments expected $423
====
</TABLE>
At June 30, 1998, the Company was also committed under a master data
processing agreement with Midwest Payment Systems ("MPS") primarily to be a
member of the "Jeanie" network in order to provide electronic banking
services to its customers via automatic teller machines ("ATMs"). During
fiscal 1997, the Company amended its original agreement with MPS by extending
the initial five year term of the contract by an additional five years in
lieu of certain cost concessions by MPS. The future minimum annual payments
expected to be incurred under the contract are as follows:
<TABLE>
YEAR ENDING JUNE 30, (In thousands)
<S> <C>
1999 $ 20
2000 20
2001 20
2002 20
2003 20
2004 and years thereafter 18
----
Total future minimum payments expected $118
====
</TABLE>
G-100
<PAGE> 256
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Additionally, the Company was committed under a financial institution venture
agreement with MPS at June 30, 1998. Under the agreement, MPS and the
Company agree to cooperatively provide for the placement and operation of
ATMs at certain of the Company's office locations. In accordance with the
original terms of the agreement, all revenues generated and expenses incurred
in operating the ATMs were shared equally between MPS and the Company.
During fiscal 1997, however, the venture agreement between MPS and the
Company was amended to extend the initial five year term an additional two
years and for both parties to share equally in the monthly net profits of the
joint venture over the first $100, which must first be paid to MPS. In lieu
of these changes in the agreement, the Company was given certain cost
concessions regarding installation costs of the ATMs. The amended term of
this venture agreement is for seven years and expires in fiscal 2003.
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on its financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's
capital amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
The minimum capital standards of the OTS generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as shareholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible assets)
equal to 3.0% of adjusted total assets. The risk-based capital requirement
currently provides for the maintenance of core capital plus general loan loss
allowances equal to 8.0% of risk-weighted assets as of June 30, 1998. In
computing risk-weighted assets, the Company multiplies the value of each
asset on its statement of financial condition by a defined risk-weighted
factor, e.g. , one-to-four family residential loans carry a risk-weighted
factor of 50%.
The OTS has proposed an amendment to the core capital requirement that would
increase the minimum requirement to a range of 4.0% - 5.0% of adjusted total
assets for substantially all savings associations. Management anticipates no
material change to the Company's excess regulatory capital position if the
proposal is adopted in its present form.
G-101
<PAGE> 257
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
As of June 30, 1998 and 1997, management believes that the Company met all
capital adequacy requirements to which it is subject.
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- --------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $8,295 7.1% *$1,762 *1.5% *$5,874 * 5.0%
Core Capital $8,295 7.1% *$3,524 *3.0% *$7,049 * 6.0%
Risk-based Capital $8,559 14.8% *$4,640 *8.0% *$5,800 *10.0%
</TABLE>
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- --------------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $7,437 7.3% *$1,537 *1.5% *$5,123 * 5.0%
Core Capital $7,437 7.3% *$3,074 *3.0% *$6,148 * 6.0%
Risk-based Capital $7,681 14.8% *$4,138 *8.0% *$5,173 *10.0%
</TABLE>
The Company's management believes that, under the current regulatory capital
regulations, the Company will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Company, such as increased interest rates or a downturn in the economy
in the Company's market area, could adversely affect future earnings and
consequently, the ability to meet future regulatory capital requirements.
* Greater than or equal to.
G-102
<PAGE> 258
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE K - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
The deposit accounts of the Company and of other savings associations are
insured by the Federal Deposit Insurance Corporation ("FDIC") through the
Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF were
below the level required by law, because a significant portion of the
assessments paid into the fund were used to pay the cost of prior thrift
failures. The deposit accounts of commercial banks are insured by the FDIC
through the Bank Insurance Fund ("BIF"), except to the extent such banks have
acquired SAIF deposits. Both the SAIF and the BIF are required by law to
attain and thereafter maintain a reserve ratio of 1.25% of insured deposits.
The reserves of the BIF met the level required by law in May 1995. As a
result of the respective reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations exceeded those paid by
healthy commercial banks by approximately $.19 per $100 in deposits in 1995.
In 1996, no BIF assessments were required for healthy commercial banks except
for a $2,000 minimum fee. This premium disparity had a negative competitive
impact on the Company and other institutions in the SAIF.
Legislation was enacted to recapitalize the SAIF and provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Company
held $55.8 million in deposits at March 31, 1995, resulting in an assessment
of approximately $366,000, or $242,000 after-tax, which was charged to
operations in fiscal 1997.
NOTE L - STOCK OPTION AND INCENTIVE PLANS
As previously discussed in Note A-12, the Corporation has a Stock Option and
Incentive Plan that was approved and adopted in fiscal 1993 that provided for
the issuance of 20,000 shares of authorized, but unissued shares of common
stock at the fair market value at the date of grant. These shares were fully
granted to the officers and directors of the Corporation in connection with
the conversion to the stock form of organization. In fiscal 1998, the Board
of Directors approved and adopted a second Stock Option and Incentive Plan
for the purpose of granting another 20,000 shares of common stock at the fair
market value to the officers, directors and key employees of the Corporation.
These shares were fully granted during fiscal 1998 and are exercisable over
a ten year period, with one-fifth of the options awarded becoming exercisable
on each of the first five anniversaries of the date of grant.
On July 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for employee stock options and similar equity instruments under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that
continue to account for stock options using APB Opinion No. 25 are required
to make pro forma disclosures of net earnings and earnings per share, as if
the fair value-based method of accounting defined in SFAS No. 123 had been
applied.
G-103
<PAGE> 259
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE L - STOCK OPTION AND INCENTIVE PLANS (continued)
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for the plans. Had compensation cost for the Corporation's
stock option plans been determined based on the fair value at the grant dates
for awards under the plans consistent with the accounting method utilized in
SFAS No. 123, the Corporation's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $938 $365 $521
===== ===== =====
Pro-forma $829 $365 $521
===== ===== =====
Earnings per share
Basic As reported $4.50 $1.75 $2.51
===== ===== =====
Pro-forma $3.98 $1.75 $2.51
===== ===== =====
Diluted As reported $4.28 $1.69 $2.44
===== ===== =====
Pro-forma $3.78 $1.69 $2.44
===== ===== =====
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1998: dividend yield
of 1.5%, expected volatility of 20.0%, a risk-free interest rate of 5.5% and
expected lives of ten years.
A summary of the status of the Corporation's stock option plans as of June
30, 1998, 1997 and 1996, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 18,500 $11.57 19,000 $11.57 19,500 $11.56
Granted 20,000 27.50 - - - -
Exercised - - 500 11.50 500 11.50
------ ------ ------ ------ ------ ------
Outstanding at end of year 38,500 $19.84 18,500 $11.57 19,000 $11.57
====== ====== ====== ====== ====== ======
Options exercisable at year-end 6,500 $11.58 6,000 $11.54 3,000 $11.58
====== ====== ====== ====== ====== ======
Weighted-average fair value of
options granted during the year $ 9.57 N/A N/A
====== ====== ======
</TABLE>
G-104
<PAGE> 260
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE L - STOCK OPTION AND INCENTIVE PLANS (continued)
The following information applies to options outstanding at June 30, 1998:
<TABLE>
<S> <C>
Number outstanding 38,500
Range of exercise prices $11.50 - $27.50
Weighted-average exercise price $19.84
Weighted-average remaining contractual life 7.06 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Corporation's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
G-105
<PAGE> 261
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
CORPORATION
The following condensed financial statements summarize the financial position
of Towne Financial Corporation as of June 30, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years ended June
30, 1998, 1997 and 1996.
TOWNE FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
June 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash $ 43 $ 13
Investment in The Blue Ash Building and
Loan Company 8,618 7,630
Prepaid expenses and other assets 5 13
------ ------
Total assets $8,666 $7,656
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities $ 3 $ 18
Shareholders' equity
Common shares 209 209
Additional paid-in capital 4,966 4,966
Retained earnings 3,555 2,701
Less required contributions for shares acquired
by ESOP (30) (60)
Unrealized losses on securities designated as
available for sale - net of related tax effects (37) (178)
------ ------
Total shareholders' equity 8,663 7,638
------ ------
Total liabilities and shareholders' equity $8,666 $7,656
====== ======
</TABLE>
G-106
<PAGE> 262
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
CORPORATION (continued)
TOWNE FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenue
Dividends received from subsidiary $150 $ - $ 56
Equity in undistributed earnings of subsidiary 817 407 492
---- ---- ----
Total revenue 967 407 548
Expenses
Management fees 12 12 12
Amortization of organizational costs - 4 5
Other operating 36 51 63
---- ---- ----
Total expenses 48 67 80
---- ---- ----
Net earnings before tax credits 919 340 468
Federal income tax credits (19) (25) (53)
---- ---- ----
Net earnings $938 $365 $521
==== ==== ====
</TABLE>
TOWNE FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Years ended June 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 938 $ 365 $ 521
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed earnings of subsidiary (817) (407) (492)
Amortization of organizational costs - 4 5
Increases (decreases) in cash due to changes in:
Prepaid expenses and other assets 8 46 (59)
Accounts payable and other liabilities (15) (33) 47
----- ----- -----
Net cash provided by (used in) operating activities 114 (25) 22
Cash flows provided by (used in) financing activities:
Proceeds from the exercise of stock options - 6 6
Payment of dividends on common shares (84) - -
----- ----- -----
Net cash provided by (used in) financing activities (84) 6 6
----- ----- -----
Net increase (decrease) in cash and cash equivalents 30 (19) 28
Cash and cash equivalents at beginning of year 13 32 4
----- ----- -----
Cash and cash equivalents at end of year $ 43 $ 13 $ 32
===== ===== =====
</TABLE>
G-107
<PAGE> 263
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF TOWNE FINANCIAL
CORPORATION (continued)
The Corporation's activities during fiscal 1998, 1997 and 1996 were solely
limited to holding the Company's stock. As previously discussed in Note
A-13, there were cash dividends of $84,000 declared and paid on 208,500
outstanding common shares of the Corporation during fiscal 1998. There was
no payment of cash dividends to the shareholders during fiscal 1997 and 1996.
As a condition to regulatory approval of the stock conversion and
reorganization to the holding company form of organization, the Company
agreed to limit the amount of dividends payable to the Corporation.
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. Under such regulations,
a savings association that, immediately prior to, and on a pro forma basis
after giving effect to a proposed capital distribution, has total capital (as
defined by OTS regulations) that is equal to or greater than the amount of
its fully phased-in capital requirement is generally permitted without OTS
approval (but subsequent to 30 days prior notice to the OTS of the planned
dividend) to make capital distributions during a calendar year in the amount
of up to the greater of (i) 100% of its net earnings to date during the
calendar year plus an amount equal to one-half of the amount by which its
total capital-to-assets ratio exceeded its fully phased-in capital-to-assets
ratio at the beginning of the calendar year or (ii) 75% of its net earnings
for the most recent four quarters. Pursuant to such OTS dividend
regulations, the Company had the ability to pay dividends of approximately
$2.3 million to the Corporation at June 30, 1998.
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's consolidated quarterly
results for the years ended June 30, 1998 and 1997. Certain amounts, as
previously reported, have been reclassified to conform to the 1998
presentation.
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1998 1998
(In thousands, except for share data)
<S> <C> <C> <C> <C>
Total interest income $2,019 $2,116 $2,162 $2,165
Total interest expense 1,289 1,349 1,363 1,395
------ ------ ------ ------
Net interest income 730 767 799 770
Provision for losses on loans 6 6 6 6
------ ------ ------ ------
Net interest income after provision
for losses on loans 724 761 793 764
Other income 65 86 215 134
General, administrative and other expense 504 504 539 561
------ ------ ------ ------
Earnings before income taxes 285 343 469 337
Federal income taxes 99 119 162 116
------ ------ ------ ------
Net earnings $ 186 $ 224 $ 307 $ 221
====== ====== ====== ======
Earnings per share
Basic $ .89 $ 1.08 $ 1.47 $ 1.06
====== ====== ====== ======
Diluted $ .85 $ 1.02 $ 1.40 $ 1.01
====== ====== ====== ======
</TABLE>
G-108
<PAGE> 264
TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, 1997 and 1996
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
(In thousands, except for share data)
<S> <C> <C> <C> <C>
Total interest income $1,714 $1,778 $1,805 $1,895
Total interest expense 1,079 1,101 1,112 1,169
------ ------ ------ ------
Net interest income 635 677 693 726
Provision for losses on loans 5 4 4 5
------ ------ ------ ------
Net interest income after provision
for losses on loans 630 673 689 721
Other income 68 64 40 40
General, administrative and other expense 864 495 485 515
------ ------ ------ ------
Earnings (loss) before income taxes (credits) (166) 242 244 246
Federal income taxes (credits) (54) 84 86 85
------ ------ ------ ------
Net earnings (loss) $ (112) $ 158 $ 158 $ 161
====== ====== ====== ======
Earnings (loss) per share
Basic $ (.54) $ .76 $ .76 $ .77
====== ====== ====== ======
Diluted N/A $ .73 $ .74 $ .74
====== ====== ====== ======
</TABLE>
G-109
<PAGE> 265
CORPORATE INFORMATION
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
TOWNE FINANCIAL CORPORATION
BOARD OF DIRECTORS
Neil S. Strawser, Director and Chairman of the Board
Ralph E. Heitmeyer, Director and President
William S. Siders, Director and Executive Vice President
Herb L. Krombholz, Director and Vice President
William T. Thornell, Director and Vice President
EXECUTIVE OFFICERS
William S. Siders, Executive Vice President
William T. Thornell, Vice President
Joseph L. Michel, Vice President, Treasurer and
Chief Financial Officer
Mildred Martin, Secretary
THE BLUE ASH BUILDING AND LOAN COMPANY
BOARD OF DIRECTORS
Neil S. Strawser, Director and Chairman of the Board
Ralph E. Heitmeyer, Director and President
William S. Siders, Director, Executive Vice President and
Managing Officer
Herb L. Krombholz, Director and Vice President
William T. Thornell, Director, Vice President and Chief
Lending Officer
EXECUTIVE OFFICERS
William S. Siders, Executive Vice President and
Managing Officer
William T. Thornell, Vice President and Chief Loan Officer
Joseph L. Michel, Vice President, Treasurer and
Chief Financial Officer
Mildred Martin, Secretary
Director Emeritus: John M. Kuhnell
Executive Offices: Towne Financial Corporation
4811 Cooper Road
Blue Ash, Ohio 45242
G-110
<PAGE> 266
Branch Locations: MAIN OFFICE
4811 Cooper Road
Blue Ash, Ohio 45242
(513) 791-1870
AMELIA OFFICE
1187 Ohio Pike
Amelia, Ohio 45102
(513) 753-7283
BEECHMONT OFFICE
8620 Beechmont Avenue
Cincinnati, Ohio 45255
(513) 474-4977
MASON OFFICE
6501 Mason-Montgomery Road
Mason, Ohio 45040
(513) 459-9660
Independent Auditors: Grant Thornton LLP
Cincinnati, Ohio
Legal Counsel: Cors & Bassett
Cincinnati, Ohio
Shareholder Services: Towne Financial acts as its own
transfer agent and registrar.
Annual Meeting: The Annual Meeting of Shareholders of Towne
Financial Corporation will be held on October
28, 1998, at 10:00 a.m., Eastern Standard Time,
at the main office of Blue Ash, 4811 Cooper
Road, Blue Ash, Ohio 45242. Shareholders are
cordially invited to attend. A formal notice of
the meeting, together with a proxy statement and
a proxy card, accompanies this Annual Report.
Form 10-KSB Annual
Report: A copy of Towne Financial's Annual Report
on Form 10-KSB, as filed with the Securities and
Exchange Commission, will be available at no
charge to shareholders upon request to:
Towne Financial Corporation
4811 Cooper Road
Blue Ash, Ohio 45242
ATTN: Joseph L. Michel, Chief Financial Officer
G-111
<PAGE> 267
Appendix H
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
--- ---
H - 1
<PAGE> 268
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>
H - 2
<PAGE> 269
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> 270
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>
H - 4
<PAGE> 271
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>
H - 5
<PAGE> 272
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>
H - 6
<PAGE> 273
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>
H - 7
<PAGE> 274
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>
H - 8
<PAGE> 275
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>
H - 9
<PAGE> 276
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>
H - 10
<PAGE> 277
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").
H - 11
<PAGE> 278
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.
H - 12
<PAGE> 279
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.
H - 13
<PAGE> 280
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
H - 14
<PAGE> 281
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
H - 15
<PAGE> 282
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
H - 16
<PAGE> 283
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.
H - 17
<PAGE> 284
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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AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
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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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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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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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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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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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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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TOWNE FINANCIAL CORPORATION AND SUBSIDIARY
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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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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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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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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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Discussion of Financial Condition Changes from June 30, 1998 to March 31, 1999
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(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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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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- ------------------------------------------------------------------------------
(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.
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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
H - 32
<PAGE> 299
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.
H - 33
<PAGE> 300
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
H - 34
<PAGE> 301
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.
H - 35
<PAGE> 302
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
H - 36
<PAGE> 303
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
H - 37
<PAGE> 304
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> 305
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
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<PAGE> 306
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
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<PAGE> 307
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
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<PAGE> 308
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%.
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<PAGE> 309
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
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<PAGE> 310
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.
H - 44
<PAGE> 311
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
H - 45
<PAGE> 312
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
H - 46
<PAGE> 313
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
H - 47
<PAGE> 314
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
H - 48
<PAGE> 315
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.
H - 49
<PAGE> 316
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
H - 50
<PAGE> 317
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
H - 51
<PAGE> 318
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
H - 52
<PAGE> 319
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
H - 53
<PAGE> 320
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
H - 54
<PAGE> 321
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> 322
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.
H - 56
<PAGE> 323
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
H - 57
<PAGE> 324
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
H - 58
<PAGE> 325
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
H - 59
<PAGE> 326
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> 327
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
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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> 329
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> 330
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> 331
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> 332
(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> 333
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.
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<PAGE> 359
THE OPTIONHOLDER: OAK HILL FINANCIAL, INC.
By:
- -------------------------------- ------------------------------
Signature
Name:
------------------------------
- --------------------------------
Name (please type or print) Title:
------------------------------
TOWNE FINANCIAL CORPORATION
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
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