AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 2004
REGISTRATION NO. 333-116248
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
WESBANCO, INC.
(Exact name of registrant as specified in its charter)
WEST VIRGINIA 6021 55-0571723
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
ONE BANK PLAZA PAUL M. LIMBERT
WHEELING, WEST VIRGINIA 26003 PRESIDENT AND CHIEF EXECUTIVE OFFICER
(304) 234-9000 WESBANCO, INC.
(Address, including zip code, ONE BANK PLAZA
and telephone number, including WHEELING, WEST VIRGINIA 26003
area code of registrant's (304) 234-9000
principal executive offices) (Name, address, including zip
code, and telephone number, including
area code, of agent for service)
---------------------
WITH COPIES TO:
JAMES C. GARDILL, ESQ. KRISTEN LARKIN STEWART, ESQ.
PHILLIPS, GARDILL, KAISER & KIRKPATRICK & LOCKHART LLP
ALTMEYER, PLLC HENRY W. OLIVER BUILDING
61 FOURTEENTH STREET 535 SMITHFIELD STREET
WHEELING, WEST VIRGINIA 26003 PITTSBURGH, PA 15222-2312
(304) 232-6810 (412) 355-6500
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
[WESTERN OHIO FINANCIAL CORPORATION LOGO]
PROXY STATEMENT OF WESTERN OHIO FINANCIAL CORPORATION
PROSPECTUS OF WESBANCO, INC.
Dear Western Ohio Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Western Ohio Financial Corporation to be held on August 17, 2004 at the
Springfield Courtyard by Marriott (formerly known as the Springfield Inn)
located at 100 South Fountain Avenue, Springfield, Ohio, commencing at 10 a.m.
local time. At this special meeting, you will be asked to vote upon an amended
Agreement and Plan of Merger pursuant to which Western Ohio will be merged with
and into WesBanco, Inc. If the merger agreement is approved at the special
meeting and the merger is completed, for each share of common stock of Western
Ohio that you own you will receive, at your election, either 1.18 shares of
WesBanco common stock or $35.00 in cash, subject to certain limitations and
possible adjustment in accordance with the terms of the merger agreement.
The merger cannot be completed unless Western Ohio's stockholders approve
the merger agreement at the special meeting. If you were a stockholder of record
of Western Ohio common stock on June 30, 2004, you are entitled to vote at the
special meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
TAKE THE TIME TO VOTE BY COMPLETING AND MAILING THE ENCLOSED PROXY CARD.
This proxy statement/prospectus also constitutes the prospectus of WesBanco
for the approximately 1,175,048 shares of WesBanco common stock to be issued in
the merger, based on Western Ohio's outstanding shares on July 8, 2004. WesBanco
and Western Ohio common stock are quoted on the Nasdaq National Market and
traded under the symbols "WSBC" and "WOFC," respectively. On July 12, 2004,
which was the last practicable trading day prior to the printing of this proxy
statement/prospectus, the closing prices of WesBanco and Western Ohio common
stock were $28.15 and $33.51, respectively.
THE BOARD OF DIRECTORS OF WESTERN OHIO BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF WESTERN OHIO'S STOCKHOLDERS. THE BOARD HAS APPROVED THE MERGER
WITH WESBANCO AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSAL TO APPROVE
THE MERGER AGREEMENT.
Sincerely,
/s/ John W. Raisbeck
JOHN W. RAISBECK
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE WESBANCO COMMON STOCK TO BE ISSUED IN
THE MERGER OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus provides you with detailed information
about the merger, WesBanco and the shares of WesBanco common stock that will be
issued if the merger is completed. We encourage you to read this entire document
carefully. Please see the section entitled "Risk Factors" beginning on page 19
for a discussion of potential risks associated with the merger and in owning
WesBanco common stock.
This proxy statement/prospectus is dated July 14, 2004 and is first being
mailed to Western Ohio stockholders on or about July 16, 2004.
WESTERN OHIO FINANCIAL CORPORATION
28 EAST MAIN STREET
SPRINGFIELD, OHIO 45502
(937) 327-1112
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 17, 2004
Notice is hereby given that a special meeting of stockholders of Western
Ohio Financial Corporation, a Delaware corporation, will be held on August 17,
2004, at the Springfield Courtyard by Marriott (formerly known as the
Springfield Inn) located at 100 South Fountain Avenue, Springfield, Ohio,
commencing at 10 a.m., local time, to consider and vote upon the following
matters described in the accompanying proxy statement/prospectus:
1. Approval and adoption of the Agreement and Plan of Merger dated as
of April 1, 2004 by and among Western Ohio, WesBanco, Inc., a West Virginia
corporation, and WOFC, Inc., a West Virginia corporation and a wholly owned
subsidiary of WesBanco, and First Amendment to Agreement and Plan of Merger
dated as of July 13, 2004, pursuant to which Western Ohio will be merged
with and into WesBanco.
2. To act on such other matters as may properly come before the
special meeting or any adjournment or postponement of the special meeting.
The amended merger agreement is more completely described in the
accompanying proxy statement/ prospectus, and a copy of the merger agreement and
first amendment thereto is attached as Annex A to the proxy
statement/prospectus. PLEASE REVIEW THESE MATERIALS CAREFULLY AND CONSIDER FULLY
THE INFORMATION SET FORTH THEREIN.
Only holders of record of Western Ohio common stock at the close of
business on June 30, 2004 will be entitled to notice of, and to vote at, the
special meeting and any adjournment or postponement thereof. Approval of the
amended merger agreement and the merger requires the affirmative vote of the
holders of at least a majority of the votes entitled to be cast at the special
meeting, if the holders of at least one-third of the shares of Western Ohio
common stock outstanding on the record date are present in person or by proxy at
the special meeting.
THE BOARD OF DIRECTORS OF WESTERN OHIO RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE AMENDED MERGER AGREEMENT.
Your vote is important. Whether or not you plan to attend the special
meeting, please complete, date, sign and return the enclosed proxy card
promptly. This will assure your representation at the special meeting and may
avoid the cost of additional communications. This will not prevent you from
voting in person at the special meeting. You may revoke your proxy at any time
before it is voted by signing and returning a later dated proxy with respect to
the same shares, by filing with the Secretary of Western Ohio a written
revocation bearing a later date, or by attending and voting in person at the
special meeting.
By Order of the Board of Directors,
/s/ David L. Dillahunt
DAVID L. DILLAHUNT
Chairman
Springfield, Ohio
July 14, 2004
YOUR VOTE IS VERY IMPORTANT
TO VOTE YOUR SHARES, PLEASE COMPLETE, DATE, SIGN AND MAIL THE ENCLOSED PROXY
CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates business and financial
information about WesBanco and Western Ohio from other documents that are not
included in or delivered with this document. This information is available to
you without charge upon your written or oral request. You can obtain these
documents by requesting them in writing or by telephone from the appropriate
company at either:
WesBanco, Inc. Western Ohio Financial Corporation
Attn: Larry G. Johnson, Secretary Attn: Deborah S. Horton, Secretary
One Bank Plaza 28 East Main Street
Wheeling, West Virginia 26003 Springfield, Ohio 45502
(304) 234-9000 (937) 325-4683
If you would like to request any documents, please do so by August 9, 2004
in order to receive them before the Western Ohio special meeting.
For further information about Western Ohio, please refer to Western Ohio's
annual report on Form 10-K for the fiscal year ended December 31, 2003, which is
attached as Annex D to this proxy statement/ prospectus, and its Form 10-Q for
the quarter ended March 31, 2004, which is attached as Annex E to this proxy
statement/prospectus and see "Where You Can Find More Information About WesBanco
and Western Ohio." For further information about WesBanco, see "Where You Can
Find More Information About WesBanco and Western Ohio."
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS....................................... 1
SUMMARY..................................................... 3
The Merger................................................ 3
The Companies............................................. 3
What Western Ohio Stockholders Will Receive in the
Merger................................................. 3
How to Choose Stock or Cash for Your Western Ohio
Shares................................................. 4
Treatment of Western Ohio Stock Options................... 4
Western Ohio Employee Stock Ownership Plan................ 4
The Special Meeting....................................... 4
Appraisal Rights.......................................... 5
Ownership of WesBanco after the Merger.................... 5
Certain Federal Income Tax Consequences................... 5
Western Ohio's Reasons for the Merger and Recommendation
to Stockholders........................................ 6
Opinion of Western Ohio's Financial Advisor............... 6
Resale of WesBanco Shares Received in the Merger.......... 6
Certain Differences in the Rights of Stockholders......... 7
Conditions to the Merger.................................. 7
Termination of the Merger Agreement....................... 7
Termination Fee........................................... 8
Effective Date of the Merger.............................. 8
Regulatory Approvals...................................... 8
Interests of Certain Persons in the Merger................ 8
Ownership of Western Ohio Common Stock by Western Ohio
Directors, Executive Officers and Affiliates........... 8
Recent Developments....................................... 8
Comparative Per Share Data.................................. 10
Share Information and Market Prices......................... 11
Selected Historical Financial Data of WesBanco.............. 12
Selected Historical Financial Data of Western Ohio.......... 13
Unaudited Pro Forma Condensed Combined Financial
Information............................................... 14
Unaudited Pro Forma Condensed Combined Balance Sheet........ 14
Unaudited Pro Forma Condensed Combined Statement of
Income.................................................... 15
Unaudited Pro Forma Condensed Combined Statement of
Income.................................................... 16
RISK FACTORS................................................ 19
THE SPECIAL MEETING......................................... 20
General................................................... 20
Date, Time and Place of the Special Meeting............... 20
Record Date and Required Vote............................. 20
Beneficial Ownership of Western Ohio Officers, Directors
and Affiliates......................................... 21
Voting and Revocation of Proxies.......................... 21
Solicitation of Proxies................................... 21
Recommendation of Western Ohio Board of Directors......... 22
PAGE
----
THE MERGER.................................................. 22
General................................................... 22
What Western Ohio Stockholders Will Receive in the
Merger................................................. 22
Effects of the Merger..................................... 23
Consideration Election Procedures and Exchange of Western
Ohio Certificates...................................... 24
Treatment of Western Ohio Stock Options................... 24
Western Ohio Employee Stock Ownership Plan................ 25
Restricted Stock Awards................................... 26
Background of the Merger.................................. 26
Recommendation of the Western Ohio Board.................. 27
Opinion of Western Ohio's Financial Advisor............... 27
Western Ohio's Reasons for the Merger..................... 33
WesBanco's Reasons for the Merger......................... 34
Interests of Certain Persons in the Merger................ 35
Regulatory Approvals...................................... 36
Appraisal Rights.......................................... 37
Restrictions on Resales by Affiliates of Western Ohio..... 40
Accounting Treatment...................................... 40
Certain Federal Income Tax Consequences of the Merger..... 40
Conduct of Business Prior to the Merger................... 44
Conditions to the Merger.................................. 46
Termination of the Merger Agreement....................... 47
Expenses.................................................. 49
Termination Fee........................................... 50
Amendment or Waiver....................................... 50
INFORMATION ABOUT WESBANCO.................................. 50
INFORMATION ABOUT WESTERN OHIO.............................. 51
DESCRIPTION OF WESBANCO CAPITAL STOCK....................... 52
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 52
WHERE YOU CAN FIND MORE INFORMATION ABOUT WESBANCO AND
WESTERN OHIO.............................................. 59
FORWARD LOOKING STATEMENTS.................................. 60
LEGAL MATTERS............................................... 61
EXPERTS..................................................... 61
Annex A -- Agreement and Plan of Merger and First Amendment
to Agreement and Plan of Merger
Annex B -- Opinion of Friedman Billings Ramsey & Co., Inc.
Annex C -- Section 262 of the Delaware General Corporation
Law
Annex D -- Western Ohio's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003
Annex E -- Western Ohio's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004
ii
QUESTIONS AND ANSWERS
Q: WHAT AM I BEING ASKED TO VOTE ON?
A: You are being asked to vote on the merger of Western Ohio with and into
WesBanco.
Q: IF THE MERGER IS COMPLETED, WHAT WILL I RECEIVE?
A: If the merger is completed, for each share of Western Ohio common stock that
you own you will receive, at your election, either 1.18 shares of WesBanco
common stock or $35.00 in cash. You may elect either of these options for
each Western Ohio share you own and, if you desire, you may elect to exchange
some of your Western Ohio shares for cash and some for WesBanco common stock.
Elections will be limited by a requirement that 55% of the total number of
outstanding shares of Western Ohio common stock be exchanged for WesBanco
common stock. Therefore, the form of consideration you receive will depend on
the elections of other Western Ohio stockholders and you may not receive all,
or any of, the consideration in the form that you selected. For example, if
all Western Ohio stockholders elected to receive cash only, 55% of the total
Western Ohio shares would nevertheless be exchanged for WesBanco common
stock, not cash, and only the remaining 45% of the Western Ohio shares would
be exchanged for cash.
Q: HOW DO I ELECT TO RECEIVE CASH, WESBANCO STOCK OR A COMBINATION OF BOTH FOR
MY WESTERN OHIO STOCK?
A: A form for making an election will be sent to you separately prior to the
effective date of the merger along with instructions explaining how to elect
the consideration you want to receive. For your election to be effective,
your properly completed election form, along with your Western Ohio stock
certificates or an appropriate guarantee of delivery, must be sent to and
received by Computershare Investor Services, LLC, the exchange agent, on or
before 5:00 p.m., Eastern Standard Time (EST), on the 33rd day following the
mailing of the election form. If you do not properly make a timely election,
you will be allocated WesBanco common stock and/or cash depending on the
elections, if any, made by other Western Ohio stockholders. Be sure to save
this proxy statement/prospectus so you can consult it when you receive your
election form.
Q: WHAT DO I NEED TO DO NOW?
A: After reviewing this document, submit your proxy by executing and returning
the enclosed proxy card. By submitting your proxy, you authorize the
individuals named in the proxy to represent you and vote your shares at the
special meeting in accordance with your instructions. Your vote is important.
Whether or not you plan to attend the special meeting, please submit your
duly completed proxy promptly in the enclosed envelope. You do not need to
elect the consideration you would like to receive in the merger at this time.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. You should not send in your Western Ohio certificates until you receive
the election form from the exchange agent.
Q: WHEN WILL THE MERGER BE COMPLETED?
A: We are attempting to complete the merger as quickly as possible. In addition
to stockholder approval, we must also obtain certain regulatory approvals. We
expect to complete the merger during the third quarter of 2004.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you instruct your broker on how to
vote. Your broker will send you directions on how you can instruct your
broker to vote. Your broker cannot vote your shares without instructions from
you. You should therefore be sure to provide your broker with instructions on
how to vote your shares.
1
Q: HOW WILL MY SHARES BE VOTED IF I RETURN A BLANK PROXY CARD?
A: If you sign, date and send in your proxy card and do not indicate how you
want to vote, your proxy will be counted as a vote for the merger.
Q: WHAT WILL BE THE EFFECT IF I DO NOT VOTE?
A. If you abstain, do not return your proxy card or otherwise fail to vote at
the special meeting, your failure to vote will have the same effect as if you
voted against the merger.
Q: CAN I CHANGE MY MIND AND REVOKE MY PROXY?
A: Yes. You may revoke your proxy and change your vote at any time before the
special meeting by:
- signing another proxy with a later date;
- giving written notice of the revocation of your proxy to the Secretary of
Western Ohio prior to the special meeting; or
- voting in person at the special meeting.
Your latest dated proxy or vote will be counted.
Q: WHOM DO I CALL IF I HAVE QUESTIONS ABOUT THE MEETING OR THE MERGER?
A: Please contact John W. Raisbeck or Robert Kuehl of Western Ohio at (937)
327-1112 or (937) 327-1107, respectively, with any questions about the
meeting or the merger.
2
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. The merger agreement and first amendment thereto are attached
to this proxy statement/prospectus as Annex A. To fully understand the merger
and for a more complete description of the terms of the merger, you should
carefully read this entire document, including the exhibits, and the documents
we refer you to under the caption "Where You Can Find More Information About
WesBanco and Western Ohio." Throughout this proxy statement/prospectus,
references to the "merger agreement" mean the merger agreement as amended by the
first amendment to the merger agreement.
THE MERGER
We propose a merger of Western Ohio with and into WesBanco. If the merger
is consummated, WesBanco will continue as the surviving corporation. The
Articles of Incorporation and Bylaws of WesBanco will continue as the Articles
of Incorporation and Bylaws of the surviving corporation until amended or
repealed in accordance with applicable law. The officers and directors of
WesBanco will continue as the officers and directors of the surviving
corporation.
THE COMPANIES
WesBanco, Inc.
One Bank Plaza
Wheeling, West Virginia 26003
(304) 234-9000
WesBanco, a bank holding company headquartered in Wheeling, West Virginia,
offers through its various subsidiaries a full range of financial services
including retail banking, corporate banking, personal and corporate trust
services, brokerage services, mortgage banking and insurance. As of March 31,
2004, WesBanco had approximately $3.4 billion of consolidated total assets, $2.5
billion of deposits and $326 million of stockholders' equity.
Western Ohio Financial Corporation
28 East Main Street
Springfield, Ohio 45502
(937) 327-1112
Western Ohio is a savings and loan holding company headquartered in
Springfield, Ohio. Western Ohio is the parent of Cornerstone Bank, a federal
savings bank, and CornerstoneBanc Financial Services, Incorporated, which
together provide retail banking, corporate banking and mortgage banking
services. As of March 31, 2004, Western Ohio had approximately $407 million of
consolidated total assets, $258 million of deposits and $45 million of
stockholders' equity.
WHAT WESTERN OHIO STOCKHOLDERS WILL RECEIVE IN THE MERGER
If the merger is completed, for each share of Western Ohio common stock
that you own you will receive, at your election, either 1.18 shares of WesBanco
common stock or $35.00 in cash, subject to certain limitations and possible
adjustment in accordance with the terms of the merger agreement as discussed
below, unless, in each case, you properly perfect your appraisal rights under
Delaware law. You may elect to exchange your Western Ohio common stock for cash,
WesBanco common stock or a combination of both. Instead of fractional shares of
WesBanco, you will receive a check for any fractional shares based on a value of
$35.00 per whole share of WesBanco common stock.
The total amount of cash and WesBanco common stock that will be paid to all
Western Ohio stockholders in the merger is fixed by a requirement that 55% of
the total number of outstanding shares of Western Ohio common stock be exchanged
for WesBanco common stock and that 45% of the total number of outstanding shares
of Western Ohio common stock be exchanged for cash. Accordingly, your election
may be subject to pro-ration, which means that you may not receive all, or any
of, the consideration in the form that
3
you select. See "The Merger -- What Western Ohio Stockholders Will Receive in
the Merger" beginning on page 22 for a detailed discussion of the pro-ration
procedures to be employed.
The 1.18 exchange ratio is subject to adjustment if certain termination
provisions, based on the market price of WesBanco's common stock, have been
triggered and the Western Ohio board of directors elects to terminate the merger
agreement. Western Ohio's right to terminate the merger agreement would arise if
the average closing price of WesBanco common stock during a specified period
before receipt of the last required regulatory approval of the merger is less
than $24.896 per share and WesBanco common stock underperforms an index of
financial institution stocks by a specified amount. However, Western Ohio would
not have the right to terminate the merger agreement if WesBanco were to elect
to make a compensating adjustment in the exchange ratio. See "The
Merger -- Termination of the Merger Agreement" beginning on page 47. The
exchange ratio is also subject to adjustment if WesBanco completes certain
corporate transactions, such as a stock split, reverse stock split or stock
dividend.
HOW TO CHOOSE STOCK OR CASH FOR YOUR WESTERN OHIO SHARES
You will be sent an election form by the exchange agent on which you may
specify whether you wish to receive cash, WesBanco common stock or a combination
of stock and cash in exchange for your shares of Western Ohio common stock. You
may also make "no election" as to whether you receive cash or WesBanco common
stock as payment for your Western Ohio shares. Your choice will be honored to
the extent possible, but because of the overall limitations on the number of
Western Ohio shares that will be exchanged for cash and the number of Western
Ohio shares that will be exchanged for WesBanco common stock, whether you
receive the amount of cash and/or stock that you request will depend on what
other Western Ohio stockholders elect to receive as consideration for their
shares. Therefore, you may not receive exactly the form of consideration that
you elect. We make no recommendation as to whether you should elect to receive
cash or stock in the merger. You must make your own decision with respect to
your election. See "The Merger -- Consideration Election Procedures and Exchange
of Western Ohio Certificates" beginning on page 24. YOU SHOULD SAVE THIS PROXY
STATEMENT/PROSPECTUS SO YOU MAY CONSULT IT IN MAKING YOUR ELECTION WHEN YOU
RECEIVE YOUR ELECTION FORM.
TREATMENT OF WESTERN OHIO STOCK OPTIONS
Under the merger agreement, holders of options to purchase Western Ohio
common stock may select how they want their options treated in the merger. All
option holders may choose to hold their stock options and have them converted
into options to purchase shares of WesBanco common stock at the effective time
of the merger. In addition, holders of stock options with an exercise price of
less than $35.00 can elect to have such options deemed exercised and, in
exchange for such deemed exercised options, receive cash in an amount equal to
the difference between $35.00 and the exercise price of the stock options. See
"The Merger -- Treatment of Western Ohio Stock Options" beginning on page 24.
WESTERN OHIO EMPLOYEE STOCK OWNERSHIP PLAN
Participants in Western Ohio's Employee Stock Ownership Plan ("ESOP") are
entitled to direct the vote of shares of Western Ohio common stock allocated to
their plan account with respect to the proposal to approve the merger. If
participants fail to direct the vote of any of these allocated shares, such
shares will not be voted in the merger and will have the effect of a vote
against the merger. Shares not allocated to the accounts of participants in the
ESOP are voted by the ESOP trustees. The ESOP will be terminated at the
effective time of the merger and the account balances of ESOP participants shall
be distributed to them after the indebtedness of the ESOP is paid off.
THE SPECIAL MEETING
A special meeting of Western Ohio's stockholders will be held on Tuesday,
August 17, 2004, at the Springfield Courtyard by Marriott located at 100 South
Fountain Avenue, Springfield, Ohio. At the special meeting, Western Ohio
stockholders will be asked to approve the merger agreement and the related
merger.
4
You may vote at the special meeting only if you owned shares of Western
Ohio common stock at the close of business on June 30, 2004. You may cast one
vote for each share of Western Ohio common stock owned by you on that date. The
holders of at least a majority of the shares of Western Ohio entitled to vote at
the special meeting must vote in favor of the merger in order to approve the
merger. As of June 30, 2004, there were 1,810,551 shares of Western Ohio common
stock outstanding, held by approximately 1,400 holders of record. As of the
record date for the special meeting, the directors and executive officers of
Western Ohio controlled approximately 17.5% of the outstanding shares of Western
Ohio common stock entitled to vote at the special meeting.
You can vote your shares by attending the special meeting and voting in
person, or by marking the enclosed proxy card with your vote, signing it and
mailing it in the enclosed return envelope. You can change your vote as late as
the date of the special meeting either by sending in a new proxy received prior
to the special meeting or by attending the special meeting and voting in person.
APPRAISAL RIGHTS
You have the right to demand appraisal for your shares of Western Ohio
common stock. This means that if you do not vote in favor of the merger, make a
written demand to Western Ohio for payment in cash of the fair value of your
shares and strictly comply with the applicable statutory procedures regarding
appraisal, you will be entitled to receive a judicial determination of the fair
value of your Western Ohio shares and to receive payment of this fair value in
cash, together with a fair rate of interest. See "The Merger -- Appraisal
Rights" beginning on page 54, and Annex C.
OWNERSHIP OF WESBANCO AFTER THE MERGER
WesBanco will issue approximately 1,175,048 shares of its common stock to
Western Ohio stockholders in connection with the merger, based on the number of
shares of Western Ohio outstanding on July 8, 2004, which would constitute
approximately 6% of the outstanding stock of WesBanco after the merger, based on
the number of shares of WesBanco common stock outstanding on June 30, 2004. The
shares will be listed for trading on the Nasdaq National Market. WesBanco common
stock is traded on the Nasdaq National Market under the symbol "WSBC."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is a condition to the completion of the merger, unless waived by the
parties in writing, that each of WesBanco and Western Ohio receives a legal
opinion from their respective tax counsel to the effect that the merger will
qualify as a "reorganization" for United States federal income tax purposes
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Tax Code"). Accordingly, we expect the merger to generally be
tax-free to holders of Western Ohio common stock for United States federal
income tax purposes to the extent that they receive WesBanco shares pursuant to
the merger. If the merger does not qualify as a "reorganization," the holders of
Western Ohio common stock generally will be required to recognize gain or loss
measured by the difference between the fair market value of the WesBanco common
stock plus cash received by such holders in the transaction and the adjusted tax
basis in their Western Ohio common stock surrendered in the transaction. If the
merger qualifies as a "reorganization," the tax consequences to holders of
shares of Western Ohio common stock will generally be as follows:
- Western Ohio stockholders who exchange their Western Ohio common stock
solely for cash will recognize gain or loss for federal income tax
purposes.
- Western Ohio stockholders who exchange their Western Ohio common stock
for a combination of cash and WesBanco common stock may recognize gain,
but not loss, for federal income tax purposes in respect of the Western
Ohio shares exchanged for cash.
- Western Ohio stockholders who exchange their Western Ohio common stock
solely for WesBanco common stock will not recognize gain or loss for
federal income tax purposes, other than gain or loss attributable to the
receipt of cash in lieu of fractional shares.
5
The actual federal income tax consequences of the transaction to you will
not be ascertainable at the time you make your election because we will not know
at that time if the transaction will qualify as a "reorganization" and to what
extent the allocation and proration procedures will apply to your election. You
should read the summary under the caption "The Merger -- Certain Federal Income
Tax Consequences of the Merger" beginning on page 40 for a more complete
discussion of the federal income tax consequences of the merger. You should also
consult your own tax advisor concerning all federal, state, local and foreign
tax consequences of the merger that may apply to you.
WESTERN OHIO'S REASONS FOR THE MERGER AND RECOMMENDATION TO STOCKHOLDERS
The Western Ohio board of directors believes that the terms of the merger
agreement and the merger are fair to, and in the best interests of, Western Ohio
and its stockholders. In reaching its decision, the Western Ohio board
considered the following factors, among others:
- the belief of the Western Ohio board that WesBanco has offered a fair
price to Western Ohio stockholders for their Western Ohio common stock;
- the per share equivalent impact of the merger with respect to earnings
per share and dividends per share on a pro forma basis for Western Ohio
stockholders electing to receive WesBanco common stock;
- the potential benefits to be received by Western Ohio's customers from
the merger and WesBanco's commitment to community banking;
- an evaluation of the potential long-term prospects of WesBanco;
- the dividend history of WesBanco common stock;
- the liquidity of WesBanco common stock; and
- WesBanco's intention to retain most of Western Ohio's employees.
The Western Ohio board of directors believes that the financial services
industry is becoming increasingly competitive, and that the merger will enable
Western Ohio's customers to be better served and will provide Western Ohio's
stockholders with substantial benefits. The merger will also provide
opportunities for Western Ohio's customers to be offered more diverse products
and services. WESTERN OHIO'S BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR
TO YOU AND IN YOUR BEST INTEREST AND RECOMMENDS THAT YOU VOTE FOR THE APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF WESTERN OHIO'S FINANCIAL ADVISOR
Western Ohio asked its financial advisor, Friedman Billings Ramsey & Co.,
Inc. ("FBR"), for advice on the fairness to Western Ohio's stockholders of the
consideration that WesBanco is offering in the merger. FBR performed a number of
analyses in which it compared the companies' historical stock prices and other
measures of performance, compared the financial terms of the merger to those of
other similar publicly announced transactions, and estimated the relative values
of WesBanco and Western Ohio based on past and anticipated future performance
and the benefits that could be expected from the merger. FBR delivered its
written opinion, dated April 1, 2004, that the merger consideration was fair to
Western Ohio stockholders from a financial point of view as of such date. See
"The Merger -- Opinion of Western Ohio's Financial Advisor" beginning on page
27. FBR's fairness opinion has been updated to the date of this proxy
statement/prospectus and is attached as Annex B.
RESALE OF WESBANCO SHARES RECEIVED IN THE MERGER
The shares of WesBanco common stock that you receive in the merger will be
registered under the Securities Act of 1933. Therefore, you may sell shares that
you receive in the merger without restriction unless you are considered an
affiliate of Western Ohio or you become an affiliate of WesBanco. A director,
executive officer or stockholder who beneficially owns 10% or more of the
outstanding shares of a company is generally deemed to be an affiliate of that
company.
6
If you are considered an affiliate of Western Ohio or become an affiliate
of WesBanco, you may resell the shares of WesBanco common stock you receive
pursuant to an effective registration statement under the securities laws, or
pursuant to Rule 145 of the SEC's rules, or in transactions otherwise exempt
from registration under the securities laws. WesBanco is not obligated and does
not intend to register for resale the shares issued to affiliates of Western
Ohio.
CERTAIN DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS
Western Ohio is a Delaware corporation governed by Delaware law and
WesBanco is a West Virginia corporation governed by West Virginia law. Once the
merger occurs, Western Ohio stockholders that receive WesBanco common stock in
the merger will become stockholders of WesBanco and their rights will be
governed by West Virginia law and WesBanco's corporate governing documents
rather than Delaware law and Western Ohio's governing documents. Because of the
differences between the laws of the states of Delaware and West Virginia and the
respective corporate governing documents of Western Ohio and WesBanco, Western
Ohio stockholders' rights as stockholders will change as a result of the merger.
See "Comparative Rights of Stockholders" beginning on page 52.
CONDITIONS TO THE MERGER
Completion of the merger is subject to the satisfaction or waiver of the
conditions specified in the merger agreement, including, among others, those
listed below:
- the approval of the merger agreement by the stockholders of Western Ohio;
- an aggregate of less than 10% of the shares of WesBanco common stock to
be issued in the merger shall be (i) subject to purchase as fractional
shares and (ii) proposed to be issued to Western Ohio stockholders who
have perfected their appraisal rights in accordance with Delaware law;
- no law or injunction may effectively prohibit the merger;
- Western Ohio and WesBanco must receive all necessary approvals of
governmental and regulatory authorities; and
- on or before the date the merger closes, the receipt of an opinion from
each party's tax counsel to the effect that for federal income tax
purposes the merger will be treated as a reorganization within the
meaning of Section 368 of the Internal Revenue Code.
TERMINATION OF THE MERGER AGREEMENT
The parties can agree to terminate the merger agreement at any time prior
to completion of the merger, and either Western Ohio or WesBanco can terminate
the merger agreement if, among other reasons, any of the following occurs:
- the merger is not approved by the stockholders of Western Ohio;
- the merger is not completed by December 31, 2004;
- a court or other governmental authority permanently prohibits the merger;
or
- the other party breaches or materially fails to comply with any of its
representations or warranties or obligations under the merger agreement.
Western Ohio will also have the right to terminate the merger agreement if
the average closing price of WesBanco stock during a specified period before
receipt of the last required regulatory approval of the merger is less than
$24.896 and WesBanco common stock underperforms an index of financial
institutions by a specified amount, unless WesBanco were to elect to make a
compensating adjustment to the exchange ratio. Western Ohio may also terminate
the merger agreement in order to enter into an agreement with respect to an
unsolicited proposal that if consummated would result in a transaction more
favorable to Western Ohio's
7
stockholders from a financial point of view, provided that WesBanco does not
make a counteroffer that is at least as favorable as the other proposal and
Western Ohio pays the termination fee described below.
TERMINATION FEE
Western Ohio must pay WesBanco a termination fee of $2.5 million if the
merger agreement is terminated (i) because the Western Ohio stockholders did not
approve the merger agreement or Western Ohio breached certain provisions of the
merger agreement and prior to such termination or within six months thereafter
Western Ohio enters into an agreement for a competing acquisition proposal, (ii)
because the Western Ohio board withdraws or modifies its recommendation of the
merger after a competing acquisition proposal has been made and either the
Western Ohio stockholders do not adopt the merger agreement at a stockholders
meeting after a takeover proposal has been made or Western Ohio's stockholders
fail to meet by December 15, 2004 or (iii) by Western Ohio after receiving a
superior proposal for the acquisition of Western Ohio.
EFFECTIVE DATE OF THE MERGER
We expect the merger to be completed as soon as practicable after all
regulatory approvals and stockholder approval has been received. We expect this
to occur during the third quarter of 2004.
REGULATORY APPROVALS
In addition to your approval, the merger is subject to the approval of the
Board of Governors of the Federal Reserve System and the West Virginia Board of
Banking and Financial Institutions. If the Federal Reserve approves the merger,
the United States Department of Justice has 15 days in which to challenge the
approval on antitrust grounds. We may not consummate the merger until expiration
of the 15-day waiting period. These governmental authorities may impose
conditions for granting approval of the merger. We must also provide notice of
the merger to the Office of Thrift Supervision. On July 6, 2004, the Federal
Reserve approved the merger. On June 14, 2004, the West Virginia Board of
Banking and Financial Institutions approved the merger.
Western Ohio and WesBanco have filed all required applications for
regulatory review and approval or notice in connection with the merger. Neither
Western Ohio nor WesBanco can offer any assurance that all necessary approvals
will be obtained or the date when any such approvals will be obtained.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When you consider the Western Ohio board's recommendation that Western Ohio
stockholders vote in favor of the merger, you should be aware that a number of
Western Ohio's executive officers and directors may have interests in the merger
that may be different from, or in addition to, yours. See "The
Merger -- Interests of Certain Persons in the Merger" beginning on page 35.
OWNERSHIP OF WESTERN OHIO COMMON STOCK BY WESTERN OHIO DIRECTORS, EXECUTIVE
OFFICERS AND AFFILIATES
As of June 30, 2004, the directors, executive officers and affiliates of
Western Ohio owned or controlled the vote of 316,462 shares of Western Ohio
common stock constituting approximately 17.5% of the outstanding shares of
Western Ohio common stock. The holders of at least a majority of the outstanding
shares of Western Ohio common stock entitled to vote must vote in favor of the
merger in order to approve the merger. See "The Special Meeting -- Beneficial
Ownership of Western Ohio Officers, Directors and Affiliates" beginning on page
21 for more information about Western Ohio directors, executive officers and
affiliates.
RECENT DEVELOPMENTS
During the second quarter of 2004, Western Ohio experienced a higher level
of prepayments on mortgage loans, primarily purchased loans, resulting in
accelerated amortization of purchased premiums that will
8
negatively impact net interest income and earnings. This will be partially
offset by a higher valuation of Bank-Owned Life Insurance (BOLI) due to the
recent increase in interest rates. While the recent rise in interest rates will
likely result in a lower level of mortgage refinancing and prepayments in future
quarters, a continuation of the current prepayment level, though not expected,
could continue to negatively impact earnings without a corresponding offset.
9
COMPARATIVE PER SHARE DATA
(UNAUDITED)
Set forth below are the basic earnings, diluted earnings, cash dividends
and book value per common share data for Western Ohio and WesBanco on a
historical basis, on a pro forma combined basis, and on a pro forma equivalent
basis per common share of Western Ohio, at or for the three month period ending
March 31, 2004, and at or for the year ended December 31, 2003.
The pro forma data was derived by combining the historical consolidated
financial information of Western Ohio and WesBanco using the purchase method of
accounting for business combinations and assumes the transaction is completed as
contemplated.
The Western Ohio pro forma equivalent share information shows the effect of
the merger from the perspective of an owner of Western Ohio common stock. The
information was computed by multiplying the pro forma information by an exchange
ratio of 1.18 so that the per share amounts are equated to the respective
amounts for one share of Western Ohio common stock. This represents the WesBanco
common stock Western Ohio stockholders will receive for each share of Western
Ohio common stock they exchange for WesBanco common stock.
The Western Ohio pro forma equivalent share information is equated to the
value for each share of Western Ohio common stock being acquired. However, under
the merger agreement elections will be limited by a requirement that 55% of the
total number of outstanding shares of Western Ohio common stock be exchanged for
WesBanco common stock. Some stockholders may elect all cash for some or all of
their shares equal to $35.00 per share. Western Ohio stockholders may also elect
to exchange some of their shares for cash and some of their shares for WesBanco
common stock. Therefore, the form of actual consideration Western Ohio
stockholders receive will depend in part on the elections of other Western Ohio
stockholders. For more information, see "The Merger -- What Western Ohio
Stockholders Will Receive in the Merger."
You should read the information below together with historical financial
statements and related notes and other information included and incorporated by
reference in this proxy statement/prospectus. The unaudited pro forma combined
data below is for illustrative purposes only. The companies may have performed
differently had they always been combined. You should not rely on this
information as being indicative of the historical results that would have been
achieved had the companies always been combined or the future results that the
combined company will experience after the merger, nor should you rely on the
three-month information as being indicative of results expected for the entire
year or for any future interim period.
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2004 DECEMBER 31, 2003
------------------ -----------------
WESBANCO COMMON STOCK:
Earnings per share
Historical (basic)............................... $ 0.49 $ 1.80
Historical (diluted)............................. 0.49 1.80
Pro forma combined (basic)....................... 0.48 1.78
Pro forma combined (diluted)..................... 0.48 1.78
Cash dividends per share
Historical....................................... 0.25 0.96
Pro forma combined............................... 0.25 0.96
Book value per share
Historical....................................... 16.55 16.13
Pro forma combined............................... 17.35 16.95
10
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2004 DECEMBER 31, 2003
------------------ -----------------
WESTERN OHIO COMMON STOCK:
Earnings per share
Historical (basic)............................... 0.29 1.44
Historical (diluted)............................. 0.28 1.42
Pro forma equivalent (basic)..................... 0.57 2.10
Pro forma equivalent (diluted)................... 0.57 2.10
Cash dividends per share
Historical....................................... 0.25 1.00
Pro forma equivalent............................. 0.30 1.13
Book value per share
Historical....................................... 25.16 24.92
Pro forma equivalent............................. 20.47 20.00
SHARE INFORMATION AND MARKET PRICES
The following table presents the closing market prices for Western Ohio and
WesBanco common stock on April 1, 2004 and July 12, 2004. April 1, 2004 was the
last full trading day prior to the date on which the signing of the merger
agreement was announced. July 12, 2004 was the last practicable trading day for
which information was available prior to the printing of this proxy
statement/prospectus. The table also presents the equivalent price per share of
Western Ohio common stock, giving effect to the merger, as of such dates. The
equivalent per share price of Western Ohio common stock is determined by
multiplying the closing market price per share of WesBanco common stock on each
date by the exchange ratio of 1.18.
WesBanco common stock trades on the Nasdaq National Market under the
trading symbol "WSBC." Western Ohio common stock trades on the Nasdaq National
Market under the trading symbol "WOFC." The market prices of shares of WesBanco
common stock and Western Ohio common stock fluctuate from day to day. As a
result, you should obtain current market quotations to evaluate the merger.
These quotations are available from stockbrokers, in major newspapers such as
The Wall Street Journal, and on the Internet. The market price of the WesBanco
common stock at the effective time of the merger or at the time stockholders of
Western Ohio receive certificates evidencing shares of WesBanco common stock may
be higher or lower than the market price at the time the merger agreement was
executed, at the date of mailing of this document or at the time of the special
meeting.
WESTERN OHIO
WESTERN EQUIVALENT PER
WESBANCO OHIO SHARE PRICE
-------- ------- --------------
April 1, 2004........................................ $31.12 $30.91 $36.72
July 12, 2004........................................ $28.15 $33.51 $33.21
11
SELECTED HISTORICAL FINANCIAL DATA OF WESBANCO
The following table sets forth certain historical financial data concerning
WesBanco for the three months ended March 31, 2004 and 2003 and for each of the
five fiscal years ended December 31, 2003. This information is based on
information contained in WesBanco's quarterly reports on Form 10-Q and annual
reports on Form 10-K filed with the Securities and Exchange Commission.
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
----------------------- --------------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SUMMARY STATEMENT OF INCOME:
Net interest income.......... $ 26,327 $ 24,842 $ 103,004 $ 103,600 $ 87,585 $ 83,527 $ 86,630
Provision for loan losses.... 1,800 1,980 9,612 9,359 5,995 3,225 4,295
Other income................. 8,761 8,247 33,230 27,852 25,001 23,376 24,581
Other expense................ 21,135 20,055 81,810 76,647 65,307 64,483 67,813
Income tax provision......... 2,394 2,165 8,682 10,620 12,282 12,271 11,465
Net income................... 9,759 8,889 36,130 34,826 29,002 26,924 27,638
PER SHARE INFORMATION:
Earnings
Basic...................... 0.49 0.44 1.80 1.70 1.60 1.41 1.37
Diluted.................... 0.49 0.44 1.80 1.70 1.60 1.41 1.37
Dividends.................... 0.25 0.24 0.96 0.935 0.92 0.895 0.88
Book value................... 16.55 15.89 16.13 15.89 14.46 13.92 13.63
SELECTED RATIOS:
Return on average assets..... 1.16% 1.09% 1.08% 1.13% 1.21% 1.18% 1.23%
Return on average equity..... 12.23% 11.14% 11.38% 10.95% 11.28% 10.42% 9.85%
SELECTED BALANCE SHEET DATA:
Assets....................... $3,376,512 $3,356,427 $3,445,006 $3,297,231 $2,474,454 $2,310,137 $2,269,726
Securities................... 1,142,074 1,205,979 1,201,109 1,193,896 758,470 546,389 567,928
Net loans.................... 1,922,912 1,799,874 1,907,303 1,795,805 1,518,909 1,570,672 1,503,694
Deposits..................... 2,460,864 2,455,540 2,482,082 2,399,956 1,913,458 1,870,361 1,814,001
Stockholders' equity......... 325,623 321,013 318,436 325,171 258,201 258,506 269,664
12
SELECTED HISTORICAL FINANCIAL DATA OF WESTERN OHIO
The following table sets forth certain historical financial data concerning
Western Ohio for the three months ended March 31, 2004 and 2003 and for each of
the five fiscal years ended December 31, 2003. This information is based on
information contained in Western Ohio's quarterly reports on Form 10-Q and
annual reports on Form 10-K filed with the Securities and Exchange Commission.
AT OR FOR THE
THREE MONTHS ENDED
MARCH 31, AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SUMMARY STATEMENT OF INCOME:
Net interest income..................... $ 2,501 $ 2,393 $ 9,410 $ 9,919 $ 9,519 $ 9,894 $ 9,783
Provision for loan losses............... 84 84 286 343 358 349 246
Other income............................ 722 825 3,643 3,093 1,939 1,294 1,261
Other expense........................... 2,369 2,246 9,229 9,136 8,216 7,899 8,127
Income tax provision.................... 258 267 1,037 1,186 1,009 1,089 988
Net income.............................. 512 621 2,501 2,347 1,875 1,851 1,683
PER SHARE INFORMATION:
Earnings
Basic................................. 0.29 0.36 1.44 1.36 1.08 1.01 0.86
Diluted............................... 0.28 0.35 1.42 1.35 1.08 1.01 0.85
Dividends............................... 0.25 0.25 1.00 1.00 1.00 1.00 1.00
Book value.............................. 25.16 24.64 24.92 24.62 23.89 23.15 21.82
SELECTED RATIOS:
Return on average assets................ 0.52% 0.73% 0.70% 0.68% 0.54% 0.54% 0.52%
Return on average equity................ 4.55% 5.77% 5.72% 5.47% 4.43% 4.50% 3.75%
SELECTED BALANCE SHEET DATA:
Assets.................................. $407,486 $351,244 $399,540 $346,795 $341,711 $352,562 $329,685
Securities.............................. 35,374 41,110 32,735 46,001 39,648 48,653 50,366
Net loans............................... 337,370 279,888 334,469 256,883 269,300 283,604 254,871
Deposits................................ 257,530 216,951 248,681 219,169 220,287 208,332 202,331
Stockholders' equity.................... 45,334 43,334 44,357 43,205 41,945 41,810 42,989
13
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Financial Information is based
on the historical financial statements of WesBanco and Western Ohio and has been
prepared to illustrate the financial effect of the merger described below. The
pro forma financial information should be read in conjunction with WesBanco's
and Western Ohio's unaudited consolidated financial statements for the three
months ended March 31, 2004 and audited consolidated financial statements for
the year ended December 31, 2003.
The Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31,
2004 assumes the merger was consummated on March 31, 2004. The Unaudited
Condensed Combined Statements of Income for the three months ended March 31,
2004 and for the year ended December 31, 2003, give effect to the merger of
Western Ohio as if such transaction had been effective during the entire period
shown. These pro forma financial statements reflect the merger based upon
preliminary purchase accounting adjustments. Actual adjustments will be made on
the basis of evaluations as of the effective date of the merger and, therefore,
may differ from those reflected in the Unaudited Pro Forma Condensed Financial
Information.
Estimates of non-recurring merger related expenses expected to occur after
the date of consummation are included in the pro forma financial information.
Non-recurring expenses are projected to range in total from $0.3 million to $0.5
million. Estimates of cost savings associated with the merger are not included
in the pro forma information. WesBanco expects cost savings to approximate 24%
to 28% of Western Ohio's estimated annualized pre-tax operating expenses of $9.3
million for 2004. These cost savings are expected to be realized in 2004 and
2005. These estimates may differ from the actual costs incurred and cost savings
achieved in the merger.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2004
-----------------------------------------------------------------
WESTERN OHIO PRO FORMA
FINANCIAL PRO FORMA COMBINED
WESBANCO, INC. CORPORATION ADJUSTMENTS WESBANCO, INC.
-------------- ------------ ----------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
Cash and cash equivalents........... $ 85,028 $ 9,223 $ 94,251
Available for sale securities....... 726,077 35,374 761,451
Held to maturity securities......... 415,997 415,997
Net loans........................... 1,922,912 337,370 $ 5,482(A) 2,265,764
Goodwill and other intangibles...... 57,514 25,935(A) 83,449
Other assets........................ 168,984 25,519 (10)(A) 194,493
----------- ---------- ------- -----------
TOTAL ASSETS...................... $ 3,376,512 $ 407,486 $31,407 $ 3,815,405
=========== ========== ======= ===========
LIABILITIES
Deposits............................ $ 2,460,864 $ 257,530 $ 2,129(A) $ 2,720,523
Other borrowings.................... 512,463 101,834 12,856(A)(C) 627,153
Other liabilities................... 46,626 2,788 2,937(B) 52,351
Subordinated debentures............. 30,936 22,000(C) 52,936
----------- ---------- ------- -----------
TOTAL LIABILITIES................. 3,050,889 362,152 39,922 3,452,963
STOCKHOLDERS' EQUITY................ 325,623 45,334 (8,515)(A) 362,442
----------- ---------- ------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................ $ 3,376,512 $ 407,486 $31,407 $ 3,815,405
=========== ========== ======= ===========
Book value per share................ $ 16.55 $ 25.16 $ 17.35
Shares outstanding.................. 19,673,103 1,801,729 20,885,082
See notes to the unaudited pro forma condensed financial information
14
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------
WESTERN OHIO PRO FORMA
FINANCIAL PRO FORMA COMBINED
WESBANCO, INC. CORPORATION ADJUSTMENTS WESBANCO, INC.
-------------- ------------ ----------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME:
Loans, including fees............... $ 28,162 $ 4,541 $(343)(A) $ 32,360
Securities and other................ 11,669 334 87(D) 12,090
----------- ---------- ----- -----------
TOTAL INTEREST INCOME............. 39,831 4,875 (256) 44,450
INTEREST EXPENSE:
Deposits............................ 9,344 1,348 (333)(A) 10,359
Other borrowings.................... 4,160 1,026 101(A)(C) 5,287
----------- ---------- ----- -----------
TOTAL INTEREST EXPENSE............ 13,504 2,374 (232) 15,646
----------- ---------- ----- -----------
NET INTEREST INCOME............... 26,327 2,501 (24) 28,804
Provision for loan losses........... 1,800 84 1,884
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES...... 24,527 2,417 (24) 26,920
Other income........................ 8,761 722 9,483
Other expense....................... 21,135 2,369 245(A)(B) 23,749
----------- ---------- ----- -----------
Income before income taxes........ 12,153 770 (269) 12,654
----------- ---------- ----- -----------
Provision (benefit) for income
taxes............................. 2,394 258 (94)(A) 2,558
----------- ---------- ----- -----------
NET INCOME.......................... $ 9,759 $ 512 $(175) $ 10,096
=========== ========== ===== ===========
Earnings per share (Basic).......... $ 0.49 $ 0.29 $ 0.48
Earnings per share (Diluted)........ $ 0.49 $ 0.28 $ 0.48
Average shares outstanding
(Basic)........................... 19,719,934 1,786,556 20,931,913
Average shares outstanding
(Diluted)......................... 19,769,505 1,828,876 20,981,484
See notes to the unaudited pro forma condensed financial information
15
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------
WESTERN OHIO PRO FORMA
FINANCIAL PRO FORMA COMBINED
WESBANCO, INC. CORPORATION ADJUSTMENTS WESBANCO, INC.
-------------- ------------ ----------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME:
Loans, including fees............... $ 115,311 $ 17,092 $ (760)(A) $ 131,643
Securities and other................ 50,205 1,467 565(D) 52,237
----------- ---------- ------- -----------
TOTAL INTEREST INCOME............. 165,516 18,559 (195) 183,880
INTEREST EXPENSE:
Deposits............................ 44,739 5,214 (1,009)(A) 48,944
Other borrowings.................... 17,773 3,935 1,097(A)(C) 22,805
----------- ---------- ------- -----------
TOTAL INTEREST EXPENSE............ 62,512 9,149 88 71,749
----------- ---------- ------- -----------
NET INTEREST INCOME............... 103,004 9,410 (283) 112,131
Provision for loan losses........... 9,612 286 9,898
----------- ---------- ------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES...... 93,392 9,124 (283) 102,233
Other income........................ 33,230 3,643 36,873
Other expense....................... 81,810 9,229 980(A)(B) 92,019
----------- ---------- ------- -----------
Income before income taxes........ 44 812 3,538 (1,263) 47,087
Provision (benefit) for income
taxes............................. 8,682 1,037 (442)(A) 9,277
----------- ---------- ------- -----------
NET INCOME.......................... $ 36,130 $ 2,501 $ (821) $ 37,810
=========== ========== ======= ===========
Earnings per share (Basic).......... $ 1.80 $ 1.44 $ 1.78
Earnings per share (Diluted)........ $ 1.80 $ 1.42 $ 1.78
Average shares outstanding
(Basic)........................... 20,056,849 1,734,203 21,260,950
Average shares outstanding
(Diluted)......................... 20,082,672 1,764,963 21,286,773
See notes to the unaudited pro forma condensed financial information
16
The following table sets forth an estimate of the expected effects of the
projected aggregate purchase accounting adjustments reflected in the pro forma
combined financial statements on the future pre-tax net income of WesBanco after
the merger (in thousands):
DISCOUNT ACCRETION (PREMIUM AMORTIZATION) FOR THE
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2004 2005 2006 2007 2008
-------- -------- -------- -------- ------
(UNAUDITED, DOLLARS IN THOUSANDS)
Loans.................................. $(1,372) $(1,372) $(1,372) $(1,366) --
Customer/deposit base.................. (544) (544) (544) (544) $(544)
Time deposits.......................... 1,345 784 -- -- --
Borrowings............................. 1,140 1,140 1,140 1,140 171
------- ------- ------- ------- -----
Increase (decrease) in pre-tax net
income............................... $ 569 $ 8 $ (776) $ (770) $(373)
======= ======= ======= ======= =====
On the effective date of the merger, the interest rates used in the
valuation of Western Ohio's assets and liabilities may be different than those
at March 31, 2004. This may change the purchase accounting adjustments and their
estimated effects on future pre-tax net income. The following table shows the
estimated effects on the purchase accounting adjustments and the pro forma
annual pre-tax net income of a 50 basis point and a 100 basis point increase in
the interest rates used to determine the estimated fair value of the indicated
assets and liabilities. The income effect has been determined by changing the
relevant interest rate.
PURCHASE ACCOUNTING ADJUSTMENTS
-----------------------------------------------
PRO 50 BASIS POINT 100 BASIS POINT
FORMA INCREASE IN RATES INCREASE IN RATES
------- ----------------- -----------------
(UNAUDITED, DOLLARS IN THOUSANDS)
Loans...................................... $ 5,482 $ 3 $(4,417)
Customer/deposit base...................... 4,342 5,404 6,465
Time deposits.............................. (2,129) (1,384) (638)
Borrowings................................. (4,731) (2,964) (1,197)
------- ------- -------
Total adjustment........................... $ 2,964 $ 1,059 $ 213
======= ======= =======
IMPACT ON PRO FORMA PRE-TAX NET INCOME FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2004 2005 2006 2007 2008
-------- -------- ------ ------ -------
(UNAUDITED, DOLLARS IN THOUSANDS)
50 Basis Point Increase in Rates.............. $ 974 $ 628 $109 $110 $(496)
100 Basis Point Increase in Rates............. 1,192 1,032 793 794 (554)
17
NOTES TO THE UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
NOTE A
The pro forma adjustments represent the purchase accounting entries to
record the merger of Western Ohio Financial Corporation. The excess of the
purchase price over the fair value of the net assets acquired, net of deferred
taxes, is allocated to goodwill. Estimated fair value adjustments included in
the Unaudited Pro Forma Condensed Balance Sheet have been determined based on
information available as of March 31, 2004. Because the final determination of
fair value of assets and liabilities will be made based on the fair values as of
the effective date of the merger, the final amounts may differ from estimates
provided herein. Fair value adjustments are amortized on a straight-line basis
over their estimated average remaining lives. Tax expense related to the net
fair value adjustments is calculated at a 35% tax rate.
Included in the pro forma adjustments is an allocation of the purchase
price to core deposit intangibles. The core deposit intangible is separated from
goodwill and amortized over its estimated average remaining life, subject to an
annual impairment test. The remaining goodwill, which is not subject to
amortization, will also be annually evaluated for possible impairment.
NOTE B
The pro forma adjustment represents estimated direct acquisition costs of
approximately $2.9 million accrued as other liabilities and merger - related
expenses expected to occur after the date of consummation, which are estimated
at $0.1 million and $0.4 million for the three months ended March 31, 2004 and
year ended December 31, 2003, respectively. These costs include certain
severance payments, legal fees and accounting and advisory fees.
NOTE C
The pro forma adjustment represents estimated borrowings needed to fund the
transaction through junior subordinated debt related to the issuance of $22
million in trust preferred securities and other possible funding sources and to
record the related interest expense.
NOTE D
The pro forma adjustment represents the net amortization/accretion that
would be recorded by WesBanco if the investment securities of Western Ohio would
have been held by WesBanco at the beginning of the period. The adjustment
reverses out the net amortization and accretion Western Ohio recorded in their
Statement of Income and records the net amortization/accretion WesBanco would
have recorded in its Statement of Income.
18
RISK FACTORS
The acquisition of WesBanco common stock in connection with the merger
involves significant risks. You should give careful attention to the following
statements respecting certain risks associated with the merger and with the
ownership of WesBanco common stock.
RISKS SPECIFICALLY RELATED TO THE MERGER
THE MIX OF CONSIDERATION -- CASH AND STOCK -- THAT WESTERN OHIO STOCKHOLDERS
ACTUALLY RECEIVE MAY BE DIFFERENT THAN THE FORM OF CONSIDERATION THAT SUCH
STOCKHOLDERS ELECT TO RECEIVE.
The total amount of cash and WesBanco common stock that will be paid to all
Western Ohio stockholders in the merger is fixed by a requirement that 55% of
the total number of outstanding shares of Western Ohio common stock be exchanged
for WesBanco common stock and that 45% of the total number of outstanding shares
of Western Ohio common stock be exchanged for cash. The amount of cash, stock or
combination of cash and stock that a Western Ohio stockholder receives in the
merger will depend on whether the stockholder has submitted an election form,
whether the stockholder has elected to receive the consideration in all stock or
all cash, and the elections made by all other stockholders. Accordingly, the mix
of consideration that a Western Ohio stockholder receives may be different than
the mix that the stockholder has elected to receive and will not be determined
until after the merger is approved.
BECAUSE WESTERN OHIO STOCKHOLDERS WILL NOT KNOW THE MIX OF CONSIDERATION THEY
WILL ACTUALLY RECEIVE WHEN THEY ELECT THEIR CONSIDERATION, WESTERN OHIO
STOCKHOLDERS MAY RECEIVE DIFFERENT FEDERAL INCOME TAX TREATMENT THAN THEY
EXPECT OR DESIRE.
Western Ohio stockholders will not know the actual mix of consideration
that they will eventually receive at the time of the special meeting or when
they elect their consideration. Assuming the merger qualifies as a
"reorganization" for U.S. federal income tax purposes, a Western Ohio
stockholder who has elected to receive only stock with the expectation of having
tax-free treatment and instead receives a combination of cash and stock as a
result of the application of the proration procedures may be required to
recognize gain on the exchange, but will not be permitted to recognize any loss
on the exchange. On the other hand, a Western Ohio stockholder who elects to
receive only cash with the expectation that he or she will recognize a loss as a
result of the merger may receive WesBanco common stock, in which case the loss
would not be recognized. For a more detailed discussion of the federal income
tax consequences of the proposed transaction, see the discussion under the
caption "The Merger -- Certain Federal Income Tax Consequences of the Merger."
WESBANCO MAY ENCOUNTER INTEGRATION DIFFICULTIES OR MAY FAIL TO REALIZE THE
ANTICIPATED BENEFITS OF THE MERGER.
WesBanco and Western Ohio may not be able to integrate their operations
without encountering difficulties including, without limitation, the loss of key
employees and customers, the disruption of their respective ongoing businesses
or possible inconsistencies in standards, controls, procedures and policies.
Additionally, in determining that the merger is in the best interests of
WesBanco and Western Ohio, as the case may be, the board of directors of each of
WesBanco and Western Ohio considered that enhanced earnings may result from the
consummation of the merger, including from reduction of duplicate costs,
improved efficiency and cross-marketing opportunities. However, there can be no
assurance that any enhanced earnings will result from the merger.
BECAUSE THE MARKET PRICE OF WESBANCO COMMON STOCK MAY FLUCTUATE, YOU CANNOT BE
CERTAIN OF THE MARKET VALUE OF THE COMMON STOCK THAT WESTERN OHIO STOCKHOLDERS
WILL RECEIVE IN THE MERGER.
The merger agreement requires that 55% of the total number of outstanding
shares of Western Ohio common stock be exchanged for WesBanco common stock.
Accordingly, many Western Ohio stockholders will receive WesBanco common stock
in connection with the merger. Any change in the price of WesBanco
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common stock prior to the merger will affect the market value of the stock that
Western Ohio stockholders will receive on the date of the merger. Stock price
changes may result from a variety of factors, including general market and
economic conditions, changes in WesBanco's businesses, operations and prospects,
and regulatory considerations. Many of these factors are beyond WesBanco's
control.
The prices of WesBanco common stock and Western Ohio common stock at the
closing of the merger may vary from their respective prices on the date the
merger agreement was executed, on the date of this proxy statement/prospectus
and on the date of the Western Ohio special meeting. As a result, the value
represented by the exchange ratio will also vary. For example, based on the
range of closing prices of WesBanco common stock during the period from April 1,
2004, the last trading day before public announcement of the merger, through
July 12, 2004, the exchange ratio represented a value ranging from a high of
$36.88 to a low of $30.54 for each share of Western Ohio common stock. Because
the date the merger is completed will be later than the date of the special
meeting, you will not know what the market value of WesBanco common stock will
be upon completion of the merger when you vote on the merger at the Western Ohio
special meeting or when you make your election to receive cash or stock.
FUTURE RESULTS OF THE COMBINED COMPANIES MAY MATERIALLY DIFFER FROM THE PRO
FORMA FINANCIAL INFORMATION PRESENTED IN THIS DOCUMENT.
Future results of the combined company may be materially different from
those shown in the pro forma financial statements that only show a combination
of the historical results of WesBanco and Western Ohio. We have estimated that
the combined company will record approximately $2.9 million of merger-related
charges. The charges may be higher or lower than we have estimated, depending
upon how costly or difficult it is to integrate the two companies. Furthermore,
these charges may decrease the capital of the combined company that could be
used for profitable, income-earning investments in the future.
THE SPECIAL MEETING
GENERAL
This section contains information about the special stockholder meeting
Western Ohio has called to consider and vote on the approval of the merger
agreement and first amendment thereto. Western Ohio is mailing this proxy
statement/prospectus to you on or about July 16, 2004. Together with this proxy
statement/ prospectus, Western Ohio is also sending to its stockholders a notice
of the Western Ohio special meeting and a form of proxy that Western Ohio's
board of directors is soliciting for use at the special meeting and at any
adjournments or postponements of the meeting.
Copies of the merger agreement and first amendment thereto are attached to
this proxy statement/ prospectus as Annex A and are incorporated by reference
into this document in their entirety. You should read the entire merger
agreement and first amendment thereto carefully. Throughout this proxy
statement/prospectus, all references to the "merger agreement" mean the merger
agreement as amended by the first amendment to the merger agreement.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting will be held on Tuesday, August 17, 2004, at 10 a.m.,
local time, the Springfield Courtyard by Marriott located at 100 South Fountain
Avenue, Springfield, Ohio.
RECORD DATE AND REQUIRED VOTE
Only holders of record of Western Ohio common stock on June 30, 2004 will
be entitled to notice of and to vote at the special meeting and any adjournments
or postponements of the special meeting. On June 30, 2004, there were 1,810,551
shares of Western Ohio common stock outstanding and entitled to vote at the
special meeting. Each share is entitled to one vote. As of June 30, 2004, there
were approximately 1,400 holders of record of Western Ohio common stock.
20
The presence, in person or by proxy, of the holders of at least one-third
of the outstanding shares of Western Ohio common stock entitled to vote is
necessary to constitute a quorum at the special meeting. The holders of at least
a majority of the shares of Western Ohio common stock entitled to vote must vote
in favor of the merger in order to approve the merger. Abstentions and broker
non-votes will have the effect of a vote against approval of the merger
agreement and the merger.
BENEFICIAL OWNERSHIP OF WESTERN OHIO OFFICERS, DIRECTORS AND AFFILIATES
As of June 30, 2004, the directors, executive officers and affiliates of
Western Ohio owned or controlled the vote of 316,462 shares of Western Ohio
common stock, constituting approximately 17.5% of the outstanding shares of
Western Ohio common stock. Each director and executive officer of Western Ohio
who owns or has control over shares of Western Ohio common stock has advised
Western Ohio that he or she will vote FOR adoption and approval of the merger
agreement.
VOTING AND REVOCATION OF PROXIES
You may use the accompanying proxy if you are unable to attend the special
meeting in person or wish to have your shares voted by proxy even if you attend
the meeting. All shares of Western Ohio common stock represented at the special
meeting by properly executed proxies received prior to or at the special
meeting, and not revoked, will be voted at the special meeting in accordance
with the instructions on the proxies. If you properly execute a proxy but
include no voting instructions, your shares will be voted to approve the merger
agreement and authorize the merger.
The Western Ohio board of directors does not know of any matters, other
than as described in the notice of special meeting, which are to come before the
special meeting. If any other matters are properly presented at the special
meeting for action, the persons named in the enclosed form of proxy will have
the authority to vote on those matters in their discretion.
If you give a proxy, you have the right to revoke it at any time before it
is voted. You may revoke your proxy by (i) filing with the Secretary of Western
Ohio a written notice of revocation bearing a later date than the proxy, (ii)
duly executing a later dated proxy relating to the same shares and delivering it
to the Secretary of Western Ohio before the taking of the vote at the special
meeting, or (iii) attending the special meeting and voting in person. Your
attendance at the special meeting will not, in and of itself, constitute a
revocation of your proxy. Any written notice of revocation or subsequent proxy
should be sent so as to be delivered to Western Ohio Financial Corporation, 28
East Main Street, Springfield, Ohio 45502, Attention: Corporate Secretary, or
hand delivered to the foregoing representative of Western Ohio, at or before the
taking of the vote at the special meeting. For a notice of revocation or later
proxy to be valid, it must actually be received by Western Ohio prior to the
vote of the stockholders. If your shares are held by a broker in street name and
you wish to change the instructions you have given your broker about how to vote
your shares, you must follow the instructions provided by the broker in order to
change your vote.
SOLICITATION OF PROXIES
Western Ohio will bear the cost of the solicitation of proxies. In addition
to solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Western Ohio in person or by telephone, telegram or
other means of communication. These directors, officers and employees will not
be additionally compensated but may be reimbursed for out-of-pocket expenses
they incur in connection with the solicitation. Arrangements will also be made
with brokerage houses, custodians, nominees and fiduciaries for the forwarding
of solicitation materials to the beneficial owners of Western Ohio common stock
held of record by such persons. Western Ohio may reimburse these custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses they incur in
connection therewith. DO NOT SEND YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.
21
RECOMMENDATION OF WESTERN OHIO BOARD OF DIRECTORS
THE WESTERN OHIO BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF WESTERN OHIO AND ITS STOCKHOLDERS, AND RECOMMENDS THAT THE
STOCKHOLDERS OF WESTERN OHIO VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
In the course of reaching its decision to approve the merger agreement and
the transactions contemplated thereby, the Western Ohio board of directors,
among other things, consulted with its legal advisors regarding the legal terms
of the merger agreement and with its financial advisor as to the fairness, from
a financial point of view, of the consideration to be paid to the holders of
shares of Western Ohio common stock. For a discussion of the factors considered
by the Western Ohio board of directors in reaching its conclusion, see "The
Merger -- Western Ohio's Reasons for the Merger."
THE MERGER
The following summary of certain terms and provisions of the merger
agreement is qualified in its entirety by reference to the provisions of the
merger agreement, which is attached to this proxy statement/prospectus as Annex
A and is incorporated into this document by reference. You are strongly
encouraged to read the merger agreement in its entirety. Throughout this proxy
statement/prospectus, all references to the "merger agreement" mean the merger
agreement as amended by the first amendment to the merger agreement.
GENERAL
At the effective time of the merger, Western Ohio will be merged with and
into WesBanco, with WesBanco continuing as the surviving corporation. The
Articles of Incorporation and Bylaws of WesBanco immediately prior to the merger
will constitute the Articles of Incorporation and Bylaws of the surviving
corporation.
WHAT WESTERN OHIO STOCKHOLDERS WILL RECEIVE IN THE MERGER
If the merger is completed, for each share of Western Ohio common stock
that you own you will receive, at your election, either 1.18 shares of WesBanco
common stock, which we will call a stock election, or $35.00 in cash, which we
will call a cash election, subject to certain limitations and possible
adjustment in accordance with the terms of the merger agreement as discussed
below, unless, in each case, you properly perfect your appraisal rights under
Delaware law. You may elect to exchange all of your shares of Western Ohio
common stock for cash or WesBanco common stock, or you may elect to exchange
some of your Western Ohio shares for cash and some for WesBanco common stock.
Instead of fractional shares of WesBanco, you will receive a check for any
fractional shares based on a value of $35.00 per whole share of WesBanco common
stock.
The total amount of cash and WesBanco common stock that will be paid to all
Western Ohio stockholders in the merger is fixed by a requirement that 55% of
the total number of outstanding shares of Western Ohio common stock be exchanged
for WesBanco common stock and that 45% of the total number of outstanding shares
of Western Ohio common stock be exchanged for cash. Accordingly, your election
may be subject to allocation and pro-ration procedures, which means that you may
not receive all, or any of, the consideration in the form that you selected.
If Western Ohio stockholders in the aggregate elect to receive more or
fewer shares of WesBanco common stock than WesBanco has agreed to issue, the
merger agreement specifies the allocation and pro-ration procedures to be used.
These allocation and pro-ration procedures are summarized as follows:
- If the number of shares for which cash elections have been made exceeds
45% of the product obtained by multiplying $35.00 by the number of shares
of Western Ohio common stock outstanding on the third day prior to the
effective time of the merger (the "total cash amount"), then all shares
for which stock elections were made and all shares for which no elections
were made will receive stock, but the shares for which cash elections
were made shall be prorated so that the cash paid in the merger equals
the total cash amount as closely as practicable.
22
- If the number of shares for which cash elections have been made is less
than the total cash amount, then all shares for which cash elections were
made will receive $35.00 cash per share. The exchange agent will then
prorate the shares for which no election was made such that the cash paid
in the merger equals the total cash amount as closely as practicable. If
after such pro-ration of all no election shares, the aggregate of all
cash election shares and no election shares is still less than the total
cash amount, only then will the exchange agent prorate the stock election
shares such that the cash paid in the merger equals the total cash amount
as closely as practicable.
For purposes of determining the total cash amount, the number of shares of
Western Ohio common stock outstanding shall not include shares underlying
Western Ohio stock options deemed to be exercised by election of the holder of
such stock option in connection with the merger. See "The Merger -- Treatment of
Western Ohio Stock Options." Western Ohio common stock subject to restricted
stock awards that are outstanding immediately prior to the effective time will,
however, be considered outstanding for purposes of determining the total cash
amount and will be entitled to receive the merger consideration.
No guarantee can be made that you will receive the amounts of cash and/or
stock you elect. As a result of the allocation procedures and other limitations
outlined in this document and in the merger agreement, you may receive WesBanco
common stock or cash in amounts that vary from the amounts you elect to receive.
The 1.18 exchange ratio is subject to adjustment in the event that certain
termination provisions, based on the market price of WesBanco's common stock,
have been triggered and the Western Ohio board of directors elects to terminate
the merger agreement. Western Ohio's right to terminate the merger agreement
would arise if the average closing price of WesBanco common stock during a
specified period before receipt of the last required regulatory approval of the
merger is less than $24.896 per share and WesBanco common stock underperforms an
index of financial institution stocks by a specified amount. However, Western
Ohio would not have the right to terminate the merger agreement if WesBanco were
to elect to make a compensating adjustment in the exchange ratio. See "The
Merger -- Termination of the Merger Agreement" for a description of the possible
exchange ratio adjustments that may result from this termination provision. In
addition, the merger agreement provides that the exchange ratio and the $35.00
cash consideration will be adjusted in the event WesBanco changes the number of
shares of WesBanco common stock issued and outstanding prior to the effective
time of the merger as a result of a stock split, stock dividend,
recapitalization, reclassification, or similar transaction.
EFFECTS OF THE MERGER
The merger shall become effective on the date and at the time the
certificates of merger are accepted for filing by the West Virginia Secretary of
State and the Delaware Secretary of State or such other later date and time as
is agreed to by the parties and specified in the certificates of merger. At that
time, the separate existence of Western Ohio will cease and WesBanco will be the
surviving corporation. The assets, liabilities and capital of Western Ohio will
be merged with those of WesBanco and those assets, liabilities and capital will
then constitute part of the assets, liabilities and capital of WesBanco.
WesBanco will continue to operate under its Articles of Incorporation and Bylaws
effective as of the day of the merger, and the officers and directors of
WesBanco will continue as the officers and directors of the surviving
corporation. The Articles of Incorporation and Bylaws of WesBanco will be
unaffected by the merger. The tenure of the directors and officers of WesBanco
immediately prior to the merger will be unaffected by the merger.
At the effective time of the merger, each share of Western Ohio common
stock issued and outstanding immediately prior to the time the merger becomes
effective will be converted automatically into the right to receive the merger
consideration, unless you properly perfect your appraisal rights under Delaware
law. Shares of Western Ohio common stock held by Western Ohio in its treasury or
beneficially owned by WesBanco (other than in a fiduciary capacity by them for
others) will not be exchanged for the merger consideration in the merger.
Instead, these shares will be canceled and retired. Shares of Western Ohio
common stock as to which appraisal rights are properly exercised also will not
be exchanged for the merger consideration.
After the merger becomes effective, each certificate evidencing shares of
Western Ohio common stock as to which appraisal rights have not been perfected
will be deemed to evidence only the right to receive the
23
merger consideration. The holder of an unexchanged certificate will not receive
any dividend or other distribution payable by WesBanco until the certificate has
been exchanged.
Giving effect to the merger, as of March 31, 2004, on a pro forma
consolidated basis, Western Ohio would have constituted approximately 9.47% of
deposits, 10.68% of assets, and 12.51% of equity of WesBanco, and its
stockholders would have held approximately 5.80% of the total outstanding shares
of WesBanco. In addition, for the three months ended March 31, 2004, Western
Ohio would have contributed approximately 8.68% of net interest income and 5.07%
of net income to WesBanco on a pro forma consolidated basis.
These percentages reflect the relative size of Western Ohio as of March 31,
2004 and may change with the normal variances in the rates of growth for
deposits and loans for all WesBanco affiliates. Additionally, it is contemplated
that WesBanco may combine with other financial institutions in the future and
these mergers may affect the percentages shown above.
CONSIDERATION ELECTION PROCEDURES AND EXCHANGE OF WESTERN OHIO CERTIFICATES
On or about the 35th day prior to the effective time of the merger,
Computershare Investor Services, LLC, WesBanco's exchange agent, will mail
transmittal materials, including an election form pursuant to which Western Ohio
stockholders will be able to select the form of consideration they prefer to
receive in the merger, and exchange instructions to each holder of record of
Western Ohio common stock on the fifth business day prior to the date such
transmittal materials are mailed.
Each election form will permit the holder of the Western Ohio common stock
to elect to receive cash, WesBanco common stock, or a combination of cash and
stock, or make no election with respect to the merger consideration you wish to
receive. An election will be properly made only if Computershare Investor
Services LLC, the exchange agent, actually receives a properly completed
election form on or before 5:00 pm Eastern Standard Time (EST) on the 33rd day
after the date that the exchange agent mails the transmittal materials. An
election form will be deemed properly completed only if it is accompanied by the
certificates representing the Western Ohio common stock covered by the election
form or an appropriate guarantee of delivery. Risk of loss and title to the
certificates theretofore representing shares of Western Ohio common stock shall
pass only upon proper delivery of such certificates to the exchange agent.
WESTERN OHIO STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE ELECTION FORM AND INSTRUCTIONS.
You may revoke or change a previously submitted election form any time at
or prior to the election date. If you properly revoke an election form, the
shares of Western Ohio common stock covered by such revoked election form shall
become no election shares and the exchange agent shall promptly return the share
certificates to you at no charge upon your written request.
If you have a preference as to the form of consideration that you receive,
you should make a timely election once you receive your election form. If you do
not submit an election form or fail to return your election form by the
specified deadline, you will be deemed to have made no election for purposes of
determining the form of consideration to be received by Western Ohio
stockholders. Neither Western Ohio nor the Western Ohio board of directors make
any recommendation as to whether you should elect cash, WesBanco common stock,
or a combination of stock and cash. You must make your own election decision.
The exchange agent will deliver the merger consideration in exchange for
lost, stolen, mutilated, or destroyed certificates of shares of Western Ohio
common stock only upon receipt of a lost stock affidavit and a bond indemnifying
WesBanco against any claim arising out of the allegedly lost, stolen, mutilated,
or destroyed certificate.
TREATMENT OF WESTERN OHIO STOCK OPTIONS
Options issued by Western Ohio to certain of its employees and directors to
purchase an aggregate of 140,307 shares of Western Ohio common stock were
outstanding as of the record date. Stock option holders can choose how they want
their stock options treated in the merger. Holders of stock options having an
exercise price of less than $35.00 may elect to have such stock options deemed
exercised on a net exercise basis immediately prior to the effective time of the
merger. However, such stock option holders shall only have
24
the right to receive cash in exchange for such deemed exercised stock options
and shall have no right to receive WesBanco common stock in exchange therefore.
The net effect of such an election is that the stock option holders will receive
cash in an amount equal to the product of the number of shares of Western Ohio
common stock underlying stock options for which such an election is made
multiplied by the difference between $35.00 and the exercise price of the stock
options. For example, if a Western Ohio stock option holder holds options to
purchase 100 shares of Western Ohio common stock with an exercise price of $20
per share and the option holder makes the election described above, the option
holder will receive $1,500 in cash in exchange for such deemed exercised stock
options. If a Western Ohio stock option holder does not elect to have his
options deemed exercised prior to the closing of the merger as described in this
paragraph, his options will automatically be converted into options to purchase
WesBanco common stock in the manner described in the next paragraph.
If a Western Ohio stock option holder fails to elect to have his options
deemed exercised as described in the previous paragraph or if the option holder
elects to have his Western Ohio stock options converted into WesBanco stock
options, his Western Ohio stock options will be converted into options to
purchase a number of shares of WesBanco common stock equal to the number of
shares of Western Ohio common stock which such holder could have purchased
pursuant to his Western Ohio stock options multiplied by the exchange ratio. The
exercise price of the converted options to purchase WesBanco common stock will
be determined by dividing the exercise price of the Western Ohio option by the
exchange ratio. For example, if a Western Ohio stock option holder holds options
to purchase 100 shares of Western Ohio common stock with an exercise price of
$20 per share immediately prior to the closing of the merger and elects to have
his Western Ohio options converted into options to purchase WesBanco common
stock, such holder will receive options to purchase 118 shares of WesBanco
common stock with an exercise price of $16.95 per share, based on a 1.18
exchange ratio.
Except as otherwise provided in the merger agreement, the Western Ohio
stock options assumed by WesBanco at the effective time of the merger will be
subject to the same terms and conditions (including expiration date and vesting)
as were applicable to such options immediately prior to the effective time of
the merger. Any restrictions or limitations on transfer with respect to shares
of Western Ohio common stock subject to Western Ohio options or any other plan,
program, or arrangement of Western Ohio or of any subsidiary of Western Ohio, to
the extent that such restrictions or limitations will not have already lapsed,
and except as otherwise expressly provided under the terms of such stock
options, will remain in full force and effect with respect to such options after
the effective time of the merger and after assumption of the options by
WesBanco.
WesBanco will file a registration statement on Form S-8 with the SEC within
30 days after the merger becomes effective to register the shares of WesBanco
common stock issuable upon exercise of the stock options assumed in the merger.
WesBanco will maintain the effectiveness of the registration statement covering
these assumed stock options as long as they remain outstanding.
WESTERN OHIO EMPLOYEE STOCK OWNERSHIP PLAN
Pursuant to the terms of Western Ohio's Employee Stock Ownership Plan,
participants in the plan are entitled to instruct the plan's trustees as to how
to vote shares of Western Ohio common stock allocated to their account with
respect to the merger. Accordingly, if you are a participant in Western Ohio's
Employee Stock Ownership Plan you can direct the plan's trustees how to vote all
plan shares that are allocated to your account with respect to the merger. If
you fail to direct the trustees as to how to vote the shares allocated to your
plan account, the shares will not be voted on these matters and will be treated
as a vote against the merger. Therefore, it is important that you instruct the
plan trustees how to vote shares allocated to your account.
Under the plan, any shares not allocated to the accounts of participants
are to be voted by the trustees. The trustees have informed Western Ohio that
they intend to vote all such shares, if any, FOR approval of the merger.
25
At the effective time of the merger, Western Ohio's Employee Stock
Ownership Plan will be terminated. Immediately after the effective time of the
merger, the ESOP's trustees will sell a sufficient number of the shares of
WesBanco common stock received in the merger in exchange for Western Ohio shares
that were unallocated to the accounts of plan participants to pay off the ESOP's
outstanding indebtedness. Any remaining unallocated shares of WesBanco common
stock and cash shall then be allocated to the ESOP participants in accordance
with the terms of the ESOP and applicable laws. The account balances of the
ESOP's participants shall be distributed to them as soon as practicable after
the earlier of the effective time of the merger or the receipt of a favorable
determination letter for termination of the ESOP from the IRS. ESOP participants
will be permitted to roll such shares over to an IRA or a qualified plan, if the
terms of the qualified plan permit the acceptance of the distribution in stock.
RESTRICTED STOCK AWARDS
Each share of Western Ohio common stock subject to a restricted stock award
outstanding immediately prior to the effective time of the merger shall be
entitled to receive the merger consideration.
BACKGROUND OF THE MERGER
In recent years, the board of directors of Western Ohio has periodically
analyzed competitive and market conditions affecting the banking industry in
general, as well as those affecting Western Ohio in particular. From time to
time, this assessment has involved meetings with outside experts, such as
Friedman, Billings, Ramsey & Co., Inc. ("FBR"), to discuss stock market
conditions and merger and acquisition market conditions.
In connection with those analyses, the board of directors of Western Ohio
has considered a number of strategic options, including acquisitions, merger of
equals transactions and, during 2003, a negotiated transaction in which Western
Ohio would have been the seller. The board consulted with FBR and its outside
legal counsel from KMZR in connection with a number of these strategic
discussions. The board was concerned that Western Ohio did not have the adequate
size and profitability levels to continue to grow and deliver acceptable returns
to shareholders, given the increasing competitiveness in the consolidating
industry, additional technology expenditures, increasing regulatory burdens and
other factors. The board also considered the possible future effect on Western
Ohio if a dissident shareholder were to launch a costly and distracting proxy
battle concerning the election of directors.
The possible negotiated sale of Western Ohio involved discussions which
began in April 2003 between Western Ohio and a bank holding company introduced
to Western Ohio by FBR. Over the next several months, several meetings and
conversations took place between senior executives of Western Ohio and senior
executives of the bank holding company. Board members of Western Ohio also met
the senior executives of the bank holding company to discuss a possible merger,
and the Western Ohio board authorized management and the board to exchange
financial and other information and conduct due diligence procedures. Following
the bank holding company's due diligence investigation of Western Ohio in
September 2003, the Western Ohio board authorized management and its advisors to
enter into negotiations regarding a definitive agreement under the terms
proposed by the bank holding company. Further due diligence and negotiations
ensued until the bank holding company terminated the merger discussions in
October 2003 as a result of the bank holding company's concerns about the
changing interest rate environment and the impact which that may have on Western
Ohio's and the bank holding company's respective earnings.
Thereafter, in December 2003, the Western Ohio board of directors
unanimously agreed to instruct FBR to explore a possible sale of Western Ohio.
In conjunction with this engagement, FBR confidentially solicited various
financial institutions for indications of interest. As part of this solicitation
process, on January 16, 2004, a representative of FBR contacted WesBanco to
determine its interest in reviewing information relative to a possible
acquisition of Western Ohio. Pursuant to this contact, a Confidentiality
Agreement was executed between WesBanco and Western Ohio on January 16, 2004,
and FBR provided a confidential memorandum regarding Western Ohio and its
business to WesBanco on or about January 17, 2004.
26
WesBanco undertook a review of the financial information and descriptive
material provided by FBR and subsequently scheduled a meeting with John W.
Raisbeck, President and Chief Executive Officer of Western Ohio, on January 29,
2004 at Western Ohio's principal offices in Springfield, Ohio. Paul M. Limbert,
President and Chief Executive Officer of WesBanco, and Robert H. Young,
Executive Vice President and Chief Financial Officer of WesBanco, met with Mr.
Raisbeck and toured the facilities of Western Ohio, including most of its seven
branch locations.
Subsequent thereto, WesBanco and three other potential purchasers each
submitted a preliminary nonbinding proposal to Western Ohio on February 5, 2004.
Following receipt of these proposals, Western Ohio invited representatives of
WesBanco and two of the other three potential purchasers to conduct due
diligence, which, in the case of WesBanco, was conducted offsite in the
Springfield, Ohio area on February 11th, 12th and 13th. Thereafter, WesBanco and
one other potential purchaser each submitted a final nonbinding proposal to
Western Ohio on February 26, 2004. After Western Ohio's board of directors
reviewed the bids at a March 1, 2004 meeting and, following such review,
instructed FBR to contact each of the bidders to determine if their bids
reflected their final and best offers, the board directed FBR to notify WesBanco
that it had submitted the bid preferred by the Western Ohio board of directors
based on its review of bid proposals received.
Western Ohio then conducted its own due diligence with respect to WesBanco
on March 3 and March 4, 2004. A number of officers of Western Ohio participated
in this due diligence process that occurred at the principal offices of WesBanco
in Wheeling, West Virginia. The parties began negotiations on a definitive
Agreement and Plan of Merger on or about March 10, 2004.
The results of the due diligence and the preliminary round of negotiations
were reviewed at a meeting of the Executive Committee of the board of directors
of WesBanco held on March 17, 2004, at which time management was authorized to
proceed with the negotiations toward a definitive agreement.
Subsequent meetings were held with various principals involved, including a
meeting at WesBanco's offices on March 23 between John W. Raisbeck and Paul M.
Limbert and the respective attorneys for the two institutions. An additional
meeting was held with these parties on March 24, 2004. In the interim, the board
of directors of WesBanco Bank reviewed the due diligence and the status of the
negotiations on March 23, 2004, and authorized management of WesBanco Bank to
finalize negotiations toward a definitive agreement. Throughout this period, the
board of directors of Western Ohio was kept informed of the status of due
diligence and negotiations, and management of Western Ohio was also instructed
to finalize negotiations towards a definitive agreement.
On April 1, 2004, at a combined meeting of the board of directors of
Cornerstone Bank and Western Ohio, the boards of these two institutions reviewed
the proposed definitive merger agreement, discussed various aspects of the
agreement with legal counsel and FBR and obtained an oral fairness opinion from
FBR, following which the board of Western Ohio approved the execution of a
definitive Agreement and Plan of Merger that was then executed late in the
afternoon on that date.
RECOMMENDATION OF THE WESTERN OHIO BOARD
The board of directors of Western Ohio believes that the merger and the
merger agreement are advisable and are fair to and in the best interests of
Western Ohio and its stockholders. THE BOARD OF DIRECTORS OF WESTERN OHIO
UNANIMOUSLY RECOMMENDS THAT THE WESTERN OHIO STOCKHOLDERS VOTE FOR THE APPROVAL
OF THE MERGER AGREEMENT AND THE MERGER.
OPINION OF WESTERN OHIO'S FINANCIAL ADVISOR
General. Western Ohio retained FBR to act as its sole financial advisor in
connection with a possible merger and related matters. As part of its
engagement, FBR agreed, if requested by Western Ohio, to render an opinion with
respect to the fairness, from a financial point of view, to the holders of
Western Ohio common shares, of the merger consideration as set forth in a
definitive merger agreement.
27
FBR is a nationally recognized specialist in the financial services
industry, and has extensive experience in advising banks and thrifts. FBR is
regularly engaged in evaluations of financial institutions and in advising
institutions with regard to mergers and acquisitions, as well as raising debt
and equity capital. Western Ohio selected FBR as its financial advisor based
upon FBR's qualifications, expertise and reputation in such capacity, as well as
Western Ohio's longstanding relationship with FBR.
On April 1, 2004, FBR delivered its oral opinion that the merger
consideration that would be paid pursuant to the merger agreement was fair to
Western Ohio stockholders, from a financial point of view, as of the date of
such opinion. FBR also delivered to the Western Ohio board of directors a
written fairness opinion dated as of April 1, 2004, confirming its oral opinion.
FBR further updated its April 1, 2004 opinion as of the date of this proxy
statement/prospectus. No limitations were imposed by Western Ohio on FBR with
respect to the investigations made or the procedures followed in rendering its
written opinion.
THE FULL TEXT OF FBR'S WRITTEN OPINION TO THE WESTERN OHIO BOARD OF
DIRECTORS, DATED AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS, IS ATTACHED
IN ITS ENTIRETY AS ANNEX B. THE WRITTEN OPINION SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND EXTENT OF REVIEW BY FBR. IT SHOULD BE READ CAREFULLY AND
IN ITS ENTIRETY IN CONJUNCTION WITH THIS PROXY STATEMENT/PROSPECTUS. THE
FOLLOWING SUMMARY OF FBR'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF THE WRITTEN OPINION. FBR'S WRITTEN OPINION IS ADDRESSED TO THE
WESTERN OHIO BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER OF WESTERN OHIO AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
WESTERN OHIO SPECIAL MEETING DESCRIBED IN THIS DOCUMENT.
FBR, in connection with rendering its opinion:
- reviewed Western Ohio's Annual Report to Shareholders and Annual Report
on Form 10-K for each of the years ended December 31, 2003, December 31,
2002 and December 31, 2001, including the audited consolidated financial
statements contained therein;
- reviewed WesBanco's Annual Report to Shareholders and Annual Report on
Form 10-K for each of the years ended December 31, 2003, December 31,
2002 and December 31, 2001, including the audited consolidated financial
statements contained therein;
- reviewed certain other public and non-public information, primarily
financial in nature, relating to the respective businesses, earnings,
assets and prospects of Western Ohio and WesBanco provided to FBR or that
was publicly available;
- participated in meetings and telephone conferences with members of senior
management of Western Ohio and WesBanco concerning the financial
condition, business, assets, financial forecasts and prospects of the
respective companies, as well as other matters FBR believed relevant to
its inquiry;
- reviewed certain stock market information for Western Ohio common stock
and WesBanco common stock and compared it with similar information for
certain companies, the securities of which are publicly traded;
- compared the results of operations and financial condition of Western
Ohio and WesBanco with that of certain companies that FBR deemed to be
relevant for purposes of its opinion;
- reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be relevant for
purposes of its opinion;
- reviewed the merger agreement and certain related documents; and
- performed such other reviews and analyses as FBR deemed appropriate.
The oral and written opinions provided by FBR to the Western Ohio board of
directors were necessarily based upon economic, monetary, financial market and
other relevant conditions as of the dates thereof.
In connection with its review and arriving at its opinion, FBR relied upon
the accuracy and completeness of the financial information and other pertinent
information provided by Western Ohio and WesBanco to FBR for purposes of
rendering its opinion. FBR did not assume any obligation to verify independently
any of the
28
provided information as being complete and accurate in all material respects.
With regard to the financial forecasts established and developed for Western
Ohio and WesBanco with the input of the respective management teams, as well as
projections of cost savings, revenue enhancements and operating synergies, FBR
assumed that these materials had been reasonably prepared in good faith on bases
reflecting the best available estimates and judgments of Western Ohio and
WesBanco as to the future performance of the separate and combined entities and
that such projections provided a reasonable basis upon which FBR could formulate
its opinion. Neither Western Ohio nor WesBanco publicly discloses such internal
management projections of the type utilized by FBR in connection with FBR's role
as financial advisor to Western Ohio with respect to the review of the merger.
Therefore, such projections cannot be assumed to have been prepared with a view
towards public disclosure. The projections were based upon numerous variables
and assumptions that are inherently uncertain, including, among others, factors
relative to the general economic and competitive conditions facing Western Ohio
and WesBanco. Accordingly, actual results could vary significantly from those
set forth in the respective projections.
FBR does not claim to be an expert in the evaluation of loan portfolios or
the allowance for loan losses with respect thereto and therefore assumes that
such allowances for Western Ohio and WesBanco are adequate to cover such losses.
In addition, FBR does not assume responsibility for the review of individual
credit files and did not make an independent evaluation, appraisal or physical
inspection of the assets or individual properties of Western Ohio or WesBanco,
nor was FBR provided with such appraisals. Furthermore, FBR assumes that the
merger will be consummated in accordance with the terms set forth in the merger
agreement, without any waiver of any material terms or conditions by Western
Ohio, and that obtaining the necessary regulatory approvals for the merger will
not have an adverse effect on either separate entity or the combined entity. In
rendering its opinion, FBR also assumed that the merger will be treated as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code of
1936, as amended.
FBR's opinion is directed to the Western Ohio board of directors and
relates only to the fairness to the holders of shares of Western Ohio common
stock of the merger consideration set forth in the definitive merger agreement
from a financial point of view, and does not address any other aspect of the
merger, the merits of the underlying decision by Western Ohio or WesBanco to
engage in the merger or the relative merits of the merger as compared to other
business strategies that might be available to Western Ohio or WesBanco. FBR did
not express any opinion as to the price at which shares of Western Ohio common
stock or WesBanco common stock may trade subsequent to the announcement of the
merger or as to the price at which shares of WesBanco may trade subsequent to
the consummation of the merger.
In connection with rendering its April 1, 2004 written opinion to the
Western Ohio board of directors, FBR performed a variety of financial and
comparative analyses, which are briefly summarized below. Such summary of
analyses does not purport to be a complete description of the analyses performed
by FBR. FBR believes that these analyses must be considered as a whole and that
selecting portions of such analyses and the factors considered by it, without
considering all such analyses and factors, could create an incomplete
understanding of the scope of the process underlying the analyses and, more
importantly, the opinion derived from them.
The preparation of a financial advisor's opinion is a complex process
involving subjective judgments and is not necessarily susceptible to partial
analyses or a summary description of such analyses. In its full analysis, FBR
also included assumptions with respect to general economic, financial market and
other financial conditions. Furthermore, FBR drew from its past experience in
similar transactions, as well as its experience in the valuation of securities
and its general knowledge of the banking industry as a whole. Any estimates in
FBR's analyses were not necessarily indicative of actual future results or
values, which may significantly diverge more or less favorably from such
estimates. Estimates of company valuations do not purport to be appraisals nor
to necessarily reflect the prices at which companies or their respective
securities actually may be sold. None of the analyses performed by FBR were
assigned a greater significance by FBR than any other in deriving its opinion.
Comparable Company Analysis. FBR reviewed and compared actual stock market
data and actual and estimated selected financial information for Western Ohio
with corresponding information for 11 publicly
29
traded Midwest thrifts with assets between $200 million and $700 million, an
equity to assets ratio above 10% and core return on average equity ratio below
6% (the "Western Ohio Peer Group"). The following is the Western Ohio Peer
Group:
TICKER BANK NAME CITY, STATE
------ --------- -----------
1. LNCB Lincoln Bancorp Plainfield, IN
2. WAYN Wayne Savings Bancshares, Inc. Wooster, OH
3. CFSL Chesterfield Financial Corp. Chicago, IL
4. NLVS Northern Savings & Loan Company* Elyria, OH
5. FFBI First Federal Bancshares, Inc.* Colchester, IL
6. UCBC Union Community Bancorp Crawfordsville, IN
7. PFED Park Bancorp, Inc.* Chicago, IL
8. NEIB Northeast Indiana Bancorp, Inc. Huntington, IN
9. FBTC First BancTrust Corporation Paris, IL
10. FBEI First Bancorp of Indiana, Inc. Evansville, IN
11. MCBF Monarch Community Bancorp, Inc. Coldwater, MI
---------------
* December 31, 2003 data was not available at the time.
The following table represents a summary analysis of the Western Ohio Peer
Group based on market prices as of March 26, 2004 and the latest publicly
available financial data as of or for the twelve months ended December 31, 2003
(or September 30, 2003, as the case may be):
WESTERN OHIO
PEER GROUP
----------------
MEAN MEDIAN WESTERN OHIO
---- ------ ------------
Tangible equity to tangible assets ratio........... 13.6% 12.7% 11.1%
Efficiency ratio................................... 66.4% 67.2% 69.5%
Core return on average assets...................... 0.72% 0.75% 0.70%
Core return on average equity...................... 5.39% 6.45% 5.72%
Price to last twelve months core earnings.......... 20.0x 20.7x 23.0x
Price to book value................................ 123.3% 120.2% 131.2%
Price to tangible book value....................... 126.0% 121.8% 131.2%
Dividend yield..................................... 2.2% 2.5% 3.1%
FBR reviewed and compared actual stock market data and actual and estimated
selected financial information for WesBanco with corresponding information for
13 publicly traded banks headquartered in West
30
Virginia and its contiguous states with assets between $1.0 billion and $5.0
billion and a core return on average assets between 0.75% and 1.25% (the
"WesBanco Peer Group"). The following is the WesBanco Peer Group:
TICKER BANK NAME CITY, STATE
------ --------- -----------
1. SUSQ Susquehanna Bancshares, Inc. Lititz, PA
2. PBKS Provident Bankshares Corporation Baltimore, MD
3. FCF First Commonwealth Financial Corp. Indiana, PA
4. FFBC First Financial Bancorp. Hamilton, OH
5. NPBC National Penn Bancshares, Inc. Boyertown, PA
6. CTBI Community Trust Bancorp, Inc. Pikeville, KY
7. CMTY Community Banks, Inc. Harrisburg, PA
8. PEBO Peoples Bancorp Inc. Marietta, OH
9. VFGI Virginia Financial Group, Inc. Culpeper, VA
10. FNBP FNB Corporation Christianburg, VA
11. FFKT Farmers Capital Bank Corporation Frankfort, KY
12. FUNC First United Corporation Oakland, MD
13. CBMD Columbia Bancorp Columbia, MD
The following table represents a summary analysis of the WesBanco Peer
Group based on market prices as March 26, 2004 and the latest publicly available
financial data as of or for the twelve months ended December 31, 2003:
WESBANCO PEER GROUP
--------------------
MEAN MEDIAN WESBANCO
-------- -------- --------
Tangible equity to tangible assets ratio............. 7.4% 7.3% 7.7%
Efficiency ratio..................................... 62.2% 62.1% 56.1%
Core return on average assets........................ 1.04% 1.02% 1.03%
Core return on average equity........................ 12.00% 11.58% 10.86%
Price to last twelve months core earnings............ 17.7x 18.0x 17.4x
Price to book value.................................. 200.9% 203.1% 203.1%
Price to tangible book value......................... 242.5% 237.9% 237.9%
Dividend yield....................................... 3.0% 3.2% 3.3%
Comparable Transaction Analysis. FBR reviewed and compared actual
information for groups of comparable pending (as of March 26, 2004) and
completed transactions (since December 31, 2002) it deemed pertinent to an
analysis of the merger. The implied acquisition price was compared to the median
ratios of (i) price to last twelve months earnings, (ii) price to book value,
(iii) price to tangible book value and (iv) core deposit premium, for each of
the following five pending and recently completed transaction comparable groups:
- all thrift acquisitions with the selling thrift headquartered in the
Midwest region ("Comparable Regional Deals");
- all thrift acquisitions with the target thrift having assets between $150
million and $500 million ("Comparable Asset Size");
- all thrift acquisitions with the target thrift having an equity to assets
ratio between 10.0% and 15.0% ("Comparable Capitalization");
- all thrift acquisitions with the target thrift having a return on average
assets between 0.25% and 1.00% ("Comparable Profitability"); and
- all thrift acquisitions with the target thrift having a nonperforming
assets to assets ratio of between 0.25% and 1.00% ("Comparable Asset
Quality").
31
FBR calculated an implied valuation for Western Ohio by applying the median
price to book value, tangible book value and earnings and core deposit premium
for each of the groups of comparable transactions described above to Western
Ohio's current book value, tangible book value, earnings, and core deposits. FBR
concluded that this analysis implied a valuation range of $59.0 million to $72.1
million for Western Ohio as compared to the $65.1 million indicated value of the
WesBanco proposal under the merger agreement.
Contribution Analysis. FBR analyzed the contribution of each company to
the resulting combined company relative to the approximate ownership of the
resulting combined company assuming 100% stock consideration. This analysis
indicated that Western Ohio stockholders would have approximately 9.9% of the
pro forma ownership of the combined company as compared to the 5.7% of pro forma
ownership of WesBanco under the merger agreement. Western Ohio's approximate
contributions are listed below by category:
WESTERN OHIO
------------
Loans....................................................... 14.8%
Deposits.................................................... 9.1%
Equity...................................................... 12.2%
Tangible equity............................................. 14.5%
Last twelve month core earnings............................. 6.8%
2004 estimated earnings..................................... 6.9%
Accretion/Dilution Analysis. On the basis of financial projections and
estimates of ongoing cost savings accruing to the resulting combined company
provided to FBR by management of Western Ohio and WesBanco, as well as estimated
one-time costs related to the merger, FBR compared per share equivalent
earnings, cash dividends, book value and tangible book value of the resulting
combined company to the stand-alone projections for Western Ohio and WesBanco.
No assumptions were made regarding revenue enhancements following the completion
of the transaction.
The accretion/dilution analysis demonstrated that, among other things, the
merger would result in:
- an estimated 51.9% accretion to earnings per share for Western Ohio
stockholders in 2005; and an estimated 2.9% accretion to earnings per
share for WesBanco stockholders in 2005 who owned stock of WesBanco after
closing, assuming full realization of estimated cost savings in 2005;
- an estimated increase in annual dividend of $0.22 per share for Western
Ohio stockholders who owned stock of WesBanco after closing assuming
WesBanco maintained its current dividend policy; and no change in cash
dividends for WesBanco stockholders; and
- an estimated 16.0% dilution to book value and 33.4% dilution to tangible
book value for Western Ohio stockholders who owned stock of WesBanco
after closing; and an estimated 5.1% accretion and 0.4% dilution to book
value and tangible book value per share, respectively, for WesBanco
stockholders.
Discounted Cash Flow Analysis. FBR performed a discounted cash flow
analysis with regard to Western Ohio in an acquisition scenario. This analysis
utilized a range of discount rates of 9.0% to 14.0% and a range of terminal
earnings multiples of 14.5x to 16.5x. The analysis resulted in a range of
present values of $51.1 million to $71.7 million for Western Ohio as compared to
the $65.1 million indicated value of the WesBanco proposal pursuant to the
merger agreement. As indicated above, this analysis was based on Western Ohio's
and WesBanco's senior management estimates and is not necessarily indicative of
actual values or actual future results and does not purport to reflect the
prices at which any securities currently trade or will trade at any time in the
future. FBR included the discounted cash flow analysis because it is a widely
used valuation methodology, but noted that the results of such methodology are
highly dependent upon numerous assumptions that must be made, including earnings
growth rates, discount rates, and terminal values.
Other Analyses. FBR also reviewed certain other information including pro
forma estimated balance sheet composition, pro forma financial performance and
pro forma deposit market share.
32
No company used as a comparison in the above analyses is identical to
Western Ohio, WesBanco or the combined resulting company, and no other
transaction is identical to the merger. Accordingly, an analysis of the results
of the foregoing is not purely mathematical; rather, such analyses involve
complex considerations and judgments concerning differences in financial market
and operating characteristics of the companies and other factors that could
affect the public trading volume of the companies to which Western Ohio,
WesBanco and the combined resulting company are being compared.
In connection with the delivery of its written opinion dated as of the date
of this proxy statement/ prospectus, FBR performed procedures to update, as
necessary, certain of the analyses described above and reviewed the assumptions
on which such analyses described above were based and the factors considered in
connection therewith. FBR did not perform any analyses in addition to those
described above in updating the written opinion.
For its financial advisory services provided to Western Ohio, FBR has been
paid a fee of $110,000 as of the date of this document and will be paid an
additional fee at the time of closing of the merger such that the total fees
paid to FBR will equal 1.25% of the aggregate transaction value. In addition,
Western Ohio has agreed to reimburse FBR for all reasonable out-of-pocket
expenses incurred by it on Western Ohio's behalf, as well as to indemnify FBR
against certain liabilities, including any such liabilities which may arise
under the federal securities laws.
FBR is a member of the National Association of Securities Dealers and in
the conduct of its broker-dealer activities may from time to time purchase
securities from, and sell securities to, Western Ohio and/or WesBanco. FBR may
also have purchased and sold the securities of both Western Ohio and WesBanco
for FBR's own account and for the accounts of its customers. FBR has in the
past, and may in the future, seek to provide investment banking services for
WesBanco.
WESTERN OHIO'S REASONS FOR THE MERGER
Western Ohio's board of directors believes that the merger is fair to, and
in the best interests of, Western Ohio and its stockholders and has approved the
merger agreement. In reaching this determination, the Western Ohio board of
directors, without assigning any relative or specific weights, considered a
number of factors, both from a short-term and long-term perspective, including,
without limitation, the following:
- The current and prospective environment in which Western Ohio operates,
including national, state and local economic conditions, Western Ohio's
competitive environment, the increased regulatory burdens on financial
institutions generally and smaller community banks in particular, the
trend towards consolidation in the financial services industry in general
and among financial institutions in Ohio and the likely effect of the
foregoing factors on Western Ohio's potential growth, development,
productivity and profitability;
- The business, financial condition, results of operation, market
valuations and acquisition history of WesBanco and the opportunity for
Western Ohio stockholders to participate in any future growth of WesBanco
by obtaining WesBanco common stock in the merger;
- The assessment of the Western Ohio board of WesBanco's existing business,
financial condition, and results of operations, and potentially,
including, but not limited to, its capability for expansion, development,
productivity and profitability;
- A detailed study of the financial impact of the merger on Western Ohio's
stockholders which confirmed, (A) based on an exchange ratio of 1.18 and
the closing price of $31.12 for WesBanco common stock as of April 1,
2004, the last trading day before the merger was announced publicly,
Western Ohio stockholders would receive an 18.8% premium to Western
Ohio's market value of $30.91 per share of its common stock on April 1,
2004 and (B) based on a price of $35.00 cash per Western Ohio share,
Western Ohio stockholders would receive a 13.2% premium to Western Ohio's
market value of $30.91 per share of its common stock on April 1, 2004. On
a per share equivalent basis, Western Ohio's shareholders would
experience an increase in earnings per share of 51.9% in 2005 as well as
an increase in dividends of 22.3%;
33
- The anticipated tax-free treatment of the exchange of Western Ohio common
stock for WesBanco common stock for Western Ohio stockholders receiving
WesBanco common stock in the merger (except for cash in lieu of
fractional shares), (See "The Merger -- Certain Federal Income Tax
Consequences of the Merger");
- The due diligence review of WesBanco's operations, financial records,
capital position and legal matters conducted by Western Ohio's employees,
financial advisors, and attorneys;
- The presentation and analysis by FBR to Western Ohio's board of directors
on April 1, 2004, and the written opinion of FBR that, as of April 1,
2004, the merger consideration was fair to the stockholders of Western
Ohio from a financial point of view;
- The condition in the merger agreement that permits Western Ohio to
terminate the merger agreement if the average closing price of WesBanco
common stock during a specified period before receipt of the last
required regulatory approval of the merger is less than $24.896 and
WesBanco common stock underperforms an index of financial institutions by
a specified amount, unless WesBanco were to elect to make a compensating
adjustment to the exchange ratio; and
- Other benefits of the WesBanco offer including (i) the WesBanco offer
containing no collar in the event WesBanco's stock price was to increase
in the period between signing and closing and (ii) the WesBanco offer
including one board seat on WesBanco's banking subsidiary for a Western
Ohio director and seats on an advisory board for all members of Western
Ohio's board of directors;
- The ability to provide WesBanco's Wealth and Asset Management services
(Trust, Insurance and Brokerage) to existing and prospective Western Ohio
commercial and upscale retail customers that are currently not available
that would likely require significant investment of time and money to
develop at Western Ohio coupled with the ability to provide newly
developed products and services more timely and cost-effectively;
- Cornerstone Bank's ability to initially operate as a separate regional
division with selected autonomy within WesBanco's organizational
structure with the retention of the President and key managers who are
familiar with the Springfield/Dayton local commercial and retail banking
market; and
- WesBanco's intention to retain most of Western Ohio's employees.
WESBANCO'S REASONS FOR THE MERGER
The board of directors of WesBanco considered a number of reasons in voting
to approve the proposed merger. First, the merger will provide WesBanco with the
opportunity to significantly expand its existing franchise to include markets
which it perceives offer significant growth opportunities in the
Dayton-Springfield area of Ohio. Western Ohio operates in three counties in this
region, namely, Montgomery County, Clark County and Green County. Its seven
locations in these counties give access to markets with a significant population
base with a median income in excess of $40,000. Given the limited product
offerings which Cornerstone Bank has had available to offer its customers,
WesBanco believes that Cornerstone Bank, upon its merger with WesBanco Bank,
will be able to compete more effectively for commercial loans, trust and
investment services through offerings of new and alternative products not
previously offered by Cornerstone Bank. These new product offerings should
facilitate a more competitive position for Cornerstone Bank in the
Springfield-Dayton market and give it opportunities for significant expansion
and growth within that market.
Secondly, the board of directors of WesBanco considered the geographic
diversification that the Dayton-Springfield market offered to its own
stockholders by expanding into areas other than West Virginia where it currently
holds approximately 84% of its total loans. The expansion in Ohio will permit
WesBanco to approximately double its total loans outside the State of West
Virginia from 16% to approximately 32%. This shifting of assets will permit
greater economic and geographic diversification for its existing stockholders
and help insulate it from economic downturns in specific geographic markets in
which it currently operates.
Third, the board of directors noted the success that WesBanco has enjoyed
in the Columbus market in expanding its commercial lending function during the
past year by growing commercial loans in excess of
34
$60 million in the prior twelve months. Its ability to compete in that growing
market encouraged WesBanco's board to expand into other regions within close
proximity to the Columbus area to permit it to provide a regional commercial
lending effort. The acquisition of Western Ohio will assist in that endeavor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Western Ohio board of directors
with respect to the merger agreement, Western Ohio stockholders should be aware
that certain persons, including some of the directors and executive officers of
Western Ohio, have interests in the merger that are in addition to their
interests as stockholders of Western Ohio generally. The Western Ohio board was
aware of these interests and considered them in approving the merger.
Change in Control Provisions. John W. Raisbeck, the President and Chief
Executive Officer of Western Ohio, will be entitled to certain benefits as a
result of the merger under the terms of his employment agreement with Western
Ohio and under the Amended and Restated Western Ohio Financial Corporation
Deferred Compensation Plan. As a result of the merger, Mr. Raisbeck will be
entitled to receive a lump sum payment of $499,500 under the terms of his
pre-existing employment agreement with Western Ohio, his accrued and vested
balance of deferred compensation of $1.1 million due to his participation in the
plan for a number of years prior to the merger and an additional $100,000 for
bringing the transaction to successful closure, which was specifically approved
by the board of directors of Western Ohio for services to Western Ohio prior to
the execution of the merger agreement and was not contingent on the merger.
In addition, under the terms of existing employment agreements between
Western Ohio and certain of its executive officers, if the merger is consummated
and in connection with or within 12 months following the effective date of the
merger either (i) the executive's employment is terminated for any reason other
than for Cause (as defined in the respective agreements), or (ii) the executive
terminates his employment following (A) a reduction in the executive's salary,
(B) a diminution of the executive's duties or (C) a relocation of the
executive's work location of more than 60 miles from his previous work location,
the executive will be entitled to receive a lump-sum cash payment equal to the
greater of:
- two years salary, or
- the executive's applicable salary for the remaining term of his
employment agreement.
Execution of New Employment Agreements. In connection with the proposed
merger, John Raisbeck entered into an employment agreement with WesBanco,
contingent upon completion of the merger, to become WesBanco's market president
of the Springfield, Ohio market. The employment agreement is for a term of one
year and provides Mr. Raisbeck an annual base salary of at least $299,550 and
provides Mr. Raisbeck substantially the same benefits that Mr. Raisbeck received
as President and Chief Executive Officer of Western Ohio and provides certain
death and disability benefits. After the initial one-year term, the employment
period may be extended only with the mutual consent of Mr. Raisbeck and
WesBanco. After the employment period ends, Mr. Raisbeck is obligated to refrain
from competition, to observe confidentiality provisions and to provide
consulting services for an additional two years. For the two-year
non-competition, confidentiality and consulting period, Mr. Raisbeck will
receive 25 monthly payments of $10,000 each. If Mr. Raisbeck's employment is
terminated for other than Cause (as defined in the employment agreement) or he
resigns for Good Reason (as defined in the employment agreement), Mr. Raisbeck
generally will be entitled to receive the remainder of the salary he would have
received had his employment not been terminated, any unreimbursed business
expenses and unpaid accrued vacation and any other amounts he would be entitled
to under any benefit plan or by law. Mr. Raisbeck is also to be appointed to the
board of directors of WesBanco Bank for a minimum period of one year under his
employment agreement and the merger agreement.
Also in connection with the proposed merger, Robert P. Brezing, Senior Vice
President of Western Ohio, Philip R. Teusink, Vice President of Cornerstone Bank
and William E. Whitmoyer, Senior Vice President of Western Ohio, have each
entered into employment agreements with WesBanco and its banking subsidiary,
WesBanco Bank, and non-competition and confidentiality agreements with WesBanco
Bank, all of which are
35
contingent upon the consummation of the merger. Each of the employment
agreements provides for a term of two years. Messrs. Brezing, Whitmoyer and
Teusink will each receive an annual base salary in an amount to be determined by
the board of directors of WesBanco Bank, but in no event shall such amount be
less than $140,295 in the case of Mr. Brezing, $115,500 in the case of Mr.
Whitmoyer, and $95,238 in the case of Mr. Teusink. In addition, each executive
will be entitled to receive such other benefits and perquisites as WesBanco Bank
provides to its other executives. If WesBanco Bank terminates the employment of
any of Messrs. Brezing, Whitmoyer and Teusink without cause (as defined in the
employment agreements), or other than due to death of the executive or by mutual
agreement, WesBanco will be obligated to pay such person an amount equal to the
greater of (i) six months of base salary at his then current base rate or (ii)
the base salary such person would have received had he continued to be employed
through the end of the existing term of the employment agreement. The
non-competition and confidentiality agreements provide one-time payments to
Messrs. Brezing, Whitmoyer and Teusink at the closing of the merger in the
amounts of $140,295, $115,500 and $95,238, respectively.
Employee Severance Benefits. Pursuant to the merger agreement, WesBanco
has agreed to use commercially reasonable efforts to continue the employment of
most of the employees of Western Ohio and its subsidiaries after the merger. Any
employees that are not offered the opportunity to continue as employees after
the merger will be entitled to receive:
- severance compensation of not less than one week of pay for each year of
service with Western Ohio, with a minimum of four weeks of severance pay
and a maximum of 26 weeks of severance pay; and
- certain outplacement consultation services at a cost not to exceed $1,000
per employee.
Continued Board Service. Pursuant to the merger agreement, one Western
Ohio director shall be appointed to the board of directors of WesBanco Bank for
at least one year. Mr. Raisbeck is entitled to be the Western Ohio director so
appointed under his employment agreement with WesBanco. In addition, each member
of the Western Ohio board of directors at the effective time of the merger shall
be appointed to a newly created advisory board for WesBanco Bank. Each such
advisory board member shall serve for at least one year and shall receive annual
compensation in an amount equal to the amount received by such member in the
fiscal year ended December 31, 2003 for service on the Western Ohio board of
directors.
Indemnification. WesBanco has agreed that it will, following the effective
time of the merger for a period of six years, indemnify, defend, and hold
harmless the current and former directors and officers of Western Ohio against
all costs, expenses, claims, damages, or liabilities arising out of actions or
omissions occurring at or prior to the effective time of the merger to the
fullest extent permitted by applicable law, including provisions relating to
advances of expenses. The merger agreement further provides that WesBanco shall
provide six years of extended liability insurance to provide for continued
coverage of Western Ohio's directors and officers with respect to matters
occurring prior to the effective time of the merger.
Ownership by Western Ohio Officers and Directors. As of June 30, 2004,
directors and officers of Western Ohio beneficially owned, in the aggregate,
316,462 shares of Western Ohio common stock, representing approximately 17.5% of
the outstanding shares of Western Ohio common stock. All of Western Ohio's
directors and officers that own Western Ohio common stock will, as a result of
the merger, be entitled to elect to receive the same merger consideration for
each share of Western Ohio common stock owned by him or her as every other
Western Ohio stockholder. Directors and officers of Western Ohio will be treated
the same as other Western Ohio stockholders, except that they may be subject to
certain restrictions on any resale of WesBanco common stock received by them
pursuant to the merger.
REGULATORY APPROVALS
WesBanco and Western Ohio have agreed to use their best efforts to obtain
all regulatory approvals required to consummate the acquisition, which include
approval from the Board of Governors of the Federal Reserve System under the
Bank Merger Act and the Bank Holding Company Act. In reviewing applications for
transactions of this type, the Federal Reserve Board must consider, among other
factors, the financial and managerial resources and future prospects of the
existing and resulting institutions, and the convenience and
36
needs of the communities to be served. In addition, the Federal Reserve Board
may not approve a transaction if it will result in a monopoly or otherwise be
anticompetitive. Furthermore, a period of 15 to 30 days must expire following
approval by the Federal Reserve Board before completion of the merger is
allowed, within which period the United States Department of Justice may file
objections to the merger under the federal antitrust laws. While we believe that
the likelihood of objection by the Department of Justice is remote in this case,
there can be no assurance that the Department of Justice will not initiate
proceedings to block the merger or, if any proceeding is instituted, as to the
result of the challenge. On July 6, 2004, the Federal Reserve approved the
merger.
As required by the Home Owners' Loan Act and the Bank Merger Act, we
provided notice of the merger to the Office of Thrift Supervision on May 25,
2004.
The merger is also subject to the prior approval of the West Virginia Board
of Banking and Financial Institutions. On June 14, 2004, the West Virginia Board
of Banking and Financial Institutions approved the merger.
Western Ohio and WesBanco have filed all required applications for
regulatory review and approval or notice in connection with the merger. The
merger cannot proceed in the absence of the requisite regulatory approvals.
There can be no assurance that the requisite regulatory approvals will be
obtained, and if obtained, there can be no assurance as to the date of any
approval. There can also be no assurance that any regulatory approvals will not
contain a condition or requirement that causes the approvals to fail to satisfy
the condition set forth in the merger agreement and described under "The Merger
-- Conditions to the Merger."
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the cash consideration or the exchange
ratio for converting Western Ohio common stock to WesBanco common stock.
Furthermore, regulatory approvals do not constitute an endorsement or
recommendation of the merger.
APPRAISAL RIGHTS
If the merger is consummated, a holder of record of Western Ohio common
stock who properly makes a demand for appraisal, as described below, will be
entitled to have those shares appraised by the Delaware Court of Chancery under
Section 262 of the Delaware General Corporation Law and to receive payment for
the "fair value" of those shares, instead of the consideration provided for in
the merger agreement. In order to be eligible to receive this payment, however,
a Western Ohio common stockholder must (1) continue to hold his or her shares
through the effective time of the merger; (2) strictly comply with the
procedures of Section 262; and (3) not vote in favor of the merger agreement.
This proxy statement/prospectus is being sent to all holders of record of
Western Ohio common stock on the record date for the Western Ohio special
meeting and constitutes notice of the appraisal rights available to those
holders under Section 262. All references in this summary of appraisal rights to
a "stockholder" or "holder" of shares of Western Ohio common stock are to the
record holder or holders of shares of Western Ohio common stock.
The statutory right of appraisal granted by Section 262 requires strict
compliance with the procedures of Section 262. Failure to follow any of these
procedures may result in a termination or waiver of appraisal rights under
Section 262. The following is a summary of the principal provisions of Section
262. The following summary is not a complete statement of Section 262 of the
Delaware General Corporation Law, and is qualified in its entirety by reference
to Section 262, which is incorporated herein by reference. A copy of Section 262
is attached as Annex C to this proxy statement/prospectus.
A holder of Western Ohio common stock who elects to exercise appraisal
rights under Section 262 must not vote in favor of the merger and must deliver a
written demand for appraisal of such holder's shares of Western Ohio common
stock prior to the vote on the merger agreement. A vote against the merger
agreement does not constitute a demand for appraisal. The written demand must
identify the stockholder of record and state the stockholder's intention to
demand appraisal of his or her shares. All demands should be delivered to John
W. Raisbeck, President and Chief Executive Officer of Western Ohio Financial
Corporation, 28 East Main Street, Springfield, Ohio 45502.
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Only a record holder of shares of Western Ohio common stock on the date of
making a written demand for appraisal who continuously holds those shares
through the effective time of the merger is entitled to seek appraisal. Demand
for appraisal must be executed by or for the holder of record and must
reasonably inform Western Ohio of the identity of the stockholder of record. If
Western Ohio common stock is owned of record in a fiduciary capacity by a
trustee, guardian or custodian, the demand should be made in that capacity. If
Western Ohio common stock is owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be made by or for all
owners of record. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a holder of record; that agent,
however, must identify the record owner or owners and expressly disclose in the
demand that the agent is acting as agent for the record owner or owners of the
shares. If a stockholder holds shares of Western Ohio common stock through a
broker who in turn holds shares of Western Ohio common stock through a central
securities depository nominee such as Cede & Co., a demand for appraisal of such
shares must be made by or on behalf of the depository nominee and must identify
the depository nominee as record holder.
A record holder such as a broker who holds shares of Western Ohio common
stock as a nominee for beneficial owners, some of whom desire to demand
appraisal, must exercise appraisal rights on behalf of those beneficial owners
with respect to the shares of Western Ohio common stock held for those
beneficial owners. In that case, the written demand for appraisal should state
the number of shares of Western Ohio common stock covered by it. Unless a demand
for appraisal specifies a number of shares, the demand will be presumed to cover
all shares of Western Ohio common stock held in the name of the record owner.
Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply with the statutory
requirements with respect to the exercise of appraisal rights before the date of
the Western Ohio special meeting.
Within 10 days after the effective date of the merger, the surviving
corporation to the merger is required to send notice of the adoption of the
merger agreement to all stockholders who have complied with Section 262 and who
have not voted in favor of the merger.
Within 120 days after the effective date of the merger, the surviving
corporation or any stockholder who has complied with the requirements of Section
262 may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the shares of Western Ohio common stock held
by all stockholders seeking appraisal. A dissenting stockholder must serve a
copy of the petition on the surviving corporation. If no petition is filed by
either the surviving corporation or any dissenting stockholder within the
120-day period, the rights of all dissenting stockholders to appraisal will
cease. Stockholders seeking to exercise appraisal rights should assume that the
surviving corporation will not file a petition with respect to the appraisal of
the fair value of their shares and should not assume that the surviving
corporation will initiate any negotiations with respect to the fair value of
those shares. The surviving corporation is under no obligation to and has no
present intention to take any action in this regard. Accordingly, stockholders
who wish to seek appraisal of their shares should initiate all necessary action
with respect to the perfection of their appraisal rights within the time periods
and in the manner prescribed in Section 262. Failure to file the petition on a
timely basis will cause the stockholder's right to an appraisal to cease.
Within 120 days after the effective date of the merger, any stockholder who
has complied with subsections (a) and (d) of Section 262 is entitled, upon
written request, to receive from the surviving corporation a statement setting
forth the total number of shares of Western Ohio common stock not voted in favor
of the merger agreement with respect to which demands for appraisal have been
received by the surviving corporation and the number of holders of those shares.
The statement must be mailed within 10 days after the surviving corporation has
received the written request or within 10 days after the time for delivery of
demands for appraisal under subsection (d) of Section 262 has expired, whichever
is later.
If a petition for appraisal is duly filed by a stockholder, a copy of the
petition will be delivered to the surviving corporation, which will then be
obligated, within 20 days after receiving service of a copy of the petition, to
provide the Delaware Court of Chancery with a duly verified list containing the
names and addresses of all stockholders who have demanded an appraisal of their
shares of Western Ohio common stock. After notice to dissenting stockholders,
the Delaware Court of Chancery is empowered to conduct a hearing
38
upon the petition, and to determine those stockholders who have complied with
Section 262 and who have become entitled to the appraisal rights provided
thereby. The Delaware Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Delaware Court may dismiss the
proceedings as to such stockholder. Where proceedings are not dismissed, the
court will determine the fair value of those shares, exclusive of any element of
value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, to be paid, if any, upon the fair value.
Stockholders who consider seeking appraisal should consider that the fair
value of their shares under Section 262 could be more than, the same as, or less
than, the value of the consideration provided for in the merger agreement
without the exercise of appraisal rights. Moreover, WesBanco and Western Ohio do
not anticipate that the surviving corporation will offer more than the merger
consideration to any stockholder exercising appraisal rights and reserve the
right to assert, in any appraisal proceeding, that, for purposes of Section 262,
the "fair value" of a share of Western Ohio common stock is less than the merger
consideration. In determining "fair value", the Delaware Court is required to
take into account all relevant factors. In Weinberger v. UOP, Inc. the Delaware
Supreme Court discussed the factors that could be considered in determining fair
value in an appraisal proceeding, stating that "proof of value by any techniques
or methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered and that "[f]air price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other facts
which could be ascertained as of the date of the merger which throw any light on
future prospects of the merged corporation. Section 262 provides that fair value
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger." In Cede & Co. v. Technicolor, Inc., the Delaware
Supreme Court stated that such exclusion is a "narrow exclusion [that] does not
encompass known elements of value," but which rather applies only to the
speculative elements of value arising from such accomplishment or expectation.
In Weinberger, the Delaware Supreme Court construed Section 262 to mean that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." The Court of Chancery may determine the cost
of the appraisal proceeding and assess it against the parties as the Court deems
equitable. However, costs do not include attorneys' and expert witness fees.
Upon application of a dissenting stockholder, the Court may order that all or a
portion of the expenses incurred by any dissenting stockholder in connection
with the appraisal proceeding (including, without limitation, reasonable
attorney's fees and the fees and expenses of experts) be charged pro rata
against the value of all shares of Western Ohio common stock entitled to
appraisal. In the absence of a court determination or assessment, each party
bears its own expenses.
Any stockholder who has demanded appraisal in compliance with Section 262
will not, after the merger, be entitled to vote such stockholder's Western Ohio
common stock for any purpose or receive payment of dividends or other
distributions, if any, on the Western Ohio common stock, except for dividends or
distributions, if any, payable to stockholders of record at a date prior to the
effective time of the merger.
A stockholder may withdraw a demand for appraisal and accept the
consideration payable pursuant to the merger agreement at any time within 60
days after the effective time of the merger; after this period, the stockholder
may withdraw such demand for appraisal only with the consent of the surviving
corporation. If an appraisal proceeding is properly instituted, it may not be
dismissed as to any stockholder without the approval of the Delaware Court of
Chancery, and any such approval may be conditioned on the Court of Chancery's
deeming the terms to be just. If, after the merger, a holder of Western Ohio
common stock who had demanded appraisal for such holder's shares fails to
perfect or loses the right to appraisal, those shares will be treated as if they
were converted into the consideration payable pursuant to the merger agreement
at the time of the merger.
In view of the complexity of these provisions of the Delaware General
Corporation Law, any Western Ohio stockholder who is considering exercising
appraisal rights should consult a legal advisor.
39
RESTRICTIONS ON RESALES BY AFFILIATES OF WESTERN OHIO
The shares of WesBanco common stock that you will receive in the merger
will be registered under the Securities Act of 1933. Such shares may be traded
freely and without restriction by those stockholders not deemed to be
"affiliates" of Western Ohio or WesBanco as that term is defined under the
Securities Act of 1933.
If you are an affiliate of Western Ohio before the merger or an affiliate
of WesBanco after the merger, you may resell the shares of WesBanco common stock
issued to you in the merger only:
- pursuant to an effective registration statement;
- pursuant to Rule 145 under the Securities Act of 1933; or
- in transactions exempt from registration.
An "affiliate" of Western Ohio, as defined by the rules promulgated
pursuant to the Securities Act, is a person who directly, or indirectly through
one or more intermediaries, controls, is controlled by, or is under common
control with Western Ohio. The foregoing restrictions are expected to apply to
the directors, executive officers, and the beneficial holders of 10% or more of
the shares of Western Ohio common stock (and to certain relatives or the spouse
of any such person and any trusts, estates, corporations, or other entities in
which any such person has a 10% or greater beneficial or equity interest). Stop
transfer instructions will be given by WesBanco to its transfer agent with
respect to the WesBanco common stock to be received by persons subject to the
restrictions described above. Western Ohio has agreed to use its diligent
efforts to obtain from each of those persons identified by Western Ohio as its
affiliates appropriate agreements that each such individual will not make any
sales of shares of WesBanco common stock received upon consummation of the
merger, except in compliance with the restrictions described in this paragraph.
WesBanco is not obligated and does not intend to register for resale the shares
issued to affiliates of Western Ohio.
ACCOUNTING TREATMENT
WesBanco will account for the merger using the purchase method of
accounting. Under this method of accounting, WesBanco will record the estimated
fair value of Western Ohio's assets and liabilities on its financial statements.
The difference between the purchase price paid by WesBanco and the estimated
fair value of Western Ohio's tangible and identifiable intangible assets net of
its liabilities will be recorded on WesBanco's books as goodwill. The
application of this accounting treatment is shown in the unaudited pro forma
condensed combined financial information included on pages 14 through 18 of this
proxy statement/ prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion addresses the material United States federal
income tax consequences of the merger to holders of Western Ohio common stock.
The discussion is based on the Tax Code, Treasury regulations promulgated
thereunder, administrative rulings and judicial decisions, all as currently in
effect and all of which are subject to change (possibly with retroactive effect)
and to differing interpretations. This discussion applies only to Western Ohio
stockholders that hold their Western Ohio common stock as a capital asset within
the meaning of Section 1221 of the Tax Code. This discussion does not address
all aspects of United States federal taxation that may be relevant to a
particular shareholder in light of its personal circumstances or to shareholders
subject to special treatment under the United States federal income tax laws,
including:
- banks or trusts,
- tax-exempt organizations,
- insurance companies,
- dealers in securities or foreign currency,
40
- traders in securities who elect to apply a mark-to-market method of
accounting,
- pass-through entities and investors in such entities,
- foreign persons,
- shareholders who received their Western Ohio common stock through the
exercise of employee stock options, through a tax-qualified retirement
plan or otherwise as compensation, and
- shareholders who hold Western Ohio common stock as part of a hedge,
straddle, constructive sale, conversion transaction or other integrated
investment.
In addition, the discussion does not address any alternative minimum tax or
any state, local or foreign tax consequences of the merger.
EACH HOLDER OF WESTERN OHIO COMMON STOCK SHOULD CONSULT ITS TAX ADVISOR WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER.
The merger is conditioned upon receipt at the closing of legal opinions
from Kirkpatrick & Lockhart LLP, tax counsel to WesBanco, and Katten Muchin
Zavis Rosenman, counsel to Western Ohio, to the effect that, on the basis of the
facts, assumptions, and representations set forth in such opinion and
certificates to be obtained from officers of WesBanco and Western Ohio, the
merger will qualify as a "reorganization" within the meaning of Section 368(a)
of the Tax Code and each of WesBanco and Western Ohio will be a "party" to the
reorganization within the meaning of Section 368(b) of the Tax Code. Neither of
these opinions is binding on the Internal Revenue Service or the courts, and
neither Western Ohio nor WesBanco intends to request a ruling from the Internal
Revenue Service regarding the United States federal income tax consequences of
the merger. Consequently, no assurance can be given that the Internal Revenue
Service will not assert, or that a court would not sustain, a position contrary
to any of those set forth below. In addition, if any of the representations or
assumptions upon which such opinions are based is inconsistent with the actual
facts, the United States federal income tax consequences of the merger could be
adversely affected.
In this regard, WesBanco has represented that the aggregate value of the
WesBanco common stock to be received by Western Ohio stockholders in the merger
will not be less than 42.5% of the aggregate value of the total consideration
received by the Western Ohio stockholders in the merger. If this representation
is not true as of the closing, Kirkpatrick & Lockhart LLP and Katten Muchin
Zavis Rosenman may be unable to render the opinions upon which the closing is
conditioned.
As of the date of this Proxy Statement/Prospectus, each of WesBanco and
Western Ohio believes that all of these representations and assumptions are now,
and will be at, as of, and after the time the merger becomes effective,
accurate; however, the representation regarding the relative value of our stock
to the aggregate consideration to be received by the holders of Western Ohio in
the merger can be made only at the close of business on the effective date of
the merger. If either WesBanco or Western Ohio learns at or before that time
that the representations and the assumptions are false or materially incorrect
and that its counsel therefore believes that the merger is unlikely to be
treated as a tax-free reorganization, then additional stockholder approval will
be obtained before consummation of the merger.
The remainder of this discussion assumes that the merger will qualify as a
"reorganization" within the meaning of Section 368(a) of the Tax Code.
The United States federal income tax consequences of the merger to a
Western Ohio stockholder generally will depend on whether the stockholder
exchanges its Western Ohio common stock for cash, WesBanco common stock or a
combination of cash and WesBanco common stock.
Receipt of Cash Only
Gain or Loss. In general, a Western Ohio stockholder who, pursuant to the
merger, receives only cash in exchange for Western Ohio common stock will
recognize capital gain or loss equal to the difference between the amount of
cash received and such Western Ohio stockholder's adjusted tax basis in the
Western
41
Ohio common stock shares surrendered (unless the Western Ohio stockholder
actually or constructively owns WesBanco common stock and the receipt of cash
has the effect of the distribution of a dividend for U.S. federal income tax
purposes as discussed below under "-- Receipt of WesBanco Common Stock and
Cash"). Such gain or loss will be long-term capital gain or loss if, as of the
effective date of the merger, the holding period for such Western Ohio common
stock shares is more than one year.
Receipt of WesBanco Common Stock Only
No Gain or Loss. A Western Ohio stockholder who, pursuant to the merger,
receives only WesBanco common stock in exchange for Western Ohio common stock
will not recognize any gain or loss upon such exchange, except in respect of
cash received in lieu of a fractional share of WesBanco common stock (as
discussed below under "-- Cash in Lieu of a Fractional Share").
Tax Basis. The aggregate adjusted tax basis of WesBanco common stock
received in the merger generally will be equal to the aggregate adjusted tax
basis of the Western Ohio common stock surrendered therefor, decreased by the
amount of any tax basis allocable to any fractional share interest in WesBanco
common stock for which cash is received.
Holding Period. The holding period of WesBanco common stock received in
the merger will include the period during which the shares of Western Ohio
common stock were held.
Receipt of WesBanco Common Stock and Cash
Gain But No Loss. A Western Ohio stockholder who, pursuant to the merger,
receives a combination of cash and WesBanco common stock in exchange for Western
Ohio common stock will recognize gain, but not loss in an amount equal to the
lesser of:
- the amount of gain realized with respect to the Western Ohio common
stock; and
- the amount of cash received (other than cash received in lieu of a
fractional share of WesBanco common stock, which will be taxed as
discussed below under "-- Cash in Lieu of a Fractional Share").
The amount of gain realized with respect to the Western Ohio common stock
exchanged will equal the excess, if any, of:
- the sum of the cash received plus the fair market value of WesBanco
common stock received over
- the Western Ohio stockholder's adjusted tax basis in such Western Ohio
common stock shares.
For this purpose, gain or loss must be calculated separately for each
identifiable block of shares of Western Ohio common stock surrendered in the
merger, and a loss realized on one block of shares may not be used to offset a
gain realized on another block of shares. Holders should consult their tax
advisors regarding the manner in which cash and WesBanco common stock shares
should be allocated among different blocks of their Western Ohio common stock
shares surrendered in the merger.
Any gain recognized will be treated as capital gain unless, as discussed
below under "-- Possible Treatment of Cash as a Dividend," the receipt of the
cash has the effect of the distribution of a dividend for U.S. federal income
tax purposes, in which case such gain will be treated as ordinary dividend
income to the extent of the Western Ohio stockholder's ratable share of
accumulated earnings and profits of WesBanco. Any capital gain will be long-term
capital gain if, as of the date of the exchange, the holding period for the
shares of Western Ohio common stock exchanged is more than one year.
Tax Basis. The aggregate adjusted tax basis of WesBanco common stock
received in the merger generally will be equal to the aggregate adjusted tax
basis of the shares of Western Ohio common stock surrendered in the merger,
reduced by the amount of cash received by the holder in the merger (excluding
any cash received instead of a fractional share), and increased by the amount of
gain recognized by the holder in the merger (including any portion of the gain
that is treated as a dividend, as described below under "-- Possible Treatment
of Cash as a Dividend," but excluding any gain or loss resulting from fractional
shares).
42
Holding Period. The holding period of WesBanco common stock received in
the merger will include the holding period of the Western Ohio common stock
exchanged therefor.
Possible Treatment of Cash as a Dividend. For purposes of this
determination, the holder of Western Ohio common stock is treated as if it first
exchanged all of its shares of Western Ohio common stock solely for WesBanco
common stock and then WesBanco immediately redeemed a portion of the WesBanco
common stock in exchange for the cash the holder actually received. The gain
recognized in this deemed redemption will be treated as capital gain, and not as
dividend if the deemed redemption is (1) "substantially disproportionate" with
respect to the holder or, (2) "not essentially equivalent to a dividend" (i.e.,
the deemed redemption results in a "meaningful reduction" in the Western Ohio
stockholder's interest in WesBanco common stock). The exchange would be
substantially disproportionate with respect to the holder if the holder's
percentage interest in WesBanco common stock (including stock constructively
owned by the holder) immediately after the merger is less than 80% of what the
percentage interest would have been if, hypothetically, the holder had elected
to receive solely WesBanco common stock in exchange for all Western Ohio common
stock shares owned or constructively owned by the holder before the merger.
Whether an exchange would result in a meaningful reduction depends on the
particular Western Ohio stockholder's facts and circumstances. The Internal
Revenue Service has ruled that a shareholder in a publicly held corporation
whose stock interest is minimal (e.g., less than 1%) and who exercises no
control with respect to corporate affairs can be considered to have a
"meaningful reduction" if that shareholder has a minor reduction in its
percentage stock ownership in the deemed redemption. Accordingly, the gain
recognized in the deemed exchange by such a shareholder would be treated as
capital gain. In determining a Western Ohio stockholder's interest in WesBanco
common stock, the Western Ohio stockholder would be deemed to own any shares of
WesBanco common stock owned, or constructively owned, by certain persons related
to such Western Ohio stockholder or that are subject to an option held by the
Western Ohio stockholder or a related person.
These rules are complex and dependent upon the specific factual
circumstances particular to each Western Ohio stockholder. Additionally, if
pro-ration of the merger consideration occurs, the risk of unintended dividend
characterization may be increased. Consequently, each holder should consult its
tax advisor as to the application of these rules to the particular facts
relevant to such holder. Western Ohio stockholders that are corporations should
consult their tax advisors regarding their eligibility for a dividends received
deduction and the treatment of the dividend as an "extraordinary dividend" under
section 1059 of the Tax Code.
Cash Received in Lieu of a Fractional Share of WesBanco Common Stock
A Western Ohio stockholder who receives cash instead of a fractional share
of WesBanco common stock will generally be treated as having received such
fractional share and then as having received such cash in redemption of that
fractional share by WesBanco. A Western Ohio stockholder who receives cash in
lieu of a fractional share of WesBanco common stock and who does not otherwise
hold shares of WesBanco common stock generally will recognize gain or loss equal
to the difference between the amount of cash received and the Western Ohio
stockholder's tax basis in such fractional share. Such gain or loss will be
long-term capital gain or loss if, as of the date of the exchange, the holding
period for such shares is more than one year. Western Ohio stockholders who
separately hold shares of WesBanco common stock should consult their own tax
advisors concerning the treatment of cash received for a fractional share.
Reporting Requirements
A holder of Western Ohio common stock receiving WesBanco common stock as a
result of the merger may be required to retain records related to such holder's
Western Ohio common stock and file with its United States federal income tax
return a statement setting forth certain facts relating to the merger.
The foregoing discussion is intended only as a summary and does not purport
to be a complete analysis or listing of all potential U.S. federal income tax
consequences of the merger.
43
YOU ARE URGED TO CONSULT YOUR TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO YOU.
CONDUCT OF BUSINESS PRIOR TO THE MERGER
Pursuant to the merger agreement, Western Ohio and WesBanco have agreed
that, until the merger becomes effective or the merger agreement is terminated,
whichever occurs first, each will, with some exceptions:
- use its best efforts to take, or cause to be taken, all necessary actions
required to consummate the transactions contemplated by the merger
agreement;
- take all necessary steps to exempt the merger agreement and the merger
from applicable anti-takeover laws and charter provisions;
- cooperate in furnishing information for the preparation and filing of the
proxy statement/prospectus;
- cooperate in the filing of any regulatory applications with respect to
the merger; and
- advise the other party of any material breaches of the representations
and warranties, covenants or conditions contained in the merger agreement
or any event that is reasonably likely to have a material adverse effect
on the party.
In addition, Western Ohio has agreed that:
- it will conduct and cause each of its subsidiaries to conduct their
respective businesses only in the ordinary and usual course consistent
with past practice and not in a manner inconsistent with any
representation or warranty contained in the merger agreement;
- it will not sell, transfer, mortgage, pledge, or subject any of its
material assets to a lien or other encumbrance except for (A) internal
reorganizations or consolidations involving existing subsidiaries that
would not be likely to present a material risk of any material delay in
the receipt of any required regulatory approval, (B) securitization
activities in the ordinary course of business and (C) other dispositions
of assets, including subsidiaries, if the fair market value of the total
consideration received therefrom does not exceed in the aggregate,
$50,000;
- it will not make any capital expenditures, additions or betterments which
individually exceed $100,000 or exceed $500,000 in the aggregate and
which otherwise are in any manner inconsistent in any material respect
with Western Ohio's 2004 capital budget;
- it will not enter into any material contract that would be reasonably
likely to (A) have a material adverse effect on Western Ohio, (B)
materially impair Western Ohio's ability to perform its obligations under
the merger agreement or (C) prevent or materially delay the consummation
of the transactions contemplated by the merger agreement;
- it will not declare or pay any dividends or other distributions on any
shares of Western Ohio common stock other than Western Ohio's regular
quarterly dividend of $0.25 per share and dividends by a subsidiary of
Western Ohio to its parent;
- it will not purchase, redeem or otherwise acquire any Western Ohio
capital stock other than pursuant to repurchase rights of Western Ohio or
certain put rights granted to employees or former employees of Western
Ohio;
- it will not issue or grant any options or other rights to acquire shares
of Western Ohio capital stock or its voting debt other than (A) the
issuance of Western Ohio common stock pursuant to the existing warrants
or options and (B) certain issuances by a subsidiary of Western Ohio;
- it will not amend its Certificate of Incorporation or Bylaws, except as
expressly contemplated by the merger agreement or so required by
regulatory agencies;
- it will not merge or consolidate with any other person or otherwise
reorganize;
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- it will not acquire any portion of the assets, business, deposits or
properties of any other entity other than (A) by way of foreclosures, (B)
acquisitions of control in a bona fide fiduciary capacity or in
satisfaction of debts previously contracted in good faith, in each case
in the ordinary and usual course of business consistent with past
practice and (C) internal reorganizations or consolidations involving
existing subsidiaries that would not be likely to present a material risk
of any material delay in the receipt of any required regulatory approval;
- other than in the ordinary course of business and except as required by
law or certain existing contractual obligations, it will not adopt or
amend any pension, retirement, stock option, stock purchase, savings,
profit-sharing, deferred compensation, consulting, bonus, group insurance
or other employee benefit, incentive or welfare plan (or similar
arrangement);
- with certain exceptions, it will not increase any compensation or
benefits payable to its officers or employees;
- it will not incur or guarantee certain long-term indebtedness or issue
long-term debt securities other than (i) in replacement of existing or
maturing debt, (ii) certain indebtedness of its subsidiaries, or (iii) in
the ordinary course of business consistent with past practice;
- except as previously publicly disclosed, it will not change its
accounting principles, practices or methods, other than as may be
required by GAAP, or the rules and regulations of the SEC or Nasdaq;
- it will not change its existing deposit policy, incur deposit
liabilities, other than deposit liabilities incurred in the ordinary
course of business consistent with past practice, or accept any brokered
deposit having a maturity longer than 365 days, other than in the
ordinary course of business;
- sell, purchase, enter into a lease, relocate, open or close any banking
or other office, or file any application pertaining to such action with
any regulatory authority;
- it will not change any of its commercial or consumer loan policies in any
material respect or make any material exceptions thereto, unless so
required by applicable law;
- it will not purchase any mortgage loan servicing rights;
- it will, and will cause its subsidiaries to, use their commercially
reasonable efforts to maintain and keep their respective properties and
facilities in their present condition and working order, ordinary wear
and tear excepted, except with respect to such properties and facilities,
the loss of which would not reasonably be expected to have a material
adverse effect on Western Ohio;
- it will, and will cause its subsidiaries to, perform all of their
obligations under all agreements relating to or affecting their
respective properties, rights and businesses, except where nonperformance
would not have a material adverse effect on Western Ohio;
- it will, and will cause its subsidiaries to, use their commercially
reasonable efforts to maintain and preserve their respective business
organizations intact, to retain present key employees and to maintain the
respective relationships of customers, suppliers and others having
business relationships with them;
- it will maintain its insurance at existing levels;
- it will provide WesBanco with a schedule of all persons Western Ohio
believes to be affiliates of Western Ohio under Rule 145 of the
Securities Act of 1933 no later than the 15th day prior to the mailing of
this proxy statement/prospectus, and will use its diligent efforts to
cause each of those persons to execute and deliver an affiliate letter to
WesBanco; and
- it will not, and will not permit any person acting on its behalf to,
solicit, initiate or knowingly encourage or participate in any
discussions or furnish any information with respect to any proposal that
is reasonably likely to lead to the acquisition of (A) assets or
businesses constituting 20% or more of the total consolidated revenues or
assets of Western Ohio and its subsidiaries or (B) 20% or more of Western
Ohio's common stock.
45
In addition, WesBanco has further agreed that:
- it will use commercially reasonable efforts to continue the employment of
the employees of Western Ohio and its subsidiaries and, for those
employees whose employment is not continued, WesBanco will provide those
individuals with certain benefits;
- it will honor each of the employment agreements as in effect with each of
Western Ohio's subsidiaries;
- it will permit Western Ohio to create a retention bonus pool to encourage
the senior management of Western Ohio to continue their employment
through the effective time of the merger;
- it will use commercially reasonable efforts to cause the shares of
WesBanco common stock to be issued in the merger to be approved for
listing on Nasdaq;
- it will provide certain indemnification to the directors and officers of
Western Ohio and its subsidiaries for a period of six years after the
effective time of the merger;
- it will cause one director of Western Ohio to be appointed to the board
of directors of WesBanco Bank for a term of at least one year after the
effective date of the merger; and
- it will create an advisory board to which each director of Western Ohio
will be appointed for at least one year and will receive annual
compensation equal to which such directors received during the fiscal
year ended December 31, 2003.
CONDITIONS TO THE MERGER
The respective obligations of Western Ohio and WesBanco to effect the
merger are subject to the following conditions, among others:
- the approval of the merger agreement by the stockholders of Western Ohio;
- the absence of any order to restrain, enjoin, or otherwise prevent the
consummation of the merger entered by any court or administrative body
which remains in effect on the date the merger closes;
- the effective status of the Registration Statement on the date the merger
closes;
- the absence of a pending or threatened stop order or proceedings seeking
a stop order suspending the effectiveness of the Registration Statement
or any amendments thereto;
- the receipt of all material governmental or other consents, approvals,
and permissions;
- the receipt of all consents required by the merger agreement to be
obtained by WesBanco and Western Ohio;
- on or before the date the merger closes, the receipt of an opinion from
each party's tax counsel to the effect that for federal income tax
purposes the merger will be treated as a tax-free reorganization within
the meaning of Section 368 of the Internal Revenue Code, and regarding
certain other tax matters;
- the accuracy in all material respects of the representations and
warranties of the parties and the performance by the parties in all
material respects of all of their obligations set forth in the merger
agreement, and the receipt of a certificate from an appropriate officer
certifying the foregoing;
- the receipt of legal opinions from the parties' counsel;
- the shares of WesBanco common stock to be issued in the merger shall have
been approved for listing on Nasdaq;
- the parties shall be satisfied with the deductibility of certain payments
to be made to John W. Raisbeck in connection with the merger;
- Western Ohio's subsidiary shall have entered into certain agreements with
certain of Western Ohio's senior executives; and
46
- the delivery of certified copies of the resolutions duly adopted by the
boards of directors and the stockholders of Western Ohio, WOFC, Inc. and
WesBanco Bank, and the board of directors of WesBanco approving the
merger agreement and authorizing the transactions contemplated therein.
In addition to the conditions discussed above, WesBanco's obligation to
consummate the merger is conditioned upon in the aggregate, an amount of less
than 10% percent WesBanco common stock to be issued in the merger being (i)
subject to purchase as fractional shares, and (ii) proposed to be issued to
Western Ohio stockholders who have perfected their appraisal rights.
The consummation of the merger by Western Ohio is also conditioned upon
Western Ohio having received from its financial advisor an opinion reasonably
acceptable to Western Ohio, dated as of the date of the first mailing of this
proxy statement/prospectus, to the effect that the consideration to be received
by Western Ohio stockholders in the merger is fair, from a financial point of
view.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the closing of
the merger, either before or after the special meeting of Western Ohio
stockholders:
- by mutual consent of Western Ohio and WesBanco;
- by either Western Ohio or WesBanco if any of the conditions to such
party's obligations to close under the merger agreement have not been met
as of the date the merger is to close and such conditions have not been
waived by the party adversely affected thereby;
- by either Western Ohio or WesBanco if the merger will violate any
non-appealable final order, decree, or judgment of any court or
governmental body having competent jurisdiction;
- by either Western Ohio or WesBanco if the merger has not closed by
December 31, 2004; and
- by either Western Ohio or WesBanco in the event that the stockholders of
Western Ohio do not adopt the merger agreement by the requisite vote at
the special meeting or any adjournment thereof.
In addition, Western Ohio may terminate the merger agreement:
- in order to enter into an agreement with respect to an unsolicited
proposal that if consummated would result in a transaction more favorable
to Western Ohio's stockholders from a financial point of view, provided
that WesBanco does not make a counteroffer that is at least as favorable
to the other proposal and Western Ohio pays the termination fee described
below;
- if Western Ohio's financial advisor shall have refused to deliver the
required fairness opinion as of the date of first mailing of this proxy
statement/prospectus;
- during the five-day period ("Election Period") commencing on the first
day following the date on which all governmental approvals have been
obtained (the "Approval Date"), if each of the following conditions is
satisfied:
(i) the average daily per share closing prices of WesBanco's common
stock during the twenty trading days preceding Approval Date (the "WesBanco
Ending Price") is less than $24.896;
(ii) the quotient obtained by dividing the WesBanco Ending Price by
$31.12 (the "WesBanco Starting Price") is less than the difference obtained
by subtracting 0.20 from the quotient obtained by dividing the Index Price
on the Approval Date by the Index Price on April 1, 2004 (the term "Index
Price" is defined in the following paragraph);
(iii) Western Ohio notifies WesBanco of Western Ohio's intention to
terminate the merger agreement during the Election Period; and
(iv) WesBanco elects not to increase the exchange ratio in accordance
with the formula described below within the five-day period following its
receipt of notice that Western Ohio intends to so terminate the merger
agreement.
47
The "Index Price" on a particular date means the closing value of the
Nasdaq Bank Index as reported on Bloomberg.com.
The Western Ohio board of directors has made no decision as to whether it
would elect to terminate the merger agreement in the event the first two
conditions described above are satisfied. Any such decision would be made by the
Western Ohio board of directors in light of the circumstances existing at the
time. Prior to making any determination to elect to terminate the merger
agreement, the Western Ohio board of directors would consult with its financial
and other advisors and would consider all financial and other information it
deemed relevant to its decision. In this regard, the Western Ohio board of
directors would consider many of the same factors that it considered in
determining whether to approve and adopt the merger agreement, including the
principal factors discussed under "The Merger -- Western Ohio's Reasons for the
Merger." In particular, the Western Ohio board of directors would analyze, among
other factors, whether the then current consideration to be received in the
merger would deliver more value to Western Ohio stockholders than the value that
could be expected in the event Western Ohio were to continue as an independent
company (which would occur if the Western Ohio board of directors were to elect
to abandon the merger and WesBanco determined not to increase the exchange
ratio). In addition, the Western Ohio board of directors would consider whether,
in light of market and other industry conditions at the time of such decision,
the exchange ratio continued to be fair from a financial point of view to
Western Ohio's stockholders. There can be no assurance that the Western Ohio
board of directors would exercise its right to terminate the merger agreement if
the first two conditions set forth above were satisfied. If Western Ohio elected
not to terminate the merger agreement, which it could do without any action on
the part of Western Ohio stockholders, the exchange ratio of WesBanco common
stock would remain 1.18.
If each of the first two conditions set forth above were satisfied and the
Western Ohio board of directors were to elect to terminate the merger agreement,
WesBanco would then have the option of increasing the consideration payable to
Western Ohio stockholders by adjusting the exchange ratio in the manner
described below. WesBanco would be under no obligation to adjust the exchange
ratio and there can be no assurance that WesBanco would elect to adjust the
exchange ratio if Western Ohio were to exercise its option to terminate the
merger agreement. Any such decision would be made by WesBanco in light of the
circumstances existing at the time. If WesBanco were to elect to adjust the
exchange ratio, Western Ohio would then not have any right to terminate the
merger agreement as a result of the above-described circumstances, and the
merger agreement would remain in effect, with the adjusted exchange ratio.
The operation of the conditions permitting Western Ohio to terminate the
merger agreement based on a decrease in the market price of the WesBanco common
stock reflects the parties' agreement that Western Ohio stockholders would
assume the risk of a decline in value of the WesBanco common stock to $24.896
per share under any circumstances and that such stockholders would assume the
risk of a more significant decline in value of the WesBanco common stock unless
the percentage decline in the value of the WesBanco common stock from $31.12 to
the average value of WesBanco common stock during the twenty day period
immediately preceding the Approval Date is more than 20 percentage points
greater than the percentage decrease, if any, in the Index Price from April 1,
2004 to the Approval Date. The premise of this agreement is that a decline in
the value of WesBanco's common stock which is comparable to the decline in the
value of an index of comparable publicly-traded stocks is indicative of a
broad-based change in market and economic conditions affecting the financial
services industry generally rather than factors which affect the value of the
WesBanco common stock in particular.
The operation and effect of the provisions of the merger agreement dealing
with a decline in the market price of WesBanco's common stock may be illustrated
by the following three scenarios:
(1) One scenario is that the WesBanco Ending Price is above $24.896. In
this event, there would be no adjustment to the 1.18 exchange ratio and Western
Ohio would be obligated to consummate the merger regardless of the change in the
Index Price (assuming all other conditions to Western Ohio's obligations were
satisfied or waived).
(2) A second scenario is that the WesBanco Ending Price is less than
$24.896 but that the percentage decline in the price of the WesBanco common
stock from the initial measurement price of $31.12 is not more
48
than 20 percentage points greater than the percentage decline, if any, in the
Index Price. Under such circumstances, there would be no adjustment to the 1.18
exchange ratio and Western Ohio would be obligated to consummate the merger
(assuming all other conditions to Western Ohio's obligations were satisfied or
waived).
(3) A third scenario is that the WesBanco Ending Price is less than $24.896
and the percentage decline in the price of WesBanco common stock from the
initial measurement price is more than 20 percentage points greater than the
decline in the Index Price. Under such circumstances, Western Ohio would have
the right, but not the obligation, to terminate the merger agreement unless
WesBanco elected to increase the exchange ratio to the lesser of:
- the number obtained by dividing (A) $29.377 (the product of the WesBanco
Starting Price, 0.80 and the exchange ratio of 1.18) by (B) the WesBanco
Ending Price; and
- the number equal to the product of the exchange ratio multiplied by a
fraction, the numerator of which is the number obtained by subtracting
0.20 from the quotient obtained by dividing the Index Price on the
Approval Date by the Index Price on April 1, 2004, and the denominator of
which is the price determined in the bullet above divided by the WesBanco
Starting Price.
For example, if the WesBanco Ending Price was $23.00 and the Index Price
was 2,966.47 on April 1, 2004 and 2,900 on the Approval Date, Western Ohio would
have the right to elect to terminate the merger agreement because (i) the
WesBanco Ending Price would be less than $24.896 and (ii) the WesBanco Ending
Price divided by the WesBanco Starting Price ($23.00/$31.12 = .74) would be less
than the difference obtained by subtracting 0.20 from the quotient obtained by
dividing the Index Price on the Approval Date by the Index Price on April 1,
2004 ((2,900/2,966.47)-0.20 = 0.78). If Western Ohio were to exercise its right
to terminate the merger agreement under such circumstances, WesBanco would have
the option to increase the exchange ratio to the lesser of (i) 1.277 (the number
determined by dividing $29.377 by the $23.00 WesBanco Ending Price), and (ii)
1.241 (the number determined by multiplying 1.18 (the exchange ratio) by a
fraction, the numerator of which is 0.78 (the Index Price on the Approval Date
(2,900) divided by the Index Price on April 1, 2004 (2,966.47) less 0.20) and
the denominator of which is .74 (the WesBanco Ending Price ($23.00) divided by
the WesBanco Starting Price ($31.12))). If WesBanco exercised its option to
adjust the exchange ratio, the exchange ratio would be 1.241 and Western Ohio
would be obligated to consummate the merger (assuming all other conditions to
Western Ohio's obligations were satisfied or waived).
If, between the April 1, 2004 and the Approval Date, WesBanco declares or
effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares or similar transaction, the prices for the
common stock of WesBanco shall be appropriately adjusted for purposes of the
above-discussed termination provision.
In the event of any termination of the merger agreement by either Western
Ohio or WesBanco as provided above, all further obligations of Western Ohio and
WesBanco under the merger agreement, except with respect to specified matters,
including without limitation those related to confidentiality and expenses, will
terminate without further liability of the parties.
EXPENSES
Whether or not the merger is consummated, all legal and accounting fees,
and other costs and expenses incurred in connection with the merger agreement
and the transactions contemplated therein, will be paid by the party incurring
such expenses. WesBanco will pay all governmental and regulatory authority fees
incurred in connection with the transactions contemplated by the merger
agreement. If the merger agreement is terminated because the parties fail to
obtain Federal Reserve Board approval, WesBanco will reimburse Western Ohio for
its out-of-pocket costs and expenses incurred in connection with the merger
agreement and the transactions contemplated by the merger agreement.
49
TERMINATION FEE
Western Ohio will pay WesBanco a termination fee in the amount of
$2,500,000 under the following circumstances:
- if Western Ohio enters into any agreement in respect of an acquisition
proposal prior to termination of the merger agreement or within six
months after termination of the merger agreement and if the merger
agreement is terminated because the Western Ohio stockholders failed to
approve the merger agreement or because Western Ohio breached any of its
representations and warranties or failed to perform its covenants
contained in the merger agreement;
- if after Western Ohio or its stockholders receive an acquisition
proposal, the Western Ohio board of directors withdraws or modifies its
recommendation to the stockholders in a manner materially adverse to
WesBanco and either (i) the Western Ohio stockholders fail to adopt the
merger agreement at a stockholders' meeting and a Takeover Proposal (as
defined in the merger agreement and summarized below) was made prior to
such meeting or (ii) the Western Ohio stockholders fail to meet by
December 15, 2004 to vote on adoption of the merger agreement; or
- if Western Ohio terminates the merger agreement after it receives a
Superior Proposal (as defined in the merger agreement and summarized
below).
Under the merger agreement, the term "Takeover Proposal" is generally
defined as any proposal that is reasonably likely to lead to the acquisition of
(A) assets or businesses constituting 20% or more of the total revenues or
assets of Western Ohio and its subsidiaries or (B) 20% or more of Western Ohio's
common stock. In addition, the term "Superior Proposal" is generally defined to
mean a written offer which would result in the acquisition of more than 50% of
the voting power of Western Ohio or all or substantially all of the consolidated
assets of Western Ohio and its subsidiaries on terms that are more favorable,
from a financial point of view, to Western Ohio's stockholders than the merger.
AMENDMENT OR WAIVER
The provisions of the merger agreement may be waived at any time by the
party that is entitled to the benefit of those provisions, by action taken by
the board of directors of that party. Any of the terms of the merger agreement
may be amended or modified in writing before the special meeting of Western Ohio
stockholders. The merger agreement may be amended after the special meeting and
prior to the closing of the merger only to the extent permitted by applicable
laws.
INFORMATION ABOUT WESBANCO
WesBanco is a bank holding company headquartered in Wheeling, West
Virginia. WesBanco provides a full range of financial services including retail
banking, corporate banking, personal and corporate trust services, brokerage
services, mortgage banking and insurance. WesBanco offers these services through
two reportable segments, community banking and trust and investment services. As
of March 31, 2004, WesBanco had approximately $3.4 billion in consolidated total
assets, $2.5 billion in deposits and $326 million of stockholder's equity.
WesBanco's main office is located at One Bank Plaza, Wheeling, West Virginia,
26003 and its telephone number is (304) 234-9000.
WesBanco's community banking segment offers services traditionally offered
by full-service commercial banks, including commercial demand, individual demand
and time deposit accounts as well as commercial, mortgage and individual
installment loans. The trust and investment services segment offers trust
services as well as various alternative investment products including mutual
funds and annuities. The market value of assets under management of the trust
and investment services segment was approximately $2.8 billion at March 31,
2004. These assets are held by WesBanco's affiliate, WesBanco Bank, Inc. in
fiduciary or agency capacities for its customers.
50
As of March 31, 2004, WesBanco's commercial banking subsidiary, WesBanco
Bank, was operated through 72 offices and 105 ATM machines located in West
Virginia, Central and Eastern Ohio, and Western Pennsylvania. Total assets of
WesBanco Bank as of March 31, 2004 approximated $3.4 billion.
WesBanco offers additional services through its non-banking affiliates,
WesBanco Insurance Services, Inc., a multi-line insurance agency specializing in
property, casualty and life insurance for personal and commercial clients and
WesBanco Securities, Inc., a full service broker-dealer, which also offers
discount brokerage services. WesBanco Asset Management, Inc. and WesBanco
Services, Inc., which were incorporated in November 2002, collectively hold
certain investment securities and real estate loans of WesBanco Bank, Inc. and
assist in managing these assets. There were approximately 1,133 full-time
equivalent employees employed by all WesBanco affiliates as of March 31, 2004.
The lending philosophy of WesBanco is to minimize credit losses by
underwriting loans to uniform credit standards (which includes independent
analysis of the repayment capacity of each borrower; adequacy of collateral, if
any, to secure each loan; and other factors unique to each loan that may
increase or mitigate their risk), diversifying its loan portfolio to avoid
concentrations of credit to any single borrower, group of related borrowers,
industry, or collateral type, and conducting ongoing reviews and monitoring of
the loan portfolio. WesBanco makes commercial, commercial real estate,
residential real estate (including home equity), and direct and indirect
consumer loans to individuals and businesses that are primarily located within
its market areas.
No material portion of the deposits of WesBanco Bank has been obtained from
a single or small group of customers, and the loss of any customer's deposits or
a small group of customers' deposits would not have a material adverse effect on
the business of WesBanco.
WesBanco also serves as investment adviser to a family of mutual funds
under the name "WesMark Funds" which includes the WesMark Growth Fund, the
WesMark Balanced Fund, the WesMark Bond Fund, the WesMark West Virginia
Municipal Bond Fund, the WesMark Small Company Growth Fund and the Automated
Cash Management Trust.
As part of its operations, WesBanco regularly evaluates the potential
acquisition of, and holds discussions with, various financial institutions and
other businesses of a type eligible for financial holding company investment. In
addition, WesBanco regularly analyzes the values of, and submits bids for, the
acquisition of customer-based funds and other liabilities and assets of such
financial institutions and other businesses. As a general rule, WesBanco
publicly announces such material acquisitions when a definitive agreement has
been reached.
For further information about WesBanco, see "Where You Can Find More
Information."
INFORMATION ABOUT WESTERN OHIO
Western Ohio, a Delaware corporation, was organized in March 1994 for the
purpose of becoming a savings and loan holding company. Western Ohio owns
Cornerstone Bank, the principal business of which has traditionally consisted of
attracting deposits from the general public, and making loans secured by
residential and non-residential real estate. In October 1997, Western Ohio
formed another subsidiary, CornerstoneBanc Financial Services, Incorporated
(formerly West Central Mortgage Services, Incorporated). This subsidiary
originates and purchases mortgage loans, which are outside of the primary market
area for Cornerstone Bank.
Western Ohio is subject to supervision by the Office of Thrift Supervision,
Department of Treasury ("OTS") and Cornerstone Bank is subject to comprehensive
regulation, examination and supervision by the OTS and by the Federal Deposit
Insurance Corporation ("FDIC"). Cornerstone Bank is a member of the Federal Home
Loan Bank system and its deposits are backed by the full faith and credit of the
United States Government and are insured up to applicable limits by the FDIC.
Western Ohio serves its customers through its main office in Springfield,
Ohio and six branch offices in Enon, New Carlisle, Springfield, Yellow Springs,
Beavercreek and Centerville. At March 31, 2004, Western
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Ohio had total assets of $407.5 million, deposits of $257.5 million and
stockholders' equity of $45.3 million. Western Ohio's common stock is traded on
the Nasdaq National Market under the symbol "WOFC."
Western Ohio has been a community-oriented savings and loan holding company
offering a variety of financial services to meet the needs of the communities it
serves. The principal business of Western Ohio consists of attracting retail
deposits from the general public and investing those funds primarily in
one-to-four family residential real estate, commercial and multi-family real
estate, construction loans and consumer and commercial business loans, all
primarily within Western Ohio's market areas.
For further information about Western Ohio, please refer to Western Ohio's
annual report on Form 10-K for the fiscal year ended December 31, 2003, which is
attached as Annex D to this proxy statement/prospectus and its Form 10-Q for the
quarter ended March 31, 2004, which is attached as Annex E to this proxy
statement/prospectus, and see "Where You Can Find More Information."
DESCRIPTION OF WESBANCO CAPITAL STOCK
The authorized capital stock of WesBanco consists of 50,000,000 shares of
common stock, par value $2.0833 per share, and 1,000,000 shares of preferred
stock without par value. As of March 31, 2004, there were approximately
19,673,103 shares of WesBanco common stock outstanding, held of record by
approximately 5,527 holders.
As of the date of this proxy statement/prospectus, there were no shares of
preferred stock outstanding. Shares of preferred stock may be issued in one or
more classes or series with such preferences, voting rights, full or limited,
but not to exceed one vote per share, conversion rights and other special rights
as the WesBanco board of directors may fix in the resolution providing for the
issuance of the shares. The issuance of shares of preferred stock could affect
the relative rights of the WesBanco common stock.
Depending upon the exact terms, limitations and relative rights and
preferences, if any, of the shares of preferred stock as determined by the board
of directors at the time of issuance, the holders of preferred stock may be
entitled to a higher dividend rate than that paid on the WesBanco common stock,
a prior claim on funds available for the payment of dividends, a fixed
preferential payment in the event of liquidation and dissolution of WesBanco,
redemption rights, rights to convert their preferred stock into shares of
WesBanco common stock, and voting rights which would tend to dilute the voting
control of WesBanco by the holders of WesBanco common stock.
Subject to the above limitations, in the event of any liquidation,
dissolution or winding up of WesBanco, and subject to the application of state
and federal laws, holders of WesBanco common stock are entitled to share ratably
in the assets available for distribution to stockholders remaining after payment
of WesBanco's obligations.
Each share of WesBanco common stock is entitled to one vote, and to
cumulate votes in the election of directors. No holder of shares of WesBanco
common stock has any preemptive right to subscribe for or purchase any other
securities of WesBanco, and there are no conversion rights or redemption or
sinking fund provisions applicable to WesBanco common stock. However, WesBanco
elects directors on a staggered basis by class with terms of 3 years. This
provision of its Articles of Incorporation requires a super majority vote of its
stockholders to change.
COMPARATIVE RIGHTS OF STOCKHOLDERS
GENERAL
At the effective time of the merger, stockholders of Western Ohio that
receive WesBanco common stock in the merger will become stockholders of WesBanco
and their rights will be governed by WesBanco's Articles of Incorporation,
WesBanco's Bylaws and the West Virginia Business Corporations Act ("WVBCA"). The
following summary, which is not a complete statement of all differences between
the rights of the holders of Western Ohio stock and WesBanco stock, discusses
differences between Western Ohio's Certificate of Incorporation and Bylaws and
WesBanco's Articles of Incorporation and Bylaws and the differences between
52
the Delaware General Corporation Law ("DGCL") and the WVBCA. For information as
to how to get the full text of each document, see "Where You Can Find More
Information."
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
Western Ohio's Certificate of Incorporation provides that a director or the
entire board of directors of Western Ohio may be removed only for cause and only
by the affirmative vote of the holders of at least 80% of the outstanding shares
of Western Ohio entitled to vote in the election of directors. Western Ohio's
Certificate of Incorporation provides that vacancies on the board of directors
of Western Ohio, including vacancies resulting from an increase in the number of
directors, may be filled by a majority vote of the remaining directors, though
less than a quorum, and each person so elected shall serve until the annual
meeting of stockholders at which the term of office of the class to which the
director has been elected expires, and until his or her successor has been
elected and qualified.
Under the WVBCA, directors may be removed by a corporation's stockholders
with or without cause if the votes cast to remove such director exceed the
number of votes cast not to remove such director; provided that, if a director
is elected by a voting group, only the stockholders of that voting group may
participate in the vote to remove him. Article III of WesBanco's Bylaws provides
that its stockholders may remove any director for cause and fill the vacancy
thus created. WesBanco's Bylaws further provide that any vacancies not created
by such removal, including vacancies resulting from an increase in the number of
directors, may be filled by the remaining directors. Any director so elected to
fill a vacancy by the other directors shall hold office for a term that expires
at the first meeting of stockholders thereafter or until his or her successor is
elected and has qualified.
QUORUM OF STOCKHOLDERS
The DGCL provides that a corporation's certificate of incorporation or
bylaws shall specify the required quorum but in no event shall a quorum consist
of less than one-third of the shares entitled to vote at the particular meeting
of stockholders. Western Ohio's Bylaws provide that the holders of at least
one-third of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law. Western Ohio's Bylaws provide that, if a meeting called for the
election of directors is adjourned, and a notice of any adjourned special
meeting of stockholders is sent to all stockholders entitled to vote thereat
stating that it will be held with those present constituting a quorum, then
except as otherwise required by law, those present at such adjourned meeting
shall constitute a quorum, and all matters shall be determined by a majority of
the votes cast at such meeting.
WesBanco's Bylaws and the WVBCA provide that the holders of a majority of
the issued and outstanding stock entitled to vote, represented in person or by
proxy, constitutes a quorum.
NOTICE AND ADJOURNMENT OF STOCKHOLDER MEETINGS
Western Ohio's Bylaws provide that written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten nor
more than 60 days before the date on which the meeting is to be held, to each
stockholder entitled to vote at such meeting. Western Ohio's Bylaws provide that
if a quorum shall fail to attend any meeting, the chairman of the meeting or the
holders of a majority of the shares of stock entitled to vote who are present,
in person or by proxy, may adjourn the meeting. When a meeting is adjourned to
another place, date or time, Western Ohio's Bylaws provide that written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date and
time of the adjourned meeting shall be given.
WesBanco's Bylaws provide that notice of every meeting of stockholders
shall be given either (i) by an advertisement in a Wheeling, West Virginia
newspaper once a week for at least two weeks preceding the date of the meeting
or (ii) by written notice mailed to each stockholder at least five days before
the date of the
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meeting. WesBanco's Bylaws provide that stockholders may adjourn a meeting at
which quorum is not present without notice other than announcement at the
meeting.
CALL OF SPECIAL MEETINGS OF STOCKHOLDERS
Western Ohio's Bylaws provide that, subject to the rights of the holders of
any class or series of Western Ohio preferred stock, special meetings of
stockholders may be called only by the board of directors pursuant to a
resolution adopted by a majority of the total number of directors which Western
Ohio would have if there were no vacancies on the board of directors. WesBanco's
Bylaws provide that special meetings of the stockholders may be called by the
board of directors, the President or by the holders of at least 10% of the
outstanding shares of WesBanco.
STOCKHOLDER CONSENT IN LIEU OF MEETING
Western Ohio's Bylaws provide that any action required or permitted to be
taken by the Western Ohio stockholders must be effected at a duly called annual
or special meeting of stockholders and may not be effected by any consent in
writing by such stockholders. The WVBCA permits any action which may be taken at
a meeting of the stockholders of WesBanco to be taken without a meeting if a
consent or consents in writing setting forth the date of signature and action so
taken shall be signed by all of the stockholders who would be entitled to vote
at a meeting for such purpose and shall be filed with WesBanco's minutes or
corporate records.
APPRAISAL RIGHTS
Under West Virginia law, stockholders are entitled to rights of appraisal
with regard to corporate actions involving certain mergers, share exchanges,
asset dispositions and certain article amendments that reduce the shares of a
stockholder to a fraction of a share where the corporation has an obligation to
repurchase the share fraction. No appraisal rights exist, however, if the stock
of the merging corporation is listed on a national securities exchange or
designated as a national market system security by the NASD.
Under the DGCL, dissenting stockholders are generally entitled to appraisal
rights only with respect to mergers or consolidations. No appraisal rights
exist, however, if the stock of the merging corporation is listed on a national
securities exchange or designated as a national market system security by the
NASD, or is held of record by more than 2,000 stockholders, unless the holders
are required to accept anything other than (i) the stock of the surviving
corporation, (ii) stock of another of a corporation whose shares are listed on a
national securities exchange or quoted on the NASDAQ National Market, or held of
record by more than 2,000 holders or (iii) cash in lieu of fractional shares. In
addition, appraisal rights exist irrespective of whether the shares are publicly
traded in the event of a "short-form" merger. See "The Merger -- Appraisal
Rights" beginning on page 37 for additional information regarding appraisal
rights under Delaware law.
DIRECTOR NUMBER AND TERM
Western Ohio's Certificate of Incorporation and Bylaws provide that the
number of directors on the Western Ohio board of directors shall be fixed from
time to time exclusively by the board of directors and that the directors shall
be divided into three classes, as equal in number as possible, with each
director serving a staggered, three-year term. In the absence of a designation
by the board, the Bylaws provide that the board shall be composed of seven
members.
The WesBanco Bylaws provide that the board of directors of WesBanco shall
consist not less than fifteen nor more than thirty-five members, with the number
to be set by the board at its January meeting each year. The WesBanco Bylaws
further provide that the WesBanco board of directors shall be divided into three
classes, as equal in number as possible, with each director having a staggered,
three-year term. Currently, the WesBanco board of directors has 18 members.
NOMINATION OF DIRECTORS
The Western Ohio Bylaws provide that any stockholder who intends to
nominate or cause to be nominated any candidate to the Western Ohio board must
notify the Secretary of Western Ohio of his or her
54
intention not less than 30 days prior to the date of the meeting, or, if less
than 40 days notice of the meeting is given to stockholders, within ten days
after notice of the meeting is given. The notice required by the Western Ohio
Bylaws must include, among other things:
- all information regarding each proposed nominee as would be required to
be disclosed under Regulation 14A under the Securities Exchange Act of
1934; and
- the name, address and class and number of shares of Western Ohio stock
owned by the stockholder making the nomination.
WesBanco's Bylaws provide that any stockholder who intends to nominate or
cause to be nominated any candidate to the WesBanco board, other than a
candidate proposed by the WesBanco board, must notify the Secretary of WesBanco
in writing not less than 30 days prior to the date of the meeting called for the
election of directors, or five days after the giving of notice of the meeting,
whichever is later.
CUMULATIVE VOTING
In an election of directors utilizing cumulative voting, each share of
stock normally having one vote is entitled to a number of votes equal to the
number of directors to be elected. Under West Virginia law and WesBanco's
Articles of Incorporation, WesBanco stockholders are entitled to cumulative
voting in the election of directors. Pursuant to the Western Ohio Certificate of
Incorporation, Western Ohio stockholders are not entitled to cumulative voting.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the DGCL, a corporations' certificate of incorporation may limit or
eliminate the personal liability of a director for breach of fiduciary as a
director except in matters involving (i) the breach of a director's duty of
loyalty, (ii) actions or omissions not in good faith, intentional misconduct or
knowing violations of law, (iii) the unlawful payment of dividends, stock
purchases or redemptions or (iv) any transaction from which a director derives
an improper personal benefit. A corporation may indemnify a person who is or was
a director, officer, employee or agent of the corporation for actions brought
against that person because of the position held with the corporation if the
person acted in good faith, in a manner reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to criminal
matters, the person had no reasonable cause to believe the person's conduct was
unlawful, except that with respect to actions brought by or in the right of the
corporation, the corporation may provide indemnification only for expenses, and
only where the indemnitee has not been adjudged liable to the corporation, or
where a court has found that the indemnitee is fairly and reasonably entitled to
such indemnification. In addition, a corporation shall indemnify such a person
to the extent such person is successful, on the merits or otherwise, in the
defense of such actions. The Western Ohio Certificate of Incorporation provides
for indemnification of its directors, officers, employees and agents to the
fullest extent permitted by the DGCL. The Western Ohio Certificate of
Incorporation also provides that Western Ohio shall advance expenses incurred by
an officer or director upon an undertaking by such person to repay such amount
if it is ultimately determined that he or she is not entitled to
indemnification, if such undertaking is required by the DGCL. The Western Ohio
Certificate of Incorporation also provides for the elimination of personal
liability of its directors to the fullest extent permitted by the DGCL.
Under the WVBCA, a corporation is generally permitted to indemnify a
director if the director conducted himself or herself in good faith, he or she
reasonably believed the conduct to be in the best interests of the corporation
(or at least not opposed to the best interests of the corporation for all
conduct that was not in his or her official capacity) and, in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful. In addition, the WVBCA permits a corporation to include
broader indemnification in its articles of indemnification so long as the
provision does not limit the liability for (i) receipt of a financial benefit to
which he or she is not entitled, (ii) an intentional infliction of harm on the
corporation or its stockholders, (iii) certain unlawful distributions, or (iv)
an intentional violation of criminal law. The articles of incorporation may also
contain a provision (an "elimination provision") eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director so long as the
provision does not eliminate or limit the liability of a director for (i) any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) acts or
55
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) certain unlawful distributions, or (iv) any transaction
from which the director derived an improper personal benefit. This articles of
incorporation provision may not apply to conduct occurring prior to the
provision's adoption. The WVBCA requires a corporation to indemnify a director
was wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he or she was a party because he or she was a director of
the corporation against reasonable expenses incurred by him or her in connection
with the proceeding.
The WVBCA permits a corporation, before final disposition of a proceeding,
to advance funds to pay for or reimburse the reasonable expenses incurred by a
director who is a party to a proceeding because he or she is a director if he or
she delivers to the corporation:
- a written affirmation of his or her good faith belief that he or she has
met the relevant standard of conduct described in the first sentence of
the preceding paragraph or that the proceeding involves conduct for which
liability has been eliminated under an elimination provision; and
- a written undertaking to repay any funds advanced if he or she is not
entitled to mandatory indemnification and it is ultimately determined
that he or she has not met the relevant standard of conduct.
The WVBCA provides that a corporation may indemnify its officers to the
same extent as a director and, if the officer is not a director or if the
officer is a party to the proceeding solely in his capacity as an officer, to a
further extent as may be provided by the articles of incorporation, the bylaws,
a resolution of the board of directors or contract, except that such additional
indemnification may not be provided for liability in connection with a
proceeding by or in the right of the corporation other than for reasonable
expenses incurred in connection with the proceeding or liability arising out of
conduct that constitutes (i) receipt by him or her of a financial benefit to
which he or she is not entitled, (ii) an intentional infliction of harm on the
corporation or the stockholders or (iii) an intentional violation of criminal
law. The WVBCA requires mandatory indemnification of officers that are not
directors to the same extent as directors.
Under the WesBanco Bylaws, WesBanco will indemnify each of its directors
and officers, whether or not then in office, against all costs and expenses
reasonably incurred in connection with any suit to which he is a party by reason
of having been an officer or director of WesBanco or another company which he
served at the request of WesBanco unless he is adjudged derelict in the
performance of his duties as director or officer. In addition, the WesBanco
Bylaws provide that an "institution-affiliated party" (as defined in 12 U.S.C.
Section 1813(u)) may not receive a "prohibited indemnification payment," which
is defined as any payment by WesBanco to an institution-affiliated party to pay
or agreement to reimburse such person for any liability or legal expenses in any
administrative proceeding brought by the appropriate federal banking agency that
results in a final order or settlement in which the institution- affiliated
party is assessed a civil money penalty, is removed or prohibited from banking,
or is required to cease an action or take any affirmative action, including
making restitution, with respect to WesBanco. Further, WesBanco may make or
agree to make a reasonable indemnification payment only if all of the following
conditions are met: (i) WesBanco's board of directors determines in writing that
the institution-affiliated party acted in good faith and the best interests of
WesBanco; (ii) the board determines that the payment will not materially affect
WesBanco's safety and soundness; (iii) the payment does not fall within the
definition of a prohibited indemnification payment; and (iv) the
institution-affiliated party agrees in writing to reimburse WesBanco, to the
extent not covered by permissible insurance, for payments made in the event that
the administrative action results in a final order or settlement in which the
institution-affiliated party is assessed a civil money penalty, is removed or
prohibited from banking, or is required, under a final order, to cease an action
or take any affirmative action.
AMENDMENT OF CERTIFICATE AND ARTICLES OF INCORPORATION AND BYLAWS
Under the DGCL, an amendment to a corporation's certificate of
incorporation must be approved by the holders of a majority of the outstanding
stock entitled to vote on the amendment and a majority of the outstanding stock
of each class entitled to vote on the amendment. Generally, the DGCL requires a
separate class vote on an amendment to the certificate of incorporation if the
amendment would change the par value of, or increase or decrease the aggregate
number of, authorized shares of such class, or alter or change the powers,
preferences or special rights of shares of such class so as to affect them
adversely. The Western Ohio
56
Certificate of Incorporation provides that the affirmative vote of the holders
of at least 80% of the voting power of its outstanding stock, voting together as
a single class, is required to amend or repeal provisions of the Western Ohio
Certificate of Incorporation relating to certain voting requirements and other
stockholder rights, certain board of director matters and other specified
provisions of the Western Ohio Certificate of Incorporation.
Under West Virginia law, the WesBanco Articles of Incorporation or Bylaws
generally may be amended by the affirmative vote of a majority of all votes of
stockholders entitled to be cast on the matter amendment and a majority of the
outstanding stock of each class entitled to vote on the amendment, unless a
greater number is specified in the articles of incorporation. The WesBanco
Articles of Incorporation provide that the affirmative vote of the holders of
not less than 75% of the outstanding shares of the voting stock shall be
required to amend the article provision dealing with the classes of directors.
The WesBanco Bylaws require that the affirmative vote of the holders of not less
than 75% of the outstanding shares of the voting stock of the corporation will
be required to amend or repeal the Bylaw provisions dealing with the composition
of the board of directors. The other Bylaw provisions may be amended by a
majority of the board of directors of WesBanco.
VOTE REQUIRED FOR EXTRAORDINARY CORPORATE TRANSACTIONS
Under the DGCL, a merger, consolidation, sale of all or substantially all
of a corporation's assets other than in the regular course of business or
dissolution of a corporation must be approved by holders of a majority of the
outstanding shares entitled to vote. No vote of stockholders of a constituent
corporation surviving a merger, however, is required (unless the corporation
provides otherwise in its certificate of incorporation) if (i) the merger
agreement does not amend the certificate of incorporation of the surviving
corporation, (ii) each share of stock of the surviving corporation outstanding
before the merger is an identical outstanding or treasury share after the
merger, and (iii) the number of shares to be issued by the surviving corporation
in the merger does not exceed 20% of the shares outstanding immediately prior to
the merger. In addition, certain mergers effected to create a holding company
structure may be effected without a stockholder vote. The Certificate of
Incorporation of Western Ohio provides that the affirmative vote of at least 80%
of the outstanding shares of Western Ohio entitled to vote in the election of
directors, voting together as a single class, shall be required to approve the
following transactions:
- certain mergers and consolidations;
- certain dispositions of at least 25% of the combined assets of Western
Ohio and its subsidiaries to an interested stockholder;
- certain issuances of securities of Western Ohio to an interested
stockholder;
- the adoption of a plan of liquidation or dissolution; and
- certain reclassifications and recapitalizations.
Notwithstanding the foregoing, the above transactions only require the
approval of a majority of the outstanding shares of Western Ohio if they are
approved by a majority of Western Ohio's disinterested directors or if certain
other conditions are satisfied. For these purposes, an "interested stockholder"
generally includes any person other than Western Ohio or its subsidiaries that
(i) beneficially owns more than 10% of the voting power of Western Ohio, (ii) is
an affiliate of Western Ohio and at any time within the preceding two years was
the beneficial owner of at least 10% of the voting power of Western Ohio or
(iii) holds shares of Western Ohio voting stock which were at any time in the
preceding two years held by an interested stockholder if such shares were
acquired in a transaction or series of transactions not involving a public
offering under the Securities Act of 1933. The term "disinterested director"
generally means any member of the Western Ohio board of directors who is
unaffiliated with an interested stockholder and either (i) was a member of the
board prior to the time that the interested stockholder became an interested
stockholder or (ii) becomes a member of the board after the time that the
interested stockholder became an interested stockholder but was recommended by a
majority of the disinterested directors.
Under the WVBCA, a merger, consolidation, sale of all or substantially all
of a corporation's assets other than in the regular course of business or
dissolution of a corporation must be approved by holders of a majority of the
outstanding shares entitled to vote. The WesBanco Articles of Incorporation and
Bylaws do not provide
57
for a greater vote. In addition, under the WVBCA no stockholder approval of a
merger or share exchange is required if (i) the corporation will survive the
merger or is the acquiring corporation in a share exchange, (ii) the articles of
incorporation of the surviving corporation will not be amended, (iii) each
stockholder of the corporation whose shares were outstanding immediately before
the effective date of the merger or share exchange will hold the same number of
shares, with identical preferences, limitations and relative rights, immediately
after the effective date, and (iv) the issuance in the merger or share exchange
of shares or other securities convertible into or rights exercisable for shares
does not otherwise require stockholder approval under the WVBCA.
INTERESTED STOCKHOLDER TRANSACTIONS AND VOTING
Except under certain circumstances, the DGCL prohibits a "business
combination" between a corporation and an "interested stockholder" (as defined
in the DGCL) within three years of the stockholder becoming an "interested
stockholder." Generally, an "interested stockholder" under the DGCL is a person
or group that directly or indirectly controls, or has the right to acquire or
control, the voting or disposition of 15% or more of the outstanding voting
stock or is an affiliate or associate of the corporation and was the owner of
15% or more of such voting stock at any time within the previous three years. A
"business combination" is defined broadly to include, among others (i) mergers
and sales or other dispositions of 10% or more of the assets of a corporation
with or to an interested stockholder, (ii) certain transactions resulting in the
issuance or transfer to the interested stockholder of any stock of the
corporation or its subsidiaries, (iii) certain transactions which would result
in increasing the proportionate share of the stock of a corporation or its
subsidiaries owned by the interested stockholder, and (iv) receipt by the
interested stockholder of the benefit (except proportionately as a stockholder)
of any loans, advances, guarantees, pledges, or other financial benefits.
A business combination between a corporation and an interested stockholder
is prohibited unless (i) prior to the date the person became an interested
stockholder, the board of directors approved either the business combination or
the transaction which resulted in the person becoming an interested stockholder,
(ii) upon consummation of the transaction that resulted in the person becoming
an interested stockholder, that person owns at least 85% of the corporation's
voting stock outstanding at the time the transaction is commenced (excluding
shares owned by persons who are both directors and officers and shares owned by
employee stock plans in which participants do not have the right to determine
confidentially whether shares will be tendered in a tender or exchange offer),
or (iii) the business combination is approved by the board of directors and
authorized by the affirmative vote (at an annual or special meeting and not by
written consent) of at least 66 2/3% of the outstanding voting stock not owned
by the interested stockholder.
These restrictions placed on interested stockholders by the DGCL do not
apply under certain circumstances, including, but not limited to, the following:
(i) if the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203 of the DGCL; or
(ii) if the corporation, by action of its stockholders, adopts an amendment to
its bylaws, articles of incorporation or certificate of incorporation expressly
electing not to be governed by the Section 203 of the DGCL, provided that such
an amendment is approved by the affirmative vote of not less than a majority of
the outstanding shares entitled to vote. Such an amendment, however, generally
will not be effective until 12 months after its adoption and will not apply to
any business combination with a person who became an interested stockholder at
or prior to such adoption. In addition, the restrictions are not applicable to
certain business combinations proposed between the announcement and the
consummation or abandonment of certain transactions, including mergers and
tender offers. Western Ohio has not elected to take itself outside the coverage
of Section 203 of the DGCL.
In addition to the interested stockholder provisions contained in the DGCL,
Western Ohio's Certificate of Incorporation contains provisions addressing
interested stockholders. Western Ohio's Certificate of Incorporation provides
that the acquisition by Western Ohio of any equity security from any "interested
person" must be approved by the holders of at least 80% of the voting stock of
Western Ohio that is not beneficially owned by such interested person. Such
stockholder approval is not required, however, for (i) acquisitions made as part
of a tender or exchange offer by Western Ohio or its subsidiaries that complies
with the Securities Exchange Act of 1934, (ii) acquisitions made pursuant to an
open market purchase program approved by a majority of Western Ohio's board of
directors, including a majority of the disinterested
58
directors, or (iii) acquisitions approved by a majority of Western Ohio's board,
including a majority of the disinterested directors, made at no more than the
market price on the date agreement is reached.
The Western Ohio Certificate of Incorporation also provides that any
beneficial owner of more than 10% of the outstanding common stock of Western
Ohio may note vote any shares in excess of such 10% on any matter.
Neither the WVBCA or WesBanco's Articles of Incorporation or Bylaws contain
any provisions address interested stockholder transactions.
WHERE YOU CAN FIND MORE INFORMATION ABOUT WESBANCO AND WESTERN OHIO
WesBanco and Western Ohio each file annual, quarterly and special reports,
proxy statements and other information with the SEC. These filings are available
over the internet from the SEC's web site at WWW.SEC.GOV. You may read and copy
any reports, statements or other information filed by WesBanco or Western Ohio
at the SEC's public reference room at 450 Fifth Street, N.W. Suite 1024,
Washington, D.C. 20549. You may also obtain copies of this information by mail
from the public reference section of the SEC, 450 Fifth Street, N.W., Suite
1024, Washington, D.C. 20549, at prescribed rates. Please call the SEC at
1-800-SEC-0330 for further information about the operation of its public
reference room.
The common stock of WesBanco and Western Ohio is listed on the Nasdaq
National Market under the symbols "WSBC" and "WOFC," respectively. You may
inspect reports and other information concerning WesBanco and Western Ohio at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
WesBanco maintains an Internet site that contains information about
WesBanco and its subsidiaries. Its address is www.wesbanco.com. Western Ohio
maintains an Internet site that contains information about Western Ohio and its
subsidiaries. Its address is www.cornerstone-online.com.
This proxy statement/prospectus is part of a Registration Statement on Form
S-4 that WesBanco has filed with the SEC with respect to the WesBanco common
stock to be issued in the merger. This proxy statement/prospectus constitutes a
prospectus of WesBanco and a proxy statement of Western Ohio for its special
meeting. As permitted by the SEC, this proxy statement/prospectus does not
contain all of the information contained in the Registration Statement. You may
obtain copies of the Form S-4 and any amendments thereto, in the manner
described above.
The SEC allows the "incorporation by reference" of information into this
proxy statement/prospectus, which means that WesBanco and Western Ohio can
disclose important information to you by referring you to another document filed
separately with the SEC by WesBanco or Western Ohio. The information
incorporated by reference is deemed to be part of this proxy
statement/prospectus, except for any information that is superseded by
information in this proxy statement/prospectus. This proxy statement/prospectus
incorporates by reference the documents set forth below that WesBanco or Western
Ohio have previously filed with the SEC. These documents contain important
information about WesBanco and Western Ohio.
The following documents, which have been filed with the SEC by WesBanco,
are hereby incorporated by reference into this proxy statement/prospectus:
- WesBanco's Annual Report on Form 10-K for the fiscal year ended December
31, 2003;
- WesBanco's Quarterly Report on Form 10-Q for the quarter ended March 31,
2004;
- WesBanco's Current Reports on Form 8-K filed on January 22, 2004,
February 26, 2004, April 5, 2004, April 22, 2004, May 24, 2004, May 28,
2004 and June 18, 2004 and its amended Current Report on Form 8-K filed
on April 27, 2004;
- the description of WesBanco common stock contained in WesBanco's
registration statement on Form 8-A filed by WesBanco pursuant to Section
12 of the Exchange Act, including any amendment or report filed for
purpose of updating the description, as filed on May 2, 1977.
59
The following documents, which have been filed with the SEC by Western
Ohio, are hereby incorporated by reference into this proxy statement/prospectus:
- Western Ohio's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 (a copy of which is attached as Annex D to this proxy
statement/prospectus;)
- Western Ohio's Quarterly Report on Form 10-Q for the quarter ended March
31, 2004 (a copy of which Form 10-Q is attached as Annex E to this proxy
statement/prospectus);
- Western Ohio's Current Reports on Form 8-K filed on January 20, 2004,
February 9, 2004, March 5, 2004, April 5, 2004 and April 26, 2004.
All documents filed by WesBanco pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this document and
before the date of the special meeting of Western Ohio's stockholders are
incorporated by reference into and are deemed to be a part of this document from
the date of filing of those documents.
You should rely only on the information contained in this proxy
statement/prospectus or on information to which we have referred you. We have
not authorized any person to give any information or to make any representations
that are different from those in this document.
If you would like to receive a copy of any of the documents incorporated by
reference, please contact WesBanco or Western Ohio at the address or telephone
number listed under the heading "Additional Information."
FORWARD LOOKING STATEMENTS
WesBanco and Western Ohio have each made forward-looking statements in this
document and in other documents to which this document refers. These statements
are subject to risks and uncertainties. These statements are based on the
beliefs and assumptions of the management of WesBanco and Western Ohio and on
information currently available to them or, in the case of information that
appears under the heading "The Merger" beginning on page 22, information that
was available to management of WesBanco and Western Ohio as of the date of the
merger agreement. Forward looking statements include, but are not limited to,
the information concerning possible or assumed future results of operations of
WesBanco. You can identify these forward looking statements by the words
"believes," "contemplates," "expects," "may," "will," "should," "would,"
"anticipates," and similar expressions. Discussions of strategy are also
forward-looking statements.
We caution you that these statements are not guarantees of future
performance and involve risks and uncertainties that we cannot predict. In
addition, many of these forward-looking statements are based on assumptions
about the future that may prove to be inaccurate. Accordingly, actual results
may differ materially from those expressed in the forward-looking statements.
Any statements in this document about the anticipated effect of the merger
and WesBanco's performance in future periods are subject to risks relating to,
among other things, the following:
- expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
- the loss of deposits, customers or revenues following the merger may be
greater than expected;
- competitive conditions in the financial services industry;
- costs or difficulties related to the integration of the businesses of
WesBanco and Western Ohio may be greater than expected;
- changes in interest rates, spreads on earning assets and interest-bearing
liabilities, and associated interest rate sensitivity;
- the effect of changing regional and national economic conditions;
- legislative and federal and state regulatory actions and reform; and
- competitors of WesBanco and Western Ohio may develop products that enable
those competitors to compete more successfully than WesBanco or Western
Ohio.
60
Both WesBanco and Western Ohio believe the forward-looking statements about
the merged company are reasonable. However, Western Ohio's stockholders should
not place undue reliance on them. Forward-looking statements are not guarantees
of performance. They involve risks, uncertainties and assumptions. The future
results and stockholder values of WesBanco following the merger may differ
materially from those expressed or implied in these forward looking statements.
Many of the factors that will determine these results and values are beyond
WesBanco's and Western Ohio's ability to control or predict.
We expressly qualify all subsequent written and oral forward looking
statements concerning the merger or other matters addressed in this document and
attributable to WesBanco or Western Ohio or any person acting on their behalf by
the foregoing cautionary statements. Neither WesBanco nor Western Ohio
undertakes any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this document or to reflect the occurrence of unanticipated events.
LEGAL MATTERS
Certain matters relating to the validity of the WesBanco common stock
issuable in connection with the merger will be passed upon for WesBanco by its
counsel, Phillips, Gardill, Kaiser & Altmeyer, PLLC, 61 Fourteenth Street,
Wheeling, West Virginia 26003. As of March 31, 2004, the members of Phillips,
Gardill, Kaiser & Altmeyer, PLLC participating in the preparation of this proxy
statement/prospectus owned an aggregate of 42,647 shares of WesBanco common
stock. Kirkpatrick & Lockhart LLP, as tax counsel to WesBanco, and Katten Muchin
Zavis Rosenman, as tax counsel to Western Ohio, each will pass upon certain tax
consequences related to the merger.
EXPERTS
The consolidated financial statements of WesBanco, Inc. incorporated by
reference in WesBanco's Annual Report on Form 10-K for the year ended December
31, 2003, have been audited by Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon, included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report, given on the
authority of such firm as experts in auditing and accounting.
The consolidated financial statements of Western Ohio Financial Corporation
incorporated by reference in Western Ohio's Annual Report on Form 10-K for the
year ended December 31, 2003, have been audited by Crowe Chizek and Company LLC,
independent auditors, as set forth in their report thereon, included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report, given on the
authority of such firm as experts in auditing and accounting.
61
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
APRIL 1, 2004
BY AND BETWEEN
WESBANCO, INC.,
WOFC, INC.,
AND
WESTERN OHIO FINANCIAL CORPORATION
TABLE OF CONTENTS
PAGE
----
ARTICLE ONE -- THE MERGER............................................. A-1
1.01 Merger; Surviving Corporation............................... A-1
1.02 Effective Time.............................................. A-1
1.03 Effects of the Merger....................................... A-2
ARTICLE TWO -- CONVERSION OF SHARES; SURRENDER OF CERTIFICATES........ A-2
2.01 Conversion of Seller Shares................................. A-2
2.02 Election and Exchange and Payment Procedures................ A-3
2.03 Seller Shareholders' Appraisal Rights....................... A-6
2.04 Anti-Dilution Provisions.................................... A-7
ARTICLE THREE -- REPRESENTATIONS AND WARRANTIES OF SELLER............. A-7
3.01 Representations and Warranties of Seller.................... A-7
ARTICLE FOUR -- REPRESENTATIONS AND WARRANTIES OF BUYER............... A-19
4.01 Representations and Warranties of Buyer..................... A-19
ARTICLE FIVE -- FURTHER COVENANTS OF SELLER........................... A-28
5.01 Operation of Business....................................... A-28
5.02 Notification................................................ A-31
5.03 Acquisition Proposals....................................... A-31
5.04 Delivery of Information..................................... A-32
5.05 Affiliates Compliance with the Securities Act............... A-33
5.06 Takeover Laws............................................... A-33
5.07 No Control.................................................. A-33
ARTICLE SIX -- FURTHER COVENANTS OF BUYER............................. A-33
6.01 Access to Information....................................... A-33
6.02 Opportunity of Employment; Employee Benefits................ A-33
6.03 Exchange Listing............................................ A-34
6.04 Notification................................................ A-34
6.05 Takeover Laws............................................... A-34
6.06 Officers' and Directors' Indemnification.................... A-35
Election of a Seller Director(s) to Buyer Board of
6.07 Directors................................................... A-35
ARTICLE SEVEN -- FURTHER OBLIGATIONS OF THE PARTIES................... A-36
7.01 Seller Stock Options........................................ A-36
7.02 Necessary Further Action.................................... A-37
7.03 Cooperative Action.......................................... A-37
7.04 Satisfaction of Conditions.................................. A-38
7.05 Press Releases.............................................. A-38
Registration Statements; Proxy Statement; Shareholders'
7.06 Meeting..................................................... A-38
7.07 Regulatory Applications..................................... A-39
7.08 Coordination of Dividends................................... A-40
ARTICLE EIGHT -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE A-40
PARTIES.............................................................
8.01 Conditions to the Obligations of Buyer...................... A-40
8.02 Conditions to the Obligations of Seller..................... A-40
8.03 Mutual Conditions........................................... A-41
A-i
PAGE
----
ARTICLE NINE -- CLOSING............................................... A-42
9.01 Closing..................................................... A-42
9.02 Closing Transactions Required of Buyer...................... A-42
9.03 Closing Transactions Required of Seller..................... A-42
ARTICLE TEN -- NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND A-43
COVENANTS...........................................................
10.01 Non-Survival of Representations, Warranties and Covenants... A-43
ARTICLE ELEVEN -- TERMINATION......................................... A-43
11.01 Termination................................................. A-43
11.02 Effect of Termination....................................... A-45
ARTICLE TWELVE -- MISCELLANEOUS....................................... A-46
12.01 Notices..................................................... A-46
12.02 Counterparts................................................ A-46
12.03 Entire Agreement............................................ A-46
12.04 Successors and Assigns...................................... A-47
12.05 Captions.................................................... A-47
12.06 Governing Law............................................... A-47
12.07 Payment of Fees and Expenses................................ A-47
12.08 Amendment................................................... A-47
12.09 Waiver...................................................... A-47
12.10 Disclosure Schedules........................................ A-48
12.11 No Third-Party Rights....................................... A-48
12.12 Waiver of Jury Trial........................................ A-48
12.13 Severability................................................ A-48
A-ii
GLOSSARY OF DEFINED TERMS
The following terms, when used in this Agreement, have the meanings
ascribed to them in the corresponding Sections of this Agreement listed below:
"Acquisition Proposal" -- Section 5.04
"Agreement" -- Preamble
"Aggregate Cash Consideration" -- Section 2.01(c)
"BHC Act" -- Section 4.01(a)
"Buyer" -- Preamble
"Buyer Balance Sheet Date" -- Section 4.01(g)
"Buyer Disclosure Schedule" -- Preamble
"Buyer ERISA Affiliate" -- Section 4.01(s)
"Buyer ERISA Affiliate Plan" -- Section 4.01(s)
"Buyer Financial Statements" -- Section 4.01(g)
"Buyer Pension Plans" -- Section 4.01(s)
"Buyer Shares" -- Preamble
"Buyer Stock Option Plans" -- Section 4.01(c)
"Cash Election Shares" -- Section 2.02(b)
"Cash Percentage" -- Section 2.01(c)
"CERCLA" -- Section 3.01(y)
"CBank" -- Section 3.01(a)
"Closing Date" -- Section 9.01
"Closing" -- Section 9.01
"Code" -- Preamble
"Compensation and Benefit Plans" -- Section 3.01(t)
"Confidentiality Letter" -- Section 12.03
"Constituent Corporations" -- Preamble
"Consultants" -- Section 3.01(t)
"Costs" -- Section 6.06(a)
"CRA" -- Section 3.01(hh)
"Delaware Secretary of State" -- Section 1.02
"Determination Date" -- Section 2.01(b)
"DGCL" -- Section 1.01
"Directors" -- Section 3.01(t)
"DOL" -- Section 3.01(t)
"DPC Shares" -- Section 2.01(c)
"Effective Time" -- Section 1.02
"Election Deadline" -- Section 2.02(b)
"Election Form" -- Section 2.02(a)
"Election Form Record Date" -- Section 2.02(b)
"Employees" -- Section 3.01(t)
"Environmental Law" -- Section 3.01(y)
"ERISA" -- Section 3.01(t)
"Exchange Act" -- Section 3.01(g)
"Exchange Agent" -- Section 2.02(a)
A-iii
"Exchange Ratio" -- Section 2.01(b)
"FDIC" -- Section 3.01(a)
"Financial Services" -- Section 3.01(a)
"GAAP" -- Section 3.01(f)
"Governmental Authority" -- Section 3.01(q)
"HOLA" -- Section 3.01(a)
"Hazardous Substances" -- Section 3.01(y)
"IRS" -- Section 3.01(m)
"Indemnified Party" -- Section 6.06(a)
"Insurance Amount" -- Section 6.06(b)
"Loan Assets" -- Section 3.01(j)
"Loan Documentation" -- Section 3.01(j)
"Mailing Date" -- Section 2.02(b)
"material adverse effect" -- Section 3.01(a)
"material" -- Section 3.01(a)
"Merger" -- Preamble
"Merger Consideration" -- Section 2.01(a)
"No-Election Shares" -- Section 2.02(b)
"Officers" -- Section 3.01(t)
"OTS" -- Section 3.01(a)
"PBGC" -- Section 3.01(t)
"PCBs" -- Section 3.01(y)
"Per Share Cash Consideration" -- Section 2.01(b)
"Per Share Stock Consideration" -- Section 2.01(b)
"Proxy Statement" -- Section 5.03(b)
"Proxy Statement/Prospectus" -- Section 7.06(a)
"Reallocated Cash Shares" -- Section 2.02(d)
"Reallocated Stock Shares" -- Section 2.02(d)
"Registration Statement" -- Section 7.06(a)
"Regulatory Authorities" -- Section 3.01(p)
"Rule 145 Affiliates" -- Section 5.06(a)
"SEC" -- Section 3.01(c)
"Securities Act" -- Section 3.01(v)
"Seller" -- Preamble
"Seller Balance Sheet Date" -- Section 3.01(f)
"Seller Central" -- Section 3.01(a)
"Seller Certificates" -- Section 2.02(g)
"Seller Disclosure Schedule" -- Preamble
"Seller Dissenting Share" -- Section 2.03
"Seller ERISA Affiliate Plan" -- Section 3.01(t)
"Seller ERISA Affiliate Plan" -- Section 3.01(t)
"Seller ESOP" -- Section 7.01(a)
"Seller Financial Statements" -- Section 3.01(f)
"Seller Meeting" -- Section 5.03(b)
"Seller Pension Plan" -- Section 3.01(t)
A-iv
"Seller Real Properties" -- Section 3.01(n)
"Seller Shares" -- Preamble
"Seller Stock Option Plans" -- Section 3.01(b)
"Seller Stock Options" -- Section 3.01(b)
"Seller Subsidiaries" -- Section 3.01(a)
"Seller Subsidiary Real Estate Collateral" -- Section 3.01(y)
"Stock Election Shares" -- Section 2.02(b)
"Subsidiary" -- Section 3.01(c)
"Surviving Corporation" -- Section 1.01
"Takeover Laws" -- Section 3.01(z)
"Tax" -- Section 3.01(m)
"Tax Returns" -- Section 3.01(m)
"Total Cash Amount -- Section 2.01(b)
"Trust Account Shares" -- Section 2.01(c)
"Updated Buyer Disclosure Schedule" -- Section 6.04
"Updated Seller Disclosure Schedule" -- Section 5.02
"WVBCA" -- Section 1.01
"West Virginia Secretary of State" -- Section 1.02
A-v
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT"), dated as of April 1,
2004, is made and entered into by and between WesBanco, Inc., a West Virginia
corporation ("BUYER"), WOFC, Inc., a West Virginia corporation and a wholly
owned subsidiary of Buyer ("ACQUISITION SUB") and Western Ohio Financial
Corporation, a Delaware corporation ("SELLER") (Acquisition Sub and Seller are
sometimes hereinafter collectively referred to as the "CONSTITUENT
CORPORATIONS").
WITNESSETH:
WHEREAS, the Boards of Directors of Seller, Acquisition Sub and Buyer have
each determined that it is in the best interests of their respective
corporations and shareholders for Buyer to acquire Seller pursuant to a merger
of Seller with and into Acquisition Sub (the "MERGER"), upon the terms and
subject to the conditions set forth in and pursuant to the terms of this
Agreement; and
WHEREAS, the Boards of Directors of Seller, Acquisition Sub and Buyer have
each approved this Agreement and the consummation of the transactions
contemplated hereby; and
WHEREAS, as a result of the Merger, in accordance with the terms of this
Agreement, Seller will cease to have a separate corporate existence, and
shareholders of Seller will receive from Buyer in exchange for each share of
common stock, $0.01 par value per share, of Seller ("SELLER SHARES"), (a) $35.00
in cash, or (b) 1.18 shares of common stock, $2.0833 par value per share, of
Buyer, as may be adjusted as provided herein ("BUYER SHARES"), all as determined
in accordance with the terms of this Agreement; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
contemplated by this Agreement qualify as a "REORGANIZATION" under the
provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "CODE"); and
WHEREAS, Seller has previously provided to Buyer a schedule disclosing
additional information about Seller (the "SELLER DISCLOSURE SCHEDULE"), and
Buyer has previously provided to Seller a schedule disclosing additional
information about Buyer (the "BUYER DISCLOSURE SCHEDULE");
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, Seller and Buyer, intending to be legally bound hereby, agree as
follows:
ARTICLE ONE
THE MERGER
1.01. Merger; Surviving Corporation
Upon the terms and subject to the conditions of this Agreement, at the
Effective Time (as defined in Section 1.02), Seller shall merge with and into
Acquisition Sub in accordance with the West Virginia Business Corporation Act
(the "WVBCA") and the Delaware General Corporation Law (the "DGCL"). Acquisition
Sub shall be the continuing and surviving corporation in the Merger, shall
continue to exist under the laws of the State of West Virginia and shall be the
only one of the Constituent Corporations to continue its separate corporate
existence after the Effective Time. As used in this Agreement, the term
"SURVIVING CORPORATION" refers to Acquisition Sub at and after the Effective
Time. As a result of the Merger, the outstanding shares of capital stock and the
treasury shares of the Constituent Corporations shall be converted in the manner
provided in Article Two.
1.02. Effective Time
The Merger shall become effective upon the latest of the following: (a) the
filing of the appropriate certificate of merger with the Secretary of State of
the State of West Virginia (the "WEST VIRGINIA SECRETARY OF STATE"), (b) the
filing of the appropriate certificate of merger with the Secretary of State of
the State of Delaware (the "DELAWARE SECRETARY OF STATE") or (c) such time
thereafter as is agreed to in writing by Buyer
A-1
and Seller and so provided in the certificates of merger filed as set forth
above. The date and time at which the Merger shall become effective is referred
to in this Agreement as the "EFFECTIVE TIME."
1.03. Effects of the Merger
At the Effective Time:
(a) the certificate of incorporation of Acquisition Sub as in effect
immediately prior to the Effective Time shall be the articles of the
Surviving Corporation;
(b) the bylaws of Acquisition Sub as in effect immediately prior to
the Effective Time shall be the regulations of the Surviving Corporation;
and
(c) the Merger shall have the effects prescribed in the WVBCA and
DGCL.
ARTICLE TWO
CONVERSION OF SHARES; SURRENDER OF CERTIFICATES
2.01. Conversion of Seller Shares
At the Effective Time, by virtue of the Merger and without any action on
the part of the holder thereof:
(a) Conversion of Seller Shares. Subject to the other provisions of
this Article Two, each Seller Share issued and outstanding immediately
prior to the Effective Time (other than (i) Seller Shares held directly or
indirectly by Buyer or Seller or any of their respective Subsidiaries (as
defined below) (except for Trust Account Shares and DPC Shares, as such
terms are defined in Section 2.01(b) hereof), and (ii) Seller Dissenting
Shares (as defined in Section 2.03)) shall, by virtue of this Agreement and
without any action on the part of the holder thereof, be converted into and
exchangeable for the right to receive, at the election of the holder
thereof as provided in and subject to the provisions of this Section 2.01,
either (i) the Per Share Stock Consideration (as defined below) or (ii) the
Per Share Cash Consideration (as defined below). The Per Share Stock
Consideration and the Per Share Cash Consideration are referred to herein
collectively as the "MERGER CONSIDERATION."
(b) Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
i. "PER SHARE STOCK CONSIDERATION" shall mean a number of Buyer
Shares equal to the Exchange Ratio;
ii. "PER SHARE CASH CONSIDERATION" shall mean $35.00;
iii. "EXCHANGE RATIO" shall mean 1.18;
iv. "TOTAL CASH AMOUNT" shall mean 45% of the product obtained by
multiplying (x) the Per Share Cash Consideration and (y) the total
number of shares of Seller Shares outstanding as of the close of
business on the Determination Date; and
v. "DETERMINATION DATE" shall mean the third calendar day
immediately prior to the Effective Time, or if such calendar day is not
a trading day on the Nasdaq, then the trading day immediately preceding
such calendar day.
(c) At the Effective Time, all Seller Shares that are owned directly
or indirectly by Buyer or Seller or any of their respective Subsidiaries
(other than Seller Shares (x) held directly or indirectly in trust
accounts, managed accounts and the like or otherwise held in a fiduciary
capacity for the benefit of third parties (any such shares, and shares of
Buyer Common Stock which are similarly held, whether held directly or
indirectly by Buyer or Seller, as the case may be, being referred to herein
as "TRUST ACCOUNT SHARES") or (y) held by Buyer or Seller or any of their
respective Subsidiaries in respect of a debt previously contracted (any
such Seller Shares, and Buyer Shares which are similarly held, whether held
directly or indirectly by Buyer or Seller, being referred to herein as "DPC
SHARES")) shall be cancelled and shall cease to exist and no Buyer Shares,
cash or other consideration shall be delivered in exchange
A-2
therefor. All Buyer Shares that are owned by Seller or any of its
Subsidiaries (other than Trust Account Shares and DPC Shares) shall become
treasury stock of Buyer.
(d) The calculations required by this Section 2.01 shall be prepared
jointly by Buyer and Seller prior to the Closing Date.
2.02. Election and Exchange and Payment Procedures
(a) Election Procedure. An election form and other appropriate and
customary transmittal materials (which shall specify that delivery shall be
effected, and risk of loss and title to the certificates theretofore
representing the Seller Shares shall pass, only upon proper delivery of such
certificates to the Exchange Agent (as defined below)) in such form as Buyer and
Seller shall mutually agree (the "ELECTION FORM") shall be mailed 35 days prior
to the anticipated Effective Time or on such other date as Seller and Buyer
shall mutually agree (the "MAILING DATE") to each holder of record of Seller
Shares as of the close of business on the fifth business day prior to the
Mailing Date (the "ELECTION FORM RECORD DATE").
(b) Election. Each Election Form shall permit the holder (or the
beneficial owner through appropriate and customary documentation and
instructions) to specify (i) the number of such holder's Seller Shares with
respect to which such holder elects to receive the Per Share Stock Consideration
("STOCK ELECTION SHARES"), (ii) the number of such holder's Seller Shares with
respect to which such holder elects to receive the Per Share Cash Consideration
("CASH ELECTION SHARES"), or (iii) that such holder makes no election with
respect to such holder's Seller Shares ("NO ELECTION SHARES"). All Seller Shares
with respect to which the Exchange Agent has not received an effective, properly
completed Election Form on or before 5:00 p.m., on the 33rd day following the
Mailing Date (or such other time and date as Buyer and Seller may mutually
agree) (the "ELECTION DEADLINE") shall also be deemed to be No Election Shares.
(c) Exchange Agent; Election Forms. Buyer will designate Computershare
Investor Services, LLC or such other entity as reasonably shall be approved by
Seller in writing to act as agent (the "EXCHANGE AGENT") for purposes of
conducting the election procedure and the exchange and payment procedures as
described in this Section 2.02. Buyer shall make available one or more Election
Forms as may reasonably be requested from time to time by all persons who become
holders (or beneficial owners) of Seller Shares between the Election Form Record
Date and the close of business on the business day prior to the Election
Deadline, and Seller shall provide to the Exchange Agent all information
reasonably necessary for it to perform as specified herein.
(d) Proper Election. Any such election shall have been properly made only
if the Exchange Agent shall have actually received a properly completed Election
Form by the Election Deadline. An Election Form shall be deemed properly
completed only if accompanied by one or more certificates (or customary
affidavits and indemnification regarding the loss or destruction of such
certificates or the guaranteed delivery of such certificates) representing all
Seller Shares covered by such Election Form, together with duly executed
transmittal materials included in the Election Form. Any Election Form may be
revoked or changed by the person submitting such Election Form at or prior to
the Election Deadline. If an Election Form is revoked prior to the Election
Deadline, the Seller Shares represented by such Election Form shall become No
Election Shares and Buyer shall cause the certificates representing such Seller
Shares to be promptly returned without charge to the Person submitting the
Election Form upon written request to that effect from the holder who submitted
the Election Form. Subject to the terms of this Agreement and of the Election
Form, the Exchange Agent shall have reasonable discretion to determine whether
any election, revocation or change has been properly or timely made and to
disregard immaterial defects in the Election Forms, and any good faith decisions
of the Exchange Agent such matters shall be binding and conclusive. Neither
Buyer nor the Exchange Agent shall be under any obligation to notify any person
of any defect in an Election Form.
(e) Pro Rata Allocation. Within ten business days after the Election
Deadline, unless the Effective Time has not yet occurred, in which case as soon
thereafter as practicable, Buyer shall cause the Exchange
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Agent to effect the allocation among the holders of Seller Shares of rights to
receive Buyer Shares or cash in the Merger in accordance with the Election Forms
as follows:
(1) Cash Election Shares More Than Total Cash Amount. If the
aggregate cash amount that would be paid upon the conversion in the Merger
of the Cash Election Shares (the "SECTION 2.02(E) CASH AMOUNT") is greater
than the Total Cash Amount, then:
(A) all Stock Election Shares and No Election Shares shall be
converted into the right to receive the Per Share Stock Consideration,
(B) the Exchange Agent shall then select from among the Cash Election
Shares, by a pro rata selection process, a sufficient number of shares
("STOCK DESIGNATED SHARES") such that the aggregate cash amount that
will be paid in the Merger (excluding, however, without limitation, any
cash paid in respect of options to purchase Seller Shares under Section
7.01 or any other provision of this Agreement) equals as closely as
practicable the Total Cash Amount, and all Stock Designated Shares shall
be converted into the right to receive the Per Share Stock
Consideration; and
(B) the Cash Election Shares that are not Stock Designated Shares
will be converted into the right to receive the Per Share Cash
Consideration.
(2) Cash Election Shares Less Than Total Cash Amount. If the Section
2.02(e) Cash Amount is less than the Total Cash Amount, then:
(A) all Cash Election Shares shall be converted into the right to
receive the Per Share Cash Consideration;
(B) the Exchange Agent shall then select first from among the No
Election Shares and then (if necessary) from among the Stock Election
Shares, by a pro rata selection process (excluding, to the extent
possible, Seller Shares acquired through the exercise of any incentive
stock option at any time within twelve months prior to the Effective
Time, which shares are identified on Exhibit 2.01(e)(2)(B) hereto), a
sufficient number of shares ("CASH DESIGNATED SHARES") such that the
aggregate cash amount that will be paid in the Merger (excluding,
however, without limitation, any cash paid in respect of options to
purchase Seller Shares under Section 7.01 or any other provision of this
Agreement) equals as closely as practicable the Total Cash Amount, and
all Cash Designated Shares shall be converted into the right to receive
the Per Share Cash Consideration; and
(C) the Stock Election Shares and the No Election Shares that are
not Cash Designated Shares shall be converted into the right to receive
the Per Share Stock Consideration.
(3) Cash Election Shares Equal to Total Cash Amount. If the Section
2.02(e) Cash Amount is equal or nearly equal (as determined by the Exchange
Agent) to the Total Cash Amount, then subparagraphs (1) and (2) above shall
not apply, all Cash Election Shares shall be converted into the right to
receive the Per Share Cash Consideration and all Stock Election Shares and
No Election Shares shall be converted into the right to receive the Per
Share Stock Consideration. The pro rata selection process to be used by the
Exchange Agent shall consist of such equitable pro ration processes as
shall be mutually determined by Buyer and Seller.
(f) Deposit with Exchange Agent; Exchange Fund. At or prior to the
Effective Time, Buyer shall provide to the Exchange Agent the number of Buyer
Shares issuable pursuant to Section 2.01(a), the Aggregate Cash Consideration
payable pursuant to Section 2.02(e), the cash in respect of fractional Buyer
Shares payable pursuant to Section 2.02(j), and the amount of all other cash
payable in the Merger, if any, all of which shall be held by the Exchange Agent
in trust for the holders of Seller Shares (collectively, the "EXCHANGE FUND").
No later than ten days after the Election Deadline, the Exchange agent shall
distribute such Buyer Shares and make payment of such cash as provided herein.
The Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the Buyer Shares held by it from time to time
hereunder, except that it shall receive and hold in trust for the recipients of
the Buyer Shares until distributed thereto pursuant to the provisions of this
Agreement all dividends or other distributions paid or
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distributed with respect to such Buyer Shares for the account of the persons
entitled thereto. The Exchange Fund shall not be used for any purpose other than
as set forth in this paragraph. The Exchange Agent shall invest cash in the
Exchange Fund, as directed by Buyer, on a daily basis; provided, however, that
all such investments shall be in (1) obligations of, or guaranteed by, the
United States of America, (2) commercial paper obligations receiving the highest
rating from either Moody's Investors Services, Inc. or Standard and Poor's
Corporation, or (3) certificates of deposit of commercial banks (not including
any Subsidiary or affiliate of Buyer) with capital exceeding $1.0 billion. All
interest and other income resulting from such investments shall be paid to
Buyer.
(g) Surrender of Seller Certificates. After the completion of the
foregoing allocation, each holder of an outstanding certificate or certificates
which prior thereto represented shares of Seller Shares ("SELLER CERTIFICATE"),
who surrenders such Seller Certificate to the Exchange Agent shall, upon
acceptance thereof by the Exchange Agent, be entitled to a certificate
representing the full number of Buyer Shares and/or the amount of cash into
which the aggregate number of Seller Shares previously represented by such
Seller Certificate surrendered shall have been converted pursuant to this
Agreement and, if such holder's Seller Shares have been converted into Buyer
Shares, any other distribution theretofore paid with respect to Buyer Shares
issuable in the Merger which remains unpaid at the Effective Time, in each case
without interest. The Exchange Agent shall accept such Seller Certificates upon
compliance with such reasonable terms and conditions as the Exchange Agent may
impose to effect an orderly exchange thereof in accordance with normal exchange
practices. Each Seller Certificate that is not surrendered to the Exchange Agent
in accordance with the procedures provided for herein shall, except as otherwise
herein provided, until duly surrendered to the Exchange Agent be deemed to
evidence ownership of the number of Buyer Shares or the right to receive the
amount of cash into which such Seller Shares shall have been converted. After
the Effective Time, there shall be no further transfer on the records of Seller
of Seller Certificates representing Seller Shares and, if such Seller
Certificates are presented to Seller for transfer, they shall be canceled
against delivery of certificates for Buyer Shares and/or cash as hereinabove
provided.
(h) Lost Certificates. If there shall be delivered to the Exchange Agent
by any person who is unable to produce any Seller Certificate for Seller Shares
for surrender to the Exchange Agent in accordance with this Section 2.02:
(i) evidence to the reasonable satisfaction of the Surviving
Corporation that such Seller Certificate has been lost, wrongfully taken,
or destroyed;
(ii) such security or indemnity as reasonably may be requested by the
Surviving Corporation to save it harmless (which may include the
requirement to obtain a third party bond or surety); and
(iii) evidence to the reasonable satisfaction of the Surviving
Corporation that such person was the owner of the Seller Shares theretofore
represented by each such Seller Certificate claimed by him to be lost,
wrongfully taken or destroyed and that he is the person who would be
entitled to present such Seller Certificate for exchange pursuant to this
Agreement;
then the Exchange Agent, in the absence of actual notice to it that any Seller
Shares theretofore represented by any such Seller Certificate have been acquired
by a bona fide purchaser, shall deliver to such person the cash and/or Buyer
Shares (and cash in lieu of fractional Buyer Share interests, if any) that such
person would have been entitled to receive upon surrender of each such lost,
wrongfully taken or destroyed Seller Certificate.
(i) No Further Ownership Rights in Seller Shares. All cash and Buyer
Shares issued upon conversion of Seller Shares in accordance with the terms
hereof (including any cash paid pursuant to Section 2.02(g) or 2.02(j)) shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
Seller Shares, subject, however, to the Surviving Corporation's obligation to
pay any dividends or make any other distributions with a record date prior to
the Effective Time which may have been declared or made by Seller on such Seller
Shares in accordance with the terms of this Agreement on or prior to the
Effective Time and which remain unpaid at the Effective Time.
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(j) No Fractional Buyer Shares.
(i) No certificates or scrip representing fractional Buyer Shares
shall be issued upon the surrender for exchange of Seller Certificates
evidencing Seller Shares, and such fractional Buyer Share interests will
not entitle the owner thereof to vote or to any rights of a shareholder of
the Surviving Corporation.
(ii) Each holder of Seller Shares who would otherwise be entitled to
receive a fractional Buyer Share shall receive from the Exchange Agent an
amount of cash equal to the product obtained by multiplying (a) the
fractional Buyer Share interest to which such holder (after taking into
account all Seller Shares held at the Effective Time by such holder) would
otherwise be entitled by (b) $35.00.
(k) Termination of Exchange Fund. Any portion of the Exchange Fund
delivered to the Exchange Agent by Buyer pursuant to Section 2.02(f) which
remains undistributed to the shareholders of Seller for twelve (12) months after
the Effective Time shall be delivered to the Surviving Corporation, upon demand,
and any shareholders of Seller who have not theretofore complied with this
Article Two shall thereafter look only to the Surviving Corporation for payment
of the Per Share Stock Consideration, the Per Share Cash Consideration, any cash
in lieu of fractional Buyer Share interest and any dividends or distributions
with respect to Buyer Shares, in each case without interest.
(l) No Liability. None of Buyer, Seller, the Exchange Agent or the
Surviving Corporation shall be liable to any former holder of Seller Shares for
any payment of the Per Share Stock Consideration, the Per Share Cash
Consideration, any cash in lieu of fractional Buyer Share interest or any
dividends or distributions with respect to Buyer Shares delivered to a public
official if required by any applicable abandoned property, escheat or similar
law.
(m) Withholding Rights. Buyer or the Exchange Agent shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Seller Certificates such amounts as Buyer or the
Exchange Agent is required to deduct and withhold with respect to the making of
such payment under the Code, or any other provision of domestic or foreign
(whether national, federal, state, provincial, local or otherwise) tax law. To
the extent that amounts are so withheld and paid over to the appropriate taxing
authority by Buyer or the Exchange Agent, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
Seller Certificates in respect of which such deduction and withholding was made
by Buyer, the Surviving Corporation or the Exchange Agent.
(n) Waiver. The Surviving Corporation may from time to time, in the case
of one or more persons, waive one or more of the rights provided to it in this
Article Two to withhold certain payments, deliveries and distributions; and no
such waiver shall constitute a waiver of its rights thereafter to withhold any
such payment, delivery or distribution in the case of any person.
(o) Section 16(a) Exemption. Prior to the Effective Time, Buyer and Seller
shall take all such steps as may be required to cause any acquisitions of Buyer
equity securities (including derivative securities with respect to any Buyer
equity securities) and dispositions of Seller equity securities (including
derivative securities with respect to any Seller equity securities) resulting
from the transactions contemplated by this Agreement by each individual who is
anticipated to be subject to the reporting requirements of Section 16(a) of the
Exchange Act with respect to Buyer or who is subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect to Seller, to be
exempt under Rule 16b-3 promulgated under the Exchange Act.
2.03. Seller Shareholders' Appraisal Rights
Anything contained in this Agreement or elsewhere to the contrary
notwithstanding, if any holder of an outstanding Seller Share who is entitled to
demand and properly demands appraisal of such Seller Share in accordance with
Section 262 of the DGCL (a "SELLER DISSENTING SHARE"), then such Seller
Dissenting Share shall not be converted into the right to receive the Per Share
Stock Consideration or the Per Share Cash Consideration, and instead:
(a) Each such Seller Dissenting Share shall nevertheless be deemed to
be extinguished at the Effective Time as provided elsewhere in this
Agreement;
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(b) Each holder perfecting such appraisal rights shall thereafter have
only such rights (and shall have such obligations) as are provided in
Section 262 of the DGCL, and the Surviving Corporation shall not be
required to deliver any cash payments to such person in substitution for
each such Seller Dissenting Share in accordance with this Agreement;
provided, however, that if any such person shall have failed to perfect or
shall withdraw or lose such holder's rights under subsection (k) of Section
262 of the DGCL, each such holder's Seller Dissenting Shares shall
thereupon be deemed to have been converted as of the Effective Time into
the right to receive the Per Share Stock Consideration or the Per Share
Cash Consideration, as shall have been designated by each such holder prior
to the such perfection, or if no such designation shall have been made, the
Per Share Cash Consideration, without any interest thereon, pursuant to
Section 2.01.
No holder of Seller Dissenting Shares shall be entitled to submit a letter
of transmittal, and any letter of transmittal submitted by a holder of Seller
Dissenting Shares shall be invalid, unless and until the demand for appraisal
rights made in respect of such Seller Dissenting Shares shall have been or is
deemed to have been withdrawn.
2.04. Anti-Dilution Provisions
The Exchange Ratio and the Per Share Stock Consideration shall be adjusted
fully to reflect any occurrence, subsequent to the date of this Agreement but
prior to the Effective Time, pursuant to which the outstanding Buyer Shares
shall have been increased, decreased, changed into or exchanged for a different
number or kind of shares or securities through reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other like
changes in Buyer's capitalization; provided, however, that nothing contained
herein shall require any adjustment to the Exchange Ratio or the Per Share Stock
Consideration as a result of the issuance of additional Buyer Shares for
consideration which, if such issuance was for more than 19.9% of the then
outstanding Buyer Shares, would not require the approval of the Buyer
shareholders. Nothing contained herein shall be deemed to permit any action
which may be proscribed by this Agreement.
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF SELLER
3.01. Representations and Warranties of Seller
Except as set forth on the Seller Disclosure Schedule (with specific
reference to the Section or Subsection of this Agreement to which the
information stated in such disclosure relates, provided that any fact, item,
contract, agreement, document or instrument listed or described, and any
information disclosed, in any Section or Subsection thereof shall be deemed
listed, described and disclosed in all other applicable Sections and Subsections
even though not expressly set forth in such other Section(s) or Subsection(s)),
Seller represents and warrants to Buyer and Acquisition Sub as follows:
(a) Corporate Status.
(i) Seller is a Delaware corporation and a unitary savings and loan
holding company registered under the Home Owners Loan Act, as amended
("HOLA"). Seller is duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the full
corporate power and authority to own its property, to carry on its
business as presently conducted, and to enter into and, subject to the
required adoption of this Agreement by the Seller shareholders and the
obtaining of appropriate approvals of Governmental Authorities and
Regulatory Authorities, perform its obligations under this Agreement and
consummate the transactions contemplated by this Agreement. Seller is
qualified to do business in the State of Ohio, but is not qualified to
do business in any other jurisdiction or required to be so qualified to
do business in any other jurisdiction except where the failure to be so
qualified would not have a material adverse effect on Seller. Seller has
made available to Buyer true and complete copies of the certificate of
incorporation and bylaws of Seller, in each case as amended to the date
of this Agreement.
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(ii) CornerstoneBanc Financial Services, Incorporated, a Delaware
corporation ("FINANCIAL SERVICES"), West Central Financial Services,
Inc., an Ohio corporation ("CENTRAL FINANCIAL"), and Cornerstone Bank, a
federal savings bank ("CBANK" and, together with Financial Services and
Central Financial, the "SELLER SUBSIDIARIES") are the only Subsidiaries
(as that term is defined in Section 3.01(c)) of Seller. CBank is a
federal savings bank, is a member bank of the Federal Home Loan Bank of
Cincinnati and is regulated by the Office of Thrift Supervision (the
"OTS") and the Federal Deposit Insurance Corporation (the "FDIC"). Each
of the Seller Subsidiaries is duly organized, validly existing and in
good standing under the laws of their respective jurisdictions of
incorporation and each has full power and authority, corporate or
otherwise, to own their property and to carry on its business as
presently conducted. Each Seller Subsidiary is qualified to do business
in the State of Ohio, but is not qualified to do business in any other
jurisdiction or required to be qualified to do business in any other
jurisdiction except where the failure to be so qualified would have a
material adverse effect on Seller. Seller has made available to Buyer
true and complete copies of the governing instruments of each Seller
Subsidiary, in each case as amended to the date of this Agreement.
(iii) As used in this Agreement, (A) any reference to any event,
change or effect being "material" with respect to any entity means an
event, change or effect which is material in relation to the financial
condition, properties, assets, liabilities, businesses or results of
operations of such entity and its subsidiaries taken as a whole and (B)
the term "material adverse effect" means, with respect to an entity, a
material adverse effect on the financial condition, properties, assets,
liabilities, businesses or results of operations of such entity and its
subsidiaries taken as a whole or on the ability of such entity to
perform its obligations under this Agreement or consummate the Merger
and the other material transactions contemplated by this Agreement other
than, in any case, any state of facts, change, development, event,
effect, condition or occurrence (i) resulting from changes in the United
States economy or the United States securities markets in general; (ii)
resulting from changes in the industries in which Seller or Buyer, as
the case may be, operates and not specifically relating to the Seller or
Buyer, as the case may be; (iii) resulting from any litigation or loss
of current or prospective customers, employee or revenues that the party
against which the material adverse effect or material adverse change is
sought to be enforced successfully bears the burden of proving arose
from the entering into of this Agreement, or (iv) resulting from the
Merger generally; provided, however, that in no event shall a decrease
in the trading price of Seller Shares or Buyer Shares, or litigation
relating thereto, be considered a material adverse effect or material
adverse change.
(b) Capitalization of Seller.
(i) The authorized capital of Seller consists solely of 7,250,000
Seller Shares, of which 2,645,000 Seller Shares are issued and
outstanding, and 250,000 shares of preferred stock, par value $.01 per
share, none of which have been issued or are outstanding. As of March
25, 2004, 805,092 Seller Shares are held in its treasury by Seller. All
outstanding Seller Shares have been duly authorized and are validly
issued, fully paid and non-assessable, and were not issued in violation
of the preemptive rights of any person. All Seller Shares issued have
been issued in compliance in all material respects with all applicable
federal and state securities laws. As of March 25, 2004, 138,307 Seller
Shares were reserved for issuance upon the exercise of outstanding stock
options (the "SELLER STOCK OPTIONS") granted under the Seller Financing
Corporation 1995 Stock Option and Incentive Plan and the Seller
Financing Corporation 1998 Omnibus Incentive Plan (collectively, the
"SELLER STOCK OPTION PLANS"). Seller has furnished to Buyer a true,
complete and correct copy of the Seller Stock Option Plans, and a list
of all participants in the Seller Stock Option Plans as of February 29,
2004 is set forth in Section 3.01(b)(i) of the Seller Disclosure
Schedule, which list identifies the number of Seller Shares subject to
Seller Stock Options held by each such participant, the exercise price
or prices of such Seller Stock Options and the dates each such Seller
Stock Option was granted, becomes exercisable and expires.
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(ii) As of February 29, 2004, except for this Agreement and the
Seller Stock Options, there are no options, warrants, calls, rights,
commitments or agreements of any character to which Seller is a party or
by which it is bound obligating Seller to issue, deliver or sell, or
cause to be issued, delivered or sold, any additional Seller Shares or
obligating Seller to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement. As of the date of this
Agreement, there are no outstanding contractual obligations of Seller to
repurchase, redeem or otherwise acquire any Seller Shares except for
such obligations arising under the Seller Stock Option Plans.
(iii) Except as disclosed in Section 3.01(b) of the Seller
Disclosure Schedule, since February 29, 2004, Seller has not (A) issued
or permitted to be issued any Seller Shares, or securities exercisable
for or convertible into Seller Shares, other than upon exercise of the
Seller Stock Options granted prior to the date hereof under the Seller
Stock Option Plans; (B) repurchased, redeemed or otherwise acquired,
directly or indirectly through any Seller Subsidiary or otherwise, any
Seller Shares; or (C) declared, set aside, made or paid to the
shareholders of Seller dividends or other distributions on the
outstanding Seller Shares.
(iv) No bonds, debentures, notes or other indebtedness of Seller
having the right to vote on any matters on which Seller's shareholders
may vote are issued or outstanding.
(c) Subsidiaries. The Seller Subsidiaries are the only Subsidiaries
of Seller. Seller owns of record and beneficially all of the issued and
outstanding equity securities of CBank, and CBank owns of record and
beneficially all of the issued and outstanding equity securities of
Financial Services and Central Financial. There are no options, warrants,
calls, rights, commitments or agreements of any character to which Seller
or any Seller Subsidiary is a party or by which any of them is bound
obligating any Seller Subsidiary to issue, deliver or sell, or cause to be
issued, delivered or sold, additional equity securities of any Seller
Subsidiary (other than to Seller, with respect to CBank, or CBank, with
respect to Financial Services and Central Financial) or obligating Seller
or any Seller Subsidiary to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement. There are no contracts,
commitments, understandings or arrangements relating to Seller's rights to
vote or to dispose of the equity securities of CBank, and all of the equity
securities of CBank held by Seller are fully paid and non-assessable and
are owned by Seller free and clear of any charge, mortgage, pledge,
security interest, hypothecation, restriction, claim, option, lien,
encumbrance or interest of any persons whatsoever. There are no contracts,
commitments, understandings or arrangements relating to CBank's rights to
vote or to dispose of the equity securities of Financial Services or
Central Financial, and all of the equity securities of Financial Services
and Central Financial held by CBank are fully paid and non-assessable and
are owned by CBank free and clear of any charge, mortgage, pledge, security
interest, hypothecation, restriction, claim, option, lien, encumbrance or
interest of any persons whatsoever. Except as disclosed in Section 3.01(c)
of the Seller Disclosure Schedule, Seller does not own beneficially,
directly or indirectly, any equity securities or similar interests of any
person, or any interest in a partnership or joint venture of any kind,
other than the Seller Subsidiaries. For purposes of this Agreement,
"Subsidiary" has the meaning ascribed to it in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC").
(d) Corporate Proceedings. Assuming the accuracy of the
representations and warranties of Buyer and Acquisition Sub set forth in
Section 4.01(y), all corporate proceedings of Seller necessary to authorize
the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, in each case by
Seller, have been duly and validly taken, except for the adoption of this
Agreement by the holders of at least a majority of the outstanding Seller
Shares entitled to vote thereon (which is the only required shareholder
vote thereon) and subject, in the case of the consummation of the Merger,
to the filing and recordation of a certificate of merger as required by the
DGCL and compliance with the applicable provisions of the WVBCA. The Board
of Directors of Seller has, by a vote of a majority of the "Disinterested
Directors" of such Board (as such term is defined in Article Eighth of
Seller's certificate of incorporation), duly adopted resolutions (i)
approving and declaring advisable this Agreement, the Merger and the other
transactions contemplated hereby and thereby, (ii) declaring that it is in
the best interests of Seller's stockholders that Seller enter into this
Agreement and consummate the Merger on the terms and subject to the
conditions set forth in this
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Agreement, (iii) declaring that this Agreement is fair to Seller's
stockholders, (iv) directing that this Agreement be submitted to a vote at
a meeting of Seller's stockholders to be held as promptly as practicable
and (v) recommending that Seller's stockholders adopt this Agreement, which
resolutions have not been subsequently rescinded, modified or withdrawn in
any way except as permitted by Section 5.03.
(e) Authorized and Effective Agreement. This Agreement has been duly
executed and delivered by Seller, and assuming the due authorization,
execution and delivery by Buyer and Acquisition Sub, constitutes a valid
and binding obligation of Seller, enforceable against Seller in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and other
similar laws relating to or affecting the enforcement of creditors' rights
generally, by general equitable principles (regardless of whether
enforceability is considered in a proceeding in equity or at law) and by an
implied covenant of good faith and fair dealing. Seller has the right,
power, authority and capacity to execute and deliver this Agreement and,
subject to the required adoption of this Agreement by Seller's
shareholders, the obtaining of appropriate approvals by Regulatory
Authorities and Governmental Authorities and the expiration of applicable
regulatory waiting periods, to perform its obligations under this
Agreement.
(f) Financial Statements of Seller. The financial statements
(including the related notes) included in the Seller SEC Documents (as
defined below) comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally
accepted accounting principles ("GAAP") (except, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present in all material respects the consolidated
financial position of Seller and its consolidated subsidiaries as of the
dates thereof and their respective consolidated results of operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
(g) SEC Filings. Seller has filed all reports and proxy materials
required to be filed by it with the SEC pursuant to the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), since January 1, 2001
(together with all information incorporated therein by reference, the
"SELLER SEC DOCUMENTS"), except for any reports or proxy materials the
failure to file which would not have a material adverse effect upon Seller.
All such filings, at the time of filing, complied in all material respects
as to form and included all exhibits required to be filed under the
applicable rules of the SEC applicable to such Seller SEC Documents. None
of such documents, as subsequently supplemented or amended prior to the
date hereof, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(h) Absence of Undisclosed Liabilities. Except as set forth in Seller
SEC Documents filed and publicly available prior to the date of this
Agreement (the "SELLER FILED SEC DOCUMENTS") (including the financial
statements included therein, as corrected pursuant to the Corrective
Release filed as Exhibit 99.2 to the Form 8-K filed by Seller with the SEC
on March 5, 2004) or in Section 3.01(h) of the Seller Disclosure Schedule
and except as arising hereunder, Seller and its subsidiaries have no
liabilities or obligations (whether accrued, absolute, contingent or
otherwise) at December 31, 2003 (the "SELLER BALANCE SHEET DATE"), other
than liabilities and obligations that individually or in the aggregate
could not reasonably be expected to have a material adverse effect on
Seller. Except as set forth in the Seller Filed SEC Documents or otherwise
disclosed in Section 3.01(h) of the Seller Disclosure Schedule, all debts,
liabilities, guarantees and obligations of Seller and the Seller
Subsidiaries incurred since the Seller Balance Sheet Date have been
incurred in the ordinary course of business and are usual and normal in
amount both individually and in the aggregate. Except as disclosed in
Section 3.01(h) of the Seller Disclosure Schedule, neither Seller nor any
Seller Subsidiary is in default or breach of any material agreement to
which Seller or the Seller Subsidiary is a party other than any such
breaches or defaults that individually or in the aggregate would not
reasonably be expected to have a material adverse effect on
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Seller. To the knowledge of Seller, no other party to any material
agreement to which Seller or any Seller Subsidiary is a party is in default
or breach of such agreement, which breach or default would reasonably be
expected to have a material adverse effect on Seller.
(i) Absence of Changes. Except (i) as set forth in the Seller Filed
SEC Documents, (ii) as set forth in Section 3.01(i) of the Seller
Disclosure Schedule, or (iii) in the ordinary course of business consistent
with Seller's past practice, since the Seller Balance Sheet Date: (a) there
has not been any material adverse change in the business, operations,
assets or financial condition of Seller and the Seller Subsidiaries taken
as a whole, and, to the knowledge of Seller, no fact or condition exists
which Seller believes will cause such a material adverse change in the
future; and (b) Seller has not taken or permitted any of the actions
described in Section 5.01(b) of this Agreement.
(j) Loan Documentation. The documentation ("LOAN DOCUMENTATION")
governing or relating to the material loan and credit-related assets ("LOAN
ASSETS") included in the loan portfolio of each Seller Subsidiary is
legally sufficient for the purposes intended thereby and creates
enforceable rights of such Seller Subsidiary in accordance in all material
respects with the terms of such Loan Documentation, subject to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
and other similar laws relating to or affecting the enforcement of
creditors' rights generally, by general equitable principles (regardless of
whether enforceability is considered in a proceeding in equity or at law)
and by an implied covenant of good faith and fair dealing, except for such
insufficiencies as would not reasonably be expected to have a material
adverse effect on Seller. Except as set forth in the Seller Filed SEC
Documents or in Section 3.01(j) of the Seller Disclosure Schedule, no
debtor under any of the Loan Documentation has asserted any claim or
defense with respect to the subject matter thereof, which claim or defense,
if determined adversely to Seller, would reasonably be expected to have a
material adverse effect on Seller. Except as set forth in the Seller SEC
Documents or in Section 3.01(j) of the Seller Disclosure Schedule, none of
the Seller Subsidiaries is a party to a loan, including any loan guaranty,
with any director, executive officer or five percent (5%) shareholder of
Seller or any Seller Subsidiary, or any person, corporation or enterprise
controlling, controlled by or under common control with either Seller or
any Seller Subsidiary. All loans and extensions of credit that have been
made by a Seller Subsidiary comply in all material respects with applicable
regulatory limitations and procedures except for such failures to comply as
would not reasonably be expected to have a material adverse effect on
Seller.
(k) Allowance for Loan Losses. Except as set forth in the Seller SEC
Documents or in Section 3.01(k) of the Seller Disclosure Schedule, there is
no loan which was made by any Seller Subsidiary and which is reflected as
an asset of such Seller Subsidiary on the Seller Financial Statements that
(A)(i) is 90 days or more delinquent or (ii) has been classified by
examiners (regulatory or internal) as "Substandard," "Doubtful" or "Loss,"
and (B) the default by the borrower under which would reasonably be
expected to have a material adverse effect on Seller. The allowance for
loan losses reflected on the Seller Financial Statements has been
determined in accordance with GAAP in all material respects and in
accordance in all material respects with all rules and regulations
applicable to Seller and the Seller Subsidiaries and is adequate in all
material respects, except for such failures and inadequacies which would
not reasonably be expected to have a material adverse effect on Seller.
(l) Reports and Records. Seller and the Seller Subsidiaries have
filed all reports and maintained all records required to be filed or
maintained by them under the rules and regulations of the OTS and the FDIC,
except for such reports and records the failure to file or maintain would
not reasonably be expected to have a material adverse effect on Seller. All
such documents and reports complied in all material respects with
applicable requirements of law and rules and regulations in effect at the
time such documents and reports were filed and contained in all material
respects the information required to be stated therein, except for such
documents and records the failure to file or contain such information would
not reasonably be expected to have a material adverse effect on Seller.
None of such documents or reports, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading,
other than such reports and documents
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which the failure to file in such fashion would not reasonably be expected
to have a material adverse effect on Seller.
(m) Taxes. Except as set forth in Section 3.01(m) of the Seller
Disclosure Schedule, Seller and the Seller Subsidiaries have timely filed
all material returns, statements, reports and forms (including elections,
declarations, disclosures, schedules, estimates and information returns)
(collectively, the "TAX RETURNS") with respect to all material federal,
state, local and foreign income, gross income, gross receipts, gains,
premium, sales, use, ad valorem, transfer, franchise, profits, withholding,
payroll, employment, excise, severance, stamp, occupancy, license, lease,
environmental, customs, duties, property, windfall profits and all other
material taxes (including any interest, penalties or additions to tax with
respect thereto, individually, a "TAX" and, collectively, "TAXES") required
to be filed with the appropriate tax authority through the date of this
Agreement. Such Tax Returns are and will be true, correct and complete in
all material respects. Seller and the Seller Subsidiaries have paid and
discharged all Taxes shown as due on such Tax Returns, other than such
Taxes that are adequately reserved as shown on the Seller Financial
Statements or have arisen in the ordinary course of business since the
Seller Balance Sheet Date. Except as set forth in Section 3.01(m) of the
Seller Disclosure Letter, neither the Internal Revenue Service (the "IRS")
nor any other taxing agency or authority, domestic or foreign, has
asserted, is now asserting or, to the knowledge of Seller, is threatening
to assert against Seller or any Seller Subsidiary any deficiency or claim
for additional Taxes, which deficiency or claim, if upheld, would
reasonably be expected to have a material adverse effect on Seller. There
are no unexpired waivers by Seller or any Seller Subsidiary of any statute
of limitations with respect to Taxes. The accruals and reserves for Taxes
reflected in the Seller Financial Statements are adequate in all material
respects for the periods covered. Seller and the Seller Subsidiaries have
withheld or collected and paid over to the appropriate Governmental
Authorities or are properly holding for such payment all Taxes required by
law to be withheld or collected, except for such failures to withhold or
collect as would not reasonably be expected to have a material adverse
effect on Seller. There are no liens for Taxes upon the assets of Seller or
any Seller Subsidiary, other than liens for current Taxes not yet due and
payable and liens that individually or in the aggregate would not
reasonably be expected to have a material adverse effect on Seller. Neither
Seller nor any Seller Subsidiary has agreed to make, or is required to
make, any adjustment under Section 481(a) of the Code. Except as set forth
in the Seller SEC Documents or in Section 3.01(l) of the Seller Disclosure
Schedule, neither Seller nor any Seller Subsidiary is a party to any
agreement, contract, arrangement or plan that has resulted, or could
result, individually or in the aggregate, in the payment of "excess
parachute payments" within the meaning of Section 280G of the Code. Neither
Seller nor any Seller Subsidiary has ever been a member of an affiliated
group of corporations, within the meaning of Section 1504 of the Code,
other than an affiliated group of which Seller is or was the common Buyer
corporation. No Tax is required to be withheld pursuant to Section 1445 of
the Code as a result of the transactions contemplated by this Agreement.
(n) Property and Title. Section 3.01(n) of the Seller Disclosure
Schedule lists and describes all real property, and any leasehold interest
in real property, owned or held by Seller or any Seller Subsidiary and used
in the business of Seller or any Seller Subsidiary (collectively, the
"SELLER REAL PROPERTIES"). The Seller Real Properties constitute all of the
material real property and interests in real property used in the
businesses of Seller and the Seller Subsidiaries. Copies of all leases of
Seller Real Properties to which Seller or any Seller Subsidiary is a party
have been provided to Buyer. Such leasehold interests have not been
assigned or subleased. All Seller Real Properties which are owned by Seller
or any Seller Subsidiary are free and clear of all mortgages, liens,
security interests, defects, encumbrances, easements, restrictions,
reservations, conditions, covenants, agreements, encroachments, rights of
way and zoning laws, except (i) those set forth in the Seller SEC Documents
or Section 3.01(n) of the Seller Disclosure Schedule; (ii) easements,
restrictions, reservations, conditions, covenants, rights of way, zoning
laws and other defects and irregularities in title and encumbrances which
do not materially impair the use thereof for the purposes for which they
are held; (iii) the lien of current taxes not yet due and payable and (iv)
other defects in title, easements, restrictive covenants and similar
encumbrances that individually or in the aggregate would not reasonably be
expected to have a material adverse effect on Seller. Seller and the Seller
Subsidiaries own, and are in rightful possession of, and have good title
to, all of the other assets
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indicated in the Seller SEC Documents as being owned by Seller or a Seller
Subsidiary, free and clear of any charge, mortgage, pledge, security
interest, hypothecation, restriction, claim, option, lien, encumbrance or
interest of any persons whatsoever except (i) those described in the Seller
SEC Documents or Section 3.01(n) of the Seller Disclosure Schedule, (ii)
for those assets disposed of in the ordinary course of business consistent
with past practices, (iii) for such as are no longer used or useful in the
conduct of its businesses and (iv) for defects in title, easements,
restrictive covenants and similar encumbrances that individually or in the
aggregate would not reasonably be expected to have a material adverse
effect on Seller. The assets of Seller and the Seller Subsidiaries, taken
as a whole, are adequate to continue to conduct the businesses of Seller
and the Seller Subsidiaries as such businesses are presently being
conducted.
(o) Legal Proceedings. Except as set forth in the Seller Filed SEC
Documents or Section 3.01(o) of the Seller Disclosure Schedule, there are
no actions, suits, proceedings, claims or investigations pending or, to the
knowledge of Seller and the Seller Subsidiaries, threatened in any court,
before any governmental agency or instrumentality or in any arbitration
proceeding (i) against Seller or any Seller Subsidiary which, if adversely
determined against Seller or any Seller Subsidiary, would have a material
adverse effect on Seller; or (ii) against or by Seller or any Seller
Subsidiary which, if adversely determined against Seller or any Seller
Subsidiary, would prevent the consummation of this Agreement or any of the
transactions contemplated hereby or declare the same to be unlawful or
cause the rescission thereof.
(p) Regulatory Matters. None of Seller, the Seller Subsidiaries and
the respective properties of Seller and the Seller Subsidiaries is a party
to or subject to any order, judgment, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or
similar submission to, or extraordinary supervisory letter from, any court
or federal or state governmental agency or authority, including any such
agency or authority charged with the supervision or regulation of financial
institutions (or their holding companies) or issuers of securities or
engaged in the insurance of deposits (including, without limitation, the
OTS, the FDIC and the SEC) or the supervision or regulation of Seller or
any Seller Subsidiary (collectively, the "REGULATORY AUTHORITIES") that
individually or in the aggregate would reasonably be expected to have a
material adverse effect on Seller. Neither Seller nor any Seller Subsidiary
has been advised by any Regulatory Authority that such Regulatory Authority
is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, judgment, decree,
agreement, memorandum of understanding, commitment letter, supervisory
letter or similar submission that individually or in the aggregate would
reasonably be expected to have a material adverse effect on Seller.
(q) No Conflict. Subject to the required adoption of this Agreement
by the shareholders of Seller, receipt of the required approvals of
Regulatory Authorities and Governmental Authorities, expiration of
applicable regulatory waiting periods, and required filings under federal
and state securities laws, the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby, by
Seller do not and will not (i) conflict with, or result in a violation of,
or result in the breach of or a default (or which with notice or lapse of
time would result in a default) under, any provision of: (A) any federal,
state or local law, regulation, ordinance, order, rule or administrative
ruling of any administrative agency or commission or other federal, state
or local governmental authority or instrumentality (each, a "GOVERNMENTAL
AUTHORITY") applicable to Seller or any Seller Subsidiary or any of their
respective properties; (B) the certificate of incorporation or bylaws of
Seller, or the governing instruments of any Seller Subsidiary; (C) any
material agreement, indenture or instrument to which Seller or any Seller
Subsidiary is a party or by which it or its properties or assets may be
bound; or (D) any order, judgment, writ, injunction or decree of any court,
arbitration panel or any Governmental Authority applicable to Seller or any
Seller Subsidiary, other than, in the case of clauses (A), (C) and (D), any
such conflicts, violations, breaches or defaults that individually or in
the aggregate would not reasonably be expected to have a material adverse
effect on Seller; (ii) result in the creation or acceleration of any
security interest, mortgage, option, claim, lien, charge or encumbrance
upon or interest in any property of Seller or any Seller Subsidiary, other
than such security interests, mortgages,
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options, claims, liens, charges or encumbrances that individually or in the
aggregate would not reasonably be expected to have a material adverse
effect on Seller; or (iii) violate the terms or conditions of, or result in
the cancellation, modification, revocation or suspension of, any material
license, approval, certificate, permit or authorization held by Seller or
any Seller Subsidiary, other than such violations, cancellations,
modifications, revocations or suspensions that individually or in the
aggregate would not reasonably be expected to have a material adverse
effect on Seller.
(r) Brokers, Finders and Others. Except for the fees paid or payable
to Friedman Billings Ramsey & Co., Inc., Seller's financial advisor
("SELLER'S FINANCIAL ADVISOR"), there are no fees or commissions of any
sort whatsoever claimed by, or payable by Seller or any Seller Subsidiary
to, any broker, finder, intermediary, attorney, accountant or any other
similar person in connection with effecting this Agreement or the
transactions contemplated hereby, except for ordinary and customary legal
and accounting fees.
(s) Employment Agreements. Except as disclosed in Section 3.01(s) of
the Seller Disclosure Schedule, neither Seller nor any Seller Subsidiary is
a party to any employment, change in control, severance or consulting
agreement not terminable at will. Neither Seller nor any Seller Subsidiary
is a party to, bound by or negotiating, any collective bargaining
agreement, nor are any of their respective employees represented by any
labor union or similar organization. Seller and Seller Subsidiaries are in
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours other than with respect to any noncompliance that
individually or in the aggregate would not reasonably be expected to have a
material adverse effect on Seller, and neither Seller nor any Seller
Subsidiary has engaged in any unfair labor practice that would not
reasonably be expected to have a material adverse effect on Seller.
(t) Employee Benefit Plans.
(i) Section 3.01(t)(i) of the Seller Disclosure Schedule contains a
complete and accurate list of all bonus, incentive, deferred
compensation, pension (including, without limitation, Seller Pension
Plans defined below), retirement, profit-sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock,
stock option, severance, welfare (including, without limitation,
"welfare plans" within the meaning of Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), fringe
benefit plans, employment or severance agreements and all similar
practices, policies and arrangements maintained or contributed to
(currently or within the last six years) by (A) Seller or any Seller
Subsidiary and in which any employee or former employee (the
"EMPLOYEES"), consultant or former consultant (the "CONSULTANTS"),
officer or former officer (the "OFFICERS"), or director or former
director (the "DIRECTORS") of Seller or any Seller Subsidiary
participates or to which any such Employees, Consultants, Officers or
Directors either participate or are parties or (B) any Seller ERISA
Affiliate (as defined below) (collectively, the "COMPENSATION AND
BENEFIT PLANS"). Neither Seller nor any Seller Subsidiary has any
commitment to create any additional Compensation and Benefit Plan or to
modify or change any existing Compensation and Benefit Plan, except to
the extent required by law and as otherwise contemplated by Sections
6.02 and 7.01 of this Agreement.
(ii) Each Compensation and Benefit Plan has been operated and
administered in accordance with its terms and with applicable law,
including, but not limited to, ERISA, the Code, the Securities Act (as
defined in Section 3.01(u)), the Exchange Act (as defined in Section
3.01(g)), the Age Discrimination in Employment Act, or any regulations
or rules promulgated thereunder, and all filings, disclosures and
notices required by ERISA, the Code, the Securities Act, the Exchange
Act, the Age Discrimination in Employment Act and any other applicable
law have been timely made, except with respect to such failures as would
not reasonably be expected to have a material adverse effect on Seller.
Each Compensation and Benefit Plan which is an "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA (a "SELLER PENSION
PLAN") and which is intended to be qualified under Section 401(a) of the
Code has received a favorable determination letter (including a
determination that the related trust under such Compensation and Benefit
Plan is
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exempt from tax under Section 501(a) of the Code) from the IRS and
Seller is not aware of any circumstances likely to result in revocation
of any such favorable determination letter. There is no material pending
or, to the knowledge of Seller, threatened legal action, suit or claim
relating to the Compensation and Benefit Plans other than routine claims
for benefits thereunder. Neither Seller nor any Seller Subsidiary has
engaged in a transaction, or omitted to take any action, with respect to
any Compensation and Benefit Plan that would reasonably be expected to
subject Seller or any Seller Subsidiary to a tax or penalty imposed by
either Section 4975 of the Code or Section 502 of ERISA, assuming for
purposes of Section 4975 of the Code that the taxable period of any such
transaction expired as of the date hereof.
(iii) No liability (other than for payment of premiums to the
Pension Benefit Guaranty Corporation ("PBGC") which have been made or
will be made on a timely basis) under Title IV of ERISA has been or is
expected to be incurred by Seller or any Seller Subsidiary with respect
to any ongoing, frozen or terminated "single-employer plan," within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or any single-employer plan of any entity (a
"SELLER ERISA AFFILIATE PLAN") which is considered one employer with
Seller under Section 4001(a)(14) of ERISA or Section 414(b), (c) or (m)
of the Code (a "SELLER ERISA AFFILIATE"). None of Seller, the Seller
Subsidiaries nor any Seller ERISA Affiliate has contributed, or has been
obligated to contribute, to a multiemployer plan under Subtitle E of
Title IV of ERISA (as defined in ERISA Sections 3(37)(A) and 4001(a)(3))
at any time since September 26, 1980. No notice of a "reportable event",
within the meaning of Section 4043 of ERISA, for which the 30-day
reporting requirement has not been waived, has been required to be filed
for any Compensation and Benefit Plan or by any Seller ERISA Affiliate
Plan within the 12-month period ending on the date hereof, and no such
notice will be required to be filed as a result of the transactions
contemplated by this Agreement. The PBGC has not instituted proceedings
to terminate any Seller Pension Plan or Seller ERISA Affiliate Plan and,
to Seller's knowledge, no condition exists that presents a material risk
that such proceedings will be instituted. There is no pending
investigation or enforcement action by the PBGC, the Department of Labor
(the "DOL"), the IRS or any other Governmental Authority with respect to
any Compensation and Benefit Plan. Under each Seller Pension Plan and
Seller ERISA Affiliate Plan, as of the date of the most recent actuarial
valuation performed prior to the date of this Agreement, the actuarially
determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of
the actuarial assumptions contained in such actuarial valuation of such
Seller Pension Plan or Seller ERISA Affiliate Plan), did not exceed the
then current value of the assets of such Seller Pension Plan or Seller
ERISA Affiliate Plan and since such date there has been neither an
adverse change in the financial condition of such Seller Pension Plan or
Seller ERISA Affiliate Plan nor any amendment or other change to such
Seller Pension Plan or Seller ERISA Affiliate Plan that would increase
the amount of benefits thereunder which reasonably could be expected to
change such result and that individually or in the aggregate would
reasonably be expected to have a material adverse effect on Seller.
(iv) All contributions required to be made under the terms of any
Compensation and Benefit Plan or Seller ERISA Affiliate Plan or any
employee benefit arrangements under any collective bargaining agreement
to which Seller or any Seller Subsidiary is a party have been timely
made or have been reflected on the Seller Financial Statements. Neither
any Seller Pension Plan nor any Seller ERISA Affiliate Plan has an
"accumulated funding deficiency" (whether or not waived) within the
meaning of Section 412 of the Code or Section 302 of ERISA and all
required payments to the PBGC with respect to each Seller Pension Plan
or Seller ERISA Affiliate Plan have been made on or before their due
dates. None of Seller, the Seller Subsidiaries nor any Seller ERISA
Affiliate (x) has provided, or would reasonably be expected to be
required to provide, security to any Seller Pension Plan or to any
Seller ERISA Affiliate Plan pursuant to Section 401(a)(29) of the Code,
and (y) has taken any action, or omitted to take any action, that has
resulted, or would reasonably be expected to result, in the imposition
of a lien under Section 412(n) of the Code or
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pursuant to ERISA that individually or in the aggregate would reasonably
be expected to have a material adverse effect on Seller.
(v) Except as disclosed in Section 3.01(t)(v) of the Seller
Disclosure Schedule, neither Seller nor any Seller Subsidiary has any
obligations to provide retiree health and life insurance or other
retiree death benefits under any Compensation and Benefit Plan, other
than benefits mandated by Section 4980B of the Code.
(vi) Seller and the Seller Subsidiaries do not maintain any foreign
Compensation and Benefit Plans.
(vii) With respect to each Compensation and Benefit Plan of Seller,
Seller has, if applicable, provided or made available to Buyer, true and
complete copies of existing: (A) Compensation and Benefit Plan documents
and amendments thereto; (B) trust instruments and insurance contracts;
(C) most recent actuarial report and financial statement; (D) most
recent summary plan description; (E) forms filed with the PBGC within
the past year (other than for premium payments); (E) most recent
determination letter issued by the IRS; and (G) any Form 5310, Form
5310A, Form 5300 or Form 5330 filed within the past year with the IRS.
(viii) Except as disclosed in the Seller Disclosure Schedule or on
Section 3.01(t)(viii) of the Seller Disclosure Schedule, the
consummation of the transactions contemplated by this Agreement would
not, directly or indirectly (including, without limitation, as a result
of any termination of employment prior to or following the Effective
Time), reasonably be expected to (A) entitle any Employee, Consultant or
Director to any payment (including severance pay or similar
compensation) or any increase in compensation, (B) result in the vesting
or acceleration of any benefits under any Compensation and Benefit Plan
of Seller or (C) result in any material increase in benefits payable
under any Compensation and Benefit Plan of Seller, any of which
reasonably would be expected to have a material adverse effect on
Seller.
(u) Compliance with Laws. Except with respect to Environmental Laws
(as defined in Section 3.01(y)) and Taxes, which are the subject of
Sections 3.01(y) and 3.01(m), respectively, each of Seller and the Seller
Subsidiaries:
(i) has been in compliance with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable thereto or to the employees
conducting such business, including, without limitation, the Equal
Credit Opportunity Act, as amended, the Fair Housing Act, as amended,
the Federal Community Reinvestment Act, as amended, the Home Mortgage
Disclosure Act, as amended, and all other applicable fair lending laws
and other laws relating to discriminatory business practices, except for
failures to be in compliance which, individually or in the aggregate,
have not had or would not reasonably be expected to have a material
adverse effect on Seller;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations
with, all Governmental Authorities that are required in order to permit
it to own or lease its properties and to conduct its business as
presently conducted, except where the failure to obtain any of the
foregoing or to make any such filing, application or registration has
not had or would not reasonably be expected to have a material adverse
effect on Seller; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect and to Seller's
knowledge, no suspension or cancellation of any of them has been
threatened in writing; and
(iii) has received no written notification or communication from
any Governmental Authority since January 1, 2003, (A) asserting that
Seller or any Seller Subsidiary is not in compliance with any of the
statutes, regulations or ordinances which such Governmental Authority
enforces, except for failures to be in compliance that individually or
in the aggregate would not reasonably be expected to have a material
adverse effect on Seller, or (B) threatening to revoke any license,
franchise, permit or governmental authorization, which revocations,
individually or in the aggregate would reasonably be expected to have a
material adverse effect on Seller, which has not been
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resolved to the satisfaction of the Governmental Authority which sent
such notification or communication. There is no event which has occurred
that, to the knowledge of Seller, would reasonably be expected to result
in the revocation of any such license, franchise, permit or governmental
authorization.
(v) Insurance.
(i) Section 3.01(v) of the Seller Disclosure Schedule lists all of
the material insurance policies, binders or bonds maintained by Seller
or any Seller Subsidiary and a description of all material claims filed
by Seller or any Seller Subsidiary against the insurers of Seller and
the Seller Subsidiaries since December 31, 2002. Seller and the Seller
Subsidiaries are insured with reputable insurers against such risks and
in such amounts as the management of Seller reasonably has determined to
be prudent in accordance with industry practices. All such insurance
policies are in full force and effect, Seller and the Seller
Subsidiaries are not in material default thereunder and all claims
thereunder have been filed in due and timely fashion, except with
respect to such policies and claims, the failure to maintain or file
would not reasonably be expected to have a material adverse effect on
Seller.
(ii) The savings accounts and deposits of CBank are insured up to
applicable limits by the FDIC in accordance with the Federal Deposit
Insurance Act, and CBank has paid all assessments and filed all reports
required by the Federal Deposit Insurance Act, except for such failures
as would not reasonably be expected to have a material adverse effect on
CBank or the availability of such insurance.
(w) Governmental and Third-Party Proceedings. No consent, approval,
authorization of, or registration, declaration or filing with, any court,
Governmental Authority or any other third party is required to be made or
obtained by Seller or any Seller Subsidiary in connection with the
execution, delivery or performance by Seller of this Agreement or the
consummation by Seller of the transactions contemplated hereby, except for
(A) filings of applications and notices, as applicable, with and the
approval of certain federal and state banking authorities, (B) the filing
of the appropriate certificates of merger with the Secretaries of State of
West Virginia and Delaware pursuant to the WVBCA and the DGCL, (C) the
adoption of this Agreement by Seller's shareholders, (D) the filing of a
premerger notification and report form by Seller under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT") or any other applicable competition, merger control, antitrust or
similar law or regulation, (E) the filing with the SEC of the Proxy
Statement/Prospectus and such reports under the Exchange Act, as may be
required in connection with this Agreement, the Merger and the other
transactions contemplated hereby, (F) any filings required under the rules
and regulations of Nasdaq and the Buyer's Exchange, and (G) such other
consents, approvals, orders, authorizations, registrations, declarations
and filings the failure of which to be obtained or made individually or in
the aggregate would not reasonably be expected to have a material adverse
effect on Seller.
(x) Contracts. (i) Except for Contracts filed as exhibits to the
Seller SEC Documents, there are no Contracts that are required to be filed
as an exhibit to any Seller SEC Document under the Exchange Act and the
rules and regulations promulgated thereunder. Except for Contracts filed in
unredacted form as exhibits to the Seller SEC Documents and purchase orders
entered into in the ordinary course of business, Section 3.01(x) of the
Seller Disclosure Schedule sets forth a true and complete list as of the
date of this Agreement of all Contracts in existence as of the date of this
Agreement (other than those which have been performed completely): (A)
which involve the payment by or to Seller or any Seller Subsidiary of more
than $100,000 in connection with the purchase of property or goods or the
performance of services or (B) which are not in the ordinary course of
their respective businesses. True, complete and correct copies of all such
Contracts have been delivered to Buyer. Neither Seller nor any Seller
Subsidiary, nor, to the knowledge of Seller, any other party thereto, is in
default under any such contract, agreement, commitment, arrangement or
other instrument to which it is a party, by which its respective assets,
business or operations may be bound or affected in any way, or under which
it or its respective assets, business or operations receive benefits, and
there has not occurred any event that, with
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the lapse of time or the giving of notice or both, would constitute such a
default except, in each case, for defaults that individually or in the
aggregate would not reasonably be expected to have a material adverse
effect on Seller.
(y) Environmental Matters. Except as otherwise disclosed in Section
3.01(y) of the Seller Disclosure Schedule: (i) Seller and the Seller
Subsidiaries are and have been at all times in compliance in all material
respects with all applicable Environmental Laws (as that term is defined in
this Section 3.01(y)), and, to the knowledge of Seller, neither Seller nor
any Seller Subsidiary has engaged in any activity in violation of any
applicable Environmental Law except for failures to be in compliance that
individually or in the aggregate could not reasonably be expected to have a
material adverse effect on Seller; (ii)(A) to the knowledge of Seller, no
investigations, inquiries, orders, hearings, actions or other proceedings
by or before any court or Governmental Authority are pending or have been
threatened in writing in connection with any of Seller's or any Seller
Subsidiary's activities and any Seller Real Properties or improvements
thereon, and (B) to the knowledge of Seller, no investigations, inquiries,
orders, hearings, actions or other proceedings by or before any court or
Governmental Authority are pending or threatened in connection with any
real properties in respect of which any Seller Subsidiary has foreclosed or
holds a mortgage or mortgages (hereinafter referred to as the "SELLER
SUBSIDIARY REAL ESTATE COLLATERAL"); (iii) to the knowledge of Seller, no
claims are pending or threatened by any third party against Seller or any
Seller Subsidiary, or with respect to the Seller Real Properties or
improvements thereon, or, to the knowledge of Seller, the Seller Subsidiary
Real Estate Collateral or improvements thereon, relating to damage,
contribution, cost recovery, compensation, loss, injunctive relief,
remediation or injury resulting from any Hazardous Substance (as that term
is defined in this Section 3.01(x)) which have not been resolved to the
satisfaction of the involved parties and which have had or are reasonably
expected to have a material adverse effect on Seller or any Seller
Subsidiary; (iv) to the knowledge of Seller, no Hazardous Substances have
been integrated into the Seller Real Properties or improvements thereon or
any component thereof, or the Seller Subsidiary Real Estate Collateral or
improvements thereon 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 and improvements; and (v) neither
Seller nor any Seller Subsidiary has knowledge that (A) any of the Seller
Real Properties or improvements thereon, or the Seller Subsidiary Real
Estate Collateral or improvements thereon has been used for the treatment,
storage or disposal of Hazardous Substances or has been contaminated by
Hazardous Substances, (B) any of the business operations of Seller or any
Seller Subsidiary have contaminated lands, waters or other property of
others with Hazardous Substances, except routine, office-generated solid
waste, or (C) any of the Seller Real Properties or improvements thereon, or
the Seller Subsidiary Real Estate Collateral or improvements thereon have
in the past or presently contain underground storage tanks, friable
asbestos materials or PCB-containing equipment, which in any event would
reasonably be expected to have a material adverse effect on Seller.
For purposes of this Agreement, (i) "ENVIRONMENTAL LAW" means the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"); the Resource Conservation and Recovery Act of
1976, as amended; the Hazardous Materials Transportation Act, as amended;
the Toxic Substances Control Act, as amended; the Federal Water Pollution
Control Act, as amended; the Safe Drinking Water Act, as amended; the Clean
Air Act, as amended; the Occupational Safety and Health Act of 1970, as
amended; the Hazardous & Solid Waste Amendments Act of 1984, as amended;
the Superfund Amendments and Reauthorization Act of 1986, as amended; the
regulations promulgated thereunder, and any other federal, state, county,
municipal, local or other statute, law, ordinance or regulation which may
relate to or deal with human health or the environment, as of the date of
this Agreement, and (ii) "HAZARDOUS SUBSTANCES" means, at any time: (a) any
"hazardous substance" as defined in Section 101(14) of CERCLA or
regulations promulgated thereunder; (b) any "solid waste," "hazardous
waste," or "infectious waste," as such terms are defined in any other
Environmental Law as of the date of this Agreement; and (c) friable
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,
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contaminants, chemicals, materials or substances listed or identified in,
or regulated by, any Environmental Law.
(z) Takeover Laws. Assuming the accuracy of the representations and
warranties of Buyer set forth in Section 4.01(y), the approval of this
Agreement and the Merger by the Board of Directors of Seller constitutes
approval of the Merger for purposes of Section 203 of the DGCL and
represents all of the action necessary to ensure that the restrictions on
business combinations (as such term is defined therein) set forth in
Section 203 of the DGCL do not and will not apply to the execution or
delivery of this Agreement (including any amendments to this Agreement) or
the consummation of the Merger and the other transactions contemplated
hereby.
(aa) Seller Information. True and complete copies of all documents
listed in the Seller Disclosure Schedule have been made available or
provided to Buyer. The books of account, stock record books and other
financial and corporate records of the Seller and its Subsidiaries, all
of which have been made available to Buyer, are complete and correct in
all material respects, including the maintenance of a system of internal
accounting controls sufficient to provide reasonable assurance that
transactions are executed with its management's authorizations and such
books and records are accurately reflected in all material respects in
the Seller Filed SEC Documents.
(bb) Ownership of Buyer Shares. As of the date hereof, except as
otherwise disclosed in Section 3.01(cc) of the Seller Disclosure
Schedule, neither Seller nor, to the knowledge of Seller, any of its
affiliates or associates (as such terms are defined under the Exchange
Act), (i) beneficially owns, directly or indirectly, or (ii) is a party
to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, any Buyer Shares.
(cc) Fairness Opinion. The Board of Directors of Seller has
received the opinion of Seller's Financial Advisor dated the date of
this Agreement to the effect that the consideration to be received by
Seller's shareholders in the Merger is fair, from a financial point of
view, to Seller's shareholders.
(dd) CRA Compliance. Neither Seller nor any Seller Subsidiary has
received any notice of non-compliance with the applicable provisions of
the Federal Community Reinvestment Act, as amended ("CRA"), and the
regulations promulgated thereunder, and CBank has received a CRA rating
of satisfactory or better from the FDIC. Seller knows of no fact or
circumstance or set of facts or circumstances which would be reasonably
likely to cause Seller or any Seller Subsidiary to receive any notice of
non-compliance with such provisions or cause the CRA rating of Seller or
any Seller Subsidiary to fall below satisfactory.
ARTICLE FOUR
REPRESENTATIONS AND WARRANTIES OF BUYER
4.01. Representations and Warranties of Buyer
Buyer and Acquisition Sub hereby jointly and severally warrant and
represent to Seller that:
(a) Corporate Status. Buyer is a West Virginia corporation and a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "BHC ACT"). Acquisition Sub is a West Virginia corporation.
Each of Buyer and Acquisition Sub is duly organized, validly existing and
in good standing under the laws of the state of its incorporation and has
the full corporate power and authority to own its property, to carry on its
business as presently conducted and to enter into and, subject to the
required obtaining of appropriate approvals of Governmental Authorities and
Regulatory Authorities, perform its obligations under this Agreement and
consummate the transactions contemplated by this Agreement, and is duly
qualified or licensed to do business and is in good standing in the State
of Ohio and each other jurisdiction in which the nature of its business or
the ownership, leasing or operation of its properties makes such
qualification or licensing necessary, other than where the failure to be so
organized, existing, qualified or licensed or in good standing individually
or in the aggregate could not reasonably be expected to have a material
adverse effect on Buyer. Buyer has made available to Seller
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true and complete copies of its and Acquisition Sub's certificates of
incorporation and bylaws, each as amended to the date of this Agreement.
(b) Corporate Proceedings. All corporate proceedings of Buyer and
Acquisition Sub necessary to authorize the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated by this Agreement, in each case by Buyer and Acquisition Sub,
have been duly and validly taken. This Agreement has been validly executed
and delivered by duly authorized officers of Buyer and Acquisition Sub. No
vote of Buyer's stockholders is required to be obtained in connection with
the consummation of the transactions contemplated hereby.
(c) Capitalization of Buyer.
(i) As of February 27, 2004, the authorized capital stock of Buyer
consists of 50,000,000 common shares, 2.0833 par value per share, of
which 19,718,128 common shares are issued and outstanding and 1,601,220
common shares are held in treasury by Buyer, and 1,000,000 preferred
shares, no par value per share, of which no shares are issued or
outstanding. The outstanding Buyer Shares have been duly authorized and
are validly issued, fully paid and non-assessable, and were not issued
in violation of the preemptive rights of any person. As of February 27,
2004, 1,000,000 Buyer Shares were reserved for issuance upon the
exercise of outstanding stock options granted under Buyer's stock option
plans (the "BUYER STOCK OPTION PLANS") and 578,070 Buyer Shares were
available for future grants of stock options under the Buyer Stock
Option Plans. As of the date of this Agreement, except for the Buyer
Shares issuable pursuant to this Agreement and as disclosed in Section
4.01(c) of the Buyer Disclosure Schedule, Buyer has no other commitment
or obligation to issue, deliver or sell any Buyer Shares. As of the date
of this Agreement, there are no bonds, debentures, notes or other
indebtedness of Buyer, and no securities or other instruments or
obligations of Buyer the value of which is in any way based upon or
derived from any capital or voting stock of Buyer, having the right to
vote (or convertible into, or exchangeable for, securities having the
right to vote) on any matters on which stockholders of Buyer may vote.
Except as set forth above, as of the date of this Agreement, there are
no material Contracts of any kind to which Buyer is a party or by which
Buyer is bound obligating Buyer to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock of, or
other equity or voting interests in, or securities convertible into, or
exchangeable or exercisable for, shares of capital stock of, or other
equity or voting interests in, Buyer or obligating Buyer to issue,
grant, extend or enter into any such security, option, warrant, call,
right or Contract. As of the date of this Agreement, there are no
outstanding material contractual obligations of Buyer to repurchase,
redeem or otherwise acquire any shares of capital stock of, or other
equity or voting interests in, Buyer.
(ii) The Buyer Shares to be issued in exchange for Seller Shares in
the Merger, when issued in accordance with the terms of this Agreement,
will be duly authorized, validly issued, fully paid and non-assessable,
will not be subject to any preemptive or other statutory right of
stockholders and will be issued in compliance with applicable United
States federal and state securities laws.
(d) Authorized and Effective Agreement. This Agreement constitutes
the legal, valid and binding obligation of Buyer and Acquisition Sub,
enforceable against Buyer and Acquisition Sub in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other similar laws
relating to or affecting the enforcement of creditors' rights generally, by
general equitable principles (regardless of whether enforceability is
considered in a proceeding in equity or at law) and by an implied covenant
of good faith and fair dealing. Each of Buyer and Acquisition Sub has the
absolute and unrestricted right, power, authority and capacity to execute
and deliver this Agreement and, subject to the satisfaction of the
requirements referred to in Section 4.01(j), the expiration of applicable
regulatory waiting periods, and required filings under federal and state
securities laws, to perform its obligations under this Agreement.
(e) No Conflict. Subject to the receipt of the required approvals of
Regulatory Authorities and Governmental Authorities, the expiration of
applicable regulatory waiting periods, the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated by this
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Agreement by Buyer and Acquisition Sub do not and will not (i) conflict
with, or result in a violation of, or result in the breach of or a default
(or which with notice or lapse of time would result in a default) under,
any provision of: (A) any federal, state or local law, regulation,
ordinance, order, rule or administrative ruling of any Governmental
Authority applicable to Buyer or Acquisition Sub or any of its or their
properties; (B) the certificates of incorporation or bylaws of Buyer or
Acquisition Sub; (C) any material agreement, indenture or instrument to
which Buyer or Acquisition Sub is a party or by which it or their
properties or assets may be bound; or (D) any order, judgment, writ,
injunction or decree of any court, arbitration panel or any Governmental
Authority applicable to Buyer or Acquisition Sub; (ii) result in the
creation or acceleration of any security interest, mortgage, option, claim,
lien, charge or encumbrance upon or interest in any property of Buyer; or
(iii) violate the terms or conditions of, or result in the cancellation,
modification, revocation or suspension of, any material license, approval,
certificate, permit or authorization held by Buyer or Acquisition Sub.
(f) SEC Filings. Buyer has filed all reports and proxy materials
required to be filed by it with the SEC pursuant to the Exchange Act,
except for any reports or proxy materials the failure to file which would
not have a material adverse effect upon Buyer and its Subsidiaries taken as
a whole. All such filings, at the time of filing, complied in all material
respects as to form and included all exhibits required to be filed under
the applicable rules of the SEC. None of such documents, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(g) Financial Statements of Buyer. Buyer has furnished to Seller
consolidated financial statements of Buyer consisting of the consolidated
balance sheets as of December 31 for each of the years 2003, 2002 and 2001,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the three years ended December 31, 2003 (the
"BUYER BALANCE SHEET DATE"), including accompanying notes and the report
thereon of Ernst & Young LLP (collectively, all of such consolidated
financial statements are referred to as the "BUYER FINANCIAL STATEMENTS").
The Buyer Financial Statements were prepared in conformity with GAAP
applied on a consistent basis and present fairly, in all material respects,
the consolidated financial condition of Buyer at the dates, and the
consolidated results of operations and cash flows for the periods, stated
therein; subject, in the case of the interim financial statements, to
normal year-end audit adjustments which are not expected to be,
individually or in the aggregate, materially adverse to Buyer and the
absence of full footnotes.
(h) Takeover Laws. Buyer has taken all action required to be taken by
it in order to exempt this Agreement and the transactions contemplated
hereby from, and this Agreement and the transactions contemplated hereby
are exempt from, the requirements of any "moratorium", "control share",
"fair price", "affiliate transaction", "business combination" or other
anti-takeover laws or regulations of any state (collectively, "TAKEOVER
LAWS") applicable to it, including, without limitation, those of the States
of West Virginia and Delaware.
(i) Brokers, Finders and Others. Except for the fees paid or payable
to Keefe, Bruyette & Woods, Inc., Buyer's financial advisor, there are no
fees or commissions of any sort whatsoever claimed by, or payable by Buyer
to, any broker, finder, intermediary or any other similar person in
connection with effecting this Agreement or the transactions contemplated
hereby.
(j) Governmental and Third-Party Proceedings. No consent, approval,
authorization of, or registration, declaration or filing with, any court,
Governmental Authority or any other third party is required to be made or
obtained by Buyer in connection with the execution, delivery or performance
by Buyer of this Agreement or the consummation by Buyer of the transactions
contemplated hereby, except for (A) filings of applications or notices, as
applicable, with and the approval of certain federal and state banking
authorities, (B) the filing of the appropriate certificate of merger with
the Secretaries of State of West Virginia and Delaware pursuant to the
WVBCA and DGCL and (C) receipt of the approvals set forth in Section 7.09.
As of the date hereof, Buyer is not aware of any reason why the approvals
set forth
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in Section 7.09 will not be received without the imposition of a condition,
restriction or requirement of the type described in Section 7.09.
(k) Buyer Information. None of the information relating to Buyer and
its Subsidiaries to be contained in (i) the Registration Statement (as
defined in Section 7.06(a) below) will, at the time the Registration
Statement is filed with the SEC and at the time it becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading and (ii) the Proxy Statement, as of
the date such Proxy Statement is mailed to shareholders of Seller and up to
and including the date of the meeting of Seller's shareholders to which
such Proxy Statement relates, will contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided
that, in each case, information as of a later date shall be deemed to
modify information as of an earlier date. All information about Buyer and
its Subsidiaries included in the Proxy Statement will be deemed to have
been supplied by Buyer.
(l) Absence of Undisclosed Liabilities. Except as set forth in Buyer
SEC Documents filed and publicly available prior to the date of this
Agreement (the "BUYER FILED SEC DOCUMENTS") (including the financial
statements included therein) or in Section 4.01(l) of the Buyer Disclosure
Schedule and except as arising hereunder, Buyer and its subsidiaries have
no liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) at the Buyer Balance Sheet Date, other than
liabilities and obligations that individually or in the aggregate could not
reasonably be expected to have a material adverse effect on Buyer. Except
as set forth in the Buyer Filed SEC Documents or otherwise disclosed in
Section 4.01(l) of the Buyer Disclosure Schedule, all debts, liabilities,
guarantees and obligations of Buyer and the Buyer Subsidiaries incurred
since the Buyer Balance Sheet Date have been incurred in the ordinary
course of business and are usual and normal in amount both individually and
in the aggregate. Except as disclosed in Section 4.01(l) of the Buyer
Disclosure Schedule, neither Buyer nor any Buyer Subsidiary is in default
or breach of any material agreement to which Buyer or the Buyer Subsidiary
is a party other than any such breaches or defaults that individually or in
the aggregate would not reasonably be expected to have a material adverse
effect on Buyer. To the best knowledge of Buyer, no other party to any
material agreement to which Buyer or any Buyer Subsidiary is a party is in
default or breach of such agreement, which breach or default would
reasonably be expected to have a material adverse effect on Buyer.
(m) Absence of Changes. Except (i) as set forth in the Buyer Filed
SEC Documents (ii) as set forth in Section 4.01(n) of the Buyer Disclosure
Schedule, or (iii) in the ordinary course of business consistent with past
practice, since the Buyer Balance Sheet Date, there has not been any
material adverse change in the business, operations, assets or financial
condition of Buyer and the Buyer Subsidiaries taken as a whole, and, to the
knowledge of Buyer, no fact or condition exists which Buyer believes will
cause such a material adverse change in the future.
(n) Allowance for Loan Losses. Except as set forth in the Buyer SEC
Documents or in Section 3.01(m) of the Buyer Disclosure Schedule, there is
no loan which was made by any Buyer Subsidiary and which is reflected as an
asset of such Buyer Subsidiary on the Buyer Financial Statements that
(A)(i) is 90 days or more delinquent or (ii) has been classified by
examiners (regulatory or internal) as "Substandard," "Doubtful" or "Loss,"
and (B) the default by the borrower under which could reasonably be
expected to have a material adverse effect on Buyer. The allowance for loan
losses reflected on the Buyer Financial Statements has been determined in
accordance with GAAP in all material respects and in accordance in all
material respects with all rules and regulations applicable to Buyer and
the Buyer Subsidiaries and is adequate in all material respects, except for
such failures and inadequacies which would not reasonably be expected to
have a material adverse effect on Buyer. Buyer has considered all potential
losses known to Buyer in establishing the current allowance for loan losses
for each Buyer Subsidiary, other than such losses that if incurred would
not have a material adverse effect on Buyer.
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(o) Reports and Records. Buyer and the Buyer Subsidiaries have filed
all reports and maintained all records required to be filed or maintained
by them under the rules and regulations of the Board of Governors of the
Federal Reserve System and the West Virginia Division of Banking, except
for such reports and records the failure to file or maintain would not
reasonably be expected to have a material adverse effect on Buyer. All such
documents and reports complied in all material respects with applicable
requirements of law and rules and regulations in effect at the time such
documents and reports were filed and contained in all material respects the
information required to be stated therein, except for such documents and
records the failure to file or contain such information would not
reasonably be expected to have a material adverse effect on Buyer. None of
such documents or reports, when filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, other than
such reports and documents which the failure to file in such fashion would
not reasonably be expected to have a material adverse effect on Buyer.
(p) Taxes. Except as set forth in Section 4.01(p) of the Buyer
Disclosure Schedule, Buyer and the Buyer Subsidiaries have timely filed all
material Tax Returns with respect to all material Taxes required to be
filed with the appropriate tax authority through the date of this
Agreement. Such Tax Returns are and will be true, correct and complete in
all material respects.
Buyer and the Buyer Subsidiaries have paid and discharged all Taxes
shown as due on such Tax Returns, other than such Taxes that are adequately
reserved as shown on the Buyer Financial Statements or have arisen in the
ordinary course of business since the Buyer Balance Sheet Date. Except as
set forth in Section 4.01(p) of the Buyer Disclosure Letter, neither the
IRS nor any other taxing agency or authority, domestic or foreign, has
asserted, is now asserting or, to the knowledge of Buyer, is threatening to
assert against Buyer or any Buyer Subsidiary any deficiency or claim for
additional Taxes, which deficiency or claim, if upheld, would reasonably be
expected to have a material adverse effect on Buyer. There are no unexpired
waivers by Buyer or any Buyer Subsidiary of any statute of limitations with
respect to Taxes. The accruals and reserves for Taxes reflected in the
Buyer Financial Statements are adequate in all material respects for the
periods covered. Buyer and the Buyer Subsidiaries have withheld or
collected and paid over to the appropriate Governmental Authorities or are
properly holding for such payment all Taxes required by law to be withheld
or collected, except for such failures to withhold or collect as would not
reasonably be expected to have a material adverse effect on Buyer. There
are no liens for Taxes upon the assets of Buyer or any Buyer Subsidiary,
other than liens for current Taxes not yet due and payable and liens that
individually or in the aggregate would not reasonably be expected to have a
material adverse effect on Buyer. Neither Buyer nor any Buyer Subsidiary
has agreed to make, or is required to make, any adjustment under Section
481(a) of the Code. Except as set forth in the Buyer SEC Documents or in
Section 4.01(p) of the Buyer Disclosure Schedule, neither Buyer nor any
Buyer Subsidiary is a party to any agreement, contract, arrangement or plan
that has resulted, or could result, individually or in the aggregate, in
the payment of "excess parachute payments" within the meaning of Section
280G of the Code. Neither Buyer nor any Buyer Subsidiary has ever been a
member of an affiliated group of corporations, within the meaning of
Section 1504 of the Code, other than an affiliated group of which Buyer is
or was the common Buyer corporation. No Tax is required to be withheld
pursuant to Section 1445 of the Code as a result of the transactions
contemplated by this Agreement.
(q) Legal Proceedings. Except as set forth in the Buyer Filed SEC
Documents or Section 4.01(q) of the Buyer Disclosure Schedule, there are no
actions, suits, proceedings, claims or investigations pending or, to the
knowledge of Buyer and the Buyer Subsidiaries, threatened in any court,
before any governmental agency or instrumentality or in any arbitration
proceeding (i) against Buyer or any Buyer Subsidiary which, if adversely
determined against Buyer or any Buyer Subsidiary, could have a material
adverse effect on Buyer; or (ii) against or by Buyer or any Buyer
Subsidiary which, if adversely determined against Buyer or any Buyer
Subsidiary, could prevent the consummation of this Agreement or any of the
transactions contemplated hereby or declare the same to be unlawful or
cause the rescission thereof.
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(r) Regulatory Matters. Except as set forth in Section 4.01(r) of the
Buyer Disclosure Schedule, none of Buyer, the Buyer Subsidiaries nor the
respective properties of Buyer and the Buyer Subsidiaries is a party to or
subject to any order, judgment, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or
similar submission to, or extraordinary supervisory letter from, any
Regulatory Authorities that individually or in the aggregate could
reasonably be expected to have a material adverse effect on Buyer. Neither
Buyer nor any Buyer Subsidiary has been advised by any Regulatory Authority
that such Regulatory Authority is contemplating issuing or requesting (or
is considering the appropriateness of issuing or requesting) any such
order, judgment, decree, agreement, memorandum of understanding, commitment
letter, supervisory letter or similar submission that individually or in
the aggregate could reasonably be expected to have a material adverse
effect on Buyer.
(s) Employee Benefit Plans.
(i) Section 4.01(s)(i) of the Buyer Disclosure Schedule contains a
complete and accurate list of all bonus, incentive, deferred
compensation, pension (including, without limitation, Buyer Pension
Plans defined below), retirement, profit-sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock,
stock option, severance, welfare (including, without limitation,
"welfare plans" within the meaning of Section 3(1) of ERISA, fringe
benefit plans, employment or severance agreements and all similar
practices, policies and arrangements maintained or contributed to
(currently or within the last six years) by (A) Buyer or any subsidiary
of Buyer and in which any employee or former employee (the "BUYER
EMPLOYEES"), consultant or former consultant (the "BUYER CONSULTANTS"),
officer or former officer (the "BUYER OFFICERS"), or director or former
director (the "BUYER DIRECTORS") of Buyer or any subsidiary of Buyer
participates or to which any such Buyer Employees, Buyer Consultants,
Buyer Officers or Buyer Directors either participate or are parties or
(B) any Buyer ERISA Affiliate (as defined below) (collectively, the
"BUYER COMPENSATION AND BENEFIT PLANS"). Neither Buyer nor any
subsidiary of Buyer has any commitment to create any additional Buyer
Compensation and Benefit Plan or to modify or change any existing Buyer
Compensation and Benefit Plan, except to the extent required by law and
as otherwise contemplated by Sections 6.02 and 7.01 of this Agreement.
(ii) Except in a manner that would not reasonably be expected to
have a material adverse effect, each Buyer Compensation and Benefit Plan
has been operated and administered in accordance with its terms and with
applicable law, including, but not limited to, ERISA, the Code, the
Securities Act (as defined in Section 3.01(u)), the Exchange Act (as
defined in Section 3.01(g)), the Age Discrimination in Employment Act,
or any regulations or rules promulgated thereunder, and all filings,
disclosures and notices required by ERISA, the Code, the Securities Act,
the Exchange Act, the Age Discrimination in Employment Act and any other
applicable law have been timely made. Each Buyer Compensation and
Benefit Plan which is an "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA (a " BUYER PENSION PLAN") and which is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter (including a determination that the
related trust under such Buyer Compensation and Benefit Plan is exempt
from tax under Section 501(a) of the Code) from the IRS and Buyer is not
aware of any circumstances likely to result in revocation of any such
favorable determination letter. There is no material pending or, to the
knowledge of Buyer, threatened legal action, suit or claim relating to
the Buyer Compensation and Benefit Plans other than routine claims for
benefits thereunder. Neither Buyer nor any subsidiary of Buyer has
engaged in a transaction, or omitted to take any action, with respect to
any Buyer Compensation and Benefit Plan that would reasonably be
expected to subject Buyer or any subsidiary of Buyer to a tax or penalty
imposed by either Section 4975 of the Code or Section 502 of ERISA,
assuming for purposes of Section 4975 of the Code that the taxable
period of any such transaction expired as of the date hereof.
(iii) No liability (other than for payment of premiums to the PBGC
which have been made or will be made on a timely basis) under Title IV
of ERISA has been or is expected to be incurred by Buyer or any
subsidiary of Buyer with respect to any ongoing, frozen or terminated
"single-employer plan," within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by
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any of them, or any single-employer plan of any entity (a "BUYER ERISA
AFFILIATE PLAN") which is considered one employer with Buyer under
Section 4001(a)(14) of ERISA or Section 414(b), (c) or (m) of the Code
(a "BUYER ERISA AFFILIATE"). None of Buyer, any subsidiary of Buyer or
any Buyer ERISA Affiliate has contributed, or has been obligated to
contribute, to a multiemployer plan under Subtitle E of Title IV of
ERISA (as defined in ERISA Sections 3(37)(A) and 4001(a)(3)) at any time
since September 26, 1980. No notice of a "reportable event", within the
meaning of Section 4043 of ERISA, for which the 30-day reporting
requirement has not been waived, has been required to be filed for any
Buyer Compensation and Benefit Plan or by any Buyer ERISA Affiliate Plan
within the 12-month period ending on the date hereof, and no such notice
will be required to be filed as a result of the transactions
contemplated by this Agreement. The PBGC has not instituted proceedings
to terminate any Buyer Pension Plan or Buyer ERISA Affiliate Plan and,
to Buyer's knowledge, no condition exists that presents a material risk
that such proceedings will be instituted. There is no pending
investigation or enforcement action by the PBGC, the DOL, the IRS or any
other Governmental Authority with respect to any Buyer Compensation and
Benefit Plan. Except as disclosed in Section 4.01(r)(iii) of the Buyer
Disclosure Schedule, under each Buyer Pension Plan and Buyer ERISA
Affiliate Plan, as of the date of the most recent actuarial valuation
performed prior to the date of this Agreement, the actuarially
determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of
the actuarial assumptions contained in such actuarial valuation of such
Buyer Pension Plan or Buyer ERISA Affiliate Plan), did not exceed the
then current value of the assets of such Buyer Pension Plan or Buyer
ERISA Affiliate Plan and since such date there has been neither an
adverse change in the financial condition of such Buyer Pension Plan or
Buyer ERISA Affiliate Plan nor any amendment or other change to such
Buyer Pension Plan or Buyer ERISA Affiliate Plan that would increase the
amount of benefits thereunder which reasonably could be expected to
change such result.
(iv) All contributions required to be made under the terms of any
Buyer Compensation and Benefit Plan or Buyer ERISA Affiliate Plan or any
employee benefit arrangements under any collective bargaining agreement
to which Buyer or any subsidiary of Buyer is a party have been timely
made or have been reflected on the Buyer Financial Statements. Neither
any Buyer Pension Plan nor any Buyer ERISA Affiliate Plan has an
"accumulated funding deficiency" (whether or not waived) within the
meaning of Section 412 of the Code or Section 302 of ERISA and all
required payments to the PBGC with respect to each Buyer Pension Plan
and each Buyer ERISA Affiliate Plan have been made on or before their
due dates. None of Buyer, the any subsidiary of Buyer nor any Buyer
ERISA Affiliate (x) has provided, or would reasonably be expected to be
required to provide, security to any Buyer Pension Plan or to any Buyer
ERISA Affiliate Plan pursuant to Section 401(a)(29) of the Code, and (y)
has taken any action, or omitted to take any action, that has resulted,
or would reasonably be expected to result, in the imposition of a lien
under Section 412(n) of the Code or pursuant to ERISA.
(v) Except as disclosed in Section 4.01(s)(v) of the Buyer
Disclosure Schedule, neither Buyer nor any subsidiary of Buyer has any
obligations to provide retiree health and life insurance or other
retiree death benefits under any Buyer Compensation and Benefit Plan,
other than benefits mandated by Section 4980B of the Code.
(vi) Buyer and the subsidiaries of Buyer do not maintain any
foreign Buyer Compensation and Benefit Plans.
(vii) With respect to each Buyer Compensation and Benefit Plan, if
applicable, Buyer has provided or made available to Seller, true and
complete copies of existing: (A) Buyer Compensation and Benefit Plan
documents and amendments thereto; (B) trust instruments and insurance
contracts; (C) most recent actuarial report and financial statement; (D)
most recent summary plan description; (E) forms filed with the PBGC
within the past year (other than for premium payments); (F) most recent
determination letter issued by the IRS; and (G) any Form 5310, Form
5310A, Form 5300 or Form 5330 filed within the past year with the IRS.
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(viii) Except as disclosed on Section 4.01(s)(viii) of the Buyer
Disclosure Schedule, the consummation of the transactions contemplated
by this Agreement would not, directly or indirectly (including, without
limitation, as a result of any termination of employment prior to or
following the Effective Time), reasonably be expected to (A) entitle any
Buyer Employee, Buyer Consultant or Buyer Director to any payment
(including severance pay or similar compensation) or any increase in
compensation, (B) result in the vesting or acceleration of any benefits
under any Buyer Compensation and Benefit Plan or (C) result in any
material increase in benefits payable under any Buyer Compensation and
Benefit Plan.
(ix) Except as disclosed on Section 4.01(s)(ix) of the Buyer
Disclosure Schedule, neither Buyer nor any subsidiary of Buyer maintains
any compensation plans, programs or arrangements the payments under
which would not reasonably be expected to be deductible as a result of
the limitations under Section 162(m) of the Code and the regulations
issued thereunder.
(x) Except as disclosed on Section 4.01(s)(x) of the Buyer
Disclosure Schedule, as a result, directly or indirectly, of the
transactions contemplated by this Agreement (including, without
limitation, as a result of any termination of employment prior to or
following the Effective Time), none of Buyer, Seller or the Surviving
Corporation, or any of their respective Subsidiaries will be obligated
to make a payment that would be characterized as an "excess parachute
payment" to an individual who is a "disqualified individual" (as such
terms are defined in Section 280G of the Code) of Buyer on a
consolidated basis, without regard to whether such payment is reasonable
compensation for personal services performed or to be performed in the
future.
(t) Compliance with Laws. Except with respect to Environmental Laws
and Taxes, which are the subject of Sections 4.01(p) and 4.01(v),
respectively, each of Buyer and the Buyer Subsidiaries:
(i) has been in compliance with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable thereto or to the employees
conducting such business, including, without limitation, the Equal
Credit Opportunity Act, as amended, the Fair Housing Act, as amended,
the Federal Community Reinvestment Act, as amended, the Home Mortgage
Disclosure Act, as amended, and all other applicable fair lending laws
and other laws relating to discriminatory business practices, except for
failures to be in compliance which, individually or in the aggregate,
have not had or would not reasonably be expected to have a material
adverse effect on Buyer;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations
with, all Governmental Authorities that are required in order to permit
it to own or lease its properties and to conduct its business as
presently conducted, except where the failure to obtain any of the
foregoing or to make any such filing, application or registration has
not had or would not reasonably be expected to have a material adverse
effect on Buyer; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect and to Buyer's
knowledge, no suspension or cancellation of any of them has been
threatened in writing; and
(iii) has received no written notification or communication from
any Governmental Authority since January 1, 2002, (A) asserting that
Buyer or any Buyer Subsidiary is not in compliance with any of the
statutes, regulations or ordinances which such Governmental Authority
enforces, except for failures to be in compliance that individually or
in the aggregate would not reasonably be expected to have a material
adverse effect on Buyer, or (B) threatening to revoke any license,
franchise, permit or governmental authorization, which revocations,
individually or in the aggregate would reasonably be expected to have a
material adverse effect on Buyer, which has not been resolved to the
satisfaction of the Governmental Authority which sent such notification
or communication. There is no event which has occurred that, to the
knowledge of Buyer, would reasonably be expected to result in the
revocation of any such license, franchise, permit or governmental
authorization.
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(u) Contracts. (i) Except for Contracts filed as exhibits to the
Buyer SEC Documents, there are no Contracts that are required to be filed
as an exhibit to any Buyer SEC Document under the Exchange Act and the
rules and regulations promulgated thereunder. Neither Buyer nor any Buyer
Subsidiary, nor, to the knowledge of Buyer, any other party thereto, is in
default under any such contract, agreement, commitment, arrangement or
other instrument to which it is a party, by which its respective assets,
business or operations may be bound or affected in any way, or under which
it or its respective assets, business or operations receive benefits, and
there has not occurred any event that, with the lapse of time or the giving
of notice or both, would constitute such a default except, in each case,
for defaults that individually or in the aggregate would not reasonably be
expected to have a material adverse effect on Buyer.
(v) Environmental Matters. Except as otherwise disclosed in Section
4.01(v) of the Buyer Disclosure Schedule: (i) Buyer and the Buyer
Subsidiaries are and have been at all times in compliance in all material
respects with all applicable Environmental Laws, and, to the knowledge of
Buyer, neither Buyer nor any Buyer Subsidiary has engaged in any activity
in violation of any applicable Environmental Law except for failures to be
in compliance that individually or in the aggregate could not reasonably be
expected to have a material adverse effect on Buyer; (ii)(A) to the
knowledge of Buyer, no investigations, inquiries, orders, hearings, actions
or other proceedings by or before any court or Governmental Authority are
pending or have been threatened in writing in connection with any of
Buyer's or any Buyer Subsidiary's activities and any Buyer Real Properties
or improvements thereon, and (B) to the knowledge of Buyer, no
investigations, inquiries, orders, hearings, actions or other proceedings
by or before any court or Governmental Authority are pending or threatened
in connection with any real properties in respect of which any Buyer
Subsidiary has foreclosed or holds a mortgage or mortgages (hereinafter
referred to as the "BUYER SUBSIDIARY REAL ESTATE COLLATERAL"); (iii) to the
knowledge of Buyer, no claims a pending or threatened by any third party
against Buyer or any Buyer Subsidiary, or with respect to the Buyer Real
Properties or improvements thereon, or, to the knowledge of Buyer, the
Buyer Subsidiary Real Estate Collateral or improvements thereon, relating
to damage, contribution, cost recovery, compensation, loss, injunctive
relief, remediation or injury resulting from any Hazardous Substance which
have not been resolved to the satisfaction of the involved parties and
which have had or are reasonably expected to have a material adverse effect
on Buyer or any Buyer Subsidiary; (iv) to the knowledge of Buyer, no
Hazardous Substances have been integrated into the Buyer Real Properties or
improvements thereon or any component thereof, or the Buyer Subsidiary Real
Estate Collateral or improvements thereon 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 and improvements;
and (v) neither Buyer nor any Buyer Subsidiary has knowledge that (A) any
of the Buyer Real Properties or improvements thereon, or the Buyer
Subsidiary Real Estate Collateral or improvements thereon has been used for
the treatment, storage or disposal of Hazardous Substances or has been
contaminated by Hazardous Substances, (B) any of the business operations of
Buyer or any Buyer Subsidiary have contaminated lands, waters or other
property of others with Hazardous Substances, except routine,
office-generated solid waste, or (C) any of the Buyer Real Properties or
improvements thereon, or the Buyer Subsidiary Real Estate Collateral or
improvements thereon have in the past or presently contain underground
storage tanks, friable asbestos materials or PCB-containing equipment,
which in any event would reasonably be expected to have a material adverse
effect on Buyer.
(w) Buyer Information. True and complete copies of all documents
listed in the Buyer Disclosure Schedule have been made available or
provided to Buyer. The books of account, stock record books and other
financial and corporate records of the Buyer and its Subsidiaries, all of
which have been made available to Buyer, are complete and correct in all
material respects, including the maintenance of a system of internal
accounting controls sufficient to provide reasonable assurance that
transactions are executed with its management's authorizations and such
books and records are accurately reflected in all material respects in the
Buyer Filed SEC Documents.
(x) CRA Compliance. Neither Buyer nor any Buyer Subsidiary has
received any notice of non-compliance with the applicable provisions of the
CRA and the regulations promulgated thereunder, and
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each Subsidiary of Buyer has received a CRA rating of satisfactory or
better from the FDIC. Buyer knows of no fact or circumstance or set of
facts or circumstances which would be reasonably likely to cause Buyer or
any Buyer Subsidiary to receive any notice of non-compliance with such
provisions or cause the CRA rating of Buyer or any Buyer Subsidiary to fall
below satisfactory.
(y) Ownership of Seller Shares. As of the date hereof, except as
otherwise disclosed in Section 4.01(y) of the Buyer Disclosure Schedule,
neither Buyer nor any of its affiliates or associates (as such terms are
defined under the Exchange Act), (i) beneficially owns, directly or
indirectly, (ii) is a party to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of, any Seller
Shares, (iii) has been an "interested shareholder" (as such term in defined
in Section 203 of the DGCL) of Seller at any time within the last three (3)
years or (iv) is an "interested stockholder" of Seller (as such term is
defined in Article Eighth of Seller's certificate of incorporation).
(z) Operation of Acquisition Sub. Acquisition Sub was formed solely
for the purpose of engaging in the transactions contemplated hereby and has
engaged in no business other than in connection with the transactions
contemplated by this Agreement.
ARTICLE FIVE
FURTHER COVENANTS OF SELLER
5.01. Operation of Business
Seller covenants to Buyer that, throughout the period from the date of this
Agreement to and including the Closing, except as expressly contemplated or
permitted by this Agreement or to the extent that Buyer shall otherwise consent
in writing:
(a) Conduct of Business. Seller's business, and the business of each
Seller Subsidiary, will be conducted only in the ordinary and usual course
consistent with past practice. Without the written consent of Buyer, Seller
shall not, and shall cause each Seller Subsidiary not to, take any action
which would be inconsistent with any representation or warranty of Seller
set forth in this Agreement or which would cause a breach of any such
representation or warranty if made at or immediately following such action,
subject to such exceptions as do not, and would not reasonably be expected
to have, individually or in the aggregate, a material adverse effect on
Buyer or the on the Surviving Corporation following the Effective Time or
except, in each case, as may be required by applicable law or regulation.
(b) Changes in Business and Capital Structure. Except as provided for
by this Agreement, as set forth in Section 5.01(b) of the Seller Disclosure
Schedule or as otherwise approved expressly in writing by Buyer, Seller
will not, and will cause each Seller Subsidiary not to:
(i) sell, transfer, mortgage, pledge or subject to any lien or
otherwise encumber any of the assets of Seller or any Seller Subsidiary,
tangible or intangible, which are material, individually or in the
aggregate, to Seller except for (A) internal reorganizations or
consolidations involving existing subsidiaries that would not be likely
to present a material risk of any material delay in the receipt of any
required regulatory approval, (B) securitization activities in the
ordinary course of business and (C) other dispositions of assets,
including subsidiaries, if the fair market value of the total
consideration received therefrom does not exceed in the aggregate,
$50,000;
(ii) make any capital expenditure or capital additions or
betterments which individually exceed $100,000 or exceed $500,000 in the
aggregate and which otherwise are in any manner inconsistent in any
material respect with Seller's capital budget for 2004;
(iii) become bound by, enter into, or perform any material
contract, commitment or transaction party which if so entered into,
would be reasonably likely to (A) have a material adverse effect on
Seller, (B) impair in any material respect the ability of Seller to
perform its obligations under this Agreement or (C) prevent or
materially delay the consummation of the transactions contemplated by
this Agreement;
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(iv) declare, pay or set aside for payment any dividends or make
any distributions on its capital shares issued and outstanding other
than quarterly cash dividends on Seller Shares in respect of each fiscal
quarter ending on or after February 29, 2004 in an amount not to exceed
$0.25 per Seller Share and (B) dividends by a direct or indirect wholly
owned subsidiary of Seller to its parent;
(v) purchase, redeem, retire or otherwise acquire any of its
capital shares other than pursuant to rights of repurchase granted to
Seller, or put rights granted to any of its employees or former
employees, pursuant to the Seller Stock Option Plans;
(vi) issue or grant any option or right to acquire any of its
capital shares or any Voting Debt other than (A) the issuance of Seller
Shares pursuant to the exercise of warrants or options outstanding as of
the date of this Agreement and (B) issuances by a wholly-owned
subsidiary of its capital stock or Voting Debt to its parent or another
wholly-owned subsidiary of Seller, or effect, directly or indirectly,
any share split or share dividend, recapitalization, combination,
exchange of shares, readjustment or other reclassification;
(vii) amend or propose to amend its certificate of incorporation,
by-laws or other governing documents except as otherwise expressly
contemplated by this Agreement;
(viii) merge or consolidate with any other person or otherwise
reorganize except for the Merger;
(ix) acquire all or any portion of the assets, business, deposits
or properties of any other entity other than (A) by way of foreclosures,
(B) acquisitions of control in a bona fide fiduciary capacity or in
satisfaction of debts previously contracted in good faith, in each case
in the ordinary and usual course of business consistent with past
practice and (C) internal reorganizations or consolidations involving
existing subsidiaries that would not be likely to present a material
risk of any material delay in the receipt of any required regulatory
approval;
(x) other than in the ordinary course of business consistent with
past practice, enter into, establish, adopt or amend any pension,
retirement, stock option, stock purchase, savings, profit-sharing,
deferred compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or arrangement, or
any trust agreement (or similar arrangement) related thereto, in respect
of any Director, Officer or Employee of Seller or any Seller Subsidiary,
or take any action to accelerate the vesting or exercisability of stock
options, restricted stock or other compensation or benefits payable
thereunder; provided, however, that Seller may take such actions in
order to satisfy either applicable law or contractual obligations,
including those arising under its benefit plans, existing as of the date
hereof and disclosed in the Seller Disclosure Schedule or regular annual
renewals of insurance contracts.
(xi) announce or pay any general wage or salary increase or bonus,
other than normal pay increases and bonuses consistent with past
practices, or enter into or amend or renew any employment, consulting,
severance or similar agreements or arrangements with any Officer,
Director or Employee, except, in each case, for changes which are
required by applicable law or to satisfy contractual obligations
existing as of the date hereof and disclosed in the Seller Disclosure
Schedule; provided, however, that Seller shall be permitted to pay (A)
pro rata bonuses as of the Closing Date to those officers of Seller and
CBank listed in Section 5.01(b)(xi) of the Seller Disclosure Schedule
based on (i) the bonuses being accrued on Seller's or CBank's books for
each of such officers in respect of Seller's current fiscal year in
accordance with the bonus policies of Seller and CBank in effect as of
the start of such fiscal year and (ii) the actual number of days elasped
from the start of Seller's current fiscal year to the Closing Date or,
if the Closing Date occurs after December 1, 2004, the full amount of
such bonus that otherwise would have been paid by Seller or CBank in
respect of such fiscal year and (B) quarterly performance and referral
bonuses to employees of CBank consistent with CBank's current policy
with respect to such bonus payments;
(xii) incur any long-term indebtedness for money borrowed,
guarantee any such long-term indebtedness or issue or sell and long-term
debt securities other than (i) in replacement of existing
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or maturing debt, (ii) indebtedness of one subsidiary of Seller to
Seller or another subsidiary of Seller, or (iii) in the ordinary course
of business consistent with past practice;
(xiii) except as disclosed in any Seller SEC Document filed prior
to the date of this Agreement, implement or adopt any change in its
accounting principles, practices or methods, other than as may be
required by GAAP, or the rules and regulations of the SEC or Nasdaq;
(xiv) change its existing deposit policy, incur deposit
liabilities, other than deposit liabilities incurred in the ordinary
course of business consistent with past practice, or accept any brokered
deposit having a maturity longer than 365 days, other than in the
ordinary course of business;
(xv) sell, purchase, enter into a lease, relocate, open or close
any banking or other office, or file any application pertaining to such
action with any Regulatory Authority;
(xvi) change any of its commercial or consumer loan policies in any
material respect, including credit underwriting criteria, or make any
material exceptions thereto, unless so required by applicable law or
Governmental Authority;
(xvii) purchase any mortgage loan servicing rights; or
(xviii) enter into any agreement to do any of the foregoing.
(c) Maintenance of Property. Seller shall, and shall cause the Seller
Subsidiaries to, use their commercially reasonable efforts to maintain and
keep their respective properties and facilities in their present condition
and working order, ordinary wear and tear excepted, except with respect to
such properties and facilities, the loss of which would not reasonably be
expected to have a material adverse effect on Seller.
(d) Performance of Obligations. Seller shall, and shall cause the
Seller Subsidiaries to, perform all of their obligations under all
agreements relating to or affecting their respective properties, rights and
businesses, except where nonperformance would not have a material adverse
effect on Seller.
(e) Maintenance of Business Organization. Seller shall, and shall
cause the Seller Subsidiaries to, use their commercially reasonable efforts
to maintain and preserve their respective business organizations intact, to
retain present key Employees and to maintain the respective relationships
of customers, suppliers and others having business relationships with them.
(f) Insurance. Seller shall, and shall cause the Seller Subsidiaries
to, maintain insurance coverage with reputable insurers, which in respect
of amounts, premiums, types and risks insured, were maintained by them at
the Seller Balance Sheet Date, and upon the renewal or termination of such
insurance, Seller and the Seller Subsidiaries will use their commercially
reasonable efforts to renew or replace such insurance coverage with
reputable insurers, in respect of the amounts, premiums, types and risks
insured or maintained by them at the Balance Sheet Date.
(g) Access to Information. (a) Seller shall, and shall cause each of
its Subsidiaries to, afford to Buyer and to Buyer's officers, employees,
investment bankers, attorneys, accountants and other advisors and
representatives reasonable and prompt access during normal business hours
during the period prior to the Effective Time or the termination of this
Agreement to all their respective properties, assets, books, contracts,
commitments, directors, officers, employees, attorneys, accountants,
auditors, other advisors and representatives and records and, during such
period, Seller shall, and shall cause each of its subsidiaries to, make
available to Buyer on a prompt basis (i) a copy of each report, schedule,
form, statement and other document filed or received by it during such
period pursuant to the requirements of domestic or foreign (whether
national, federal, state, provincial, local or otherwise) laws and (ii) all
other information concerning its business, properties and personnel as
Buyer may reasonably request (including the financial and tax work papers
of Crowe, Chizek and Company, LLP), provided that Buyer shall not
unreasonably interfere with Seller's business operations and Seller may, in
its discretion, limit Buyer's access to Seller's employees whose work
product Seller reasonably wishes to keep confidential.
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5.02. Notification
Between the date of this Agreement and the Closing Date, Seller promptly
shall notify Buyer in writing if Seller becomes aware of any fact or condition
that (a) causes or constitutes a breach in any material respect of any of
Seller's representations and warranties or (b) would (except as expressly
contemplated by this Agreement) cause or constitute a breach in any material
respect of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. Should any such fact or condition require any change in the Seller
Disclosure Schedule, Seller will promptly deliver to Buyer a supplement to the
Seller Disclosure Schedule specifying such change ("UPDATED SELLER DISCLOSURE
SCHEDULE"); provided, however, that the disclosure of such change in the Updated
Seller Disclosure Schedule shall not be deemed to constitute a cure of any
breach of any representation or warranty made pursuant to this Agreement unless
consented to in writing by Buyer. During the same period, Seller will promptly
notify Buyer of (i) the occurrence of any breach in any material respect of any
of Seller's covenants contained in this Agreement, (ii) the occurrence of any
event that may make the satisfaction of the conditions in this Agreement
impossible or unlikely in any material respect or (iii) the occurrence of any
event that is reasonably likely, individually or taken with all other facts,
events or circumstances known to Seller, to result in a material adverse effect
with respect to Seller.
5.03. Acquisition Proposals
(a) From the date hereof until this Agreement has been terminated as
provided herein, Seller shall not, nor shall it permit any of its subsidiaries
to, or authorize or permit any director, officer or employee of Seller or any of
its subsidiaries or any investment banker, attorney, accountant or other advisor
or representative of Seller or any of its subsidiaries (the "SELLER
REPRESENTATIVES") to, directly or indirectly, (i) solicit, initiate or knowingly
encourage any Takeover Proposal (as defined below) or any inquiries or the
making of any proposal that constitutes or could reasonably be expected to lead
to a Takeover Proposal or (ii) enter into, continue or otherwise participate in
any discussions or negotiations regarding, or furnish to any person any
information with respect to, or otherwise cooperate in any way with respect to,
any Takeover Proposal; provided, however, that at any time prior to obtaining
the approval of its shareholders, the Board of Directors of Seller or Seller
Representatives may, in response to a bona fide written Takeover Proposal that
such Board of Directors determines in good faith constitutes or is reasonably
likely to lead to a Superior Proposal (as defined below), and which Takeover
Proposal was unsolicited and did not otherwise result from a breach of this
Section 5.03, and subject to compliance with Section 5.03(c) and (d), (x)
furnish information with respect to Seller and its subsidiaries to the person
making such Takeover Proposal (and its representatives) pursuant to a customary
confidentiality agreement, provided that all such information is provided to
Buyer or has been previously provided to Buyer, and (y) participate in
discussions or negotiations with the person making such Takeover Proposal (and
its representatives) regarding such Takeover Proposal.
The term "TAKEOVER PROPOSAL" means any inquiry, proposal or offer from any
person relating to, or that is reasonably likely to lead to, any direct or
indirect acquisition, in one transaction or a series of transactions, including
any merger, consolidation, tender offer, exchange offer, stock acquisition,
asset acquisition, share exchange, business combination, recapitalization,
liquidation, dissolution, joint venture or similar transaction, of (A) assets or
businesses that constitute or represent 20% or more of the total revenue or
assets of Seller and its subsidiaries, taken as a whole, or (B) 20% or more of
the outstanding Seller Shares, or other equity or voting interests in, any of
Seller's Subsidiaries directly or indirectly holding, individually or taken
together, the assets or businesses referred to in clause (A) above, in each case
other than the transactions contemplated by this Agreement.
(b) Neither the Board of Directors of Seller nor any committee thereof
shall, unless the Board of Directors or a committee thereof determines in good
faith, after consulting with legal counsel, that the failure to take any such
action set forth in this Section 5.03(b) would be reasonably likely to result in
a breach of its fiduciary duties under applicable laws (i) (A) withdraw (or
modify in a manner adverse to Buyer) the recommendation by such Board of
Directors or any such committee of this Agreement or the Merger, (B) determine
that this Agreement or the Merger is no longer advisable, (C) recommend that the
stockholders of Seller reject this Agreement or the Merger, (D) recommend the
approval or adoption of any
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Takeover Proposal or (E) resolve, agree or propose publicly to take any such
actions, (ii) adopt or approve any Takeover Proposal, or withdraw its approval
of this Agreement, or resolve or agree to take any such actions, (iii) without
limiting Section 5.03(b)(i), propose publicly to adopt or approve any Takeover
Proposal or propose publicly to withdraw its approval of this Agreement, or
resolve or agree to take any such actions, or (iv) cause or permit Seller to
enter into any letter of intent, memorandum of understanding, agreement in
principle, acquisition agreement, merger agreement, option agreement, joint
venture agreement, partnership agreement or other agreement (each, an
"ACQUISITION AGREEMENT") constituting or related to, or which is intended to or
is reasonably likely to lead to, any Takeover Proposal (other than a
confidentiality agreement referred to in Section 5.03(a)), or resolve or agree
to take any such actions. Notwithstanding anything in this Section 5.03 to the
contrary, at any time prior to obtaining the Stockholder Approval, the Board of
Directors of Seller may, in response to a Superior Proposal and that did not
result from a breach of Section 5.03(a), cause Seller to terminate this
Agreement pursuant to Section 11.01(d)(iii) and concurrently enter into a
binding Acquisition Agreement containing the terms of a Superior Proposal;
provided, however, however, that Seller shall not exercise its right to
terminate this Agreement pursuant to Section 11.01(d)(iii) until after the third
business day following Buyer's receipt of written notice (a "NOTICE OF SUPERIOR
PROPOSAL") from Seller advising Buyer that the Board of Directors of Seller has
received a Superior Proposal and that such Board of Directors intends to,
subject to any action taken by Buyer pursuant to this sentence, cause Seller to
accept such Superior Proposal and terminate this Agreement, specifying the terms
and conditions of the Superior Proposal and identifying the person making such
Superior Proposal (it being understood and agreed that any amendment to the
price or any other material term of a Superior Proposal shall require a new
Notice of Superior Proposal and a new three business day period).
The term "SUPERIOR PROPOSAL" means any bona fide binding written offer not
solicited by or on behalf of Seller and received subsequent to the date hereof
made by a third party that if consummated would result in such third party (or
in the case of a direct merger between such third party and Seller, the
stockholders of such third party) acquiring, directly or indirectly, more than
50% of the voting power of Seller or all or substantially all the assets of
Seller and its subsidiaries, taken as a whole, that the Board of Directors of
Seller determines in its good faith judgment (after consultation with its
financial advisor or other financial advisor of nationally recognized
reputation) is reasonably likely to result in terms which are more favorable
from a financial point of view to Seller's stockholders than the Merger, taking
into account, among other things, any changes to the terms of this Agreement
offered by Buyer in response to such Superior Proposal or otherwise.
(c) In addition to the obligations of Seller set forth in paragraphs (a)
and (b) of this Section 5.03, Seller promptly shall, but in any case within 24
hours, advise Buyer in writing of any request for information that Seller
reasonably believes could lead to or contemplates a Takeover Proposal or of any
Takeover Proposal, or any inquiry Seller reasonably believes could lead to any
Takeover Proposal, the terms and conditions of such request, Takeover Proposal
or inquiry (including any subsequent material amendment or modification to such
terms and conditions) and the identity of the person making any such request,
Takeover Proposal or inquiry. Seller shall keep Buyer informed in all material
respects on a timely basis of the status and details (including material
amendments or proposed amendments) of any such request, Takeover Proposal or
inquiry.
(d) Nothing contained in this Section 5.03 or elsewhere in this Agreement
shall prohibit Seller from (i) taking and disclosing to its stockholders a
position contemplated by Rule 14e-2(a) and Rule 14d-9 promulgated under the
Exchange Act or (ii) making any disclosure to Seller's stockholders if, in the
good faith judgment of the Board of Directors of Seller, after consultation with
outside counsel, failure so to disclose would be inconsistent with applicable
law.
5.04. Delivery of Information
Seller shall furnish to Buyer promptly after such documents are available:
(a) all reports, proxy statements or other communications by Seller to its
shareholders generally; and (b) all press releases relating to any transactions.
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5.05. Affiliates Compliance with the Securities Act
(a) No later than the 15th day prior to the mailing of the Seller Proxy
Statement, Seller shall deliver to Buyer a schedule of all persons who Seller
reasonably believes are, or are likely to be, as of the date of the Seller
Meeting, deemed to be "affiliates" of Seller as that term is used in Rule 145
under the Securities Act and/or Accounting Series Releases 130 and 135, as
amended, of the SEC (the "RULE 145 AFFILIATES"). Thereafter and until the
Effective Time, Seller shall identify to Buyer each additional person whom
Seller reasonably believes to have thereafter become a Rule 145 Affiliate.
(b) Seller shall use its diligent efforts to cause each person who is
identified as a Rule 145 Affiliate pursuant to Section 5.06(a) above (who has
not executed and delivered the same concurrently with the execution of this
Agreement) to execute and deliver to Buyer on or before the date of mailing of
the Seller Proxy Statement, a written agreement, substantially in the form of
Exhibit A attached hereto.
5.06. Takeover Laws
Seller shall take all necessary steps to (a) exempt (or cause the continued
exemption of) this Agreement and the Merger from the requirements of Section 203
of the DGCL and from any provisions under its certificate of incorporation and
bylaws, as applicable, by action of the Board of Directors of Seller or
otherwise, and (b) assist in any challenge by Buyer to the validity, or
applicability to the Merger, of any Takeover Law.
5.07. No Control
Nothing contained in this Agreement shall give Buyer, directly or
indirectly, the right to control or direct the operations of Seller or any
Seller Subsidiary prior to the Effective Time. Prior to the Effective Time each
of Seller and Buyer shall exercise, consistent with the terms of this Agreement,
complete control and supervision over its and its subsidiaries respective
operations.
ARTICLE SIX
FURTHER COVENANTS OF BUYER
6.01. Access to Information
Buyer shall furnish to Seller promptly after such documents are available:
(i) all reports, proxy statements or other communications by Buyer to its
shareholders generally; and (ii) all press releases relating to any
transactions.
6.02. Opportunity of Employment; Employee Benefits
(a) Buyer agrees to use its commercially reasonable efforts to continue the
employment of substantially all of the Employees of Seller and the Seller
Subsidiaries after the Merger. Employees of Seller and the Seller Subsidiaries
(other than employees who are otherwise parties to employment or change in
control agreements) who are not offered the opportunity to continue as employees
following the Effective Time shall be entitled to receive (a) severance
compensation of not less than one (1) week of pay for each year of service with
Seller and/or any Seller Subsidiary, with a minimum severance of 4 weeks of pay
and a maximum severance of 26 weeks of pay, and (b) outplacement consultation
services of a type and nature to be agreed upon by Seller and Buyer prior to the
Effective Time and with a cost of up to $1,000 for each employee of Seller or
any Seller Subsidiary not offered employment after, or otherwise terminated
within three (3) months after, the Effective Time. Nothing in this section or
elsewhere in this Agreement shall be deemed to be a contract of employment or be
construed to give said employees any rights other than as employees at will
under Ohio law and said employees shall not be deemed to be third-party
beneficiaries of this provision. From and after the Effective Time, the
Employees of Seller and the Seller Subsidiaries that remain an employee thereof
after the Effective Time ("CONTINUING EMPLOYEES") shall be provided with
employee benefits that do not discriminate between employees who were covered by
the Compensation and Benefit Plans and employees who were covered by the Buyer
Compensation and Benefit plans. Each such Seller Employee and/or Seller
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Subsidiary Employee shall be credited with years of service with Seller, the
appropriate Seller Subsidiary and, to the extent credit would have been given by
Seller or the appropriate Seller Subsidiary for years of service with a
predecessor (including any business organization acquired by Seller or any
Seller Subsidiary), years of service with a predecessor of Seller or a Seller
Subsidiary, for purposes of eligibility and vesting (but not for benefit accrual
purposes) in the employee benefit plans of Buyer, and shall not be subject to
any exclusion or penalty for pre-existing conditions that were covered under the
Seller Compensation and Benefit Plans immediately prior to the Effective Time,
or to any waiting period relating to such coverage. Notwithstanding the
foregoing, all then active Seller Employees and all then active Seller
Subsidiary Employees shall commence participation in Buyer's Employee Stock
Ownership Plan and its Defined Benefit Pension Plan as of the Effective Time.
The foregoing covenants shall survive the Merger, and Buyer shall before the
Effective Time adopt resolutions that amend its tax-qualified retirement plans
to provide for the Seller or Seller Subsidiary service credits referenced
herein.
(b) The Surviving Corporation shall cause CBank or its successor to honor
the terms of each of the employment agreements as in effect at the Seller
Subsidiaries in accordance with their terms after the Effective Time.
(c) Seller shall be entitled to create a retention bonus pool from which
Seller's senior management shall, subject to Buyer's prior approval, with such
approval not to be withheld or delayed unreasonably, be able to offer retention
bonuses to employees of Seller whom such senior management wishes to encourage
to remain in Seller's employ until the Effective Time.
6.03. Exchange Listing
Buyer shall file a listing application with Nasdaq for the Buyer Shares to
be issued to the former holders of Seller Shares in the Merger at the time
prescribed by applicable rules and regulations of the Buyer Exchange, and shall
use all commercially reasonable efforts to cause the Buyer Shares to be issued
in connection with the Merger to be approved for listing on the Buyer Exchange,
subject to official notice of issuance, prior to the Closing Date. In addition,
Buyer will use its best efforts to maintain its listing on Nasdaq.
6.04. Notification
Between the date of this Agreement and the Closing Date, Buyer promptly
shall notify Seller in writing if Buyer becomes aware of any fact or condition
that (i) causes or constitutes a breach in any material respect of any of
Buyer's or Acquisition Sub's representations and warranties or (ii) would
(except as expressly contemplated by this Agreement) cause or constitute a
breach in any material respect of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or discovery
of such fact or condition. Should any such fact or condition require any change
in the Buyer Disclosure Schedule, Buyer promptly shall deliver to Seller a
supplement to the Buyer Disclosure Schedule specifying such change ("UPDATED
BUYER DISCLOSURE SCHEDULE"); provided, however, that the disclosure of such
change in the Updated Buyer Disclosure Schedule shall not be deemed to
constitute a cure of any breach of any representation or warranty made pursuant
to this Agreement unless consented to in writing by Seller. During the same
period, Buyer promptly shall notify Seller of (i) the occurrence of any breach
in any material respect of any of Buyer's or Acquisition Sub's covenants
contained in this Agreement, (ii) the occurrence of any event that may make the
satisfaction of the conditions in this Agreement impossible or unlikely in any
material respect or (iii) the occurrence of any event that is reasonably likely,
individually or taken with all other facts, events or circumstances known to
Buyer, to result in a material adverse effect with respect to Buyer.
6.05. Takeover Laws
Buyer shall take all necessary steps to (a) exempt (or cause the continued
exemption of) this Agreement and the Merger from the requirements of any
Takeover Law and from any provisions under its Articles and Regulations, as
applicable, by action of the Board of Directors of Buyer or otherwise, and (b)
assist in any challenge by Seller to the validity, or applicability to the
Merger, of any Takeover Law.
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6.06. Officers' and Directors' Indemnification
(a) For a period of six (6) years following the Effective Time, Buyer
shall, to the fullest extent permitted by applicable law, indemnify, defend and
hold harmless, and provide advancement of expenses to, each person who is not,
or has been at any time prior to the date hereof or who becomes prior to the
Effective Time, a Director or Officer of Seller or any Seller Subsidiary (each,
an "INDEMNIFIED PARTY") against all costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "COSTS") incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of actions or omissions occurring on or prior to the
Effective Time (including, without limitation, matters, acts or omissions
occurring in connection with the approval of this Agreement and the consummation
of the transactions contemplated hereby), whether asserted or claimed prior to,
at or after the Effective Time; provided that any determination required to be
made with respect to whether an Indemnified Party's conduct complies with the
standards set forth under applicable law for indemnification shall be made by
the court in which the claim, action, suit or proceeding was brought or by
independent counsel (which shall not be counsel that provides material services
to Buyer) selected by Buyer and reasonably acceptable to such Indemnified Party.
(b) If Buyer, the Surviving Corporation or any of its successors or assigns
(i) consolidates with or merges into any other person and is not the continuing
or surviving corporation or entity of such consolidation or merger, (ii)
transfers or conveys all or substantially all its properties and assets to any
person or (iii) transfers, by means of a distribution, sale, assignment or other
transaction, all of the stock of the Surviving Corporation or all or
substantially all of its assets, to any person, then, and in each such case,
Buyer shall cause proper provision to be made so that the successor and assign
of Buyer or the Surviving Corporation assumes the obligations set forth in this
Section and in such event all references to the Surviving Corporation in this
Section shall be deemed a reference to such successor and assign.
(c) For a period of six (6) years from the Effective Time, Buyer shall
provide that portion of directors' and officers' liability insurance that serves
to reimburse the present and former Officers and Directors of Seller and the
Seller Subsidiaries (determined as of the Effective Time) (as opposed to Seller)
with respect to claims against such Officers and Directors arising from facts or
events which occurred before the Effective Time, on terms no less favorable than
those in effect on the date hereof; provided, however, that Buyer may substitute
therefor policies providing at least comparable coverage containing terms and
conditions no less favorable than those in effect on the date hereof; provided,
however that in no event shall Buyer be required to expend more than 250% of the
current amount expended by Seller (the "INSURANCE AMOUNT") to maintain or
procure such directors' and officers' liability insurance coverage; provided,
further that if Buyer is unable to maintain or obtain the insurance called for
by this Section 6.06(c), Buyer shall obtain as much comparable insurance as, in
the good faith judgment of the Surviving Corporation's board, is available for
the Insurance Amount.
(d) Any Indemnified Party wishing to claim indemnification under Section
6.06(a), upon learning of any claim, action, suit, proceeding or investigation
described above, shall promptly notify Buyer thereof; provided that the failure
so to notify shall not affect the obligations of Buyer under Section 6.06(a)
unless and to the extent that Buyer is actually and materially prejudiced as a
result of such failure.
(e) The provisions of this Section 6.06 shall survive consummation of the
Merger and are intended to be for the benefit of, and will be enforceable by,
each indemnified party, his or her heirs and his or her representatives. The
Surviving Corporation shall pay (as incurred) all expenses, including reasonable
expenses of counsel, that an Indemnified Party may incur in enforcing the
indemnity and other obligations provided for in this Section 6.06.
6.07. Election of a Seller Director to Board of Directors; Advisory Board
(a) Buyer shall, or shall cause the board of directors of Buyer's principal
banking subsidiary, to appoint one (1) of the current directors of Seller to
such board at the first meeting of such board held after the Effective Time.
Such appointee shall hold such position for at least one year after the
effective date of such appointment unless such person earlier resigns or is
removed for cause.
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(b) Buyer shall cause Acquisition Sub to (i) create an advisory board for
CBank or its successor after the Effective Time, (ii) appoint each then current
director of Seller to such advisory board, (iii) maintain such advisory board as
so composed for at least one year after the Effective Time, and (iv) provide
such advisory board members with compensation equal, on an annual basis, to that
received by them in the fiscal year ended December 31, 2003.
ARTICLE SEVEN
FURTHER OBLIGATIONS OF THE PARTIES
7.01. Seller Stock Options
(a) As soon as practicable following the date of this Agreement, the Board
of Directors of Seller (or, if appropriate, any committee administering Seller
Stock Option Plans) and the Board of Directors of Buyer shall adopt such
resolutions or take such other actions (if any), including, without limitation,
the approval of Seller's stockholders pursuant to the Proxy Statement, as may be
required to effect the following:
(i) Each Seller Stock Option outstanding immediately prior to the
Effective Time that is exercisable for a Seller Share at an exercise price
less than $35.00 shall, upon the request of the holder thereof, be deemed
exercised on a net exercise basis (i.e., based on the difference between
the $35.00 and the exercise price per share) and each Seller Share
resulting from such net exercise shall be entitled to receive the Per Share
Cash Consideration pursuant to the provisions of Section 2.01; provided,
that such shares shall not be deemed outstanding for purposes of
calculation of the Total Cash Amount pursuant to Article Two;
(ii) Each Seller Share subject to a Restricted Stock Award outstanding
immediately prior to the Effective Time shall, be deemed outstanding for
purposes of calculating the number of Outstanding Shares entitled to
receive the Merger Consideration pursuant to the provisions of Article Two;
(iii) Each Seller Stock Option outstanding immediately prior to the
Effective Time as to which the holder thereof has not made the election
permitted pursuant to Section 7.01(a)(i) shall be amended and converted
into an option to purchase a number of Buyer Shares (rounded to the nearest
whole share) (an "ADJUSTED OPTION") equal to (i) the number of Seller
Shares subject to such Seller Stock Option immediately prior to the
Effective Time multiplied by (ii) the Exchange Ratio; and the per share
exercise price for the Buyer Shares issuable upon the exercise of such
Adjusted Option shall be equal to (i) the exercise price per share of the
Seller Shares at which such Seller Stock Option was exercisable immediately
prior to the Effective Time divided by (ii) the Exchange Ratio (rounded to
the nearest whole cent); provided, however, that in the case of any Seller
Stock Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code, the conversion formula shall
be adjusted, if necessary, to comply with Section 424(a) of the Code.
Except as otherwise provided herein, the Adjusted Options shall be subject
to the same terms and conditions (including expiration date, vesting and
exercise provisions) as were applicable to the corresponding Seller Stock
Options immediately prior to the Effective Time;
(iv) make such other changes to Seller Stock Plans as Buyer and Seller
may agree are appropriate to give effect to the Merger and the provisions
of this Section 7.01; and
(v) Seller's Employee Stock Ownership Plan (the "SELLER ESOP") shall
be terminated as of the Effective Time. To the extent permitted by
applicable law and consistent with fiduciary duties owed by the trustees of
the Seller ESOP, promptly after the Effective Time, the trustees of the
Seller ESOP shall sell a sufficient number of shares of Buyer Shares
received with respect to the Seller Shares held, unallocated, in the
suspense account in the Seller ESOP such that the proceeds of such sale
shall equal or exceed the then outstanding ESOP indebtedness and shall
apply the proceeds from such sale to the payment of the ESOP indebtedness.
Any remaining shares of Buyer Shares and cash held in the suspense account
after the repayment of the ESOP indebtedness shall be allocated to the ESOP
participants in accordance with the terms of the Seller ESOP and applicable
laws and regulations. In connection with
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the termination of the Seller ESOP, the Buyer shall promptly apply to the
IRS for a favorable determination letter on the tax-qualified status of the
Seller ESOP on termination and any amendments made to the Seller ESOP in
connection with its termination or otherwise, if such amendments have not
previously received a favorable determination letter from the IRS with
respect to their qualification under Code Section 401(a). Any amendments to
the Seller ESOP requested by the IRS prior to the Effective Time shall be
adopted by Seller and any amendments requested by the IRS after the
Effective Time shall be adopted by Buyer if upon advice of legal counsel to
Buyer that such amendments are appropriate. Any and all distributions from
the Seller ESOP after its termination shall be made consistent with the
aforementioned determination letter from the IRS. The account balances of
participants in the Seller ESOP will be distributed as soon as practicable
after the later of (a) the Effective Time and (b) the receipt of a
favorable determination letter for termination of the Seller ESOP from the
IRS or, if earlier, the receipt of an opinion of counsel reasonably
acceptable to Buyer that such distribution may be made in accordance with
applicable law. Prior to the Effective Time, Seller shall make
contributions to, and payments on the loan of, the Seller ESOP consistent
with past practices on regularly scheduled payment dates.
(b) The adjustments provided herein with respect to any Seller Stock
Options that are "incentive stock options" as defined in Section 422 of the Code
shall be and are intended to be effected in a manner which is consistent with
Sections 422 and 424(a) of the Code and all regulations promulgated thereunder.
(c) At the Effective Time, Buyer shall assume the Seller Stock Plans, with
the result that all obligations of Seller under Seller Stock Plans with respect
to the Adjusted Options shall be obligations of Buyer following the Effective
Time.
(d) On or prior to the date that is thirty (30) days after the Effective
Time, Buyer shall prepare and file with the SEC a registration statement on Form
S-8 (or another appropriate form) registering a number of shares of Buyer Shares
equal to at least the number of shares subject to the Adjusted Options. Such
registration statement shall be kept effective (and the current status of the
prospectus or prospectuses required thereby shall be maintained) as long as any
Adjusted Options may remain outstanding.
(e) Except as otherwise specifically provided by this Section 7.01 and
except to the extent required under the respective terms of Seller Stock Options
as in effect on the date of this Agreement, all restrictions or limitations on
transfer with respect to Seller Stock Options awarded under Seller Stock Plans
or any other plan, program or arrangement of Seller or any of its subsidiaries,
to the extent that such restrictions or limitations shall not have already
lapsed, and all other terms thereof, shall remain in full force and effect with
respect to such options after giving effect to the Merger and the assumption by
Buyer as set forth above.
(f) In addition to any method of exercise permitted under the applicable
Seller Stock Option, a holder of an Adjusted Option may exercise such Adjusted
Option in whole or in part in accordance with its terms by delivering a properly
executed notice of exercise to Buyer, together with the consideration therefor
and the federal withholding tax information, if any, required in accordance with
the related Seller Stock Plan.
7.02. Necessary Further Action
Each of Seller, Acquisition Sub and Buyer agrees to use its best efforts to
take, or cause to be taken, all necessary actions and execute all additional
documents, agreements and instruments required to consummate the transactions
contemplated in this Agreement.
7.03. Cooperative Action
Subject to the terms and conditions of this Agreement, each of Seller,
Acquisition Sub and Buyer agrees to use its best efforts to take, or cause to be
taken, all further actions and execute all additional documents, agreements and
instruments which may be reasonably required, in the opinion of counsel for
Seller and counsel for Buyer and Acquisition Sub, to satisfy all legal
requirements of the States of West Virginia and Delaware and the United States,
so that this Agreement and the transactions contemplated hereby will become
effective as promptly as practicable.
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7.04. Satisfaction of Conditions
Each of Buyer, Acquisition Sub and Seller shall use its best efforts to
satisfy all of the conditions to this Agreement and to cause the consummation of
the transactions described in this Agreement, including making all applications,
notices and filings with Governmental Authorities and Regulatory Authorities and
taking all steps to secure promptly all consents, rulings and approvals of
Governmental Authorities and Regulatory Authorities which are necessary for the
performance by each party of each of its obligations under this Agreement and
the transactions contemplated hereby.
7.05. Press Releases
None of Buyer, Acquisition Sub and Seller shall make any press release or
other public announcement concerning the transactions contemplated by this
Agreement without the consent of the other parties hereto as to the form and
contents of such press release or public announcement, except to the extent that
such press release or public announcement may be required by law or Nasdaq rules
to be made before such consent can be obtained.
7.06. Registration Statements; Proxy Statement; Shareholders' Meeting
(a) As promptly as reasonably practical following the date hereof, Seller
shall prepare, in consultation with Buyer and with Buyer's cooperation, and
cause to be filed with the SEC, mutually acceptable proxy material which shall
constitute the proxy statement/prospectus relating to the matters to be
submitted to the Seller stockholders at the Seller's Stockholders Meeting (such
proxy statement/prospectus and all amendments or supplements thereto, the "PROXY
STATEMENT/PROSPECTUS"), and Buyer shall and file with the SEC a registration
statement on Form S-4 with respect to the issuance of Buyer Shares in the Merger
(such registration statement and all amendments or supplements thereto, the
"REGISTRATION STATEMENT"). Each of Seller and Buyer agrees to use all
commercially reasonable efforts to cause the Registration Statement including
the Proxy Statement/Prospectus to be declared effective under the Securities Act
as promptly as reasonably practicable after the filing thereof. Buyer also
agrees to use all reasonable efforts to obtain, prior to the effective date of
the Registration Statement, all necessary state securities law or "Blue Sky"
permits and approvals required to carry out the transactions contemplated by
this Agreement. Seller agrees to promptly furnish to Buyer all information
concerning Seller, the Seller Subsidiaries and the Officers, Directors and
shareholders of Seller and the Seller Subsidiaries as Buyer reasonably may
request in connection with the foregoing. Each of Seller and Buyer shall
promptly notify the other upon the receipt of any comments from the SEC or its
staff or any request from the SEC or its staff for amendments or supplements to
the Registration Statement or the Proxy Statement/Prospectus and shall promptly
provide the other with copies of all correspondence between it and its
representatives, on the one hand, and the SEC and its staff, on the other hand.
Notwithstanding the foregoing, prior to filing the Registration Statement (or
any amendment or supplement thereto) or filing or mailing the Proxy Statement/
Prospectus (or any amendment or supplement thereto) or responding to any
comments of the SEC with respect thereto, each of Seller and Buyer, as the case
may be, (i) shall provide the other party with a reasonable opportunity to
review and comment on such document or response, (ii) shall include in such
document or response all comments reasonably proposed by such other party, and
(iii) shall not file or mail such document or respond to the SEC prior to
receiving such other's approval, which approval shall not be withheld,
conditioned or delayed unreasonably.
(b) Each of Seller and Buyer agrees, as to itself and its Subsidiaries,
that none of the information supplied or to be supplied by it for inclusion or
incorporation by reference in (i) the Registration Statement will, at the time
the Registration Statement and each amendment or supplement thereto, if any, is
filed with the SEC and at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made, not misleading, and (ii) the Proxy Statement/Prospectus and any amendment
or supplement thereto will, as of the date such Seller Proxy Statement is mailed
to shareholders of Seller and up to and including the date of the meeting of
Seller's shareholders to which such Seller Proxy Statement relates, contain any
untrue statement of a material
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fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
where they were made not misleading.
(c) Each of Seller and Buyer agrees, if it shall become aware prior to the
Effective Time of any information furnished by it that would cause any of the
statements in the Registration Statement and the Proxy Statement/Prospectus to
be false or misleading with respect to any material fact, or to omit to state
any material fact necessary to make the statements therein not false or
misleading, to promptly inform the other party thereof and to take the necessary
steps to correct the Registration Statement and the Proxy Statement/ Prospectus.
(d) Buyer agrees to advise Seller, promptly after Buyer receives notice
thereof, of the time when the Registration Statement has become effective or any
supplement or amendment has been filed, of the issuance of any stop order or the
suspension of the qualification of Buyer Shares for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
(e) Seller shall, as promptly as practicable following the date of this
Agreement, establish a record date (which will be as promptly as reasonably
practicable following the date of this Agreement) for, duly call, give notice
of, convene and hold a meeting of its stockholders (the "SELLER MEETING") for
the purpose of adopting this Agreement and approving the transactions
contemplated hereby, regardless of whether the Board of Directors of Seller
determines at any time that this Agreement or the Merger is no longer advisable
or recommends that the stockholders of Seller reject this Agreement or the
Merger. Seller shall cause the Seller Meeting to be held as promptly as
practicable following the effectiveness of the Registration Statement, and in
any event not later than 30 days after the effectiveness of the Registration
Statement. Seller shall, through its Board of Directors, recommend to its
stockholders that they adopt this Agreement, and shall include such
recommendation in the Proxy Statement/Prospectus, in each case subject to its
fiduciary duties as provided in Section 5.03. Without limiting the generality of
the foregoing, Seller agrees that its obligations pursuant to this Section shall
not be affected by the commencement, public proposal, public disclosure or
communication to Seller or any other person of any Takeover Proposal.
7.07. Regulatory Applications
Buyer, Acquisition Sub and Seller and their respective Subsidiaries shall
cooperate and use their respective best efforts to prepare all documentation, to
timely effect all filings and to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental and Regulatory Authorities,
including, without limitation, those required to be filed pursuant to the HSR
Act and the BHC Act, as well as pre-merger notification forms required by the
merger notification or control laws and regulations of any applicable
jurisdiction, as agreed to by the parties, in any event which are necessary to
consummate the transactions contemplated by this Agreement. Each of Buyer and
Seller shall have the right to review in advance, and to the extent practicable,
each will consult with the other, in each case subject to applicable laws
relating to the exchange of information, with respect to, and shall be provided
in advance so as to reasonably exercise its right to review in advance, all
material written information submitted to any third party or any Governmental or
Regulatory Authority in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties hereto agrees
to act reasonably and as promptly as practicable. Each party hereto agrees that
it will consult with the other party hereto with respect to the obtaining of all
material permits, consents, approvals and authorizations of all third parties
and Governmental and Regulatory Authorities necessary or advisable to consummate
the transactions contemplated by this Agreement and each party will keep the
other apprised of the status of material matters relating to completion of the
transactions contemplated hereby. Each party agrees, upon request, to furnish
the other party with all information concerning itself, its Subsidiaries,
directors, officers and shareholders and such other matters as may be reasonably
necessary or advisable in connection with any filing, notice or application made
by or on behalf of such other party or of its Subsidiaries to any third party or
Governmental or Regulatory Authority.
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7.08. Coordination of Dividends
After the date of this Agreement, Seller shall coordinate with Buyer the
payment of any dividends authorized under Section 5.01(b)(iv) and the record
date and payment dates relating thereto, it being the intention of the parties
hereto that the holders of Seller Shares (who will become holders of Buyer
Shares following the Closing) shall not receive two dividends, or fail to
receive one dividend, from Seller and/or Buyer for any single calendar quarter.
ARTICLE EIGHT
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES
8.01. Conditions to the Obligations of Buyer and Acquisition Sub
The obligations of Buyer and Acquisition Sub under this Agreement shall be
subject to the satisfaction, or written waiver by Buyer prior to the Closing
Date, of each of the following conditions precedent:
(a) The representations and warranties of Seller set forth in this
Agreement shall be true and correct in all material respects as of the date
of this Agreement and as of the Closing Date as though such representations
and warranties were also made as of the Closing Date, except that those
representations and warranties which by their terms speak as of a specific
date shall be true and correct as of such date; and Buyer and Acquisition
Sub shall have received a certificate, dated the Closing Date, signed on
behalf of Seller by its chief executive officer and chief financial officer
of Seller to such effect.
(b) Seller shall have performed in all material respects all of its
covenants and obligations under this Agreement to be performed by it on or
prior to the Closing Date, including those relating to the Closing, and
Buyer and Acquisition Sub shall have received a certificate, dated the
Closing Date, signed on behalf of Seller by its chief executive officer and
chief financial officer of Seller to such effect.
(c) In the aggregate, an amount of less than ten percent (10%) of the
number of Buyer Shares to be issued in the Merger shall be (i) subject to
purchase as fractional shares, and (ii) proposed to be issued to Seller's
shareholders who have perfected their appraisal rights under Section 262 of
the DGCL in connection with the transactions contemplated by this
Agreement.
(d) Buyer shall have received the written opinion of Kirkpatrick &
Lockhart ("K&L"), tax counsel to Buyer ("K&L"), dated the Closing Date, to
the effect that, on the basis of facts, representations and assumptions set
forth in such opinion, the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a)(1)(A) of
the Code. In rendering its opinion, K&L will require and rely upon
customary representations contained in letters from Buyer and Seller that
counsel to Buyer reasonably deems relevant.
(e) Buyer shall have received the written opinion of Katten Muchin
Zavis Rosenman, counsel to Seller ("KMZR"), dated the Closing Date, in
substantially the form of Exhibit B hereto.
8.02. Conditions to the Obligations of Seller
The obligations of Seller under this Agreement shall be subject to
satisfaction, or written waiver by Seller prior to the Closing Date, of each of
the following conditions precedent:
(a) The representations and warranties of Buyer and Acquisition Sub
set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as
though such representations and warranties were also made as of the Closing
Date, except that representations and warranties which by their terms speak
as of a specific date shall be true and correct as of such date; and Seller
shall have received a certificate, dated the Closing Date, signed on behalf
of Buyer and Acquisition Sub by Buyer's chief executive officer and chief
financial officer to such effect.
(b) Buyer shall have performed in all material respects all of its
covenants and obligations under this Agreement to be performed by it on or
prior to the Closing Date, including those related to the
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Closing, and Seller shall have received a certificate, dated the Closing
Date, signed on behalf of Buyer and Acquisition Sub by Buyer's chief
executive officer and chief financial officer to such effect.
(c) Seller shall have received the written opinion of KMZR to Seller,
dated the Closing Date, to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, the Merger will
be treated for Federal income tax purposes as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. In rendering its opinion, KMZR
will require and rely upon customary representations contained in letters
from Buyer and Seller that counsel to Buyer reasonably deems relevant.
(d) Seller shall have received the written opinion of Phillips,
Gardill, Kaiser & Altmeyer, PLLC, transaction counsel to Buyer and
acquisition Sub, dated the Closing Date, dated the Closing Date, in
substantially the form of Exhibit C hereto.
(e) Buyer shall have obtained the consent or approval of each person
(other than Governmental and Regulatory Authorities) whose consent or
approval shall be required in connection with the transactions contemplated
hereby under any loan or credit agreement, note, mortgage, indenture,
lease, license or other agreement or instrument, except those for which
failure to obtain such consents and approvals would not, individually or in
the aggregate, have a material adverse effect, after the Effective Time, on
the Surviving Corporation.
(f) Seller shall have received from Seller's Financial Advisor an
opinion reasonably acceptable to Seller, dated as of the date of the first
mailing of the Proxy Statement/Prospectus to Seller's shareholders, to the
effect that the consideration to be received by such shareholders in the
Merger is fair, from a financial point of view.
8.03. Mutual Conditions
The obligations of Seller and Buyer under this Agreement shall be subject
to the satisfaction, or written waiver by Buyer and Seller prior to the Closing
Date, of each of the following conditions precedent:
(a) The shareholders of Seller shall have duly adopted this Agreement
by the required vote.
(b) All approvals of Governmental Authorities and Regulatory
Authorities required to consummate the transactions contemplated by this
Agreement shall have been obtained and shall remain in full force and
effect and all statutory waiting periods in respect thereof shall have
expired and no such approvals or statute, rule or order shall contain any
conditions, restrictions or requirements which would reasonably be expected
to have a material adverse effect after the Effective Time on the present
or prospective consolidated financial condition, business or operating
results of the Surviving Corporation.
(c) No temporary restraining order, preliminary or permanent
injunction or other order issued by a court of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of the
Merger shall be in effect. No Governmental or Regulatory Authority of
competent jurisdiction shall have enacted, issued, promulgated, enforced,
deemed applicable or entered any statute, rule, regulation, judgment,
decree, injunction or other order prohibiting consummation of the
transactions contemplated by this Agreement or making the Merger illegal.
(d) The Registration Statement shall have become effective under the
Securities Act and no stop-order or similar restraining order suspending
the effectiveness of the Registration Statement shall have been issued and
no proceeding for that purpose shall have been initiated by the SEC.
(e) Buyer shall have received all state securities and "blue sky"
permits and other authorizations and approvals necessary to consummate the
Merger and the transactions contemplated hereby and no order restraining
the ability of Sunday to issue Sunday Shares pursuant to the Merger shall
have been issued and no proceedings for that purpose shall have been
initiated or threatened by any state securities administrator.
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(f) The Buyer Shares to be issued in the Merger shall have been
approved for listing on the Buyer Exchange subject to official notice of
issuance.
(g) Each of the parties shall be satisfied with the deductibility
under the provisions of Section 280G of the Code of the payments to be made
to John W. Raisbeck, the President and Chief Executive Officer of Seller,
in connection with the transactions contemplated hereby.
(h) CBank or its successor shall have entered into Noncompete,
Consulting or Employment Agreements with those senior executives of Seller
and CBank listed in Section 8.03(h) of the Seller Disclosure Schedule on
terms and conditions mutually satisfactory to Buyer and such individuals.
ARTICLE NINE
CLOSING
9.01. Closing
The closing (the "CLOSING") of the transactions contemplated by this
Agreement shall be held at Seller's main office in Springfield, Ohio, commencing
at 9:00 a.m. local time, on (a) the date designated by Buyer, which date shall
not be earlier than the third business day to occur after the last of the
conditions set forth in Article Eight shall have been satisfied or waived in
accordance with the terms of this Agreement (excluding conditions that, by their
terms, cannot be satisfied until the Closing Date) or later than the last
business day of the month in which such third business day occurs; provided, no
such election shall cause the Closing to occur on a date after that specified in
Section 11.01(b)(i) of this Agreement or after the date or dates on which any
Governmental or Regulatory Authority approval or any extension thereof expires,
and provided further, that if Seller has delivered a termination notice pursuant
to the provisions of Section 11.01(d)(iv), the Closing Date shall be the third
business day following delivery of the Top-Up Notice, if any, or (b) such other
date to which the parties agree in writing. The date of the Closing is sometimes
herein called the "CLOSING DATE."
9.02. Closing Transactions Required of Buyer
At the Closing, Buyer shall cause all of the following to be delivered to
Seller:
(a) The certificates of Buyer contemplated by Section 8.02(a) and (b)
of this Agreement.
(b) Copies of resolutions adopted by the directors of Buyer and
Acquisition Sub, approving and adopting this Agreement and authorizing the
consummation of the transactions described herein, accompanied by a
certificate of the secretary or assistant secretary of Buyer and
Acquisition Sub, as applicable, dated as of the Closing Date, and
certifying (i) the date and manner of adoption of each such resolution; and
(ii) that each such resolution is in full force and effect, without
amendment or repeal, as of the Closing Date.
(c) The opinions of counsel to Buyer and Acquisition Sub contemplated
by Section 8.02 of this Agreement.
9.03. Closing Transactions Required of Seller
At the Closing, Seller shall cause all of the following to be delivered to
Buyer:
(a) Certificate of merger duly executed by the Surviving Corporation
in accordance with the WVBCA and DGCL and in appropriate form for filing,
respectively, with the Secretaries of State of West Virginia and Delaware.
(b) The certificates of Seller contemplated by Sections 8.01(a) and
(b) of this Agreement.
(c) Copies of all resolutions adopted by the directors and the
shareholders of Seller approving and adopting this Agreement and
authorizing the consummation of the transactions described herein,
accompanied by a certificate of the secretary or the assistant secretary of
Seller, dated as of the Closing
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Date, and certifying (i) the date and manner of the adoption of each such
resolution; and (ii) that each such resolution is in full force and effect,
without amendment or repeal, as of the Closing Date.
(d) The opinions of KMZR contemplated by Section 8.01(e) of this
Agreement.
ARTICLE TEN
NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
10.01. Non-Survival of Representations, Warranties and Covenants
The representations, warranties and covenants of Buyer, Acquisition Sub and
Seller set forth in this Agreement, or in any document delivered pursuant to the
terms hereof or in connection with the transactions contemplated hereby, shall
not survive the Closing and the consummation of the transactions referred to
herein, other than covenants which by their terms are to survive or be performed
after the Effective Time (including, without limitation, those set forth in
Sections 6.02, 6.06, 6.07, 7.05 and 7.06, this Article Ten and Article Twelve);
except that no such representations, warranties or covenants shall be deemed to
be terminated or extinguished so as to deprive the Surviving Corporation (or any
director, officer or controlling person thereof) of any defense in law or equity
which otherwise would be available against the claims of any person, including,
without limitation, any shareholder or former shareholder of either Seller or
Buyer.
ARTICLE ELEVEN
TERMINATION
11.01. Termination
This Agreement may be terminated, and the Merger may be abandoned, at any
time prior to the Effective Time, whether prior to or after this Agreement has
been adopted by the shareholders of Seller:
(a) By mutual written agreement of Seller and Buyer duly authorized by
action taken by or on behalf of their respective Boards of Directors;
(b) By either Seller or Buyer upon written notification to the
non-terminating party by the terminating party:
(i) at any time after December 31, 2004, if the Merger shall not have
been consummated on or prior to such date and such failure to consummate
the Merger is not caused by a breach of this Agreement by the terminating
party;
(ii) if the shareholders of Seller shall not have adopted this
Agreement by reason of the failure to obtain the requisite vote upon a vote
held at a Seller Meeting, or any adjournment thereof; or
(iii) if the approval of any Governmental or Regulatory Authority
required for consummation of the Merger and the other transactions
contemplated by this Agreement shall have been denied by final non-
appealable action of such Governmental or Regulatory Authority.
(c) By Buyer by providing written notice to Seller:
(i) if prior to the Closing Date, any representation and warranty of
Seller shall have become untrue such that the condition set forth at
Section 8.01(a) would not be satisfied and which breach has not been cured
within ten (10) business days following receipt by Seller of written notice
of breach or is incapable of being cured during such time period; or
(ii) if Seller shall have failed to comply in any material respect
with any covenant or agreement on the part of Seller contained in this
Agreement required to be complied with prior to the date of such
termination, which failure to comply shall not have been cured within ten
(10) business days following receipt by Seller of written notice of such
failure to comply or is incapable of being cured during such time period.
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(d) By Seller by providing written notice to Buyer:
(i) if prior to the Closing Date, any representation and warranty of
Buyer or Acquisition Sub shall have become untrue such that the condition
set forth at Section 8.02(a) would not be satisfied and which breach has
not been cured within ten (10) business days following receipt by Buyer of
written notice of breach or is incapable of being cured during such time
period;
(ii) if Buyer or Acquisition Sub shall have failed to comply in any
material respect with any covenant or agreement on the part of Buyer or
Acquisition Sub contained in this Agreement required to be complied with
prior to the date of such termination, which failure to comply shall not
have been cured within ten (10) business days following receipt by Buyer of
written notice of such failure to comply or is incapable of being cured
during such time period;
(iii) by Seller following receipt of a Superior Proposal subject to
compliance with the terms and conditions of Section 5.03(b);
(iv) if Seller's Financial Advisor shall have refused to deliver the
"bring-down" to its fairness opinion required to be delivered pursuant to
Section 8.02(f); and
(v) this Agreement may be terminated any time prior to Closing by the
Board of Directors of Seller at any time during the five-day period
following the Determination Date (as defined below) (the "WALKAWAY RIGHT"),
if:
(1) the Average Closing Price (as defined below) shall be less than
the product of 0.80 and the Starting Price (as defined below); and
(2) (a) the number obtained by dividing the Average Closing Price
(as defined below) by the Starting Price (such number being referred to
herein as the "BUYER RATIO") shall be less than (b) the number obtained
by dividing the Index Price (as defined below) on the Determination Date
by the Index Price on the Starting Date (as defined below) and
subtracting 0.20 from such quotient;
subject to the following. If Seller elects to exercise its termination
right pursuant to the immediately preceding sentence, it shall give
prompt written notice to Buyer; provided that such notice of election to
terminate may be withdrawn by Seller at any time within the
aforementioned five-day period. During the five-day period commencing
with its receipt of such notice, Buyer shall have the option of
increasing the Exchange Ratio in a manner such that the conditions set
forth in clauses (1) and (2) above shall be deemed not to exist (the
"TOP-UP NOTICE"). For purposes hereof, the condition set forth in clause
(1) above shall be deemed not to exist if the Exchange Ratio and/or the
Per Share Cash Consideration is increased so that the Per Share
Consideration (as defined below) after such increase is not less than the
Per Share Consideration that would have been in effect if the condition
set forth in clause (1) above did not exist. For purposes hereof, the
condition set forth in clause (2) above shall be deemed not to exist if
the Exchange Ratio is increased so that the Per Share Consideration after
such increase is not less than the Per Share Consideration that would
have been in effect if the condition set forth in clause (2) above did
not exist. If Buyer makes this election, within such five-day period, it
shall give prompt written notice to Seller of such election and the
revised Exchange Ratio, whereupon no termination shall have occurred
pursuant to this Section 11.01(d)(v) and this Agreement shall remain in
effect in accordance with its terms (except as the Exchange Ratio shall
have been so modified), and any references in this Agreement to "Exchange
Ratio" shall thereafter be deemed to refer to the Exchange Ratio after
giving effect to any adjustment made pursuant to this Section
11.01(d)(v). For purposes of this Section 11.01(d)(v), the following
terms shall have the following meanings:
"AVERAGE CLOSING PRICE" means the average of the last reported
sale prices per share of the Buyer Shares as reported on the Nasdaq
(as reported in The Wall Street Journal or, if not reported therein,
in another mutually agreed upon authoritative source) for the 20
consecutive trading days ending on the Determination Date.
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"DETERMINATION DATE" shall mean the date on which the last
approval, consent or waiver of any Governmental Entity required to
permit consummation of the transactions contemplated by this
Agreement is received, without regard to any requisite waiting period
in respect thereof.
"INDEX PRICE" on a given date means the closing value of the
Nasdaq Bank Index as reported on Bloomberg.com, or if not reported
therein, in another mutually agreed upon authoritative source.
"PER SHARE CONSIDERATION" shall mean the sum of the Exchange
Ratio multiplied by the Average Closing Price.
"STARTING PRICE" shall mean last reported sale prices per share
of Buyer Common Stock as reported on the Nasdaq (as reported in The
Wall Street Journal or, if not reported therein, in another mutually
agreed upon authoritative source) on the Starting Date.
"STARTING DATE" shall mean the last full trading day prior to
the announcement by press release of the Merger or, if such
announcement occurs after the close of trading on any trading day,
such trading day.
If Buyer declares or effects a stock dividend, reclassification,
recapitalization, split-up, combination, exchange of shares or similar
transaction between the Starting Date and the Determination Date, the
prices for the common stock of Buyer shall be appropriately adjusted for
the purposes of applying this Section 11.01(d)(v).
11.02. Effect of Termination
(a) If this Agreement is validly terminated by either Seller or Buyer
pursuant to Section 11.01, this Agreement will forthwith become null and void
and there will be no liability or obligation on the part of either Seller or
Buyer, except (i) that the provisions of Sections 5.03, 7.05, 7.06 and 12.07 and
this Article XI will continue to apply following any such termination, (ii) that
nothing contained herein shall relieve any party hereto from liability for
breach of its representations, warranties, covenants or agreements contained in
this Agreement and (iii) as provided in paragraph (b) below.
(b) Seller shall promptly pay to Buyer a termination fee of $2,500,000 in
immediately available federal funds if:
(i) Seller or CBank enters into any agreement in respect of an
Acquisition Proposal prior to the termination of this Agreement or after
the termination of this Agreement pursuant to Sections 11.01(b)(ii) or
11.01(c) and before the date that is six months after the date of
termination of this Agreement; or
(ii) Seller, CBank or the shareholders of Seller receive an
Acquisition Proposal, the Board of Directors of Seller withdraws or
modifies in any manner materially adverse to Buyer its recommendation to
the shareholders of Seller and either (A) (1) the shareholders of Seller do
not adopt this Agreement at the meeting called and held for such purpose in
accordance with this Agreement and (2) at any time after the date of this
Agreement and before the date of such shareholders' meeting, a Takeover
Proposal shall have been publicly announced or other otherwise communicated
to the Senior management or Board of Directors of Seller or (B) the
shareholders of Seller fail to meet by December 15, 2004, to vote on the
adoption of this Agreement; or
(iii) Seller terminates this Agreement pursuant to the provisions of
Section 11.01(d)(iii) hereof.
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ARTICLE TWELVE
MISCELLANEOUS
12.01. Notices
All notices, requests, demands and other communications required or
permitted to be given under this Agreement shall be given in writing and shall
be deemed to have been duly given (a) on the date of delivery if delivered by
hand or by telecopy, upon confirmation of receipt, (b) on the first business day
following the date of dispatch if delivered by a recognized next-day courier
service, or (c) on the third business day following the date of mailing if sent
by certified mail, postage prepaid, return receipt requested. All notices
thereunder shall be delivered to the following addresses:
If to Seller, to:
Western Ohio Financial Corporation
28 East Main Street
Springfield, Ohio 45501-0509
Attn: Chief Executive Officer
Facsimile Number: (937) 327-1126
with a copy to:
Katten Muchin Zavis Rosenman
1025 Thomas Jefferson Street N.W.
East Lobby, Suite 700
Washington, D.C. 20007-5201
Attention: Jeffrey W. Werthan
Facsimile Number: (202) 298-7570
If to Buyer, to:
WesBanco, Inc.
1 Bank Plaza
Wheeling, WV 26003
Attn: Chief Executive Officer
Facsimile Number: (304) 234-9450
with a copy to:
Phillips, Gardill, Kaiser & Altmeyer, PLLC
61 Fourteenth Street
Wheeling, WV 26003
Attention: James C. Gardill
Facsimile Number: (304) 232-4918
Any party to this Agreement may, by notice given in accordance with this Section
12.01, designate a new address for notices, requests, demands and other
communications to such party.
12.02. Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be a duplicate original, but all of which taken together
shall be deemed to constitute a single instrument.
12.03. Entire Agreement
This Agreement and the related Letter of Confidentiality dated January 16,
2004 as accepted by Seller and Buyer (the "LETTER OF CONFIDENTIALITY") (a)
constitute the entire agreement, and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement and the Letter of Confidentiality and (b)
except for the provisions of Sections 6.02(a), 6.02(b), 6.06, 6.07(b) and
7.01(a) of this Agreement, are not intended to confer upon any person other than
the parties hereto and thereto (and their respective successors and assigns) any
rights or remedies.
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12.04. Successors and Assigns
This Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns (including successive, as well as immediate,
successors and assigns) of the parties hereto. This Agreement may not be
assigned by either party hereto without the prior written consent of the other
party.
12.05. Captions
The captions contained in this Agreement are included only for convenience
of reference and do not define, limit, explain or modify this Agreement or its
interpretation, construction or meaning and are in no way to be construed as
part of this Agreement.
12.06. Governing Law
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Delaware without giving effect to principles of conflicts
or choice of laws (except to the extent that mandatory provisions of Federal law
are applicable).
12.07. Payment of Fees and Expenses
(a) Except as otherwise agreed in writing, each party hereto shall pay all
costs and expenses, including legal and accounting fees, and all expenses
relating to its performance of, and compliance with, its undertakings herein.
All fees to be paid to Governmental and Regulatory Authorities in connection
with the transactions contemplated by this Agreement shall be borne by Buyer.
(b) Notwithstanding the provisions of subsection (a) above, if this
Agreement is terminated as a result of the failure of the parties to obtain the
approval of the Federal Reserve Board under the BHC Act, then Buyer shall
promptly reimburse Seller for Seller's documented out-of-pocket costs and
expenses in connection with this Agreement and the transactions contemplated
hereby.
(c) Each of the parties acknowledges that the agreements contained in this
Section are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, the other party would not enter into this
Agreement; accordingly, if either of the parties fails to pay in a timely manner
the amounts due pursuant to this Section and, in order to obtain such payment,
the other party makes a claim that results in a judgment against the first party
for the amounts set forth in this Section, the first party shall pay to the
other party its costs and expenses (including attorneys' fees and expenses) in
connection with such suit, together with interest on the applicable amounts at a
rate per annum equal to three-month LIBOR (as reported in The Wall Street
Journal (Northeast edition) or, if not reported therein, in another
authoritative source selected by the party to which payment is due) on the date
such payment was required to be made (or if no quotation for three-month LIBOR
is available for such date, on the next preceding date for which such a
quotation is available) plus 200 basis. Payment of the fees or the reimbursement
of expenses described in this Section shall not be in lieu of damages incurred
if of intentional breach of the provisions of this Section.
12.08. Amendment
From time to time and at any time prior to the Effective Time, this
Agreement may be amended only by an agreement in writing executed in the same
manner as this Agreement, after authorization of such action by the Boards of
Directors of the Constituent Corporations; except that after the Seller Meeting,
this Agreement may not be amended if it would violate the DGCL or the federal
securities laws.
12.09. Waiver
The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power or privilege under this Agreement or the documents referred to
in this Agreement will operate as a waiver of such right, power or privilege,
and no single or partial exercise of any such right, power or privilege will
preclude any other or further exercise of such right, power or privilege or the
exercise of any other right, power or privilege.
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12.10. Disclosure Schedules
If of any inconsistency between the statements in the body of this
Agreement and those in the Seller Disclosure Schedule (other than an exception
expressly set forth as such in the Seller Disclosure Schedule with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement will control.
12.11. No Third-Party Rights
Except as specifically set forth herein, nothing expressed or referred to
in this Agreement will be construed to give any person other than the parties to
this Agreement any legal or equitable right, remedy or claim under or with
respect to this Agreement or any provision of this Agreement. This Agreement and
all of its provisions and conditions are for the sole and exclusive benefit of
the parties to this Agreement and their successors and assigns.
12.12. Waiver of Jury Trial
Each of the parties hereto irrevocably waives any and all right to trial by
jury in any legal proceeding arising out of or related to this Agreement or the
transactions contemplated hereby.
12.13. Severability
If any provision of this Agreement is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
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IN WITNESS WHEREOF, this Agreement and Plan of Merger has been executed on
behalf of Buyer, Acquisition Sub and Seller to be effective as of the date set
forth in the first paragraph above.
ATTEST: WESBANCO, INC.
By: /s/ PAUL M. LIMBERT
--------------------------------------------- -----------------------------------------
Printed Name: Paul M. Limbert
Title: President and Chief Executive Officer
ATTEST: WOFC, INC.
By: /s/ PAUL M. LIMBERT
--------------------------------------------- -----------------------------------------
Printed Name: Paul M. Limbert
Title:
ATTEST: WESTERN OHIO FINANCIAL CORPORATION
By: /s/ JOHN W. RAISBECK
--------------------------------------------- -----------------------------------------
Printed Name: John W. Raisbeck
Title: President and Chief Executive Officer
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EXHIBIT A
, 2004
WesBanco, Inc.
1 Bank Plaza
Wheeling, WV 26003
Attn: Chief Executive Officer
Gentlemen:
I have been advised that, as of the date hereof, I may be deemed to be an
"affiliate" of Western Ohio Financial Corporation, a Delaware corporation
("WFC"), as the term "affiliate" is (i) defined for purposes of paragraphs (c)
and (d) of Rule 145 of the Rules and Regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), and/or (ii) used in
and for purposes of Accounting Series, Releases 130 and 135, as amended, of the
Commission. Pursuant to the terms of the Agreement and Plan of Merger, dated as
of April 1, 2004 (the "Merger Agreement"), by and between WFC, WesBanco, Inc., a
West Virginia corporation ("Buyer"), and WOFC, Inc., a West Virginia corporation
and a wholly-owned subsidiary of Buyer ("Acquisition Sub"), WFC will be merged
(the "Merger") with and into Acquisition Sub and the name of the surviving
corporation will be , a West Virginia corporation (the "Surviving
Corporation").
As used herein, "WFC Common Shares" means the shares of common stock, $0.01
par value per share, of WFC, and "Buyer Shares" means the common shares, $2.0833
par value per share, of Buyer.
I represent, warrant and covenant to Buyer that if I receive any Buyer
Shares as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of any
Buyer Shares (including any securities which may be paid as a dividend or
otherwise distributed thereon or received pursuant to the exercise of stock
options) acquired by me in the Merger in violation of the 1933 Act or the
Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed
their requirements and other applicable limitations upon my ability to
sell, transfer or otherwise dispose of Buyer Shares (including any
securities which may be paid as a dividend or otherwise distributed thereon
or received pursuant to the exercise of stock options) to the extent I felt
necessary, with my counsel or counsel for WFC.
C. I have been advised that the issuance of Buyer Shares to me
pursuant to the Merger has been or will be registered with the Commission
under the 1933 Act on a Registration Statement on Form S-4. However, I have
also been advised that, because at the time the Merger will be submitted
for a vote of the shareholders of WFC, I may be deemed to be an affiliate
of WFC, the distribution by me of any Buyer Shares acquired by me in the
Merger will not be registered under the 1933 Act and that I may not sell,
transfer or otherwise dispose of any Buyer Shares (including any securities
which may be paid as a dividend or otherwise distributed thereon or
received pursuant to the exercise of stock options) acquired by me in the
Merger unless (i) such sale, transfer or other disposition has been
registered under the 1933 Act, (ii) such sale, transfer or other
disposition is made in conformity with the volume and other limitations of
Rule 145 promulgated by the Commission under the 1933 Act, or (iii) in the
opinion of counsel reasonably acceptable to the Surviving Corporation, such
sale, transfer or other disposition is otherwise exempt from registration
under the 1933 Act.
D. I understand that Buyer is under no obligation to register under
the 1933 Act the sale, transfer or other disposition by me or on my behalf
of any Buyer Shares acquired by me in the Merger or to take any other
action necessary in order to make an exemption from such registration
available.
E. I also understand that stop transfer instructions will be given to
Buyer's transfer agent with respect to Buyer Shares (including any
securities which may be paid as a dividend or otherwise distributed thereon
or received pursuant to the exercise of stock options) and that there will
be placed on
A-50
the certificates for the Buyer Shares acquired by me in the Merger, or any
substitutions therefor, a legend stating in substance:
"The common shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933 applies. The common shares represented by this certificate may only
be transferred in accordance with the terms of an agreement
dated , 2004 between the registered holder hereof and the
issuer of the certificate, a copy of which agreement will be mailed to
the holder hereof without charge within five days after receipt of
written request therefor."
F. I also understand that unless the transfer by me of my Buyer Shares
has been registered under the 1933 Act or is a sale made in conformity with
the provisions of Rule 145, the Surviving Corporation reserves the right to
put the following legend on the certificates issued to my transferee:
"The common shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired from a
person who received such common shares in a transaction to which Rule
145 promulgated under the Securities Act of 1933 applies. The common
shares may not be sold, pledged or otherwise transferred except in
accordance with an exemption from the registration requirements of the
Securities Act of 1933."
It is understood and agreed that the legends set forth in paragraphs E and
F above shall be removed by delivery of substitute certificates without such
legends if the undersigned shall have delivered to the Surviving Corporation a
copy of a letter from the staff of the Commission, or an opinion of counsel in
form and substance reasonably satisfactory to the Surviving Corporation, to the
effect that such legends are not required for purposes of the 1933 Act.
Very truly yours,
--------------------------------------
Printed Name:
--------------------------------------
Accepted this day of
, 2004
WESBANCO, INC.
By:
-------------------------------------------------
Printed Name:
-------------------------------------
Title:
-----------------------------------------------
A-51
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
A-52
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
JULY 13, 2004
The parties to this First Amendment to Agreement and Plan of Merger (this
"Amendment") are WESTERN OHIO FINANCIAL CORPORATION, a Delaware corporation
("Seller"), WESBANCO, INC., a West Virginia corporation ("Buyer") and WOFC,
INC., a West Virginia corporation and wholly owned subsidiary of Buyer
("Acquisition Sub").
WITNESSETH:
WHEREAS, on April 1, 2004, Buyer, Seller and Acquisition Sub entered into
an Agreement and Plan of Merger (the "Merger Agreement") setting forth their
agreement regarding the merger of Seller with and into Acquisition Sub (the
"Merger"); and
WHEREAS, the Boards of Directors of Buyer, Seller and Acquisition Sub have
determined that it is in the best interests of their respective corporations and
shareholders for the structure of the Merger to be changed such that Seller will
merge with and into Buyer rather than Acquisition Sub (the "Modified Merger");
and
WHEREAS, it is intended that for federal income tax purposes the Modified
Merger qualify as a "reorganization" under Section 368(a) of the Internal
Revenue Code of 1986, as amended; and
WHEREAS, Buyer, Seller and Acquisition Sub desire to amend the Merger
Agreement to reflect the Modified Merger as set forth in this Amendment,
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Buyer, Seller and Acquisition Sub,
intending to be legally bound, agree as follows:
1. Except as amended by this Amendment, the Merger Agreement shall continue
in full force and effect in accordance with its terms.
2. Section 1.01 of the Merger Agreement is hereby amended and restated to
read in its entirety as follows:
"1.01 MERGER; SURVIVING CORPORATION
Upon the terms and subject to the conditions of this Agreement, at the
Effective Time (as defined in Section 1.02), Seller shall merge with and into
Buyer in accordance with the West Virginia Business Corporation Act (the
"WVBCA") and the Delaware General Corporation Law (the "DGCL"). Buyer shall be
the continuing and surviving corporation in the Merger and shall continue to
exist under the laws of the State of West Virginia. As used in this Agreement,
the term "SURVIVING CORPORATION" refers to Buyer at and after the Effective
Time. As a result of the Merger, the outstanding shares of capital stock and the
treasury shares of Seller shall be converted in the manner provided in Article
Two. Notwithstanding anything to the contrary in this Agreement, all references
to "ACQUISITION SUB" shall mean Buyer to the extent appropriate to effect the
merger of Seller into Buyer, and all references to "CONSTITUENT CORPORATIONS"
shall be references to Buyer and Seller collectively."
3. Section 4.01(z) of the Merger Agreement is hereby deleted in its
entirety.
4. There is hereby added a new subsection (f) at the end of Section 8.01,
which shall read in its entirety as follows:
"(f) Seller shall have received from Buyer copies of the written approvals
of the Board of Governors of the Federal Reserve System and the West
Virginia Division of Banking to the modification of the Merger as
contemplated by the First Amendment to this Agreement."
5. Seller, Buyer and Acquisition Sub hereby agree that the sole purpose of
this Amendment is to change the structure of the Merger so that Seller is merged
directly into Buyer rather than into Acquisition Sub and
A-53
that the Merger Agreement shall be construed in all instances so as to give
effect to the Modified Merger structure.
6. Capitalized terms used but not otherwise defined in this Amendment shall
have the meanings given to them in the Merger Agreement.
7. This Amendment may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on the date and year first above written.
ATTEST: WESBANCO, INC.
By: /s/ PAUL M. LIMBERT
--------------------------------------------- -----------------------------------------
Name: Paul M. Limbert
Title: President and Chief Executive Officer
ATTEST: WOFC, INC.
By: /s/ PAUL M. LIMBERT
--------------------------------------------- -----------------------------------------
Name: Paul M. Limbert
Title:
ATTEST: WESTERN OHIO FINANCIAL CORPORATION
By: /s/ JOHN W. RAISBECK
--------------------------------------------- -----------------------------------------
Name: John W. Raisbeck
Title: President and Chief Executive Officer
A-54
ANNEX B
July 14, 2004
Board of Directors
Western Ohio Financial Corporation
28 East Main Street
Springfield, OH 45502
Board of Directors:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR")
provide you with its opinion as to the fairness, from a financial point of view,
to the holders of common stock ("Shareholders") of Western Ohio Financial
Corporation ("Western Ohio" or the "Company") of the Consideration (as
hereinafter defined) to be paid pursuant to the Agreement and Plan of Merger by
and between Western Ohio, WesBanco, Inc. ("WesBanco"), and WOFC, Inc. dated
April 1, 2004, as amended by the First Amendment to Agreement & Plan of Merger
dated as of July 13, 2004 (as amended, the "Agreement"), pursuant to which
WesBanco will acquire Western Ohio in a merger transaction (the "Merger"). The
Agreement provides, among other things, that each issued and outstanding share
of common stock of Western Ohio shall be converted into the right to receive
from WesBanco $35.00 in cash or 1.18 shares of common stock (the
"Consideration"), subject to certain terms and conditions. The Agreement will be
considered at a meeting of the Shareholders of Western Ohio. The terms of the
Merger are more fully set forth in the Agreement.
We have acted as Western Ohio's financial advisor in connection with, and
have participated in certain negotiations leading to, the execution of the
Agreement. In connection with rendering our opinion set forth herein, we have
among other things:
1. Reviewed Western Ohio's Annual Report to Shareholders and Annual Report
on Form 10-K for each of the years ended December 31, 2003, December 31,
2002 and December 31, 2001, including the audited consolidated financial
statements contained therein, and Western Ohio's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004;
2. Reviewed WesBanco's Annual Report to Shareholders and Annual Report on
Form 10-K for each of the years ended December 31, 2003, December 31,
2002 and December 31, 2001, including the audited consolidated financial
statements contained therein, and WesBanco's Quarterly Report on Form
10-Q for the quarter ended March 31, 2004;
3. Reviewed certain other public and non-public information, primarily
financial in nature, relating to the respective businesses, earnings,
assets and prospects of Western Ohio and WesBanco provided to FBR or
that was publicly available;
4. Participated in meetings and telephone conferences with members of
senior management of Western Ohio and WesBanco concerning the financial
condition, business, assets, financial forecasts and prospects of the
respective companies, as well as other matters FBR believed relevant to
its inquiry;
5. Reviewed certain stock market information for Western Ohio common stock
and WesBanco common stock and compared it with similar information for
certain companies, the securities of which are publicly traded;
6. Compared the results of operations and financial condition of Western
Ohio and WesBanco with that of certain companies that FBR deemed to be
relevant for purposes of its opinion;
7. Reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be relevant for
purposes of its opinion;
8. Reviewed the Agreement and certain related documents; and
9. Performed such other reviews and analyses as FBR deemed appropriate.
B-1
BOARD OF DIRECTORS
WESTERN OHIO FINANCIAL CORPORATION
JULY 14, 2004
PAGE 2
In rendering this opinion, FBR did not assume responsibility for
independently verifying, and did not independently verify, any financial or
other information concerning Western Ohio and/or WesBanco furnished to it by
Western Ohio or WesBanco, or the publicly-available financial and other
information regarding Western Ohio, WesBanco and other financial services
organizations. FBR has assumed that all such information is accurate and
complete and has no reason to believe otherwise. FBR has further relied on the
assurances of management of Western Ohio and WesBanco that they are not aware of
any facts that would make such financial or other information relating to such
entities inaccurate or misleading. With respect to financial forecasts used in
our analysis, we have assumed that such forecasts have been reasonably prepared
by management of Western Ohio and WesBanco, as the case may be, on a good faith
basis reflecting the best currently available estimates and judgments of the
management of Western Ohio and WesBanco as to the future performance of Western
Ohio, WesBanco and Western Ohio and WesBanco combined, as the case may be. FBR
has assumed that there has been no undisclosed material change in Western Ohio's
or WesBanco's assets, financial condition, results of operations, business or
prospects since December 31, 2003. FBR did not undertake an independent
appraisal of the assets or liabilities of Western Ohio or WesBanco. FBR is not
an expert in the evaluation of allowances for loan losses, was not requested to
and did not independently review such allowances, and was not requested to and
did not independently review any individual credit files of Western Ohio or
WesBanco. FBR's conclusions and opinion are necessarily based upon economic,
market and other conditions and the information made available to FBR as of the
date of this opinion. FBR expresses no opinion on matters of a legal,
regulatory, tax or accounting nature related to the Merger. Moreover, we express
no opinion as to the fairness of any term or aspect of the Merger and related
transactions other than the fairness of the Consideration.
FBR, as part of its investment banking business, is customarily engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
FBR has acted as financial advisor to Western Ohio in connection with the
Merger and will receive a fee for services rendered, a significant portion of
which is contingent upon the consummation of the Merger. In the ordinary course
of FBR's business, it may effect transactions in the securities of Western Ohio
or WesBanco for its own account and/or for the accounts of its customers and,
accordingly, may at any time hold long or short positions in such securities.
From time to time, principals and/or employees of FBR may also have positions in
such securities. As a part of FBR's investment banking business, FBR has in the
past provided investment banking services to WesBanco, for which it has received
customary fees. In the future, FBR may solicit business from WesBanco.
This letter is for the information of the Board of Directors of Western
Ohio and may not be relied upon by any other person or used for any other
purpose, reproduced, disseminated, quoted from or referred to without FBR's
prior written consent; provided, however, this letter may be referred to and
reproduced in its entirety in proxy materials sent to the Shareholders in
connection with the solicitation of approval for the Merger.
Based upon and subject to the foregoing, as well as any such other matters
as we consider relevant, it is FBR's opinion, as of the date hereof, that the
Consideration is fair, from a financial point of view, to the Shareholders of
Western Ohio.
Very truly yours,
/s/ FRIEDMAN, BILLINGS, RAMSEY & CO.,
INC.
B-2
ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
C-1
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, then either a constituent corporation
before the effective date of the merger or consolidation or the surviving
or resulting corporation within 10 days thereafter shall notify each of the
holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall,
also notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constitutent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constitutent corporation
that are entitled to appraisal rights of the effective date of the merger
or consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constitutent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise
C-2
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
C-3
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
ANNEX D
WESTERN OHIO FINANCIAL CORPORATION'S
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24120
WESTERN OHIO FINANCIAL CORPORATION
(Name of registrant in its charter)
DELAWARE 31-1403116
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28 EAST MAIN STREET
SPRINGFIELD, OHIO 45501-0509
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (937) 325-4683
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. YES [ ] NO [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the last reported sale price of the registrant's Common
Stock on June 30, 2003 was $42.8 million.
At March 1, 2004, there were issued and outstanding 1,779,823 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K -- Portions of the Annual Report to
Shareholders for the fiscal year ended December 31, 2003.
Part III of Form 10-K -- Portions of the Proxy Statement for the
registrant's 2004 Annual Meeting of Shareholders.
D-1
FORWARD-LOOKING STATEMENTS
Western Ohio Financial Corporation and its wholly owned subsidiary,
Cornerstone Bank, may from time to time make written or oral "forward-looking
statements," including statements contained in its filings with the Securities
and Exchange Commission. These forward-looking statements may be included in
this Annual Report on Form 10-K and the exhibits attached to it, in the
Company's reports to shareholders and in other communications, which are made in
good faith by us pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
- the strength of the United States economy in general and the strength of
the local economies in which we conduct operations;
- the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
- inflation, interest rate, market and monetary fluctuations;
- the timely development and acceptance of our new products and services
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors'
products and services;
- the willingness of users to substitute our products and services for
products and services of our competitors;
- our success in gaining regulatory approval of our products and services,
when required;
- the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
- the impact of technological changes;
- acquisitions;
- changes in consumer spending and saving habits; and,
- our success at managing the risks involved in the foregoing.
The list of important factors stated above is not exclusive. We do not
undertake, and expressly disclaim any obligation, to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of Western Ohio Financial Corporation or Cornerstone Bank.
D-2
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. BUSINESS.................................................... D-4
Item 2. PROPERTIES.................................................. D-27
Item 3. LEGAL PROCEEDINGS........................................... D-27
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... D-27
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES........... D-28
Item 6. SELECTED FINANCIAL DATA..................................... D-28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... D-28
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ D-28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. D-28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... D-29
Item 9A. CONTROLS AND PROCEDURES..................................... D-29
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... D-29
Item 10A. CODE OF ETHICS.............................................. D-29
Item 11. EXECUTIVE COMPENSATION...................................... D-30
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................. D-30
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. D-30
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................... D-30
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... D-31
SIGNATURES................................................................... D-33
EX-31.1
EX-31.2
EX-32
D-3
PART I
ITEM 1. BUSINESS
GENERAL
Western Ohio Financial Corporation (the "Company"), a Delaware corporation,
was organized in March 1994 for the purpose of becoming a savings and loan
holding company. Western Ohio Financial Corporation owns Cornerstone Bank (the
"Bank") whose principal business has traditionally consisted of attracting
deposits from the general public, and making loans secured by residential real
estate. In October 1997, the Company formed another subsidiary, CornerstoneBanc
Financial Services, Incorporated (formerly West Central Mortgage Services,
Incorporated), ("CFSI"). This subsidiary originates and purchases mortgage
loans, which are outside of the normal lending area for Cornerstone Bank.
The Company is subject to supervision by the Office of Thrift Supervision,
Department of Treasury ("OTS") and the Bank is subject to comprehensive
regulation, examination and supervision by the OTS and by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is a member of the Federal Home Loan
Bank ("FHLB") system and its deposits are backed by the full faith and credit of
the United States Government and are insured up to applicable limits by the
FDIC.
The Company serves its customers through its main office in Springfield,
Ohio and six branch offices in Enon, New Carlisle, Springfield, Yellow Springs,
Beavercreek and Centerville. At December 31, 2003, the Company had total assets
of $399.5 million, deposits of $248.7 million and shareholders' equity of $44.4
million, or 11.1% of total assets. The Company's common stock is traded on the
Nasdaq National Market under the symbol "WOFC."
The Company has been, and intends to continue to be, a community-oriented
savings and loan holding company offering a variety of financial services to
meet the needs of the communities it serves. The principal business of the
Company consists of attracting retail deposits from the general public and
investing those funds primarily in one- to four family residential real estate,
commercial and multi-family real estate, construction loans and consumer and
commercial business loans, all primarily within the Company's market areas.
The executive offices of the Company are located at 28 East Main Street,
Springfield, Ohio 45501-0509, and the telephone number at that address is (937)
325-4683.
The Corporation's primary market area consists of Clark, Greene, Franklin
and portions of Montgomery counties. Located in west-central Ohio, Clark and
Greene counties' economic environment consists of a traditional industrial base
supplemented by the service and support industries, and its close proximity to a
major U.S. military installation, Wright Patterson Air Force Base. Since
September 11, 2001, the Air Force Base has increased some of its military
operations. Navistar Truck Manufacturer is the largest industrial employer in
Clark County. While Navistar's Clark county operations have provided stable
employment for the area over the last several decades, in recent years Navistar
has shifted its operations to smaller truck production, which has led to layoffs
that could possibly affect the economic viability of the Corporation's market
area. The Community Hospital, Clark State Community College, Mercy Medical
Center and Wittenberg University are also major employers in the area. While the
Bank has no branches in Franklin County, the Company does commercial and
commercial real estate lending to business customers in this market located in
central Ohio. The Franklin County market, which includes Columbus, Ohio, the
state capital, Ohio State University, and a relatively high concentration of
insurance companies, is primarily a service-oriented economy with a fairly
stable economic environment. According to the estimated 2001 U.S. Census, Clark
County had a population of approximately 144,076, Greene county 148,426 and
Montgomery county 554,232. In comparison to the 1990 U.S. Census, Clark County
decreased .5%, Greene County increased .4% and Montgomery county decreased .9%.
Unemployment for all four counties has improved during the past year with
Clark and Montgomery County unemployment rates moving fairly consistent with the
national average while Greene County has remained below the national rate of
unemployment. In 2002, Clark County had an unemployment rate of 6.4% as compared
to the State of Ohio at 5.0%. The unemployment rate in Clark County decreased to
6.0% in 2003
D-4
as compared with 6.2% for the State of Ohio. For the year ended 2003, Greene
County had an unemployment rate of 4.6%, up from 3.9% in 2002. Montgomery County
had an unemployment rate of 5.3% in 2003 compared to 4.7% in the year 2002. In
addition, Franklin County had an unemployment rate of 4.0% in 2003 compared to
3.9% in the year 2002.
RISK FACTORS
Like all regulated financial institutions, the Company is exposed to
numerous risks that could adversely impact profits, financial condition and cash
flows, and, ultimately, franchise value. In order to mitigate these risks
somewhat, the Company has various policies, personnel and committees that
establish limits for and monitor various aspects of its risk profile. There can
be no assurance that such policies, personnel and committees will be effective
in controlling these or other risks.
GEOGRAPHIC RISKS
A significant majority of the Company's assets, deposits and fee income is
generated in Company's local lending area. As a result, deterioration of local
economic conditions in this area could expose the Company to losses associated
with higher loan default rates and lower asset collateral values, deposit
withdrawals and other factors that could adversely impact its financial
condition and results of operations.
FLUCTUATIONS IN INTEREST RATES (MARKET RISK)
Significant increases in market interest rates, or the perception that an
increase may occur, could adversely impact the Company's ability to generate new
variable loans and cause the value of its fixed-rate assets to decline. An
increase in market interest rates may also adversely impact the ability of
adjustable rate borrowers to meet repayment obligations, thereby causing
nonperforming loans and loan charge-offs to increase. Significant decreases in
market interest rates could result in an acceleration of loan repayments thereby
mitigating the positive impact of declining interest rates on fixed rate assets.
Changes in market interest rates, including changes in the relationship between
short-term and long-term market interest rates or between different rate
indices, can impact interest rate spread.
COMPETITION RISK
The Company faces significant competitive pressure from local, regional,
national and international banking institutions as well as thrifts, finance
companies, credit unions, brokerage and insurance companies and other financial
intermediaries. Many of the Company's competitors are larger and have greater
financial and other resources. The Company competes on the basis of its
reputation, localized decision-making, interest rates, convenient locations and
quality of customer service.
CREDIT RISK
The Company is exposed to credit risk on the loans and other credit
instruments it has in its portfolio. While the portfolio is closely monitored
and an on-going analysis and evaluation of this risk is performed, because of
the nature of the Company's business, unexpected credit losses may subsequently
be identified as a result of additional analysis performed by the Company or
comments received from regulatory examiners. In addition, collateral values may
deteriorate subsequent to the making of a loan so that a loss exposure develops.
LEGISLATIVE AND REGULATORY RISK
The Company's operations are subject to extensive regulation by federal
banking authorities and are also subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on its
operations. Policies adopted and positions taken by these regulatory and
administrative entities can impact the Company's operations. In addition, these
authorities periodically conduct examinations of the Company and may impose
various requirements or sanctions. The regulatory environment may periodically
change significantly as new laws and regulations are promulgated. As a result of
new laws and regulations, the competitive environment may also change
significantly.
D-5
DIVIDEND LIMITATION RISK
The Company is a holding company and its operations are conducted primarily
through the Bank, its operating subsidiary. Thus, the Company's ability to pay
dividends to its shareholders and to service its debt is dependent primarily
upon the ability of the Bank to make dividend and other payments to the Company.
Certain laws and regulatory requirements restrict the ability of the Bank to
make such payments to the Company, and the Company to make payments to
shareholders.
LIQUIDITY RISK
The Company closely monitors its liquidity position including its sources
of funding and commitments to fund assets or deposit withdrawals. The Company
maintains several credit facilities. The Company believes that it has sufficient
liquidity to fund its commitments. However, changes in the stability of the
economic, social or political environments culminating in large withdrawals, or
a deterioration in the public's confidence in the banking system in general or
the Company in particular, could have an adverse impact on the Company's
liquidity position.
OPERATIONAL RISK
The Company relies on various information systems for operating significant
aspects of its business, including loan and deposit information, as well as
internal management systems. These systems and the Company's operations could be
adversely affected by, among other things, damage or interruption from natural
disasters, power loss, network failure, improper operations, security breaches,
computer viruses or sabotage. Controls and procedures have been implemented to
minimize these risks, but any disruption in the operation of the Company's
various information systems could adversely impact its operations, which may
affect its results of operations and financial condition.
REPUTATION RISK
The Company strives to operate in a professional manner and has implemented
various personnel policies and procedures, including an employee code of conduct
applicable to all employees, to help ensure the maintenance of integrity and
professionalism. Nevertheless, the Company or its employees may fail to perform
in accordance with these policies and procedures, or the Company may find itself
in a situation that is embarrassing from a public relations perspective and,
upon this information becoming public knowledge, may suffer damage to its
reputation. This damage could adversely impact customer confidence and have an
adverse impact on the Company's financial condition and results of operations.
DISINTERMEDIATION
In the banking and financial services businesses, disintermediation is the
process by which customers and potential customers bypass banks and other
traditional financial institutions thereby depleting anticipated revenue
streams. While the Company continues its efforts to make its products and
services an integral, valuable component of its customers' financial
transactions, the possibility of disintermediation is an inherent risk in the
banking and traditional financial services business as customers may migrate to
other financial intermediaries.
LENDING ACTIVITIES
GENERAL
The Company primarily focuses its lending activities on the origination of
loans secured by first mortgages on owner-occupied, one-to-four family real
estate, commercial and multi-family real estate and construction loans, home
equity and commercial business loans in its market area as well as other areas
beyond its normal lending territory. At December 31, 2003, the Company's net
loan portfolio, excluding loans in process and deferred loan fees, premiums and
discounts, totaled $334.5 million. At December 31, 2003, the
D-6
Company's gross loan portfolio totaled $337.3 million, of which $175.1 million,
or 51.9%, was comprised of permanent loans secured by one-to-four family real
estate.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project, is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation -- Federal Regulation of Savings Institutions." At
December 31, 2003, the maximum amount that the Bank could have loaned to any one
borrower and the borrower's related entities was $6.5 million. At December 31,
2003, the Bank did not have any loans outstanding in excess of such limitation.
The largest principal balance and commitment to lend to any one borrower, or
group of related borrowers, at the Bank was $5.3 million secured by multiple
loans ranging in size from approximately $5,000 for a motor vehicle to a letter
of credit secured by real estate mortgage and a limited guarantee from Community
hospital. In addition, one borrower had a tax-free bond purchased by Cornerstone
secured by real estate on assisted living quarters. The third was a
participation loan with Bank One secured by real estate. At December 31, 2003,
each of these loans was performing in accordance with its terms.
Management always reserves the right to change its emphasis on the amount
or type of lending in which the Company engages to adjust to market or other
factors, including changes in the Company's asset/liability management policies.
LOAN PORTFOLIO COMPOSITION
The following information reflects the composition of the Company's loan
portfolio in dollar amounts and in percentages (before deductions for loans in
process, deferred fees and discounts and allowance for losses) as of the dates
indicated.
DECEMBER 31,
-----------------------------------------------------------------------
2003 2002 2001 2000
------------------ ------------------ ------------------ --------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
-------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Real Estate Loans:
One-to-four family......... $175,139 51.91% $124,117 47.70% $154,915 56.82% $178,106
Multi-family............... 24,685 7.32 25,113 9.65 28,665 10.51 29,610
Commercial real estate..... 88,787 26.32 61,918 23.80 40,176 14.73 38,309
Construction............... 3,473 1.03 4,644 1.78 3,737 1.37 8,476
-------- ------ -------- ------ -------- ------ --------
Total real estate
loans................ 292,084 86.58 215,792 82.93 227,493 83.43 254,501
-------- ------ -------- ------ -------- ------ --------
Other Loans:
Consumer Loans:
Home equity.............. 24,426 7.24 21,587 8.30 19,468 7.14 17,766
Deposit account.......... 48 -- 29 -- 45 .02 85
Home improvement......... -- -- -- -- -- -- --
Other secured............ 222 .07 302 .12 471 .17 957
Other.................... 479 .14 517 .20 773 .28 566
-------- ------ -------- ------ -------- ------ --------
Total consumer loans..... 25,175 7.45 22,435 8.62 20,757 7.61 19,374
-------- ------ -------- ------ -------- ------ --------
Commercial business
loans.................... 20,107 5.96 21,977 8.45 24,415 8.96 14,090
-------- ------ -------- ------ -------- ------ --------
Total other loans...... 45,282 13.41 44,412 17.07 45,172 16.57 33,464
-------- ------ -------- ------ -------- ------ --------
Total loans............ 337,366 100.00% 260,204 100.00% 272,665 100.00% 287,965
====== ====== ======
Less:
Loans in process........... (1,313) (1,390) (1,553) (2,609)
Deferred fees and
discounts................ 217 (125) (117) (87)
Allowance for loan
losses................... (1,801) (1,806) (1,695) (1,665)
-------- -------- -------- --------
Total loans, net....... $334,469 $256,883 $269,300 $283,604
======== ======== ======== ========
DECEMBER 31,
----------------------------
2000 1999
------- ------------------
PERCENT AMOUNT PERCENT
------- -------- -------
(DOLLARS IN THOUSANDS)
Real Estate Loans:
One-to-four family......... 61.85% $178,304 68.01%
Multi-family............... 10.28 30,233 11.53
Commercial real estate..... 13.31 22,339 8.52
Construction............... 2.94 6,923 2.64
------ -------- ------
Total real estate
loans................ 88.38 237,799 90.70
------ -------- ------
Other Loans:
Consumer Loans:
Home equity.............. 6.17 15,369 5.86
Deposit account.......... .03 146 .06
Home improvement......... -- -- --
Other secured............ .33 1,664 .64
Other.................... .20 1,679 .64
------ -------- ------
Total consumer loans..... 6.73 18,858 7.20
------ -------- ------
Commercial business
loans.................... 4.89 5,499 2.10
------ -------- ------
Total other loans...... 11.62 24,357 9.30
------ -------- ------
Total loans............ 100.00% 262,156 100.00%
====== ======== ======
Less:
Loans in process........... (4,659)
Deferred fees and
discounts................ (62)
Allowance for loan
losses................... (2,781)
--------
Total loans, net....... $254,654
========
D-7
The following schedule shows the contractual maturity of the Company's
gross loan portfolio at December 31, 2003. The schedule does not include any
principal prepayment assumptions (dollars in thousands).
CONSTRUCTION AND
ONE- TO FOUR-FAMILY NONRESIDENTIAL COMMERCIAL DEVELOPMENT CONSUMER
DUE DURING ------------------- ------------------- ------------------ ----------------- ------------------
PERIODS WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
ENDING AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
DECEMBER 31 AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- -------- -------- -------- -------- ------- -------- ------ -------- ------- --------
2004(1)(2)........... $ 5,051 4.87% $ 15,180 4.29% $ 8,991 4.42% $3,145 5.91% $ 60 7.43%
2005 to 2008......... 4,516 6.80 18,629 5.37 5,346 4.90 -- -- 5,881 4.70
2009 and following... 165,572 5.69 79,663 5.86 5,770 6.57 328 7.38 19,234 4.09
-------- ---- -------- ---- ------- ---- ------ ---- ------- ----
$175,139 5.69% $113,472 5.57% $20,107 5.16% $3,473 6.05% $25,175 4.24%
======== ==== ======== ==== ======= ==== ====== ==== ======= ====
TOTAL
DUE DURING -------------------
PERIODS WEIGHTED
ENDING AVERAGE
DECEMBER 31 AMOUNT RATE
----------- -------- --------
2004(1)(2)........... $ 32,427 4.58%
2005 to 2008......... 34,372 5.37
2009 and following... 270,567 5.65
-------- ----
$337,366 5.52%
======== ====
---------------
(1) Includes construction loans.
(2) Includes demand loans and loans having no stated maturity.
The following table sets forth at December 31, 2003, the dollar amount of
gross loans receivable contractually due after December 31, 2004, and whether
such loans have fixed interest rates or adjustable interest rates (dollars in
thousands).
DUE AFTER DECEMBER 31, 2004
--------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
Real estate loans:
One-to-four family................................. $133,686 $ 36,402 $170,088
Nonresidential..................................... 11,260 87,032 98,292
Construction....................................... 328 -- 328
Other loans:
Consumer loans..................................... 610 24,505 25,115
Commercial business loans.......................... 1,674 9,442 11,116
-------- -------- --------
Total................................................ $147,558 $157,381 $304,939
======== ======== ========
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE AND CONSTRUCTION LENDING
The Company focuses its lending efforts on the origination and purchase of
loans secured by first mortgages on owner-occupied, one-to-four family
residences. Residential loan originations of this type are generated by the
Company's marketing efforts, its present customers, walk-in customers and
referrals from real estate agents and builders. At December 31, 2003, the
Company's one-to-four family residential permanent mortgage loans totaled $175.1
million, or 51.9% of the Company's total gross loan portfolio.
At December 31, 2003, $134.6 million of the Company's one-to-four family
residential mortgage loans, or 39.9% of the Company's total gross loan
portfolio, had fixed interest rates. From time to time, the Company may purchase
loans secured by one-to-four family residences.
The Company currently originates up to a maximum of 30-year, owner occupied
one-to-four family residential mortgage loans in amounts up to 97% of the
appraised value of the security property provided that private mortgage
insurance is obtained in an amount sufficient to reduce the Company's exposure
to at or below the 80% loan-to-value level. Interest rates charged on these
loans are priced on a regular basis according to market conditions. Residential
loans do not include prepayment penalties. The Company also originates up to a
maximum of 30-year one-to-four family residential loans to nonowner-occupants,
with loan-to-value ratios of up to 100% with private mortgage insurance.
D-8
In underwriting one-to-four family residential real estate loans, the
Company evaluates, among other things, both the borrower's ability to make
monthly payments and the value of the property securing the loan. Most
properties securing real estate loans made by the Company are appraised by
independent licensed fee appraisers approved by the Board of Directors. The
Company requires borrowers to obtain title, fire and property insurance
(including flood insurance, if necessary) in an amount not less than the amount
of the loan. In prior years, the Company has accepted title opinions. Real
estate loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale or disposition of the secured property.
The Company originates a limited number of loans to finance the
construction of one-to-four family residences. At December 31, 2003, the Company
had loans to finance the construction of one-to-four family residences totaling
$3.5 million, or 1.0% of the Company's loan portfolio. Substantially all of
these loans are made to individuals who propose to occupy the premises upon
completion of construction. Construction loans are generally structured for up
to a 30-year term with a six-month construction phase, during which the borrower
pays interest only. Upon completion of the construction phase, these loans
continue as permanent loans of the Company. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
The Company also engages in commercial and multi-family real estate
lending. At December 31, 2003, the Company had $113.5 million of permanent
commercial and multi-family real estate loans, which represented 33.6% of the
Company's gross loan portfolio.
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, office buildings, strip shopping
centers, motels, nursing homes, restaurants and churches located in the
Company's market areas. Multi-family and commercial real estate loans generally
have terms that do not exceed 15 years. Generally, the loans are made in amounts
up to 75% of the appraised value of the secured property. The Company analyzes
the financial condition of the borrower, the borrower's credit history, and the
reliability and predictability of the cash flow generated by the property
securing the loan. Currently, appraisals on properties securing multi-family and
commercial real estate loans originated by the Company are performed by
independent licensed fee appraisers. Construction loans on multi-family and
commercial real estate projects are structured to be converted to permanent
loans at the end of the construction phase, which generally runs up to 12
months. These construction loans have rates and terms that generally match any
permanent multi-family or commercial real estate loan then offered by the
Company, except that during the construction phase, the borrower pays interest
only. These loans generally provide for the payment of interest and loan fees
from loan proceeds.
Construction and development loans are obtained principally through
continued business from developers and builders who have previously borrowed
from the Company, as well as referrals from existing customers and walk-in
customers. The application process includes a submission to the Company of
accurate plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value or the cost of construction (land plus building).
In addition, the Company from time to time has purchased loans secured by
commercial and multi-family real estate. The Company purchased approximately
$6.9 million of commercial and multi-family real estate participation loans in
fiscal 2003.
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one-to-four
family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired. The
largest single loan is $5.3 million and is secured by commercial real estate and
was performing in accordance with its terms as of December 31, 2003.
D-9
CONSUMER LENDING
The Company offers secured and unsecured consumer loans, including home
improvement loans, home equity loans, loans secured by savings deposits and
equity securities, and retail mobile home loans. The Company currently
originates all of its consumer loans in its primary market areas. The Company
originates consumer loans on a direct basis by extending credit directly to the
borrower.
At December 31, 2003, consumer loans excluding home equity loans were
$749,000 or .2% of the Company's gross loan portfolio. Home equity loans were
$24.4 million or 7.2% of the Company's gross loan portfolio as of December 31,
2003.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Loans secured by
deposit accounts at the Company are currently originated for up to 90% of the
account balance with a hold placed on the account restricting the withdrawal of
the account balance.
The underwriting standards employed by the Company for consumer loans,
other than loans secured by deposits, include an application, a determination of
the applicant's payment history on other debts and an assessment of ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss, depreciation or fluctuation in value. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
COMMERCIAL BUSINESS LENDING
Commercial business loans have been added to the list of the Company's
products. The outstanding balance of unsecured commercial lines of credit was
$57,000 as of December 31, 2003. Commercial loans secured by other than mortgage
had outstanding balances of $20.0 million as of December 31, 2003. The purpose
of these loans will generally be for working capital or expansion of existing
businesses. These loans have been priced at prime plus a specified spread, or at
the one-year constant-maturity treasury index plus a specified spread. Some of
these loans are payable on demand.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property the value of which tends to be
more easily ascertainable, commercial business loans typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Bank's commercial business loans may be secured by
business assets. However, the collateral securing the loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
ORIGINATIONS, PURCHASES AND SALES OF LOANS
While the Company offers fixed-rate and adjustable-rate loans, its ability
to originate loans is dependent upon the relative customer demand for loans in
its market areas, which is affected by the interest rate environment and other
factors. From time to time, the Company may purchase loans in order to continue
to leverage the Bank's borrowing ability, provide more interest rate sensitive
assets, and supplement a slow down in the local mortgage market. The Bank will
continue to evaluate purchase opportunities.
D-10
NON-PERFORMING ASSETS AND CLASSIFIED ASSETS
When a borrower fails to make a required payment on real estate secured
loans and consumer loans, a notice is sent 30 days after payment is due. At 60
days after the payment is due, the Company generally initiates collection
procedures by written notice and/or telephone call. In most cases, delinquencies
are cured promptly. However, if a loan secured by real estate or other
collateral has been delinquent for more than 90 days, satisfactory payment
arrangements must be adhered to or the Company will initiate proceedings for
foreclosure or repossession.
When a loan becomes delinquent 90 days or more or when the collection of
principal or interest becomes doubtful, the Company will place the loan on
non-accrual status and, as a result, previously accrued interest income on the
loan is taken out of current income. The loan will remain on non-accrual status
as long as the loan is 90 days or more delinquent.
The following table sets forth information concerning delinquent loans at
December 31, 2003. The amounts presented represent the total remaining principal
balances of the related loans, rather than the actual payment amounts which are
overdue.
LOANS DELINQUENT FOR:
---------------------------------------------
TOTAL 60 DAYS
60-89 DAYS 90 DAYS AND OVER AND OVER
---------- ---------------- -------------
(DOLLARS IN THOUSANDS)
Real estate
One- to four-family......................... $523 $1,266 $1,789
Construction................................ -- -- --
Commercial.................................. 80 -- 80
Multi-family................................ -- -- --
Consumer/commercial........................... 62 153 215
---- ------ ------
Total.................................... $665 $1,419 $2,084
==== ====== ======
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. For all periods presented, the Company
has had no troubled debt restructurings (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates). Foreclosed assets include assets acquired in
settlement of loans.
AT DECEMBER 31,
---------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------ ------ -------
Nonaccruing loans
One- to four-family.................. $ 1,266 $ 1,536 $1,767 $2,443 $ 1,304
Consumer............................. 149 32 11 64 20
Commercial real estate/business
loans............................. 4 211 1,040 1,094 1,431
------- ------- ------ ------ -------
Total............................. 1,419 1,779 2,818 3,601 2,755
Accruing loans delinquent more than 90
days................................. -- -- -- -- --
Troubled debt restructurings........... -- -- -- -- --
------- ------- ------ ------ -------
Total nonperforming loans.............. $ 1,419 $ 1,779 $2,818 $3,601 $ 2,755
======= ======= ====== ====== =======
Total as a percentage of total loans... 0.36% 0.66% 0.82% 1.02% 0.84%
Total allowance for loan losses to
nonperforming loans.................. 126.92% 101.52% 60.15% 46.24% 100.94%
For the year ended December 31, 2003, gross interest income that would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $16,000.
D-11
As of December 31, 2003, the Company had no other interest bearing assets,
which would be required to be disclosed as non-performing if such assets were
loans.
The Company had no foreign loans outstanding for any of the years
presented. Other than the categories noted on page 5, there is no concentration
of loans in any industry greater than 10% in the portfolio.
CLASSIFIED ASSETS
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered by the OTS to be of lesser
quality, as "substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the Bank will sustain "some loss" if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard," with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets that do not currently expose the
Bank to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management.
When a bank classifies problem assets as either substandard or doubtful, it
may establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances that have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When a savings bank classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge-off such amount. A savings
bank's determination as to the classification of its assets and the amount of
its valuation allowances is subject to review by the savings bank's Regional
Director at the regional OTS office, who may order the establishment of
additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the loans in its portfolio to determine whether any loans require classification
in accordance with applicable regulations. On the basis of management's review
of its assets, at December 31, 2003, the Bank had classified a total of $1.6
million, or .4%, of its total assets as substandard and $168,000 as doubtful. At
December 31, 2002, total classified assets were $1.9 million, or .5% of the
Bank's assets.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk in its loan portfolio and
changes in the nature and volume of its loan activity. Such evaluation, which
includes a review of loans for which full collectibility may not be reasonably
assured, considers among other matters, the estimated fair value of the
underlying collateral, economic conditions, historical loan loss experience and
other factors that warrant recognition in providing for an adequate loan loss
allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value. If fair value at the date of foreclosure is lower
than the balance of the related loan, the difference will be charged-off to the
allowance at the time of transfer. Valuations are periodically updated by
management and if the value declines, a specific provision for losses on such
property is established by a charge to operations.
Although management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. At December 31, 2003, the Company had a total allowance for loan
losses of $1.8 million, or .53%of total loans.
D-12
See Note 3 of the Notes to Consolidated Financial Statements in the Company's
Annual Report to Shareholders filed as Exhibit 13 hereto.
The following table sets forth an analysis of the Company's allowance for
loan losses.
YEAR ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------- ------
(DOLLARS IN THOUSANDS)
Balance at beginning of period........... $1,806 $1,695 $1,665 $ 2,781 $3,200
Charge-offs
One- to four-family.................... (34) (246) (57) (41) (215)
Consumer............................... (50) (20) (125) (103) (373)
Commercial............................. (269) (267) (231) (1,444) (148)
------ ------ ------ ------- ------
(353) (533) (413) (1,588) (736)
Recoveries
One- to four-family.................... 14 38 27 38 20
Consumer............................... 6 16 41 66 48
Commercial............................. 42 247 17 19 3
------ ------ ------ ------- ------
62 301 85 123 71
Net charge-offs.......................... (291) (232) (328) (1,465) (665)
Additions charged to operations.......... 286 343 358 349 246
------ ------ ------ ------- ------
Balance at end of period................. $1,801 $1,806 $1,695 $ 1,665 $2,781
====== ====== ====== ======= ======
Ratio of net charge-offs to average loans
outstanding during the year............ 0.10% 0.09% 0.12% 0.54% 0.27%
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
DECEMBER 31,
----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------- -------------- -------------- -------------- --------------
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
One- to four-family... $ 377 52.9% $ 609 49.5% $ 636 58.2% $ 686 64.8% $ 477 70.7%
Commercial real
estate.............. 344 33.6 268 33.5 168 25.2 156 23.6 898 20.0
Consumer/Commercial
business............ 85 13.5 45 17.0 340 16.6 534 11.6 771 9.3
Unallocated........... 995 -- 884 -- 551 -- 289 -- 635 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total............... $1,801 100.0% $1,806 100.0% $1,695 100.0% $1,665 100.0% $2,781 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
INVESTMENT ACTIVITIES
Liquidity may increase or decrease depending upon the availability of funds
and comparative yields on investments in relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by the OTS regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. As of December 31, 2003, Cornerstone considers its
available liquidity sufficient to meet its outstanding short and long-term
needs.
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, mortgage-backed securities ("MBSs"),
collateralized mortgage obligations ("CMOs"), certain certificates of deposit of
insured
D-13
banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
The investment policy of the Company is to invest funds among various
categories of investments and maturities based upon the need for liquidity, to
achieve balance between its desire to minimize risk and maximize yield, to
provide collateral for borrowings, and to fulfill the Company's asset/liability
management policies.
At December 31, 2003, the Company's cash and interest-bearing deposits in
other financial institutions totaled $6.9 million, or 1.7% of total assets. The
Company also has a $9.3 million investment in the common stock of the FHLB of
Cincinnati in order to satisfy the requirement for membership therein.
The Company periodically invests in MBSs and CMOs (collectively
"mortgage-backed securities"). At December 31, 2003 the Company had investments
in mortgage-backed securities of $21.8 million, or 5.5% of total assets. The
MBSs, which totaled $36.9 million at December 31, 2002, were all insured or
guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. Accordingly, management
believes that the Company's mortgage-backed securities are generally more
resistant to credit problems than loans, which generally lack such insurance or
guarantees. Because these securities represent a pass through of principal and
interest from underlying individual 30-year mortgages, such securities do
present prepayment risk. The CMO securities held by the Company also carry
certain risks. The principal represented by such securities may be repaid over a
longer or shorter period than initially assumed and may hinder certain aspects
of the Company's asset/liability management strategy. As of December 31, 2003,
the Company held $4.6 million of CMO securities. Mortgage-backed securities can
serve as collateral for borrowings and, through sales and repayments, as a
source of liquidity.
At December 31, 2003, the Company held $6.8 million in municipal
securities, a decrease of $122,000. These municipal securities are primarily
Ohio municipal debenture bonds with fixed rates.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At December 31, 2003, the Bank was in compliance
with this regulation. See "Regulation -- Federal Regulation of Savings
Institutions" for a discussion of additional restrictions on the Bank's
investment activities.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Securities:
U.S. government agencies........ $ 4,090 $ 4,094 $ 2,052 $ 2,180 $ 2,105 $ 2,079
Municipal securities............ 6,774 6,833 6,932 6,955 1,634 1,563
Mortgage-backed securities...... 21,894 21,808 36,301 36,866 35,814 36,006
FHLB stock...................... 9,335 9,335 8,971 8,971 8,568 8,568
------- ------- ------- ------- ------- -------
Total securities and FHLB
stock........................ $42,093 $42,070 $54,256 $54,972 $48,121 $48,216
======= ======= ======= ======= ======= =======
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the investment
securities portfolio, excluding FHLB of Cincinnati stock, as of
D-14
December 31, 2003. The weighted average yield has been computed using the
historical amortized cost for securities available for sale.
DECEMBER 31, 2003
-----------------------------------------------------
LESS THAN 1 TO 6 TO OVER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
--------- -------- -------- -------- --------
CARRYING CARRYING CARRYING CARRYING CARRYING
VALUE VALUE VALUE VALUE VALUE
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Securities:
U.S. government agencies.................... $ -- $4,094 $ -- $ -- $ 4,094
Municipal securities........................ -- -- -- 6,833 6,833
Mortgage-backed securities.................. 251 4,352 60 17,145 21,808
---- ------ ------ ------- -------
Total securities............................ $251 $8,446 $ 60 $23,978 $32,735
==== ====== ====== ======= =======
Weighted average yield...................... 7.50% 5.26% 11.40% 4.20% 4.51%
Excluding those holdings in the investment portfolio in the U.S. government
agencies, there were no investments in securities of any one issuer, which
exceeded 10% of the consolidated shareholders' equity at December 31, 2003.
SOURCES OF FUNDS
GENERAL
The Company's primary sources of funds are deposits, borrowings, repayment
of loan principal, sales and repayments of mortgage-backed securities, and funds
provided from operations. Borrowings, consisting of FHLB advances, may be used
at times to compensate for seasonal reductions in deposits or deposit inflows at
less than projected levels, and may be used on a longer-term basis to support
expanded lending activities.
DEPOSITS
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of passbook and
statement savings accounts, NOW, demand and money market fund accounts, and
certificate accounts ranging in terms from six months to ten years. The Company
solicits deposits from its market area and sometimes uses brokers to obtain
deposits. The Company relies primarily on competitive pricing policies,
advertising and customer service to attract and retain these deposits.
The variety of deposit accounts offered by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Company endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives. The
ability of the Company to attract and maintain certificates of deposit accounts
and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions.
D-15
The following table sets forth the average dollar amount of deposits in the
various types of deposit programs offered by the Company and the average rate
paid for those deposits for the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2003 2002 2001
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Demand and NOW accounts............. $ 29,064 0.34% $ 24,382 0.50% $ 19,148 0.81%
Savings and money market accounts... 76,356 1.15 71,728 2.04 60,117 3.57
Certificates of deposit............. 119,122 3.55 121,156 4.68 133,226 5.98
-------- ---- -------- ---- -------- ----
Total deposits.................... $224,542 2.40% $217,266 3.34% $212,491 4.83%
======== ==== ======== ==== ======== ====
The following table indicates the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
2003.
MATURITY
-------------------------------------------------------
3 MONTHS OVER 3 TO OVER 6 TO OVER
OR LESS 6 MONTHS 12 MONTHS 12 MONTHS TOTAL
-------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Certificates of deposit less than
$100,000................................ $ 2,409 $2,365 $ 4,739 $41,260 $ 50,773
Certificates of deposit $100,000 or
more.................................... 8,553 5,876 24,199 50,411 89,039
------- ------ ------- ------- --------
Total certificates of deposit............. $10,962 $8,241 $28,938 $91,671 $139,812
======= ====== ======= ======= ========
BORROWINGS
Another source of funds includes advances from the FHLB of Cincinnati. As a
member of the FHLB of Cincinnati, the Bank is required to own capital stock and
is authorized to apply for advances. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and includes a range of
maturities. The FHLB of Cincinnati may prescribe the acceptable uses to which
these advances may be put, as well as limitations in the size of the advances
and repayment provisions. The FHLB advances are secured by the Bank's blanket
agreement for advances and security agreement and are not tied to specific
investments or loans.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
-------- ------- --------
(DOLLARS IN THOUSANDS)
Average balance outstanding during the year........... $ 88,466 $83,599 $ 88,898
Maximum balance outstanding at any month-end during
the year............................................ $103,473 $90,737 $101,518
Balance outstanding at end of period.................. $103,473 $81,243 $ 76,655
Weighted average interest rate during the year........ 4.45% 5.03% 5.55%
Weighted average interest rate at end of year......... 4.03% 4.92% 5.45%
SERVICE CORPORATION ACTIVITIES
Federal savings institutions generally may invest a limited percentage of
their assets in service corporations. In addition, federal savings institutions
may invest up to 50% of their regulatory capital in conforming loans to their
service corporations. In addition to investments in service corporations,
federal savings institutions are permitted to invest an unlimited amount in
operating subsidiaries engaged solely in activities in which federal savings
institutions may engage directly.
D-16
At December 31, 2003, the Bank had a book investment of $1.4 million in
CornerstoneBanc Financial Services, an operating subsidiary created to generate
mortgage lending in areas outside of the Bank's normal lending area.
COMPETITION
The Company faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from commercial banks, other savings institutions, credit
unions and mortgage bankers making loans secured by real estate located in the
Company's market area. The Company competes for real estate and other loans
principally based on interest rates charged, the quality of services it provides
to borrowers, loan fees it charges, and the types of loans it originates.
The Company attracts most of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from
commercial banks, other savings institutions, credit unions and brokerage firms
located in the same communities. Periodically, the Company will solicit brokered
deposits. The Company competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges at each.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act made sweeping changes in the financial services in
which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliation with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in existence
on May 4, 1999, including the Company, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after May
4, 1999 will be subject to the same restrictions as a multiple thrift holding
company. In addition, a unitary thrift holding company in existence at May 4,
1999 may be sold only to a financial holding company engaged in activities
permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities in
which the Company is currently engaged, except to the extent that competition
with other types of financial institutions may increase as they engage in
activities not permitted prior to enactment of the GLB Act.
REGULATION
GENERAL
The Bank is subject to regulation, examination and oversight by the OTS and
the FDIC. The Bank must file periodic reports with the OTS and FDIC concerning
its activities and financial condition. Examinations are conducted periodically
by federal regulators to determine whether the Bank complies with various
regulatory requirements and is operating in a safe and sound manner. The Bank is
a member of the FHLB of Cincinnati.
USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 was
enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington, D.C., which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcement's and the intelligence communities'
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions,
D-17
regulators and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into
law the Sarbanes-Oxley Act of 2002, or the SOA. The SOA is the most far-reaching
U.S. securities legislation enacted in many years, and includes many substantive
and disclosure-based requirements. The stated goals of the SOA are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. The SOA generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the Securities
and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange
Act"). Given the extensive and continuing SEC role in implementing rules
relating to many of the SOA's new requirements, the effects of these
requirements remain to be determined, although it is likely that the Company's
costs will increase somewhat, at least in the short term, as a result of SOA
implementation. The Company is continuing to assess the financial effects of the
SOA on its operations.
OFFICE OF THRIFT SUPERVISION
GENERAL
The OTS is an office in the Department of the Treasury and is responsible
for the regulation and supervision of all federally-chartered savings and loan
associations and all other savings and loan associations the deposits of which
are insured by the FDIC. The OTS issues regulations governing the operation of
savings and loan associations based on their asset size to cover the costs of
this supervision and examination. The OTS also may initiate enforcement actions
against savings and loan associations and certain persons affiliated with them
for violations of laws or regulations or for engaging in unsafe or unsound
practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings and loan association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on
low-to-moderate income communities and borrowers in that area. The Bank has
received a "satisfactory" examination rating under those regulations.
Federal Regulation of Savings Institutions. The OTS has extensive
authority over the operations of federal savings institutions. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. When these
examinations are conducted by the OTS and the FDIC, the examiners may require an
institution to provide for higher general or specific loan-loss reserves. All
federal savings institutions are subject to a semi-annual assessment, based upon
the institution's total assets, to fund OTS operations. The Bank's OTS
assessment for the fiscal year ended December 31, 2003 was $81,000.
The OTS also has extensive enforcement authority over all federal savings
institutions and their holding companies, including the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and they are prohibited from engaging in any
activities not permitted by such laws. For instance, no federal savings
institution may invest in non-investment grade corporate debt-securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of
D-18
total capital, except with approval of the OTS. Federal savings institutions are
also generally authorized to branch nationwide. The Bank complies with the noted
restrictions.
The Bank's general permissible lending limit for loans-to-one borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 2003 the Bank's lending limit under this restriction was $6.5
million. The Bank complies with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution that fails to comply with these
standards must submit a compliance plan.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF"), which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period. The
Bank is classified as well capitalized.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However SAIF insured institutions
are required to pay a Financing Corporation ("FICO") assessment, in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s. The
assessment was 1.7 basis points for the quarter ended December 31, 2003. These
assessments, which may be revised based upon the level of BIF and SAIF deposits,
will continue until the bonds mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings associations are required to maintain a minimum
level of regulatory capital. The OTS has established capital standards,
including a tangible capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to such savings
associations. These capital requirements must be generally as stringent as the
comparable capital requirements for national banks.
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The OTS is also authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common shareholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage-servicing
rights, must be deducted from tangible capital.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank's subsidiaries are includable subsidiaries.
At December 31, 2003, the Bank had tangible capital of $41.3 million, or
10.3% of adjusted total assets, which is $35.3 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At December 31, 2003, the Bank had no intangibles that were
subject to these tests. As a result of the prompt corrective action provisions
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio.
At December 31, 2003, the Bank had core capital equal to $41.3 million, or
10.3% of adjusted total assets, which is $25.3 million above the minimum
leverage ratio requirement of 4% in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 2003, the Bank had
no capital instruments that qualify as supplementary capital and $1.8 million of
general loss reserves, which was less than 1.0% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at December 31, 2003.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one-to-four family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the Fannie Mae or Freddie Mac.
OTS regulations also require every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from
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assets, liabilities and off-balance sheet contracts. The rule will not become
effective until the OTS evaluates the process by which savings associations may
appeal an interest rate risk deduction determination. It is uncertain as to when
this evaluation may be completed. Any savings institution with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise.
On December 31, 2003, the Bank had total capital (as defined above) of
$43.1 million (including $41.3 million in core capital and $1.8 of general loss
reserves) and risk-weighted assets of $293.9 million. Total capital was 14.7% of
risk-weighted assets. This amount was $19.6 million above the 8.0% requirement
in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank
may have a substantial adverse effect on the Company's operations and
profitability. The Company's shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Capital Distributions. The OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions,
according to ratings of associations based on their capital level and
supervisory condition. Capital distributions, for purposes of such regulation,
include, without limitation, payments of cash dividends, repurchases, and
certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other association.
A savings and loan holding company must file a notice or an application
with the OTS before it can declare and pay a dividend. An application must be
submitted and approval from the OTS must be obtained (1) if the proposed
distribution would cause total distributions for that year to exceed net income
for that calendar year to date plus the savings association's retained net
income for the preceding two years; (2) if the savings association will not be
at least adequately capitalized following the capital distribution; (3) if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation or agreement
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between the savings association and the OTS (or the FDIC), or a condition
imposed on the savings association in an OTS-approved application or notice; or,
(4) if the savings association has not received certain favorable examination
ratings from the OTS. If a savings association subsidiary of a holding company
is not required to file an application, it must file a notice with the OTS.
In addition to certain federal income tax considerations, OTS regulations
impose limitations on the payment of dividends and other capital distributions
by savings association. Under OTS regulations applicable to converted savings
associations, the Bank is not permitted to pay a cash dividend on its common
shares if its regulatory capital would, as a result of payment of such
dividends, be reduced below the amount required for the Liquidation Account, or
below applicable regulatory capital requirements prescribed by the OTS.
Liquidity. Office of Thrift Supervision ("OTS") regulations presently
require the Bank to maintain sufficient liquidity to assure its safe and sound
operation. To that end, the Bank maintains investments having maturities of 5
years or less, sells loans into the secondary market and borrows funds from the
FHLB. These activities are intended to provide a source of relatively liquid
funds on which the Bank may rely, if necessary, to fund deposit withdrawals or
other short-term funding needs. At December 31, 2003 the Bank had commitments to
originate mortgage one-to-four family loans totaling $973,000 and commitments to
originate commercial and consumer loans of $6.2 million. In addition, the Bank
had $1.3 million in commitments to fund loans on residential properties under
construction as well as $1.5 million in commitments to fund nonresidential
loans. The Bank had no commitments to purchase or sell loans. The Bank considers
its liquidity and capital reserves sufficient to meet its outstanding short and
long-term needs.
Qualified Thrift Lender Test. Savings associations must meet one of two
possible tests in order to be a qualified thrift lender ("QTL"). The first test
requires a savings association to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTI"), which are
generally related to domestic residential real estate and manufactured housing
and include credit card, student and small business loans and stock issued by
any FHLB, Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal
National Mortgage Association ("FNMA"). Under this test, 65% of an institution's
"portfolio assets" (total assets less goodwill and other intangibles, property
used to conduct business, and 20% of liquid assets) must consist of QTI on a
monthly average basis in nine out of every 12 months. The second test permits a
savings association to qualify as a QTL by meeting the definition of "domestic
building and loan association" under the Internal Revenue Code of 1986, as
amended (the Code). In order for an institution to meet the definition of a
"domestic building and loan association" under the Code, at least 60% of such
institution's assets must consist of specified types of property, including
cash, loans secured by residential real estate or deposits, educational loans
and certain governmental obligations. The OTS may grant exceptions to the QTL
test under certain circumstances. If a savings association fails to meet the QTL
test, the association and its holding company become subject to certain
operating and regulatory restrictions. At December 31, 2003 the Bank met the QTL
test.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS or to impose fines or corrective measures.
The Bank was examined for CRA compliance in 2003 and received a rating of
satisfactory.
Transactions with Affiliates. Under federal law, all transactions between
and among Cornerstone and its affiliates, which include its holding company, are
subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W
promulgated thereunder as interpreted by the OTS. Generally, these requirements
limit these transactions to a percentage of the bank's capital and require all
of them to be on terms at least as
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favorable to the bank as transactions with non-affiliates. In addition, a bank
may not lend to any affiliate engaged in non-banking activities not permissible
for a bank holding company or acquire shares of any affiliate that is not a
subsidiary. The OTS is authorized to impose additional restrictions on
transactions with affiliates if necessary to protect and ensure safety and
soundness standards. The OTS regulations also set forth various reporting
requirements relating to transactions with affiliates.
Extensions of credit by Cornerstone to its executive officers, directors
and principal shareholders are subject to Section 22(h) of the Federal Reserve
Act, which among other things, generally prohibits loans to any such individual
where the aggregate amount exceeds an amount equal to 15% of an institution's
unimpaired capital and surplus plus an additional 10% of unimpaired capital and
surplus in the case of loans that are fully secured by readily marketable
collateral.
Section 22(h) permits loans to directors, executive officers and principal
stockholders made pursuant to a benefit or compensation program that is widely
available to employees of Cornerstone provided that no preference is given to
any officer, director or principal stockholder, or related interest thereto,
over any other employee. In addition, the aggregate amount of extensions of
credit by a savings institution to all insiders cannot exceed the institution's
unimpaired capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers.
Holding Company Regulation. The Company is a unitary savings and loan
company subject to regulatory oversight by the OTS. As such, the Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings association subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association.
As a unitary savings and loan company, the Company generally is not subject
to activity restrictions. If the Company acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan company, and the activities of the Company and any of its subsidiaries
(other than the Bank or any other SAIF insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan company. See "Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Exchange Act. Accordingly, the Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal shareholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public-information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FDIC. The FDIC is an independent federal agency that insures the deposits,
up to prescribed statutory limits, of federally-insured banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund (the
"BIF") for commercial banks and state savings banks and the SAIF for savings
associations. The FDIC is required to
D-23
maintain designated levels of reserves in each fund. The Bank's deposit accounts
are insured by the FDIC in the SAIF up to the prescribed limits. The FDIC has
examination authority over all insured depository institutions, including the
Bank, and has authority to initiate enforcement actions if the FDIC does not
believe the OTS has taken appropriate action to safeguard safety and soundness
and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution. Since the Bank is considered a healthy
institution under this system, it has historically paid the lowest assessment
rate.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts). At December 31, 2003 the Bank complied with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board might be used to satisfy liquidity requirements
that may be imposed by the OTS. (See "Liquidity.")
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Banks. The FHLBs provide credit to their members in the
form of advances. See "Deposits and Borrowings." The Bank is a member of the
FHLB of Cincinnati and must maintain an investment in the capital stock of the
FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate
outstanding principal amount of the Bank's residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or 5%
of its advances from the FHLB. The Bank complies with this requirement with an
investment in stock of the FHLB of Cincinnati of $9.3 million at December 31,
2003.
For the year ended December 31, 2003, dividends paid by the FHLB of
Cincinnati to the Bank totaled $364,000, which constituted a $39,000 decrease
over the amount of dividends received in 2002.
FEDERAL TAXATION
The Company and the Bank are each subject to the federal tax laws and
regulations that apply to corporations generally. In addition to the regular
income tax, the Company and the Bank may be subject to an alternative minimum
tax imposed at a minimum tax rate of 20% on "alternative minimum taxable income"
(which is the sum of a corporation's regular taxable income, with certain
adjustments, and tax preference items), less any available exemption. Such tax
preference items include interest on certain tax-exempt bonds issued after
August 7, 1986. In addition, 75% of the amount by which a corporation's
"adjusted current earnings" exceeds its alternative minimum taxable income
computed without regard to this preference item and prior to reduction by net
operating losses, is included in alternative minimum taxable income. Net
operating losses can offset no more than 90% of alternative minimum taxable
income. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Small Business Act"), which was signed into law on August 21, 1996, certain
thrift institutions were allowed deductions for bad debts under methods more
favorable than those granted to other taxpayers. Qualified thrift institutions
could compute deductions for bad debts using either the specific charge off
method of Section 166 of the Code, or one of the two reserve methods of Section
593 of the Code. The reserve methods under Section 593 of the Code permitted a
thrift institution annually to elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available
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to small banks. Under the "percentage of taxable income" method, a thrift
institution generally was allowed a deduction for an addition to its bad debt
reserve equal to 8% of its taxable income (determined without regard to this
deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowance
addition to bad debt reserves for qualifying loans under either the experience
method or the percentage of taxable income method.
The Small Business Act eliminated the percentage of taxable-income reserve
method of accounting for bad debts by thrift institutions, effective for taxable
years beginning after 1995. Thrift institutions that would be treated as small
banks are allowed to use the experience method applicable to such institutions,
while thrift institutions that are treated as large banks are required to use
only the specific charge off method. The Company and the Bank qualify as a small
bank.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in the method of accounting,
initiated by the taxpayer, and having been made with the consent of the
Secretary of the Treasury. Section 481(a) of the Code requires certain amounts
to be recaptured with respect to such change. Generally, the amounts to be
recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that becomes a
large bank, the amount of the institution's applicable excess reserves generally
is the excess of (i) the balances of its reserve for losses on qualifying real
property loans (generally loans secured by improved real estate and its reserve
or losses on nonqualifying loans (all other types of loans) as of the close of
its last taxable year beginning before January 1, 1996, over (ii) the balances
of such reserves as of the close of its last taxable year beginning before
January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift
institution that becomes a small bank, the amount of the institution's
applicable excess reserves generally is the excess of (i) the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the thrift's reserves would have been at the close of its
last year beginning before January 1, 1996, had the thrift always used the
experience method.
For taxable years that began on or after January 1, 1996, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(C)(v) (generally a loan secured by
residential real and church property and certain mobile homes), but only to the
extent that the loan is made to the owner of the property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Act, which require recapture in
the case of certain excessive distributions to shareholders. The pre-1988
reserves may not be utilized for payment of cash dividends or other
distributions to a shareholder (including distributions in dissolution or
liquidation) or for any other purpose (except to absorb bad debt losses).
Distribution of a cash dividend by a thrift institution to a shareholder is
treated as made: first, out of the institution's post-1951 accumulated earnings
and profits; second, out of the pre-1988 reserves; and third, out of such other
accounts as may be proper. To the extent a distribution by the Bank to the
Company is deemed paid out of its pre-1988 reserves under these rules, the
pre-1988 reserves would be reduced and the Bank's gross income for tax purposes
would be increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid of the pre-1988 reserves.
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The Bank has not been audited by the IRS recently with respect to federal
income tax returns. In the opinion of management, any examination of still open
returns would not result in a deficiency that could have a material adverse
effect on the financial condition of the Bank.
OHIO TAXATION
The Company is subject to the Ohio Corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 and
(ii) 0.4% times taxable net worth. Under these alternative measures of computing
tax liability, the states to which a taxpayer's adjusted total net income and
adjusted total net worth are apportioned or allocated are determined by complex
formulas. The minimum tax is $50 per year.
A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio Corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
..22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times
taxable-net worth.
Certain holding companies, such as the Company, will qualify for complete
exemption from the net worth tax if certain conditions are met. The Company has
in the past and will most likely in the future meet these conditions and
therefore, will calculate its Ohio franchise tax on the net income basis.
The Bank is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions." This annual tax was imposed at a rate of 1.3% for the 2003 tax
year and thereafter of the Bank's apportioned book net worth, determined in
accordance with generally accepted accounting principles, less any statutory
deduction. As a "financial institution," the Bank is not subject to any tax
based upon net income or net profits imposed by the State of Ohio.
DELAWARE TAXATION
As a Delaware holding company, the Company is exempted from Delaware
corporate income tax but is required to file an annual report with and pay an
annual fee to the State of Delaware. The Company is also subject to an annual
franchise tax imposed by the State of Delaware.
EXECUTIVE OFFICERS
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors. Each executive officer
of the Company is also an executive officer of the Bank. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
NAME AGE POSITIONS HELD WITH THE COMPANY
---- --- -------------------------------
John W. Raisbeck.......... 64 President and Chief Executive Officer
Robert A. Kuehl........... 56 Senior Vice President, Treasurer and Chief Financial
Officer
William E. Whitmoyer...... 56 Senior Vice President
Robert P. Brezing......... 58 Senior Vice President
The business experience of each executive officer who is not also a
Director of the Company is set forth below.
Robert Kuehl. Mr. Kuehl is Senior Vice President, Treasurer and Chief
Financial Officer of the Company and the Bank, a position he has held since
February 1, 2004. From January 2003 to October 2003, Mr. Kuehl served as Chief
Financial Officer of Superior Bank, Little Rock, Arkansas. From October 2000 to
March 2002, Mr. Kuehl served as Executive Vice President and Chief Financial
Officer of Main Street Bank,
D-26
Reading, Pennsylvania. Mr. Kuehl was Senior Vice President and Controller for
Wilmington Savings Fund Society, Wilmington, Delaware, from December 1998 to
October 2000.
William E. Whitmoyer. Mr. Whitmoyer is Senior Vice President of Mortgage
lending. Mr. Whitmoyer has responsibility for all mortgage-banking functions and
all consumer loans. From 1995 to February 2001, Mr. Whitmoyer served as Senior
Vice President of Member Mortgage Services, a multi-state mortgage banking
operation providing services to credit unions in a five state area.
Robert P. Brezing. Mr. Brezing is Senior Vice President of the Company and
the Bank, positions he has held since October 1997. He is manager of Business
Banking, responsible for all commercial loans and commercial real estate loans.
From 1988 to 1997, Mr. Brezing served as Vice President of Banc One Corporation,
Columbus, Ohio.
EMPLOYEES
At December 31, 2003 the Company and its subsidiary had 87 employees,
including 7 part-time employees. The Company's employees are not represented by
any collective bargaining group. Management considers its employee relations to
be good.
ITEM 2. PROPERTIES
The Company conducts its business at its main office, which also serves as
its executive office, and the Bank's six branch offices located in its market
area. The following table sets forth information relating to each of the
Company's offices as of December 31, 2003.
1. Main Office, 28 East Main Street, Springfield, Ohio
2. Enon Branch, 7601 Dayton-Springfield Road, Enon, Ohio
3. New Carlisle Branch, 210 North Main Street, New Carlisle, Ohio
4. Springfield Branch, 1480 Upper Valley Pike, Springfield, Ohio
5. Yellow Springs Branch, 50 Kahoe Lane, Yellow Springs, Ohio
6. Beavercreek Branch, 3216 Seajay Drive, Beavercreek, Ohio
7. Centerville Branch, 6291 Wilmington Pike, Dayton, Ohio
The Company owns all of its offices. The total net book value of the
Company's premises and equipment (including land, building and leasehold
improvements and furniture, fixtures and equipment) at December 31, 2003 was
$4.2 million. The Company considers all properties to be in good operating
condition and suitable for the purpose for which they are used. The properties
are unencumbered by any mortgage or security interest and are, in management's
opinion, adequately insured. See Note 4 of the Notes to Consolidated Financial
Statements in the Annual Report to Shareholders filed as Exhibit 13 hereto.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiary are involved from time to time as plaintiff
or defendant in various legal actions arising in the normal course of their
business. While the ultimate outcome of pending proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing the Company, the Bank or its subsidiary in the proceedings, that
the resolution of these proceedings should not have a material effect on the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2003.
D-27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Page 5 of the Company's 2003 Annual Report to Shareholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 6 and 7 of the Company's 2003 Annual Report to Shareholders are
herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 8 through 18 of the Company's 2003 Annual Report to Shareholders are
herein incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. The Board of Directors
meets at least quarterly to review the Company's interest rate risk position and
profitability. The Board of Directors also reviews the Company's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Company's objectives in the most
effective manner. In addition, the Board anticipates reviewing on a quarterly
basis the Company's asset/liability position, including simulations of the
effect on the Company's capital of various interest rate scenarios.
In managing its asset/liability mix, the Company, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing net interest margin
than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
The primary objective of the Company's investment strategy is to provide
liquidity necessary to meet funding needs as well as to address daily, cyclical
and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock and U.S. Government securities.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to achieve the proper balance between its desire to minimize risk
and maximize yield, to provide collateral for borrowings, and to fulfill the
Company's asset/liability management policies.
The Company's cost of funds responds to changes in interest rates due to
the relatively short-term nature of its deposit portfolio. Consequently, the
results of operations are heavily influenced by the levels of short-term
interest rates. The Company offers a range of maturities on its deposit products
at competitive rates and monitors the maturities on an ongoing basis. For
additional information regarding market risk, see pages 21 to 22 of the
Company's 2003 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 27 through 55 of the Company's 2003 Annual Report to Shareholders are
herein incorporated by reference.
D-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide
only reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act)) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the last fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated herein by reference
from the sections "Election of Directors-General" and "Meetings and Committees
of the Board of Directors" from the Company's Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on April 22, 2004, (the "Proxy
Statement"). For information concerning executive officers of the Company who
are not also Directors, see "Executive Officers" in Part I of this Form 10-K.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who beneficially own more than 10%
of the Company's Common Stock (or any other equity securities, of which there is
none), to file with the Securities and Exchange Commission (the "SEC") initial
reports of ownership and reports of changes in ownership of the Company's Common
Stock. Officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 2003, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with in the year 2003.
ITEM 10A. CODE OF ETHICS
The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The
D-29
Company undertakes to provide to any person without charge, upon written request
to the Company Secretary, a copy of such code of ethics.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this item is incorporated herein by reference
from the sections "Executive Compensation", "Compensation of Directors,"
"Employment Agreements", "Compensation Committee Report on Executive
Compensation" and "Stock Performance Presentation" from the Company's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the sections "Voting
Securities and Principal Holders Thereof" and "Election of Directors -- General"
from the Company's Proxy Statement.
The following table provides information as of December 31, 2003 related to
our equity compensation plans in effect at that time.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
NUMBER OF WEIGHTED-
SECURITIES TO BE AVERAGE NUMBER OF
ISSUED UPON EXERCISE PRICE OF SECURITIES
EXERCISE OF OUTSTANDING REMAINING AVAILABLE
OUTSTANDING OPTIONS, FOR FUTURE ISSUANCE
OPTIONS, WARRANTS WARRANTS UNDER EQUITY
PLAN CATEGORY AND RIGHTS AND RIGHTS COMPENSATION PLANS
------------- ----------------- ----------------- -------------------
(a) (b) (c)
Equity Compensation Plans Approved by
Security Holders................... 160,814 $19.02 163,226
Equity Compensation Plans Not
Approved by Security Holders....... -0- $ -0- -0-
------- ------ -------
Total................................ 160,814 $19.02 163,226
======= ====== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the section "Certain Transactions" from
the Company's Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees.................................................. $71,583.30
Audit-Related Fees.......................................... -0-
Tax Fees.................................................... 20,520.00
All Other Fees*............................................. 11,905.28
---------------
* All Other Fees primarily includes review of Bank Secrecy Act procedures and
professional fees associated with the Bank's customer information file and
related profitability reporting.
All of the above services were approved by the Audit Committee. The Company
currently has no formal Audit Committee pre-approval procedures in place that
permit management to engage the auditors with respect to pre-approved services.
It is the Company's policy that the Audit Committee approves in advance all
services to be provided by the auditors.
D-30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
The following information appearing in the Company's Annual Report to
Shareholders for the year ended December 31, 2003, is incorporated herein by
reference in this Annual Report on Form 10-K as Exhibit 13.
PAGES IN
ANNUAL
ANNUAL REPORT SECTION REPORT
--------------------- --------
Report of Independent Auditors.............................. 26
Consolidated Balance Sheets................................. 27
Consolidated Statements of Income........................... 28
Consolidated Statements of Comprehensive Income............. 29
Consolidated Statements of Shareholders' Equity............. 30
Consolidated Statements of Cash Flows....................... 31-32
Notes to Consolidated Financial Statements.................. 33-55
(a)(2) Financial Statement Schedules:
Financial statement schedules are omitted as they are not applicable or the
required information is contained in the financial statements or notes therein
found in the Company's 2003 Annual Report to Shareholders.
(a)(3) Exhibits:
REFERENCE TO PRIOR
REGULATION FILING OR EXHIBIT
S-K EXHIBIT NUMBER ATTACHED
NUMBER DOCUMENT HERETO
----------- -------- ------------------
3(i) Certificate of Incorporation................................ *
3(ii) Amended and Restated Bylaws................................. ****
4 Instruments defining the rights of security holders,
including indentures........................................ *
10 Material contracts:
(a) 1995 Stock Option and Incentive Plan.................... **
(b) Management Recognition Plan............................. **
(c) Employment Agreement with John W. Raisbeck.............. ****
(d) Employment Agreement with Robert P. Brezing............. ****
(e) Employment Agreement with Richard K. Smith.............. 10-(e)
(f) Employment Agreement with John Clemmer.................. 10-(f)
(g) Employment Agreement with William E. Whitmoyer.......... *****
(h) 1998 Omnibus Incentive Plan............................. ***
(i) Cornerstone Bank Deferred Compensation Plan, as
amended..................................................... ****
13 Annual report to security holders........................... 13
21 Subsidiaries of the registrant.............................. 21
23 Consent of Crowe Chizek and Company LLC..................... 23
31.1 Certification by the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.................................. 31.1
31.2 Certification by the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.................................. 31.2
32+ Certifications of the CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.............................. 32
D-31
---------------
+ Furnished herewith.
* Incorporated by reference to the Company's Registration Statement No.
33-76734.
** Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
*** Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
**** Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
***** Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 2001
(b) Reports on Form 8-K:
The Company filed a current report on Form 8-K on October 17, 2003
regarding its quarterly earnings for the third quarter of 2003.
D-32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTERN OHIO FINANCIAL CORPORATION
By: /s/ JOHN W. RAISBECK
------------------------------------
John W. Raisbeck
President and Chief Executive
Officer
(Duly Authorized Representative)
Date: March 26, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the dates indicated.
By: /s/ JOHN W. RAISBECK By: /s/ DAVID L. DILLAHUNT
------------------------------ ------------------------------
John W. Raisbeck David L. Dillahunt
President and Chief Executive Chairman of the Board
Officer
(Principal Executive Officer)
Date: March 26, 2004 Date: March 26, 2004
By: /s/ HOWARD V. DODDS By: /s/ JOHN E. FIELD
------------------------------ ------------------------------
Howard V. Dodds John E. Field
Director Director
Date: March 26, 2004 Date: March 26, 2004
By: /s/ ARTISTIDES G. By: /s/ WILLIAM N. SCARFF
GIANAKOPOULOS ------------------------------
------------------------------ William N. Scarff
Aristides G. Gianakopoulos Director
Director
Date: March 26, 2004 Date: March 26, 2004
By: /s/ JEFFREY L. LEVINE By: /s/ PETER J. HACKETT
------------------------------ ------------------------------
Jeffrey L. Levine Peter J. Hackett
Director Director
Date: March 26, 2004 Date: March 26, 2004
By: /s/ ROBERT A. KUEHL
------------------------------
Robert A. Kuehl
Senior Vice President,
Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 26, 2004
D-33
EXHIBIT 31.1
CERTIFICATIONS
I, John W. Raisbeck, certify that:
1. I have reviewed this annual report on Form 10-K of Western Ohio
Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c. Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter, that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ JOHN W. RAISBECK
--------------------------------------
John W. Raisbeck
Chief Financial Officer
Date: March 26, 2004
D-34
EXHIBIT 31.2
CERTIFICATIONS
I, Robert A. Kuehl, certify that:
1. I have reviewed this annual report on Form 10-K of Western Ohio
Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c. Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter, that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ ROBERT A. KUEHL
--------------------------------------
Robert A. Kuehl
Chief Financial Officer
Date: March 26, 2004
D-35
EXHIBIT 32
CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Western Ohio Financial
Corporation (the "Company") for the fiscal year ended December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, John W. Raisbeck, Chief Executive Officer of the Company, certify, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ JOHN W. RAISBECK
--------------------------------------
John W. Raisbeck
Chief Executive Officer
Date: March 26, 2004
In connection with the Annual Report on Form 10-K of Western Ohio Financial
Corporation (the "Company") for the fiscal year ended December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Robert A. Kuehl, Chief Financial Officer of the Company, certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ ROBERT A. KUEHL
--------------------------------------
Robert A. Kuehl
Chief Financial Officer
Date: March 26, 2004
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
D-36
EXHIBIT 13
TABLE OF CONTENTS
Letter to Shareholders 3
Market Price of Western Ohio Financial Corporation's
Common Shares and Related Shareholder Matters 5
Selected Consolidated Financial Information 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General 8
Forward-Looking Statements 9
Analysis of Financial Condition 12
Comparison of Years Ended December 31, 2003 and December 31, 2002 13
Comparison of Years Ended December 31, 2002 and December 31, 2001 16
Average Balances, Interest Rates and Yields 19
Rate/Volume Analysis 20
Asset/Liability Management and Market Risk 21
Liquidity and Capital Resources 23
Impact of Inflation and Changing Prices 25
Report of Independent Auditors 26
Consolidated Financial Statements 27
Notes to Consolidated Financial Statements 33
Western Ohio Financial Corporation and Subsidiary Shareholder Information 56
Board of Directors and Officers 56
Market Makers 58
2
Dear Fellow Shareholders:
2003 was another strong year for Western Ohio Financial Corporation and its sole
subsidiary, Cornerstone Bank. Earnings, return on assets and return on equity
improved for the sixth consecutive year in spite of industry-wide compression of
net interest margin and a recession.
Let's look at the 2003 highlights, details of which are covered more
comprehensively in the Management Discussion and Analysis.
- Net income improved 6.6% over 2002 from $2,347,000 to $2,501,000,
while fully diluted earnings per share increased from $1.35 to $1.42.
- Non-interest income improved nearly 21% reflecting increased gains on
sale of mortgage loans, deposit service charges and loan fees. Once a
major weakness, your company ranks near the top of its peer group for
this earnings component.
- Total assets grew 15% from $346,800,000 to $399,540,000 reflecting an
increase in loan balances of 30% from $257,000,000 to $334,600,000 for
2003.
- Total deposits increased by 13.4% from $219,200,000 to $248,700,000
for the year. Core deposits grew 10%.
- Non-interest expense increased only a modest 1.0%.
- Earning asset quality has been excellent as reflected in
significantly lower average impaired loans and non-performing loan
levels and net charge offs.
- The branch network experienced increased loan and deposit volumes as
well as significant growth in related fees resulting largely from
increased calls, cross-selling and bank at work services.
- Our capital position remains in all respects well above required
minimums.
The primary reason for our success has been the commitment and ability to
develop relationships and build on those relationships. Across the bank where
our staff meets the customer, we remain focused on relationships with our
customers, providing value at a competitive price, providing enhanced
convenience and broader product offerings as well as efficiency in answering
questions, solving problems, providing faster credit turnaround times, and above
all courtesy and respect for our valued customers at all times.
Not only do we strive to develop relationships with our customers, we also
strive to develop lasting relationships with the local communities we serve and
the charitable organizations that serve them. We have accomplished this in many
different ways throughout the year. Our caring employees actively participated
in community charity events
3
with such organizations as the American Cancer Society, MR/DD, American Red
Cross, Junior Achievement, United Way, Habitat for Humanity and others. Our
employees are very proud of the home they helped build and sponsor with Habitat
for Humanity. We are also grateful for the recognition each year from the United
Way and American Cancer Society for outstanding campaigns. Our employees look
forward to our regular blood drives. These are just a small sampling of what
makes us proud and our communities a better place to live and work. Our
Cornerstone Bank employees are committed to helping the communities we serve and
our fellow employees any time there is a need or a good cause. We take our
community involvement seriously.
Our corporate challenges remain the same: finding new sources for profitable
growth, increased competition, coping with regulatory change, growing our core
deposits, competing on value not just price and service quality in an
ever-changing environment; and most of all, retaining and acquiring top quality
people in all phases of our business. On the national scene, from most reports
an economic recovery appears to be in progress. This should ultimately bode well
for the markets we serve and your company, although we expect some sluggishness
for the next few months especially in the jobs sector. We also anticipate some
modest continuation of margin compression in the finance sector, although we
believe interest rates could remain fairly steady with some upward pressure
perhaps just before and especially after the election this Fall. There remains
uncertainty regarding war and potential terrorist acts.
We remain committed to improving the performance of the company and thus
shareholder value. We have been successful over the past six years, but there is
still much more to accomplish.
We can't thank enough our shareholders, our dedicated and caring staff and Board
of Directors and our valued customers for their continuing support.
John W. Raisbeck
President and Chief Executive Officer
David L. Dillahunt
Chairman of the Board
4
MARKET PRICE OF WESTERN OHIO FINANCIAL CORPORATION'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
There were 1,779,823 common shares of WOFC outstanding, including unearned
employee benefit plan shares, on December 31, 2003, held of record by
approximately 574 registered shareholders and 1,050 beneficial holders behind
brokers, banks, and depositories. Price information with respect to WOFC's
common shares is quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") National Market System. The Wall Street
Journal publishes daily trading information for our stock under the abbreviation
"WstnOH Fnl" in the National Market Listing.
Fiscal Year 2003 Fiscal Year 2002
----------------------------- -----------------------------
Low High Dividend Low High Dividend
----------------------------- -----------------------------
First quarter $20.05 $23.50 $.25 $18.55 $20.35 $.25
Second quarter 20.78 26.13 .25 19.10 21.02 .25
Third quarter 24.05 28.51 .25 18.77 21.00 .25
Fourth quarter 28.27 33.28 .25 19.87 21.50 .25
The Corporation has repurchased shares and intends to continue to repurchase
shares in order to enhance shareholder value when the Board of Directors
considers it to be in the best interest of the Corporation's shareholders.
During 2003 the Corporation repurchased 31,500 shares and 22,200 in 2002. The
Corporation's ability to repurchase shares will continue to be limited by its
earnings and profits, and pre-1988 bad debt tax reserves included in
Cornerstone's retained earnings.
There were no sales of unregistered securities during 2003.
See accompanying notes to consolidated financial statements.
5
SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ----------- ------------- -------------- -----------
(In Thousands)
Selected Financial Condition Data:
Total assets $ 399,540 $ 346,795 $ 341,711 $ 352,562 $ 329,685
Loans, net 334,469 256,883 269,300 283,604 254,871
Cash and cash equivalents 6,853 19,312 16,915 4,805 9,614
Mortgage-backed securities 21,808 36,866 36,006 39,219 41,591
Securities 10,927 9,135 3,642 9,434 8,775
Deposits 248,681 219,169 220,287 208,332 202,331
Borrowed funds 103,473 81,243 76,655 100,225 82,183
Total stockholders' equity 44,357 43,205 41,945 41,810 42,989
December 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ---------- ------------ ----------- ----------
(In Thousands)
Selected Operations Data:
Total interest income $ 18,559 $ 21,381 $ 24,718 $ 25,624 $ 23,415
Total interest expense 9,149 11,462 15,199 15,730 13,632
----------- ---------- ---------- ---------- ---------
Net interest income 9,410 9,919 9,519 9,894 9,783
Provision for loan losses 286 343 358 349 246
----------- ---------- ---------- ---------- ---------
Net interest income after pro-
vision for loan losses 9,124 9,576 9,161 9,545 9,537
Non-interest income:
Service charges 2,537 2,278 1,603 1,182 1,085
Gain on sales of loans
and securities 629 730 314 75 111
Other non-interest income 477 85 22 37 65
----------- ---------- ---------- ---------- ---------
Total non-interest income 3,643 3,093 1,939 1,294 1,261
Total non-interest expense 9,229 9,136 8,216 7,899 8,127
----------- ---------- ---------- ---------- ---------
Income before income taxes 3,538 3,533 2,884 2,940 2,671
Income tax expense 1,037 1,186 1,009 1,089 988
----------- ---------- ---------- ---------- ---------
Net income $ 2,501 $ 2,347 $ 1,875 $ 1,851 $ 1,683
=========== ========== ========== ========== =========
See accompanying notes to consolidated financial statements.
6
SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to
average total assets) 0.70% 0.68% 0.54% 0.54% 0.52%
Interest rate spread information:
Average during year 2.54 2.55 2.30 2.44 2.57
End of year 2.45 2.54 2.20 2.65 2.37
Net interest margin 2.77 2.95 2.83 2.99 3.13
Ratio of operating expense to
average total assets 2.57 2.64 2.37 2.32 2.51
Return on equity (ratio of net
income to average equity) 5.72 5.47 4.43 4.50 3.75
Quality Ratios:
Non-performing assets to total assets at end
of year 0.36 0.51 0.82 1.02 0.83
Allowance for loan losses to non-performing
loans 126.92 101.52 60.15 46.24 100.94
Allowance for loan losses to total loans 0.54 0.70 0.63 0.58 1.09
Allowance for loan losses to classified assets 41.76 28.78 51.04 42.30 75.14
Capital Ratios:
Total equity to total assets at end of
year 11.10 12.46 12.27 11.86 13.04
Average equity to average assets 12.21 12.40 12.21 12.09 13.87
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.09 x 1.12 x 1.12 x 1.12 x 1.13 x
Per Share Data:
Earnings per share-Basic $ 1.44 1.36 1.08 1.01 0.86
Earnings per share-Diluted 1.42 1.35 1.08 1.01 0.85
Dividend payout ratio 0.69 x 0.74 x 0.93 x 0.99 x 1.18 x
Book value per share $ 24.92 24.62 23.89 23.15 21.82
Cash dividends paid $ 1.00 1.00 1.00 1.00 1.00
Number of full service offices 7 7 7 6 6
See accompanying notes to consolidated financial statements.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Western Ohio Financial Corporation ("the Corporation" or "WOFC"), owns
Cornerstone Bank ("Cornerstone"), a federal savings bank as its principal
subsidiary. The business of Cornerstone, which has traditionally consisted of
attracting deposits from the general public and making loans secured by
residential and nonresidential real estate. Cornerstone's profitability, and
consequently the Corporation's profitability, is primarily dependent upon its
net interest income, which is the difference between interest income on its loan
and investment portfolio and interest paid on deposits and other borrowed funds
and the levels of non-interest income and non-interest expense. 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. Non-interest income consists primarily of service charges and other
fees and gains on sales of securities and other assets. Non-interest expense
includes salaries and employee benefits, occupancy of premises, federal deposit
insurance premiums, franchise taxes, data processing expenses and other
operating expenses. In October 1997, the Corporation formed another subsidiary,
CornerstoneBanc Financial Services, Incorporated (formerly West Central Mortgage
Services, Incorporated), ("CFSI"). The primary business of CFSI is to hold
one-to-four family mortgage loans from outside the Corporation's primary market
area.
The operating results of the Corporation are also affected by general economic
conditions, the monetary and fiscal policies of federal agencies and the
policies of agencies that regulate financial institutions. The Corporation'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, commercial loans and other types of loans, which
is, in turn, affected by the interest rates at which such loans are made,
general economic conditions affecting loan demand and the availability of funds
for lending activities.
The Corporation's primary market area consists of Clark, Greene and portions of
Montgomery counties. Located in west-central Ohio, Clark and Greene counties'
economic environment consists of a traditional industrial base supplemented by
the service and support industries, and its close proximity to a major U.S.
military installation, Wright Patterson Air Force Base. Since September 11,
2001, the Air Force Base has increased some of its military operations and this
could increase the economic environment in Clark and Greene Counties. Navistar
Truck Manufacturer is the largest industrial employer in Clark County. While
Navistar's Clark County operations have provided stable employment for the area
over the last several decades, in recent years Navistar has shifted its
operations to smaller truck production, which has led to layoffs that could
possibly affect the economic viability of the Corporation's market area. The
Community Hospital, Clark State Community College, Mercy Medical Center and
Wittenberg University are also major employers in the area. Unemployment for all
three counties has improved during the past year with Clark and Montgomery
County unemployment rates moving fairly consistent with the national average
while Greene County has remained below the national rate of unemployment.
The Corporation offers a range of customer services and products, including
deposit accounts and loans. These loans are primarily one-to-four family
mortgage loans, multi-family and commercial real estate loans, commercial
See accompanying notes to consolidated financial statements.
8
loans and home equity lines of credit. Smaller portions of the Corporation's
loans receivable consist of construction and consumer loans.
Management and the Board of Directors of the Corporation have sought to enhance
shareholder value by using excess capital to repurchase outstanding shares when
business and market conditions warrant. As a practical matter, however, the
Corporation's ability to repurchase shares will continue to be limited by its
earnings, level of stock price and pre-1988 bad debt tax reserves included in
Cornerstone's retained earnings.
FORWARD-LOOKING STATEMENTS
When used throughout this document, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimated," "projected,"
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Bank's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Bank's market
area and competition that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors listed
above could affect the Corporation's financial performance and could cause
actual results for future periods to differ materially from any statements
expressed with respect to future periods.
The reader should not place undue reliance on any forward-looking statements.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events or for any other reason.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Western Ohio's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the banking industries. Application of these principles
requires management to make estimates, assumptions, and judgments that affect
the amounts reported in the financial statements and accompanying notes. These
estimates, assumptions, and judgments are based on information available as of
the date of the financial statements; accordingly, as this information changes,
the financial statements could reflect different estimates, assumptions, and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions, and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Estimates, assumptions, and judgments are necessary when assets and liabilities
are required to be recorded at fair value, when a decline in the value of an
asset not carried on the financial statements at fair value warrants an
impairment, write-down or valuation reserve to be established, or when an asset
or liability needs to be recorded contingent upon a future event. Carrying
assets and liabilities at fair value inherently results in more financial
statement volatility. The fair values and the information used to record
valuation adjustments for certain assets and liabilities are based either on
quoted market prices or are provided by other third-party sources, when
available. When third-party information is not available, valuation adjustments
are estimated in good faith by management primarily through the use of internal
cash flow modeling techniques.
See accompanying notes to consolidated financial statements.
9
The most significant accounting policies followed by the Corporation are
presented in Note 1 to the consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes and
in this financial review, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are
determined. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions, and the estimates
underlying those amounts, management has identified the determination of the
allowance for loan losses, the valuation of retained interests, including
mortgage and other servicing assets, to be the accounting areas that require the
most subjective or complex judgments, and as such would most likely be subject
to subsequent revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable
credit losses incurred in the loan portfolio at a particular balance sheet date.
Determining the amount of the allowance for loan losses is considered a critical
accounting estimate because it requires significant judgment and the use of
estimates related to the amount and timing of expected future cash flows on
impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends and
conditions and collateral values, all of which may be susceptible to significant
change. The loan portfolio also represents the largest asset type on the
consolidated balance sheet. Note 1 to the consolidated financial statements
describes the methodology used to determine the allowance for loan losses and a
discussion of the factors driving changes in the amount of the allowance for
loan losses.
The allowance for loan losses consists of allocated and unallocated components.
The allocated component of the allowance for loan losses reflects expected
losses resulting from analyses developed through specific credit allocations for
individual loans and historical loss experience for each loan category. The
specific credit allocations are based upon regular analyses of all loans over a
fixed-dollar amount where the internal credit rating is at or below a
predetermined classification. These analyses involve a high degree of judgment
in estimating the amount of loss associated with specific loans, including
estimating the amount and timing of future cash flows and collateral values.
The unallocated portion of the allowance for loan losses reflects management's
estimate of likely inherent but undetected losses within the loan portfolio due
to uncertainties in economic conditions, delays in obtaining information,
including unfavorable information about the financial condition of the borrower,
the difficulty in identifying future events that correlate to subsequent loss
rates, and risk factors that have not yet materialized that would impact loss
allocation factors. The unallocated allowance also includes a component that
accounts for the inherent imprecision in loan loss analysis. The analysis for
both the allocated and unallocated components is updated quarterly.
Many factors requiring both quantitative as well as qualitative judgment, affect
the allowance for loan losses. Although management believes its process for
determining the allowance adequately considers all of the potentially critical
factors that could ultimately result in credit losses, the process includes
subjective elements and therefore may be susceptible to significant change. To
the extent the actual outcomes differ from management estimates, additional
provision for loan losses could be required that could adversely affect the
earnings and financial position in the future.
See accompanying notes to consolidated financial statements.
10
Retained interests, including Mortgage Servicing Rights (MSRs), are established
and accounted for based on discounted cash flow modeling techniques which
require management to make estimates regarding the amount and timing of expected
future cash flows, including assumptions about loan prepayment rates, credit
loss experience, and costs to service, as well as discount rates that consider
the risk involved. MSRs do not trade in an open market with active trading with
readily available market prices. Although sales of MSRs do occur, the exact
terms and conditions may not be readily available to assist in a valuation
exercise. Because the values of these assets are sensitive to changes in
assumptions, the valuation of retained interests, which in part is provided by
an independent third party, is considered a critical accounting estimate.
The expected and actual prepayment rates for mortgage loans are the most
significant factors impacting the value of MSRs, which have a high correlation
to the movement of market interest rates. Increases in mortgage loan prepayments
reduce estimated future net servicing cash flows because the life of the
underlying loan has declined. Management compares its fair value estimates and
assumptions to observable market data when available, monitors the movement in
market interest rates due to their impact on the prepayment of loans, and
updates the valuation of MSRs quarterly.
OVERVIEW
The main source of revenue for the Corporation is net interest income from
lending activity and deposit gathering. In addition the Company collects fees
from customers for services related to these two major activities. The level of
lending activity is influenced by the economic factors such as market interest
rates, business spending and consumer confidence coupled with the competitive
conditions within the financial services industry, which includes both Community
Banks as well as larger Regional Banks.
The low level of interest rates during the past year provided the Company the
opportunity to originate very high levels of residential mortgage loans, however
this low level of rates also afforded customers the opportunity to refinance
their existing mortgages at lower rates, which resulted in a higher level of
loan payoffs. This in turn affected the Company's ability to grow the balance
sheet during 2003. The result has been continued margin compression for both the
Bank as well as the industry. The Bank experienced a modest decline in net
interest income during 2003 and the result was a lower net interest margin due
to lower spread, primarily driven by reduced yields on originated loans. In
order to provide a slightly higher level of earning assets during the year, the
Company purchased mortgage loan pools in order to replace the higher level of
residential mortgages that were paid off due to refinancing.
The Company will continue to increase its focus on fee-based services in order
to reduce the reliance on net interest income due to its interest rate
sensitivity. In addition, the Bank will continue to focus on the growth of
Business Banking and increased business relationships. The business loans
provide a higher net interest spread than residential mortgages and also provide
an additional source of fees and cost-effective deposits.
Finally, the credit quality of the loan portfolio showed continued improvement
during the past year due in part to an improving economy which contributed to
improved financial results for business customers.
See accompanying notes to consolidated financial statements.
11
Competitive conditions within the financial services industry will continue in
2004 and net interest margin compression will continue to challenge the Company.
The economy, which has improved recently but still provides many mixed results,
especially on the jobs front, may provide improved loan and business
opportunities during 2004.
ANALYSIS OF FINANCIAL CONDITION
Total assets of the Corporation increased $52.7 million, or 15.2% from $346.8
million at December 31, 2002 to $399.5 million at December 31, 2003. This
increase in assets was attributable to growth in loans receivable, partially
offset by declines in cash and cash equivalents and securities. Cash and cash
equivalents decreased $12.5 million from $19.3 million at December 31, 2002 to
$6.9 million at December 31, 2003. Securities decreased $13.3 million from $46.0
million at December 31, 2002, to $32.7 million at December 31, 2003. The primary
reason for the increase in loans receivable was the purchase of mortgage loan
pools, primarily fifteen year and adjustable rate mortgages.
Net loans receivable increased from $256.9 million at December 31, 2002, to
$334.5 million at December 31, 2003, an increase of $77.6 million, or 30.2%. The
increase was primarily the result of purchasing $76.5 million of new residential
mortgage loan originations within the United States, primarily fifteen year
fixed and adjustable rate loans of three to five years. Traditional one-to-four
family residential mortgage loans increased $51.0 million from $124.1 million at
December 31, 2002 to $175.1 at December 31, 2003. This increase was the result
of the purchased residential mortgage loans previously mentioned coupled with a
net reduction in Bank originated loans due to the continued heavy mortgage
refinancing activity in 2003. Additionally, commercial real estate mortgage
loans increased $26.5 million from $87.0 million at December 31, 2002 to $113.5
million at December 31, 2003. The Bank's strategic direction continues to be
diversification of its loan portfolio into more commercial and other real estate
mortgage type loans in order to increase loan interest income and
non-interest-bearing commercial deposits as well as reducing the duration of its
typical one-to-four family mortgage portfolio.
Securities available for sale decreased $13.3 million, or 28.8%, from $46.0
million at December 31, 2002 to $32.7 million at December 31, 2003. The decrease
was due to sale of securities of $9.5 million and maturities and principal
repayments of $22.7 million. Principal repayments on existing mortgage-backed
securities available for sale accelerated in 2003, which was primarily
attributable to higher levels of residential mortgage refinancing during this
current low interest rate environment. The decline in securities available for
sale was partially offset by securities purchases amounting to $20.1 million
during 2003.
Liabilities increased from $303.6 million at December 31, 2002, to $355.2
million at December 31, 2003, an increase of $51.6 million, or 17.0%. The
primary reason for the increase in total liabilities was an increase in brokered
deposits and Federal Home Loan Bank ("FHLB") advances, which provided the
funding for the loan growth mentioned above. FHLB advances increased $22.2
million, or 27.4%, to $103.5 million at December 31, 2003 from $81.2 million at
December 31, 2002. The FHLB advances are secured by a blanket pledge of
mortgages to the FHLB and are not tied to specific securities or mortgages.
Under the blanket pledge, the Corporation had approximately $36.5 million in
additional borrowing capacity with the FHLB at December 31, 2003.
Deposits, which are comprised of customer accounts and brokered certificates of
deposit, increased $29.5 million, or 13.5%, from $219.2 million as of December
31, 2002 to $248.7 million as of December 31, 2003. The increase occurred
entirely in brokered deposit accounts, from a zero balance at
See accompanying notes to consolidated financial statements.
12
December 31, 2002 to $30.7 million at December 31, 2003. Deposits in the money
market accounts increased $0.4 million from $66.5 million at December 31, 2002
to $66.9 million at December 31, 2003. Deposits in non-interest-bearing checking
accounts increased $2.4 million, or 22.0%, to $13.1 million at December 31, 2003
from $10.8 million at December 31, 2002. These increases in customer deposits
were offset by reductions in interest-bearing checking accounts and customer
certificates of deposit. Management's strategy has been to encourage multiple
deposit relationships and achieve parity in pricing between certificates of
deposit and wholesale funding from the FHLB.
Total shareholders' equity increased $1.2 million, or 2.7%, from $43.2 million
at December 31, 2002 to $44.4 million at December 31, 2003. This increase was
due primarily to net income of $2.5 million during the current year, an increase
of $238,000 in the employee stock ownership plan and a net reduction of $609,000
in the cost of the Company's treasury shares in 2003. The increase was partially
offset by dividend payments to shareholders of $1.7 million and a reduction of
$488,000 in accumulated other comprehensive income.
COMPARISON OF RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
The Corporation's results of operations depend primarily on the level of its net
interest income, non-interest income (fees) as well as the level of its
operating expenses. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rate
earned and paid on them, respectively. In addition, the Corporation receives
fees from loan originations, loan sales, late payments, loan servicing and
payments for service related to transaction and other deposit accounts, and from
dividends on its FHLB stock.
GENERAL. Net income for the year ended December 31, 2003, was $2.5 million, an
increase of $154,000 or 6.6% compared to the year ended December 31, 2002. The
increase was primarily the result of growth in non-interest income in 2003 of
$550,000 above the prior year's level, partially offset by a decline in net
interest income of $509,000 from the level in 2002 and a modest increase in
total non-interest expense. The returns on average assets and average
shareholders' equity in 2003 were 0.70% and 5.72%, respectively, compared to
0.68% and 5.47% in 2002. Earnings per share on a fully diluted basis increased
$.07 per share, or 5.2% from $1.35 per share for 2002 to $1.42 per share for
2003.
Net interest income is the largest component of the Corporation's income and is
affected by the interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
decreased $509,000 from $9.9 million to $9.4 million, or 5.1%, primarily due to
a decline in the yields on interest-earning assets, both investment securities
and loans, partially offset by lower rates paid on interest-bearing liabilities
coupled with a modest shift of deposits from higher rate certificates of deposit
to lower rate checking and money market accounts. The Corporation's net interest
margin of 2.77% in 2003 declined 18 basis points from 2.95% in 2002 mainly
resulting from a reduction in the net interest rate spread by 1.0 basis points
from 2.55% in 2002 to 2.54% in 2003. The benefit of the decline in the rate paid
on interest-bearing liabilities of 90 basis points from 3.81% in 2002 to 2.92%
in 2003 was more than offset by the reduction in the yield on interest-earning
assets of 98 basis points from 6.36% in 2002 to 5.46% in 2003. (See the table
under Average Balances, Interest Rates and Yields). Management expects the
current level of deposit costs to increase in the second half of 2004 and
subsequent years since the general level of interest rates is expected to rise.
See accompanying notes to consolidated financial statements.
13
The provision for loan losses for the year ended December 31, 2003, was
$286,000, a decrease of $57,000, compared to $343,000 for the year ended
December 31, 2002. Non-interest income increased $550,000 to $3.6 million for
the full year 2003 above the prior years results, primarily due to an increase
in deposit service charges and other non-interest income. Non-interest expense
increased $93,000 from $9.1 million at December 31, 2002, to $9.2 million at
December 31, 2003, primarily the result of increased professional services and
other non-interest expense. Income taxes decreased $149,000 from $1.2 million at
December 31, 2002, to $1.1 million at December 31, 2003, as a result of an
increase in nontaxable earning assets from the Bank owned life insurance policy.
INTEREST INCOME. Total interest income of $18.6 million for the year ended
December 31, 2003 decreased $2.8 million, or 13.2%, from $21.4 million for the
year ended December 31, 2002. This decrease is due primarily to lower yields on
loans and securities, which was partially offset by an increase in the amount of
interest-earning assets, namely loans receivable. The yield on interest-earning
assets of 5.46% in 2003 declined 90 basis points from 6.36% in 2002, primarily
due to a decline in loan yields. The reduction in yields on total loans of 99
basis points in 2003 to 5.82% from 6.81% in 2002 was the largest contributor to
the declining interest income. There was an increase in average gross loan
balances in 2003 of $24.8 million, or 9.2%, primarily in commercial mortgage
loans and 1-4 family residential mortgages, partially offset the reduction of
interest income for loans. Interest income from securities and other investments
declined by $1.5 million in 2003 from the prior year principally due to a
decline in average interest-earning assets of $18.6 million, or 31.0%, in 2003
versus 2002 and a reduction in the average yield of 176 basis points from 4.89%
in 2002 to 3.13% in 2003. (See the table under Average Balances, Interest Rates
and Yields)
INTEREST EXPENSE. Total interest expense of $9.1 million for the year ended
December 31, 2003, decreased by $2.3 million, or 20.2%, compared to $11.5
million for the year ended December 31, 2002. The decrease was primarily rate
driven as lower rates were paid on all deposit accounts and the deposit mix
shifted modestly from generally higher cost certificates of deposit to lower
rate checking and money market accounts. The total cost of funds declined by 89
basis points year over year as rates paid on interest-bearing liabilities of
3.81% in 2002 declined to 2.92% in 2003. Overall, interest expense on deposits,
which included brokered certificates of deposit, decreased $2.1 million or 28.8%
for the year ended December 31, 2003 from $7.3 million in December 31, 2002 to
$5.2 million at December 31, 2003. Interest expense on FHLB borrowings decreased
$272,000, or 6.5%, from $4.2 million in 2002 to $3.9 million in 2003 due
primarily to a decline of 58 basis points from 5.03% in 2002 to 4.45% in 2003.
An increase in average FHLB advances of $4.9 million in 2003 above the prior
year modestly offset the decline in interest expense. (See the table under
Average Balances, Interest Rates and Yields)
PROVISION FOR LOAN LOSSES. The provision for loan losses totaled $286,000 and
$343,000 for the years ended December 31, 2003 and December 31, 2002,
respectively. The Corporation maintains an allowance for loan losses in an
amount, which in management's judgment, is adequate to absorb probable losses
incurred in the loan portfolio. While management utilizes its best judgment and
information available, ultimate adequacy of the allowance is dependent on a
variety of factors, including performance of the Corporation's loan portfolio,
the economy, changes in real estate values and interest rates and the view of
the regulatory authorities toward loan classifications. The provision for loan
losses is determined by management as the amount to be added to the allowance
for loan losses after net charge-offs have been deducted to bring the allowance
to a level considered adequate to absorb probable losses in the loan portfolio.
The amount of the provision is based on management's regular review of the loan
portfolio and consideration of such
See accompanying notes to consolidated financial statements.
14
factors as historical loss experience, changes in size and composition of the
loan portfolio and specific borrower considerations, including the ability of
the borrower to repay the loan and the estimated value of the underlying
collateral. Management believes that the total allowance of $1.8 million on
total loan portfolio of $337.4 million at December 31, 2003 is adequate.
The ratio of nonperforming loans to total loans and the allowance for loan
losses to total loans at December 31, 2003 amounted to 0.42% and .53%,
respectively versus 0.69% and 0.70% at December 31, 2002. Net charge-offs of
$353,000 in 2003 increased $59,000 from the prior year's results. The allowance
for loan losses of $1.8 million at December 31, 2003 remained the same as the
prior year-end balance.
Nonperforming loans, of $1.4 million at December 31, 2003, decreased by
$360,000, or 20.2%, from $1.8 million at December 31, 2002. This decrease
occurred primarily in commercial loans and one-to-four family mortgage loans. At
December 31, 2003 approximately $1.3 million, or 89% of the nonperforming loans,
were secured by one-to-four family mortgages where the Corporation is well
secured and has had low loan loss experience.
The Corporation will continue to review its allowance for loan losses and make
further provisions as required dependent upon the economic and asset quality
conditions. Although the Corporation maintains its allowance for loan losses at
a level that it considers to be adequate to provide for probable incurred
losses, there can be no assurance that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods. In addition, the Corporation's determination as to the amount of
the allowance for loan losses is subject to review by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"),
which can order the establishment of additional allowances. At December 31,
2003, the Corporation was aware of no regulatory directives or suggestions that
the Corporation make additional provisions for losses on loans.
NON-INTEREST INCOME. Non-interest income increased $550,000 from $3.1 million in
2002 to $3.6 million in 2003 due to increases in service charges and other
non-interest income modestly offset by a decline in gains on the sale of loans.
Service charges on loans and deposits, including nonsufficient funds charges,
increased approximately $259,000 during 2003 above the prior year's results. The
Corporation believes these deposit service charges continue to be sustainable
due to its overdraft honor program, which provides most customers the courtesy
of honoring checks drawn on insufficient balances, up to limits established by
management. Gains on loan sales of $433,000 in 2003 occurred on the sale of
$18.9 million of new mortgage loan originations. This compares to gains on loan
sales in 2002 of $504,000 on new mortgage loan originations of $29.5 million.
Other non-interest income of $477,000 in the year ended December 31, 2003
increased by $392,000 from $85,000 in the year ended December 31, 2002 due to
the benefit of the full year of added interest income from the Bank owned life
insurance policy, accounted for as fee income, which was purchased by the Bank
in late 2002. In addition, net gains on securities amounted to $196,000 for
fiscal year 2003 versus securities gains of $226,000 for fiscal year 2002.
NON-INTEREST EXPENSE. Total non-interest expense increased modestly, by $93,000,
or only 1.0% in 2003, from $9.1 million in 2002 to $9.2 million in 2003. The
increase is primarily due to increases in professional services, state franchise
taxes and other non-interest expense. Professional services increased $122,000
from $614,000 in 2002 to $736,000 in 2003, due primarily to the consulting
expense related to the overdraft honor program. As noted above, the service
charges collected on deposits have more than offset this expenditure. The
contract is scheduled to expire at the end of 2004. State franchise taxes
increased primarily due to a higher level of earnings for the Bank in 2003.
Other non-interest expense of $1.3 million for the period ended December 31,
2003 increased by $47,000, or 3.60%, from $1.3 million for the previous year.
This increase was primarily comprised of loan fees for servicing purchased
mortgage loans and added expenses related to the Bank
See accompanying notes to consolidated financial statements.
15
owned life insurance. Other major categories of non-interest expense consist of
salaries and wages, data processing, advertising, franchise taxes, telephone,
and printing and supplies.
INCOME TAX EXPENSE. Income tax expense was $1.1 million for the year ended
December 31, 2003, a decrease of $149,000, or 12.6%, from the same period the
prior year. The reduction in income taxes occurred primarily due to the addition
of $8.4 million of Bank owned life insurance in the fourth quarter of 2002. The
income received on the BOLI, which is nontaxable, resulted in increased revenue
without a corresponding tax liability. The Corporation's effective tax rate for
2003 and 2002 was 29.4% and 33.6%, respectively. The addition of the Bank owned
life insurance in 2002 was the primary factor in the reduction in the effective
tax rate for the Company.
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
The Corporation's results of operations depend primarily on the level of its net
interest income and non-interest income and the level of its operating expenses.
Net interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them. In
addition, the Corporation receives fees from loan originations, loan sales, late
payments, loan servicing and payments for service related to transaction and
other deposit accounts, and from dividends on its FHLB stock.
GENERAL. Net income for the year ended December 31, 2002, was $2.3 million, an
increase of $472,000, or 25.2%, compared to the year ended December 31, 2001.
The increase was primarily the result of an increase in non-interest income in
2002 of $1.2 million, offset in part by an increase in total non-interest
expense. In addition, net interest income grew by $400,000. The returns on
average assets and average shareholders' equity in 2002 were 0.68% and 5.47%,
respectively, compared to 0.54% and 4.43% in 2001. Basic earnings per share
increased $.28 per share from $1.08 per share for 2001 to $1.36 per share for
2002.
Net interest income is the largest component of the Corporation's income and is
affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
increased $400,000 from $9.5 million to $9.9 million, or 4.2%, primarily due to
lower interest rates on interest-bearing liabilities as the shift of deposits
went from certificates of deposit to checking and money market accounts,
partially offset by lower rates on loans and securities. The continued general
decrease in rates paid on liabilities during the year 2002 positively impacted
the Corporation's net interest margin, which increased 12 basis points from
2.83% in 2001 to 2.95% in 2002. The average cost of funds decreased to 3.81% in
2002 from 5.04% in 2001.
The provision for loan losses for the year ended December 31, 2002, was
$343,000, a decrease of $15,000 compared to $358,000 for the year ended December
31, 2001. Non-interest income increased $1.2 million to $3.1 million primarily
due to an increase in deposit fees, service charges, security sales, and gains
on loan sales. Non-interest expense increased $920,000, from $8.2 million at
December 31, 2001, to $9.1 million at December 31, 2002, primarily the result of
increases in salaries, benefits and professional services. Income taxes
increased $177,000 from $1.0 million at December 31, 2001, to $1.2 million at
December 31, 2002, as a result of higher tax expense associated with the
additional net income.
INTEREST INCOME. Total interest income decreased $3.3 million, or 13.5%, for the
year ended December 31, 2002, compared to the prior year. This decrease is due
primarily to lower yields on loans and securities and, to a lesser extent, a
decrease in volume. Total gross loans decreased 4.6% with the decrease primarily
in one-to-four family real estate loans. With the overall decrease in interest
rates during the year, new loans were added with lower yields during 2002
compared to new loans added during 2001. Interest from securities
See accompanying notes to consolidated financial statements.
16
and other sources fell by $250,000 primarily due to lower yields on securities
and overnight investments partially offset by an increase in the average
balances of securities held for sale.
INTEREST EXPENSE. Total interest expense decreased $3.7 million or 24.6% for the
year ended December 31, 2002, compared to the prior year 2001. The decrease was
due primarily to lower rates paid on all deposit accounts and the shift from
certificates of deposit to checking and money market accounts, and to a lesser
extent, a decrease in volume. Overall, interest expense on deposits decreased
$3.0 million, or 29.3%, for the year ended December 31, 2002 from $10.3 million
in December 31, 2001 to $7.3 million in December 31, 2002. Interest on FHLB
borrowings decreased $724,000, or 14.7%, from $4.9 million in 2001 to $4.2
million in 2002 due to a decrease in borrowing costs and a decrease in average
outstanding borrowings from the FHLB.
PROVISION FOR LOAN LOSSES. The provision for loan losses totaled $343,000 and
$358,000 for the year ended December 31, 2002 and December 31, 2001. The
Corporation maintains an allowance for loan losses in an amount, which, in
management's judgment, is adequate to absorb probable losses in the loan
portfolio. Management believed that the total allowance for loan losses of $1.8
million at December 31, 2002, was adequate given the collateral supporting
non-performing loans, local economic conditions, the level of impaired and
non-performing loans, and the composition of the loan portfolio.
Net charge-offs were $232,000 and $328,000 for the years ended December 31, 2002
and December 31, 2001 respectively. Allowance for loan loss increased $111,000
from $1.7 million in 2001 to $1.8 million in 2002. During the same period,
nonresidential and commercial balances increased $15.8 million. With respect to
the higher concentrations in nonresidential and commercial loans, management
believes that the total allowance of $1.8 million on total loans of $260 million
at December 31, 2002 is adequate.
Non-performing loans decreased to $1.8 million at December 31, 2002 from $2.8
million at December 31, 2001. This decrease occurred primarily in commercial
loans and one-to-four family mortgage loans. At December 31, 2002 approximately
$1.5 million, or 86%, of the non-performing loans, were secured by one-to-four
family mortgages where the Corporation is well secured and has had low loan loss
experience.
NON-INTEREST INCOME. Non-interest income increased $1.2 million from $1.9
million in 2001 to $3.1 million in 2002. Service charges on loans and deposits
increased approximately $675,000 during 2002. Service charges on deposits,
including non-sufficient funds and ATM charges, increased $589,000. The
Corporation believes these deposit service charges are sustainable due to its
new overdraft honor program, which provides to most customers the courtesy of
honoring checks drawn on insufficient balances, up to limits established by
management. Loan service and prepayment fees increased $85,000 due to increased
volume from lower rates during the year. Additionally, gain on loan sales
increased $167,000 to $504,000 in 2002 due to the sale of $29.5 million of new
mortgage loan originations. This compares to gains on loan sales in 2001 of
$337,000 on new mortgage loan originations of $13.7 million. In addition, gains
on securities increased by $249,000 to $226,000 as of December 31, 2002 compared
to a loss of $23,000 for December 31, 2001.
See accompanying notes to consolidated financial statements.
17
NON-INTEREST EXPENSE. Total non-interest expense increased 11.2% in 2002, from
$8.2 million in 2001 to $9.1 million in 2002. The increase is primarily due to
increases in salaries and benefits of $673,000 and an increase in occupancy
expense of $22,000. Professional services increased $106,000 from $508,000 in
2001 to $614,000 in 2002. This is due primarily to the fees payable to the
consultants on the overdraft honor program. As noted above, the service charges
on deposits have more than offset this expenditure. Other non-interest expense
consists of items such as data processing, marketing, franchise taxes,
telephone, printing and supplies and loan expenses. Additionally, included in
the 2002 non-interest expense totals is approximately $396,000 of expenses
related to the Corporation's Centerville, Ohio branch, which opened in September
2001.
INCOME TAX EXPENSE. Income tax expense was $1.2 million for the year ended
December 31, 2002, an increase of $177,000 from the same period of the prior
year. Income taxes increased primarily due to higher net income. The
Corporation's effective tax rate for 2002 and 2001 was 33.6% and 35.0%,
respectively.
See accompanying notes to consolidated financial statements.
18
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The following table presents for
the periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates paid. No tax equivalent adjustments were made. All average balances are
monthly average balances. Nonaccruing loans have been included in the table as
loans carrying a zero yield. The average balance of securities available for
sale includes unrealized gains and losses.
Year Ended December 31,
---------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------ ------------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------- -------- ------ ----------- ------ ----- ----------- -------- -----
(Dollars in Thousands)
Interest-earning
assets:
Loans, net $ 293,856 $ 17,092 5.82% $ 269,060 18,316 6.81% $ 279,612 $ 21,403 7.65%
Securities 34,279 1,074 3.13 52,754 2,578 4.89 42,836 2,600 6.07
Interest-bearing
deposits 2,919 29 0.99 5,619 84 1.49 5,856 161 2.75
FHLB stock 9,107 364 4.00 8,720 403 4.62 8,236 554 6.73
--------- -------- ---- ----------- ------ ---- ---------- --------
Total
interest-earning
assets 340,161 18,559 5.46 336,153 21,381 6.36 336,540 24,718 7.34
Non-earning
assets 18,285 10,137 10,332
--------- ----------- ----------
Total assets $ 358,446 $ 346,290 $ 346,872
========= =========== ==========
Interest-bearing
liabilities:
Time deposits $ 119,122 $ 4,234 3.55 $ 121,156 5,670 4.68 $ 133,226 7,966 5.98
Demand and NOW
deposits 29,064 99 0.34 24,382 123 0.50 19,148 156 0.81
Savings
deposits 76,356 881 1.15 71,728 1,462 2.04 60,117 2,146 3.57
Borrowings 88,466 3,935 4.45 83,599 4,207 5.03 88,898 4,931 5.55
--------- -------- ---- ----------- ------ ---------- --------
Total
interest-bearing
liabilities 313,008 9,149 2.92 300,865 11,462 3.81 301,389 15,199 5.04
Non-earning
liabilities 1,677 2,481 3,146
--------- ----------- ----------
Total
liabilities 314,685 303,346 304,535
Equity 43,761 42,944 42,337
--------- ----------- ----------
Total
Liabilities/
Equity $ 358,446 $ 346,290 $ 346,872
========= =========== ==========
Net interest
income $ 9,410 $9,919 $ 9,519
======== ====== ========
Net interest rate
spread 2.54% 2.55% 2.30%
==== ==== ====
Net earning assets $ 27,153 $ 35,288 $ 35,151
========= =========== ==========
Net yield on average
interest-
earning assets 2.77% 2.95% 2.83%
==== ==== ====
Average interest-
earning assets
to average interest
-bearing liabilities 1.09 X 1.12 X 1.12 X
See accompanying notes to consolidated financial statements.
19
RATE/VOLUME ANALYSIS. The following schedule presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the increase or decrease related to changes in average outstanding
balances and changes due to the volatility of interest rates. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by new rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
Year Ended December 31, Year Ended December 31,
--------------------------------------- ------------------------------------
2003 vs. 2002 2002 vs. 2001
--------------------------------------- ------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------------- Increase ---------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- -------- ---------- --------- --------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans, net $ 2,112 $ (3,336) $ (1,224) $ (785) $ (2,302) $ (3,087)
Securities (749) (755) (1,504) 538 (560) (22)
Other (22) (72) (94) 25 (253) (228)
--------- -------- ---------- --------- --------- ----------
Total interest-earning
assets $ 1,341 $ (4,163) $ (2,822) $ (222) $ (3,115) $ (3,337)
========= ======== ========== ========= ========= ==========
Interest-bearing liabilities:
Time deposits $ (101) $ (1,335) $ (1,436) $ (676) $ (1,620) $ (2,296)
Demand and NOW deposits 35 (59) (24) 36 (69) (33)
Savings deposits 101 (682) (581) 359 (1,043) (684)
Borrowings 273 (545) (272) (283) (441) (724)
--------- -------- ---------- --------- --------- ----------
Total interest-bearing
liabilities $ 308 $ (2,621) $ (2,313) $ (564) $ (3,173) $ (3,737)
========= ======== ========== ========= ========= ==========
Net interest income $ (509) $ 400
========== ==========
See accompanying notes to consolidated financial statements.
20
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest rate risk is the risk that the
Corporation's financial condition will be adversely affected due to movements in
interest rates. The income of financial institutions is primarily derived from
the excess of interest earned on interest-earning assets over the interest paid
on interest-bearing liabilities. Accordingly, the Corporation places great
importance on monitoring and controlling interest-rate risk. The measurement and
analysis of the exposure of the Corporation's primary operating subsidiary,
Cornerstone Bank, to changes in the interest rate environment are referred to as
asset/liability management. One method used to analyze the Corporation's
sensitivity to changes in interest rates is the "net portfolio value" ("NPV")
methodology used by the OTS as part of its capital regulations.
NPV is generally considered to be the present value of the difference between
expected incoming cash flows on interest-earning and other assets and expected
outgoing cash flows on interest-bearing and other liabilities. The application
attempts to quantify interest rate risk as the change in the NPV, which would
result from a theoretical basis point (1 basis point equals .01%) change in
market interest rates. Changes of 100 and 200 basis point increases and
decreases in market interest rates are considered in the measurement of the
Corporation's interest rate risk.
Presented on the following page is an analysis of Cornerstone's interest rate
risk as of December 31, 2003, and December 31, 2002, as measured by changes in
NPV for instantaneous and sustained parallel shifts of 100 to 200 basis points
in market interest rates. The tables also contain the policy limits set by the
Board of Directors as the maximum change in NPV the Board of Directors deems
advisable in the event of various changes in interest rates. Such limits have
been established with consideration to the impact on the NPV capital position of
various rate changes and the institution's strong capital position.
As illustrated in the tables, the institution's NPV is more sensitive to rising
rates than declining rates. From an overall perspective, such difference in
sensitivity occurs principally because, as rates rise, borrowers do not prepay
fixed-rate loans as quickly as they do when interest rates are declining. Thus,
in a rising interest rate environment, because Cornerstone has primarily
fixed-rate loans within its loan portfolio, the amount of interest Cornerstone
would receive on its loans would increase relatively slowly as loans are slowly
prepaid and new loans at higher rates are originated. Moreover, the interest
Cornerstone would pay on its deposits would increase relatively rapidly because
Cornerstone's deposits generally have shorter periods to repricing.
See accompanying notes to consolidated financial statements.
21
December 31, 2003 December 31, 2002
Change in Board limit ----------------- -----------------
Interest Rate Minimum $Change %Change NPV $Change %Change NPV
(Basis Points) NPV Ratio In NPV In NPV Ratio In NPV In NPV Ratio
------------- --------- ------ ------ ----- ------ ------ -----
(Dollars in Thousands)
+200 6.75 (4,928) (11) 11.72% (5,756) (12) 11.72
+100 7.25 (4,089) (9) 12.57 (2,103) (4) 12.57
- 8.00 - - 13.01 - - 13.01
(100) 9.00 1,019 2 13.17 978 2 13.17
(200) 9.00 (1,318) (3) 13.40 2,234 5 13.40
As of December 31, 2003, the percentage change in NPV resulting from certain
changes in interest rates were within the policy limits of the institution's
Board of Directors. As the table above suggests, in a rising interest rate
environment, Cornerstone's net interest income could be negatively affected.
Moreover, rising interest rates could negatively affect Cornerstone's earnings
and thereby the Corporation's earnings due to diminished loan demand. As part of
its interest rate risk strategy, Cornerstone has attempted to utilize
adjustable-rate and short-term duration loans and investments.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
Consideration also needs to be given to the current low interest rate
environment. Many of the Bank's deposits are within 100 and 200 basis points of
a zero interest rate. If overall rates and loan yields continue to decline, the
Bank's ability to reduce deposit rates will be limited by the zero interest rate
floor. This could negatively affect earnings and future NPV.
See accompanying notes to consolidated financial statements.
22
LIQUIDITY AND CAPITAL RESOURCES
Western Ohio Financial Corporation's liquidity, primarily represented by cash
equivalents, is a result of its operating, investing and financing activities.
These activities are summarized below for the years ended December 31, 2003,
2002 and 2001.
Year Ended December 31,
2003 2002 2001
----------- ----------- -----------
Net income $ 2,501 $ 2,347 $ 1,875
Adjustments to reconcile net income to
Net cash from operating activities 152 1,041 1,375
----------- ----------- -----------
Net cash from operating activities 2,653 3,388 3,250
Net cash from investment activities (65,576) (2,587) 23,237
Net cash from financing activities 50,464 1,596 (14,377)
----------- ----------- -----------
Net change in cash and cash equivalents (12,459) 2,397 12,110
Cash and cash equivalents at
Beginning of period 19,312 16,915 4,805
----------- ----------- -----------
Cash and cash equivalents at
End of period $ 6,853 $ 19,312 $ 16,915
=========== =========== ===========
At December 31, 2003, the Corporation had no outstanding commitments to sell
loans or securities.
OTS regulations presently require Cornerstone Bank to maintain sufficient
liquidity to assure its safe and sound operation. To that end, Cornerstone Bank
maintains investments generally having maturities of five years or less, sells
loans into the secondary market and borrows funds from the FHLB. These
activities are intended to provide a source of relatively liquid funds on which
Cornerstone may rely, if necessary, to fund deposit withdrawals or other
short-term funding needs.
The Corporation's primary sources of funds consist of deposits and repayments of
loans and interest earned on securities. The Bank maintains a higher ratio of
loans to deposits in comparison with other similarly sized financial
institutions. Historically, this factor has not had a material effect on the
Corporation's liquidity as it has utilized other potential sources of funds
including borrowings from the FHLB of Cincinnati to maintain liquidity and to
meet operating expenses. In 2003, the Corporation also utilized brokered
certificates of deposit, which will primarily have maturity dates of three years
or less, to fund asset growth. Management believes that loan sales and
repayments and other sources of funds will be adequate to meet the Corporation's
foreseeable liquidity needs. The Corporation anticipates that it will have
sufficient funds available to meet current loan commitments. At December 31,
2003, the Corporation had outstanding commitments to extend credit that amounted
to $ 41.1 million.
OTS regulations require that financial institutions maintain "tangible capital"
of not less than 1.5% of the financial institution's adjusted total assets.
Tangible capital is defined as "core capital" less any intangible assets. Core
capital is comprised of common shareholders' equity (including retained
earnings). OTS prompt corrective action regulations require core capital to be
maintained at 3% of total institution assets. The following table indicates the
requirement for core capital is 4% because that is the level that the OTS prompt
corrective action regulations require to be considered adequately capitalized.
See accompanying notes to consolidated financial statements.
23
OTS regulations require the institution to maintain "risk-based capital" in an
amount not less than 8% of risk-weighted assets. Risk-based capital is defined
as core capital plus certain additional items. Cornerstone's adjustment to core
capital included the portion of the loan and lease loss allowance over the
amount required for loans classified as loss. This adjustment is $1.8 million as
of December 31, 2003.
The following table summarizes Cornerstone's regulatory capital requirements and
actual capital at December 31, 2003.
Excess of Actual
Capital Over Current
Actual Capital Current Requirement Requirement
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Tangible Capital $41,295 10.34% $5,993 1.50% $35,302 8.84%
Core Capital 41,295 10.34 15,980 4.00 25,315 6.34
Risk-Based Capital 43,087 14.66 23,510 8.00 19,577 6.66
See Note 11 of Notes to Consolidated Financial Statements.
The Corporation has various financial obligations, including contractual
obligations and commitments, that may require future cash payments.
The following table provides significant fixed and determinable contractual
obligations to third parties by payment date at December 31, 2003. Further
discussion of the nature of each obligation is provided in Notes 5 and 6 to the
consolidated financial statements.
One Year One to Three Three to Over Five
or Less Years Five Years Years Total
------- ----- ---------- ----- -----
Deposits without a maturity $108,869 $ -- $ -- $ -- $108,869
Consumer and Brokered Deposits 48,086 78,824 11,318 1,584 139,812
FHLB Advances 23,386 8,424 52,754 18,909 103,473
The following table indicates the amounts of significant commitments at December
31, 2003. Further discussion is provided in Note 8 to the consolidated financial
statements.
Fixed Variable
Rate Rate Total
----------- ---------- -----------
First mortgage loans $ 973 $ - $ 973
Consumer and other loans - 111 111
Commercial loans - 6,087 6,087
Home equity lines of credit - 16,776 16,776
Commercial lines of credit - 7,231 7,231
Stand-by letters of credit - 9,919 9,919
----------- ---------- -----------
$ 973 $ 40,124 $ 41,097
=========== ========== ===========
Commitments to extend credit, including loan commitments, standby letters of
credit, and commercial letters of credit do not necessarily represent future
See accompanying notes to consolidated financial statements.
24
cash requirements, in that these commitments often expire without being drawn
upon.
NEW ACCOUNTING STANDARDS
During 2003, the Company adopted FASB Statement 149, Amendment of Statement 133
on Derivative instruments and Hedging Activities, requiring that commitments to
make mortgage loans be accounted for as derivatives if the loans are to be held
for sale. FASB Statement 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equities requires reporting trust
preferred securities and mandatory redeemable shares as liabilities on the
balance sheet. As of December 31, 2003 the Company did not have financial
instruments with these characteristics on the balance sheet. FASB Statement 132
(revised in 2003), Employers' Disclosures about Pensions and Other
Postretirement Benefits, was revised in 2003 to require additional disclosures
as to expense recorded, assets, obligations and cash flows related to these
benefits or retirement plans. FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, requires recognizing the fair values of
guarantees, such as standby letters of credit, performance guarantees and
guarantees of the indebtedness of others. FASB Interpretation 46 (revised in
December, 2003), Consolidation of Variable Interest Entities, changes the
accounting model for consolidation from one based on consideration of control
through voting interests to consideration as to whether the entity has
sufficient equity at risk to enable it to operate without additional financial
support or whether voting rights in the entity are not proportional to the
equity interest. The adoption of these new standards, where applicable, did not
materially affect the Company's operating results or financial condition.
IMPACT OF INFLATION (DEFLATION) AND CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared according to accounting principles generally accepted in the
United States of America which require the measurement of financial position and
operating results primarily in terms of historical dollars without considering
changes in the relative purchasing power of money over time due to inflation and
more recently, the impact of deflation. An exception to historical cost
presentation is the valuation of securities available for sale under FASB No.
115. The primary assets and liabilities of the Corporation are monetary in
nature. As a result, interest rates have a more significant impact on the
Corporation's performance than the effects of general levels of inflation and
deflation. Interest rates do not necessarily move in the same direction or
magnitude as the prices of goods and services.
See accompanying notes to consolidated financial statements.
25
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Western Ohio Financial Corporation
Springfield, Ohio
We have audited the accompanying consolidated balance sheets of Western Ohio
Financial Corporation as of December 31, 2003 and 2002, and the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of Western Ohio
Financial Corporation as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles general accepted in
the United States of America.
Crowe Chizek and Company LLC
Columbus, Ohio
February 5, 2004
See accompanying notes to consolidated financial statements.
26
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in thousands, except share data)
2003 2002
---- ----
ASSETS
Cash and due from financial institutions $ 5,558 $ 5,243
Overnight deposits in other financial institutions 1,295 13,947
Interest-bearing deposits in other financial institutions - 122
------------ ------------
Total cash and cash equivalents 6,853 19,312
Securities available for sale 32,735 46,001
Federal Home Loan Bank stock 9,335 8,971
Loans, net of allowance of $1,801 in 2003 and $1,806 in 2002 334,469 256,883
Real estate owned 323 494
Premises and equipment, net 4,192 4,352
Accrued interest receivable 1,879 1,511
Bank owned life insurance 9,122 8,683
Other assets 632 588
------------ ------------
Total assets $ 399,540 $ 346,795
============ ============
LIABILITIES
Deposits
Non-interest-bearing deposits $ 13,149 $ 10,778
Interest-bearing deposits 235,532 208,391
Borrowed funds 103,473 81,243
Advance payments from borrowers for taxes and insurance 638 644
Other liabilities 2,391 2,534
------------ ------------
Total liabilities 355,183 303,590
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 7,250,000 shares authorized;
2,645,000 shares issued 26 26
Additional paid-in capital 40,709 40,642
Retained earnings 21,626 20,855
Unearned employee stock ownership plan shares (119) (357)
Unearned management recognition plan shares (51) (71)
Shares held by deferred compensation plan (325) (260)
Treasury stock; 865,177 and 889,889 shares, at cost (17,493) (18,102)
Accumulated other comprehensive income (loss) (16) 472
------------ ------------
Total shareholders' equity 44,357 43,205
------------ ------------
Total liabilities and shareholders' equity $ 399,540 $ 346,795
============ ============
See accompanying notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands except per share data)
2003 2002 2001
---- ---- ----
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 17,092 $ 18,316 $ 21,403
Securities 1,074 2,578 2,600
Interest-bearing deposits and overnight funds 29 84 161
Other interest and dividend income 364 403 554
----------- ----------- -----------
Total interest income 18,559 21,381 24,718
INTEREST EXPENSE
Deposits 5,214 7,255 10,268
Borrowed funds 3,935 4,207 4,931
----------- ----------- -----------
Total interest expense 9,149 11,462 15,199
----------- ----------- -----------
NET INTEREST INCOME 9,410 9,919 9,519
Provision for loan losses 286 343 358
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,124 9,576 9,161
NON-INTEREST INCOME
Service charges 2,537 2,278 1,603
Net gain on sale of securities 196 226 (23)
Net gain on sale of loans held for sale 433 504 337
Other 477 85 22
----------- ----------- -----------
Total non-interest income 3,643 3,093 1,939
NON-INTEREST EXPENSE
Salaries and employee benefits 4,747 4,718 4,045
Occupancy and equipment 893 928 906
Federal deposit insurance 34 38 40
State franchise taxes 562 495 531
Professional services 736 614 508
Advertising 133 227 322
Data processing 789 828 811
Other 1,335 1,288 1,053
----------- ----------- -----------
Total non-interest expense 9,229 9,136 8,216
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,538 3,533 2,884
Income tax expense 1,037 1,186 1,009
----------- ----------- -----------
NET INCOME $ 2,501 $ 2,347 $ 1,875
=========== =========== ===========
EARNINGS PER COMMON SHARE
Basic $ 1.44 $ 1.36 $ 1.08
=========== =========== ===========
Diluted $ 1.42 $ 1.35 $ 1.08
=========== =========== ===========
See accompanying notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands)
2003 2002 2001
---- ---- ----
NET INCOME $ 2,501 $ 2,347 $ 1,875
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain (loss) on available for sale securities
arising during the period (357) 558 788
Reclassification adjustment for amounts realized on
securities sales included in net income (131) (149) 15
----------- ----------- -----------
Total other comprehensive income, net of tax (488) 409 803
------------ ----------- -----------
COMPREHENSIVE INCOME $ 2,013 $ 2,756 $ 2,678
=========== =========== ===========
See accompanying notes to consolidated financial statements.
29
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands, except share data)
Additional
Shares Common Paid-In Retained
Outstanding Stock Capital Earnings
----------- --------- ---------- ---------
BALANCE AT JANUARY 1, 2001 1,815,834 $ 26 $ 40,617 $ 20,065
Net income - - - 1,875
Cash dividends declared - $1.00 per share - - - (1,709)
Purchase of treasury shares (64,600) - - -
Commitment to release employee stock ownership plan shares - - 34 -
Shares earned under management recognition plan, including
tax benefit realized on vesting of plan shares - - - -
Management recognition plan shares awarded, net of forfeitures 600 - - -
Shares purchased for deferred compensation plan - - 4 -
Stock options exercised, including tax benefit 3,667 - (33) -
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification and tax effects - - - -
----------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2001 1,755,501 26 40,622 20,231
Net income - - - 2,347
Cash dividends declared-$1.00 per share - - - (1,723)
Purchase of treasury shares (22,200) - - -
Commitment to release employee stock ownership plan shares - - 61 -
Shares earned under management recognition plan, including
tax benefit realized on vesting of plan shares - - - -
Management recognition plan shares awarded, net of forfeitures 3,024 - - -
Shares purchased for deferred compensation plan - - 87 -
Stock options exercised, including tax benefit 18,786 - (128) -
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification and tax effects - - - -
----------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2002 1,755,111 26 40,642 20,855
Net income - - - 2,501
Cash dividends declared-$1.00 per share - - - (1,730)
Purchase of treasury shares (31,500) - - -
Commitment to release employee stock ownership plan shares - - 140 -
Shares earned under management recognition plan, including
tax benefit realized on vesting of plan shares - - - -
Management recognition plan shares awarded, net of forfeitures (173) - - -
Shares purchased for deferred compensation plan - - 64 -
Stock options exercised, including tax benefit 56,385 - (137) -
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification and tax effects - - - -
----------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2003 1,779,823 $ 26 $ 40,709 $ 21,626
=========== ========= ========= =========
Unearned Accumulated
Employee Other
Benefit Treasury Comprehensive
Plan Shares Stock Income Total
----------- -------- ------------- -----
BALANCE AT JANUARY 1, 2001 $ (935) $(17,223) $ (740) $ 41,810
Net income - - - 1,875
Cash dividends declared - $1.00 per share - - - (1,709)
Purchase of treasury shares - (1,200) - (1,200)
Commitment to release employee stock ownership plan shares 238 - - 272
Shares earned under management recognition plan, including
tax benefit realized on vesting of plan shares 41 - - 41
Management recognition plan shares awarded, net of forfeitures (11) 11 - -
Shares purchased for deferred compensation plan - (4) - -
Stock options exercised, including tax benefit - 86 - 53
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification and tax effects - - 803 803
-------- -------- -------- ---------
BALANCE AT DECEMBER 31, 2001 (667) (18,330) 63 41,945
Net income - - - 2,347
Cash dividends declared-$1.00 per share - - - (1,723)
Purchase of treasury shares - (443) - (443)
Commitment to release employee stock ownership plan shares 238 - - 299
Shares earned under management recognition plan, including
tax benefit realized on vesting of plan shares 59 - - 59
Management recognition plan shares awarded, net of forfeitures (58) 58 - -
Shares purchased for deferred compensation plan - (87) - -
Stock options exercised, including tax benefit - 440 - 312
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification and tax effects - - 409 409
-------- -------- -------- ---------
BALANCE AT DECEMBER 31, 2002 (428) (18,362) 472 43,205
Net income - - - 2,501
Cash dividends declared-$1.00 per share - - - (1,730)
Purchase of treasury shares - (701) - (701)
Commitment to release employee stock ownership plan shares 238 - - 378
Shares earned under management recognition plan, including
tax benefit realized on vesting of plan shares 34 - - 34
Management recognition plan shares awarded, net of forfeitures (14) 14 - -
Shares purchased for deferred compensation plan - (64) - -
Stock options exercised, including tax benefit - 1,295 - 1,158
Change in net unrealized gain (loss) on securities available
for sale, net of reclassification and tax effects - - (488) (488)
-------- -------- -------- ---------
BALANCE AT DECEMBER 31, 2003 $ (170) $(17,818) $ (16) $ 44,357
======== ======== ======== =========
See accompanying notes to consolidated financial statements.
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands)
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,501 $ 2,347 $ 1,875
Adjustments to reconcile net income to net cash
from operating activities:
Net amortization on securities 599 422 203
Compensation expense on ESOP shares 378 299 272
Compensation expense on MRP shares 34 59 41
Depreciation and amortization 488 677 692
FHLB stock dividends (364) (403) (554)
Net deferred loan fees 131 8 30
Deferred income taxes (26) 113 182
Provision for loan losses 286 343 358
Net realized gain on sales of securities (196) (226) 23
Net gain on sale of loans (433) (504) (337)
Net gain on sale of real estate owned (27) (92) -
Net change in:
Bank owned life insurance (439) - -
Other assets and other liabilities 90 156 120
Accrued interest receivable (368) 189 345
----------- ----------- -----------
Net cash from operating activities 2,654 3,388 3,250
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (20,100) (29,382) (14,016)
Maturities and principal payments 22,743 11,599 9,417
Sales 9,481 11,855 14,598
Purchases of loans (76,485) (12,763) (1,582)
Net (increase) decrease in loans (1,125) 24,556 15,835
Purchase of Bank owned life insurance - (8,684) -
Premises and equipment expenditures (333) (143) (1,035)
Proceeds from sale of premises and equipment 5 - 20
Proceeds from sale of real estate owned 238 375 -
----------- ----------- -----------
Net cash from investing activities (65,576) (2,587) 23,237
(Continued)
31
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2003, 2002, and 2001
(Dollars in thousands)
2003 2002 2001
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 29,512 (1,118) 11,955
Net change in advance payments from borrowers
for taxes and insurance (6) (20) 94
Net change in short-term borrowings (2,420) (13,305) (16,915)
Proceeds from FHLB advances 25,243 21,693 2,500
Repayments on FHLB advances (593) (3,800) (9,155)
Cash dividends paid (1,730) (1,723) (1,709)
Proceeds from exercise of stock options 1,158 312 53
Purchase of treasury stock (701) (443) (1,200)
----------- ----------- -----------
Net cash from financing activities 50,463 1,596 (14,377)
----------- ----------- -----------
Net change in cash and cash equivalents (12,459) 2,397 12,110
Cash and cash equivalents at beginning of year 19,312 16,915 4,805
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,853 $ 19,312 $ 16,915
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 8,983 $ 11,670 $ 15,584
Income taxes 1,065 1,010 821
Supplemental noncash disclosures:
Transfer from loans to real estate owned 40 777 -
See accompanying notes to consolidated financial statements.
32
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation: The consolidated financial statements include the
accounts of Western Ohio Financial Corporation (Western) and its wholly owned
subsidiary, Cornerstone Bank (Bank), together referred to as the Corporation.
The financial statements of the Bank include the accounts of its wholly-owned
subsidiary, CornerstoneBanc Financial Services, Inc.
Nature of Operations: The Corporation's revenues, operating income and assets
are primarily from the banking industry. The Corporation operates seven offices
in west central Ohio. Loan customers include a wide range of individuals,
businesses and other organizations. Major portions of loans are secured by
various forms of collateral including real estate, business assets, consumer
property and other items. Commercial loans are expected to be repaid from cash
flows from operations of businesses. The Corporation's primary funding source is
deposits from customers in its market area, although borrowings from the Federal
Home Loan Bank and wholesale certificates of deposit are used to support
investment and lending activities. The Corporation also purchases investments
and engages in limited mortgage banking operations.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses, servicing rights, fair values of financial instruments and status of
contingencies are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents include cash on hand, amounts due
from depository institutions, federal funds sold and interest-bearing deposits
in other financial institutions with original maturities of 90 days or less. Net
cash flows are reported for customer loan and deposit transactions, advance
payments from borrowers for taxes and insurance and short-term borrowings.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value
with unrealized holding gains and losses reported in other comprehensive income.
Securities are classified as trading when held for short-term periods in
anticipation of market gains and are carried at fair value. Other securities
such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premiums and discounts. Gains
and losses on sales are based on the amortized cost of the specific security
sold. Securities are written down to fair value when a decline in fair value is
not temporary.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an allowance for
loan losses. Loans held for sale are reported at the lower of cost or market, on
an aggregate basis.
(Continued)
33
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Consumer loans are
typically charged off no later than 180 days past due. In all cases, loans are
placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash basis or cost recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and home equity loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at the lower of cost or fair value when acquired,
establishing a new cost basis. If fair value declines, a valuation allowance is
recorded through expense. Costs after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Building and related components
are depreciated using the straight-line method with useful lives ranging from 5
to 39 years. Furniture, fixtures and equipment are depreciated using the
straight-line method with useful lives ranging from 3 to 5 years. These assets
are reviewed for impairment when events indicate the carrying amount may not be
recoverable. Maintenance and repairs are expensed, and major improvements are
capitalized.
Servicing Rights: Servicing rights are recognized as assets for purchased rights
and for the allocated value of retained servicing rights on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Fair value is determined using prices for similar assets with similar
characteristics when available, or based upon discounted cash flows using
market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance.
(Continued)
34
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain key executives and directors. Bank owned life insurance is recorded at
its cash surrender value, or the amount that can be realized.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and standby letters of credit
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise plan equal to or
greater than the market price of the underlying common stock at date of grant.
The following table illustrates the effect on net income and earnings per share
if expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock -Based Compensation.
2003 2002 2001
---- ---- ----
Net income:
As reported $ 2,501 $ 2,347 $ 1,875
Pro forma 2,496 2,280 1,804
Earnings per share:
As reported
Basic $ 1.44 $ 1.36 $ 1.08
Diluted 1.42 1.35 1.08
Pro forma
Basic $ 1.44 $ 1.32 $ 1.04
Diluted 1.41 1.31 1.04
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003 2002 2001
---- ---- ----
Risk-free interest rate 3.27% 4.40% 4.87%
Expected option life 5 Years 5 Years 5 Years
Expected stock price volatility 15.15 23.36 23.82
Dividend yield 3.68% 5.05% 5.59%
Estimated fair value of options granted $2.85 $3.00 $2.66
(Continued)
35
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Stock Ownership Plan: The cost of shares issued to the employee stock
ownership plan ("ESOP"), but not yet allocated to participants, is shown as a
reduction of shareholders' equity. Compensation expense is based on the market
price of shares as they are committed to be released to participant accounts.
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest.
Management Recognition Plan: The cost of unearned shares held by the management
recognition plan ("MRP") is shown as a reduction of shareholders' equity. The
cost of shares awarded to participants is amortized to expense as the shares are
earned over the vesting periods of the awards on a straight-line method.
Earnings Per Common Share: Basic earnings per common share is based on net
income divided by the weighted average number of shares outstanding during the
period. ESOP shares are considered outstanding for the calculation unless
unearned. Diluted earnings per common share includes the dilutive effect of
additional potential common shares issuable under stock options. MRP shares are
considered outstanding as they become vested.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a separate
component of shareholders' equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Restrictions of Cash: The Corporation was required to have $250,000 and $364,000
cash on hand or on deposit with the Federal Reserve Bank to meet regulatory
reserve and clearing requirements at year-end 2003 and 2002. These balances do
not earn interest.
Fair Value of Financial Instruments: Fair value of financial instruments is
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Newly Issued But Not Yet Effective Accounting Standards: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management has determined that the new accounting standards adopted in 2003 have
not had a material impact on the Company's financial condition or results of
operations.
(Continued)
36
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Dividend Restriction: Banking regulations require the maintenance of certain
capital levels and may limit the amount of dividends paid by the Bank to Western
Ohio Financial Corporation or Western Ohio Financial Corporation shareholders.
Operating Segments: Internal financial information is primarily reported and
aggregated in two lines of business, banking and mortgage banking. While the
chief decision-makers monitor the revenue streams of the various products and
services, the identifiable segments are not material and operations are managed
and financial performance is evaluated on a Company-wide basis. Accordingly, all
of the financial service operations are considered by management to be
aggregated in one reportable operating segment.
Reclassifications: Some items in prior financial statements have been
reclassified to conform with the current presentation.
(Continued)
37
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 2 - SECURITIES
Year-end securities available for sale were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----------- ----------- -----------
2003
U.S. government agencies $ 4,094 8 (4)
Municipal securities 6,833 59 -
Mortgage-backed securities 21,808 14 (100)
----------- ----------- ----------
Total $ 32,735 $ 81 $ (104)
=========== =========== ==========
2002
U.S. government agencies $ 2,180 $ 128 $ -
Municipal securities 6,955 23 -
Mortgage-backed securities 36,866 595 (30)
----------- ----------- ----------
Total $ 46,001 $ 746 $ (30)
=========== =========== ==========
At year-end 2003 and 2002, there were no holdings of securities of any one
issuer, other than the U.S. government and its agencies, in an amount greater
than 10% of shareholders' equity.
Contractual maturities of debt securities at year-end 2003 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
Available for sale
Fair
Value
-----
Due in one year or less $ -
Due from one to five years 4,094
Due from five to ten years -
Due after ten years 6,833
Mortgage-backed securities 21,808
----------
$ 32,735
==========
(Continued)
38
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 2 - SECURITIES (CONTINUED)
Proceeds of available for sale securities and the gross gains and losses were as
follows:
2003 2002 2001
---- ---- ----
Proceeds $ 9,481 $ 11,855 $ 14,598
Gross gains 204 234 3
Gross losses 8 8 26
Securities pledged at year-end 2003 and 2002 had a carrying amount of $ 4,352
and $ 11,020 and were pledged to secure public deposits, borrowings, and for
other purposes as required or permitted by law.
Securities with unrealized losses at year end 2003 not recognized in income are
as follows:
Less than 12 Months 12 Months or More
------------------- ----------------- Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
------------------------- ----- ---- ----- ---- ----- ----
US treasury $ -- $ -- $ 4,094 $ 4 $ 4,094 $ 4
Municipal securities -- -- 6,833 -- 6,833 --
Mortgage- backed securities 258 -- 21,550 100 21,808 100
----- ---- -------- ------ -------- -----
Total temporarily impaired $ 258 $ -- $ 32,477 $ 104 $ 32,735 $ 104
===== ==== ======== ====== ======== =====
NOTE 3 - LOANS
Year-end loans were as follows:
2003 2002
---- ----
First mortgage loans secured by:
One-to-four family residences $ 175,139 $ 124,117
Other properties 113,472 87,031
Construction properties 3,473 4,644
Other loans:
Consumer 749 848
Commercial 20,107 21,977
Home equity 24,426 21,587
------------ ------------
Total loans 337,366 260,204
Less:
Net deferred loan fees, premiums and discounts 217 (125)
Loans in process (1,313) (1,390)
Allowance for loan losses (1,801) (1,806)
------------ ------------
Net loans $ 334,469 $ 256,883
============ ============
There was one loan held for sale as of December 31, 2003 for a total of $1.6
million.
(Continued)
39
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
2003 2002 2001
---- ---- ----
Beginning balance $ 1,806 $ 1,695 $ 1,665
Provision for loan losses 286 343 358
Loans charged-off (353) (533) (413)
Recoveries of previous charge-offs 62 301 85
------------ ------------ ------------
Balance at end of year $ 1,801 $ 1,806 $ 1,695
============ ============ ============
Impaired loans were as follows:
2003 2002
---- ----
Year-end loans with no
allocated allowance for loan losses $ 293 $ 216
Year-end loans with
allocated allowance for loan losses - 268
------------ ------------
Total $ 293 $ 484
============ ============
Amount of the allowance for loan losses allocated $ - $ 129
2003 2002 2001
---- ---- ----
Average of impaired loans during the year $ 408 $ 376 $ 1,005
Interest income recognized during impairment 16 36 265
Cash-basis interest income recognized
during impairment 16 36 265
(Continued)
40
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 3 - LOANS (Continued)
Non-performing loans were as follows:
2003 2002
---- ----
Loans past due over 90 days still on accrual $ - $ -
Nonaccrual loans 1,419 1,779
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified loans.
Certain directors and executive officers and their related interests were loan
customers of the Corporation. A summary of activity on related party loans is as
follows:
2003
----
Beginning balance $ 3,838
New loans 2,968
Repayments (1,148)
Other changes -
------------
Ending balance $ 5,658
============
The Bank services for investors' mortgage loans with aggregate unpaid principal
balances of $41.6 million at December 31, 2003, and $35.6 million at December
31, 2002, which are not reflected in the accompanying, consolidated balance
sheets. Custodial escrow balances maintained in connection with serviced loans
were $375,934 and $314,744 at year end 2003 and 2002. The right to service loans
for others is generally obtained by the sale of loans with servicing retained.
Activity regarding mortgage servicing rights (MSRs):
2003 2002 2001
---- ---- ----
Beginning balance $ 304 $ 95 $ -
Capitalized MSRs 148 288 97
Amortization of MSRs (149) (79) (2)
------------ ------------ ------------
Balance at end of year $ 303 $ 304 $ 95
============ ============ ============
There was no valuation allowance related to MSRs at December 31, 2003.
(Continued)
41
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2003 2002
---- ----
Land $ 1,214 $ 1,214
Buildings and improvements 4,089 4,075
Furniture, fixtures and equipment 4,249 3,961
---------- -----------
9,552 9,250
Accumulated depreciation (5,360) (4,898)
---------- -----------
$ 4,192 $ 4,352
========== ===========
Depreciation expense was $488,000 $677,000 and $692,000 for 2003, 2002 and 2001.
NOTE 5 - DEPOSITS
Year-end deposits were as follows:
2003 2002
---- ----
Checking - non-interest-bearing $ 13,149 $ 10,778
Checking - interest-bearing 16,890 18,596
Money market accounts 66,945 66,466
Passbook and savings accounts 11,885 11,502
Certificates of deposit:
In denominations under $100,000 58,342 91,210
In denominations of $100,000 or more 50,773 20,617
Brokered Certificates of Deposit 30,697 -
---------- -----------
$ 248,681 $ 219,169
========== ===========
Deposits from principal officers, directors and their affiliates at year-end
2003 and 2002 were $1,133,000 and $2,359,000 respectively.
At year-end 2003, scheduled maturities of certificates of deposit were as
follows:
2004 $ 48,086
2005 38,493
2006 23,801
2007 16,530
2008 11,318
Thereafter 1,584
-----------
$ 139,812
===========
(Continued)
42
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 6- BORROWED FUNDS
Borrowed funds at year-end 2003 and 2002 consisted of advances from the Federal
Home Loan Bank of Cincinnati ("FHLB") and were as follows:
2003 2002
---- ----
Weighted Weighted
Balance Average Rate Balance Average Rate
------- ------------ ------- ------------
FHLB advances maturing in:
2003 $ - - $ 15,674 3.90%
2004 23,386 2.63% 7,516 5.85
2005 8,424 3.06 4,462 4.23
2006 5,232 2.65 1,043 4.73
2007 2,000 2.62 46 4.92
2008 48,754 4.81 45,049 4.98
2009-Thereafter 15,677 4.90 7,453 5.15
----------- ---- ---------- ----
Total $ 103,473 4.03% $ 81,243 4.92%
=========== ==== ========== ====
Average balances of borrowings outstanding during 2003 and 2002 were $88.5 and
$83.6. Advances under the borrowing agreements are collateralized by a blanket
pledge of the Corporation's residential mortgage loan portfolio and FHLB stock.
Mortgage loans and all shares of FHLB stock owned by the Bank totaling $193.0
and $9.3 at December 31, 2003, and $142.6 and $9.0 at December 31, 2002 were
pledged as collateral for the FHLB advances. Advances of $45.0, $4.0 and $3.0
million maturing in 2008, 2009, and 2010 are fixed rate advances convertible to
quarterly adjustable at the option of the FHLB after certain pre-established
dates.
Payments on amortizing FHLB advances usually amount to approximately $40,000 to
$50,000 a month.
NOTE 7 - EMPLOYEE BENEFIT PLANS
Employee stock ownership plan: The Corporation offers an ESOP for the benefit of
all salaried employees who meet age and service requirements. The ESOP borrowed
funds from the Corporation with which to acquire common shares of the
Corporation. The loan is secured by the shares purchased with the loan proceeds
and will be repaid by the ESOP with funds from the Corporation's discretionary
contributions to the ESOP and earnings on ESOP assets. The shares are being
allocated to eligible employees' accounts over a ten-year period, which started
in 1994. Expense for shares committed to be allocated during 2003, 2002 and 2001
was $378,000, $299,000 and $272,000.
(Continued)
43
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 7 - EMPLOYEE BENEFIT PLANS(CONTINUED)
The ESOP shares at year-end 2003 and 2002 were as follows:
2003 2002
---- ----
Allocated shares 126,463 111,585
Shares committed to be released for allocation 14,878 14,878
Unreleased shares 7,440 22,318
-------------- --------------
Total ESOP shares 148,781 148,781
============== ==============
Fair value of unreleased shares $ 239 $ 465
============== ==============
Management recognition plan (MRP): The Corporation maintains an MRP for the
benefit of directors and certain key employees of the Corporation. The MRP is
used to provide such individuals ownership interest in the Corporation in a
manner designed to compensate such directors and key employees for services to
the Corporation. As of December 31, 2003, 68,220 shares of the initial 105,800
shares reserved for grants have been awarded. One-fifth of such shares will be
earned and nonforfeitable on each of the first five anniversaries of the dates
of the awards. Grantees have all the benefits of shareholders, including the
right to receive dividends, except for certain restrictions on the
transferability of the shares. Compensation expense, which is based upon the
cost of the shares, was $34,000, $59,000 and $41,0000 for 2003, 2002 and 2001.
Deferred compensation plans: In 1996, the Corporation adopted a non-qualified
deferred compensation plan for two officers. Under the plan, those covered
agreed to defer a portion of their current compensation in exchange for future
payments.
In 1998, the Corporation established a non-qualified deferred compensation plan
for the benefit of certain officers and directors. Eligible employees may
allocate up to 100% of compensation (base salary, bonus, MRP, annual retainer or
meeting fees) to their deferred compensation accounts.
401(k) profit sharing plan: The Corporation offers a 401(k) profit sharing plan
covering substantially all employees. The annual expense of the plan is based on
a partial matching of voluntary employee contributions of up to 6% of individual
compensation. The matching percentage was 50% for 2003, 2002 and 2001. Employee
contributions are vested at all times and the Corporation's matching
contributions become fully vested after an individual has completed 5 years of
service. The contribution expense included in salaries and employee benefits was
$59,000, $58,000 and $55,000 for 2003, 2002 and 2001.
Stock option and incentive plans: In January 1995, shareholders approved an
Incentive Stock Option Plan. Under the provisions of the Plan, 264,500 shares
have been allocated for non-qualified and incentive stock options to be granted
to directors and selected employees. Grantees are awarded 10-year options to
acquire shares at the market price on the date the option is granted. The
options fully vest and become exercisable in five equal annual installments
commencing one year after the date of the grant.
(Continued)
44
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 7 - EMPLOYEE BENEFIT PLANS(CONTINUED)
In April 1998, shareholders approved an Omnibus Incentive Plan. Under the
provisions of the plan, 235,224 shares have been allocated for non-qualified and
incentive stock options to be granted to directors and selected employees.
Grantees are awarded 10-year options to acquire shares at the market price on
the date the option is granted. The options are fully vested and exercisable on
the date of the grant.
The following is a summary of activity in the stock option and incentive plan:
-------------------Stock Options-------------------
Weighted-
Options Average
Available Options Exercise
for Grant Outstanding Price
--------- ----------- -----
January 1, 2001 161,532 241,346 $ 18.56
Granted (5,800) 5,800 17.91
Forfeited 7,028 (7,028) 20.20
Exercised - (3,667) 13.86
------- ------- --------
December 31, 2001 162,760 236,451 18.56
Granted (6,000) 6,000 19.93
Forfeited 3,400 (3,400) 21.83
Exercised - (18,786) 15.09
------- ------- --------
December 31, 2002 160,160 220,265 18.87
Granted (2,834) 2,834 27.20
Forfeited 5,900 (5,900) 24.16
Exercised - (56,385) 16.09
------- ------- --------
December 31, 2003 163,226 160,814 $ 19.02
======= ======= ========
(Continued)
45
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 7 - EMPLOYEE BENEFIT PLANS(CONTINUED)
The following table summarizes information about stock options outstanding at
year-end 2003:
Weighted Average
Remaining Number
Exercise Price Contractual Life Outstanding Exercisable
-------------- ---------------- ----------- -----------
$ 14.75 6.43 37,938 37,938
16.88 6.55 500 500
17.50 1.08 39,284 39,284
17.90 7.47 2,000 2,000
18.00 7.34 1,350 1,350
18.50 1.43 16,172 16,172
18.77 8.05 2,000 2,000
20.02 8.84 2,000 2,000
20.99 8.41 2,000 2,000
22.00 3.48 25,000 25,000
23.00 4.86 25,736 25,736
26.90 3.81 4,000 4,000
27.20 9.64 2,834 2,834
------- -------
160,814 160,814
======= =======
NOTE 8 - COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit and overdraft protection are issued to meet customer financing needs.
These are arrangements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Off-balance sheet risk to credit losses exists up to the face
amount of these instruments, although material losses are not anticipated. The
same credit policies are used to make such commitments as are used for loans,
including obtaining collateral at exercise of the commitment.
At year-end 2003 and 2002, the Corporation had commitments to originate loans
and amounts available on approved lines of credit as follows:
Fixed Variable
Rate Rate Total
---- ---- -----
2003
First mortgage loans $ 973 $ - $ 973
Consumer and other loans - 111 111
Commercial loans - 6,087 6,087
Home equity lines of credit - 16,776 16,776
Commercial lines of credit - 7,231 7,231
Stand-by letters of credit - 9,919 9,919
----------- ---------- -----------
$ 973 $ 40,124 $ 41,097
=========== ========== ===========
(Continued)
46
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 8- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (Continued)
2002
First mortgage loans $ 840 $ - $ 840
Consumer and other loans - 419 419
Commercial loans - 6,365 6,365
Home equity lines of credit - 14,763 14,763
Commercial lines of credit - 13,612 13,612
Stand-by letters of credit - 9,362 9,362
----------- ---------- -----------
$ 840 $ 44,521 $ 45,361
=========== ========== ===========
The interest rates on fixed-rate loan commitments ranged from 6.00% to 6.63% at
year-end 2003 and 5.38% to 7.00% at year-end 2002.
Employment Agreements: The Corporation has employment agreements with certain
officers of the Corporation and Cornerstone. The agreements provide for a term
of employment for up to four years and a salary and performance review not less
often than annually, as well as inclusion of the employee in any formally
established employee benefit plan for which such personnel are eligible. The
employment agreements also contain provisions with respect to payment should a
change in control occur.
Liquidation Account: In conjunction with its conversion to a stock institution
in 1994, the Corporation established a liquidation account of $21.7, which was
equal to its total net worth as of the date of the latest statement of financial
condition appearing in the final conversion prospectus. The liquidation account
is maintained for the benefit of eligible depositors who continue to maintain
their accounts with the Corporation after the conversion. The liquidation
account is reduced annually to the extent that eligible depositors have reduced
their qualifying deposits. Subsequent increases do not restore an eligible
account holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
(Continued)
47
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 9 - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial instruments at
year-end were as follows:
2003 2002
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 6,853 $ 6,853 $ 19,312 $ 19,312
Securities available for sale 32,735 32,735 46,001 46,001
FHLB stock 9,335 9,335 8,971 8,971
Loans, net 334,469 337,507 256,883 265,445
Accrued interest receivable 1,879 1,879 1,511 1,511
Financial liabilities:
Deposits (248,681) (250,296) (219,169) (223,596)
Borrowed funds (103,473) (105,302) (81,243) (82,918)
Advance payments by borrowers
for taxes and insurance (638) (638) (644) (644)
Accrued interest payable (660) (660) (494) (494)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair values of fixed-rate loans and loans that reprice less frequently than each
year, are based on the rates charged at year-end for new loans with similar
maturities, applied until the loan is assumed to reprice or be paid. Estimated
fair values for certificates of deposit and borrowings are based on the rates
paid at year-end for new deposits or borrowings applied until maturity.
Estimated fair values for other financial instruments and off-balance-sheet loan
commitments are considered nominal. Fair values for impaired loans are estimated
using discounted cash flow analysis or underlying collateral values. Fair values
of loans held for sale is based on market quotes.
NOTE 10 - INCOME TAXES
Income tax expense consisted of the following:
2003 2002 2001
---- ---- ----
Current $ 1,063 $ 1,073 $ 827
Deferred (26) 113 182
----------- ---------- ----------
$ 1,037 $ 1,186 $ 1,009
=========== ========== ===========
(Continued)
48
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 10 - INCOME TAXES(CONTINUED)
The sources of year-end gross deferred income tax assets and liabilities were as
follows:
2003 2002
---- ----
Deferred tax assets
Deferred compensation and management
recognition plan $ 145 $ 117
Allowance for loan losses 612 596
Unrealized loss on securities available for sale 8 35
Deferred loan fees 102 -
---------- -----------
867 748
Deferred tax liabilities
Accumulated depreciation 23 62
FHLB stock dividends 1,564 1,440
Unrealized gain on securities available for sale - 243
Loan servicing 103 103
---------- -----------
1,690 1,848
---------- -----------
$ (823) $ (1,100)
========== ===========
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income taxes as a result of the
following:
2003 2002 2001
---- ---- ----
Income tax computed at the
statutory tax rate $ 1,203 $ 1,201 $ 981
Tax-exempt income (59) (38) (3)
Tax-exempt life insurance earinings (143) (6) (5)
Tax effect of other items 36 29 36
----------- ---------- -----------
$ 1,037 $ 1,186 $ 1,009
=========== ========== ===========
Effective tax rate 29.3% 33.6% 35.0%
=========== ========== ===========
Retained earnings at December 31, 2003 and 2002 include $8,709 for which no
provision for federal income taxes has been made. This amount represents the
qualifying and nonqualifying tax bad debt reserve as of December 31, 1987, which
is the Corporation's base year for purposes of calculating the bad debt
deduction for tax purposes. The related amount of unrecognized deferred tax
liability was $2,961 at December 31, 2003 and 2002. If this portion of retained
earnings is used in the future for any purpose other than to absorb bad debts,
it will be added to future taxable income.
(Continued)
49
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 11 - REGULATORY CAPITAL REQUIREMENTS
Banks are subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
the regulators. Failure to meet capital requirements can initiate regulatory
action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically under capitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. At year-end 2003 and
2002, management believes Cornerstone is in compliance with all regulatory
capital requirements. Cornerstone is considered well capitalized under the
Federal Deposit Insurance Act at year-end 2003 and 2002. Management is not aware
of any matters subsequent to December 31, 2003 that would cause Cornerstone's
capital category to change.
The following is a reconciliation of capital under accounting principles
generally accepted in the United States of America, as shown on the accompanying
consolidated balance sheets, to the Bank's regulatory capital at year-end 2003
and 2002:
2003 2002
---- ----
Total shareholders' equity per financial statements $ 44,357 $ 43,205
Nonallowable items:
Parent Corporation equity (3,078) (1,979)
Unrealized (gain)/ loss on securities available for sale 16 (472)
-------------- --------------
Tier I (core) and tangible capital 41,295 40,754
Additional capital items:
General valuation allowances (limited) 1,792 1,663
-------------- --------------
Total risk-based capital $ 43,087 $ 42,417
============== ==============
(Continued)
50
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE-11-REGULATORY CAPITAL REQUIREMENTS (Continued)
At year-end 2003 and 2002, Cornerstone's actual capital levels and minimum
required levels were as follows:
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ---- ------ -----
2003
Total capital (to risk-weighted assets) $ 43,087 14.7% $ 23,510 8.0% $ 29,388 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 41,295 14.0 11,755 4.0 17,633 6.0
Tier 1 (core) capital (to adjusted
total assets) 41,295 10.3 15,980 4.0 19,975 5.0
Tangible capital (to adjusted total assets) 41,295 10.3 5,993 1.5 N/A
2002
Total capital (to risk-weighted assets) $ 42,417 17.0% $ 19,989 8.0% $ 22,428 10.0%
Tier 1 (core) capital (to
risk-weighted assets) 40,754 16.3 9,994 4.0 14,991 6.0
Tier 1 (core) capital (to adjusted
total assets) 40,754 11.8 13,841 4.0 17,301 5.0
Tangible capital (to adjusted total assets) 40,754 11.8 5,190 1.5 N/A
Banking regulations limit capital distributions by banks. Generally, capital
distributions are limited to the current year to date undistributed net income
and prior two years' undistributed net income, as long as the institution
remains well capitalized after the proposed distribution.
Cornerstone may make a capital distribution without the approval of the OTS
provided it notifies the OTS 30 days before it declares the capital distribution
and it meets the following requirements: (i) has a regulatory rating in one of
the two top examination categories, (ii) is not of supervisory concern, and will
remain adequately-or well-capitalized, as defined in the OTS prompt corrective
action regulations, following the proposed distribution.
(Continued)
51
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 12 - PARENT CORPORATION ONLY CONDENSED FINANCIAL STATEMENTS
Condensed financial information of Western Ohio Financial Corporation is as
follows:
CONDENSED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
---- ----
ASSETS
Cash and cash equivalents $ 2,625 $ 1,484
Investment in bank subsidiary 41,279 41,226
Intercompany receivables 119 357
Other assets 334 271
---------- -----------
Total assets $ 44,357 $ 43,338
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ - $ 133
Shareholders' equity 44,357 43,205
---------- -----------
Total liabilities and shareholders' equity $ 44,357 $ 43,338
========== ===========
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
INTEREST AND DIVIDEND INCOME
Dividends from subsidiaries $ 2,700 $ 2,000 $ 2,000
Loan to ESOP 20 37 54
Other 17 17 27
----------- ----------- -----------
Total interest and dividend income 2,737 2,054 2,081
Operating expenses (541) (442) (412)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND DISTRIBUTIONS
IN EXCESS OF EARNINGS OF SUBSIDIARY 2,196 1,612 1,669
Income tax benefit 165 132 113
----------- ----------- -----------
INCOME BEFORE DISTRIBUTIONS IN EXCESS OF
EARNINGS OF SUBSIDIARY 2,361 1,744 1,782
Undistributed subsidiary earnings 140 603 93
----------- ----------- -----------
NET INCOME $ 2,501 $ 2,347 $ 1,875
=========== =========== ===========
(Continued)
52
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 12 - PARENT CORPORATION ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,501 $ 2,347 $ 1,875
Adjustments to reconcile net income to cash
provided by operations:
Undistributed subsidiary earnings (140) (603) (93)
Compensation expense on ESOP and MRP shares 412 358 313
Changes in:
Other assets and other liabilities (597) (339) (11)
----------- ----------- -----------
Net cash from operating activities 2,176 1,763 2,084
CASH FLOWS FROM INVESTING ACTIVITIES
Change in intercompany advances/receivables 238 (99) (85)
----------- ----------- -----------
Net cash from investing activities 238 (99) (85)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (1,730) (1,723) (1,709)
Proceeds from stock options exercised 1,158 312 53
Purchase of treasury stock (701) (443) (1,200)
----------- ----------- -----------
Net cash from financing activities (1,273) (1,854) (2,856)
----------- ----------- -----------
Net change in cash and cash equivalents 1,141 (190) (857)
Cash and cash equivalents at beginning of year 1,484 1,674 2,531
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,625 $ 1,484 $ 1,674
=========== =========== ===========
(Continued)
53
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 13 - EARNINGS PER COMMON SHARE
The factors used in the earnings per share computation were as follows:
2003 2002 2001
---- ---- ----
Basic earnings per common share
Net income $ 2,501 $ 2,347 $ 1,875
============== ============== ==============
Weighted average common shares outstanding 1,753,590 1,758,510 1,780,119
Less: Average unallocated ESOP shares (16,701) (31,579) (46,458)
Less: Average nonvested MRP shares (2,686) (3,531) (4,422)
-------------- -------------- --------------
Average shares 1,734,203 1,723,400 1,729,239
============== ============== ==============
Basic earnings per common share $ 1.44 $ 1.36 $ 1.08
============== ============== ==============
Diluted earnings per common share
Net income $ 2,501 $ 2,347 $ 1,875
============== ============== ==============
Weighted average common shares outstanding for basic
earnings per common shares 1,734,203 1,723,400 1,729,239
Add: Dilutive effects of stock options 30,760 17,666 11,701
-------------- -------------- --------------
Average shares and dilutive potential
common shares 1,764,963 1,741,066 1,740,940
============== ============== ==============
Diluted earnings per common share $ 1.42 $ 1.35 $ 1.08
============== ============== ==============
Stock options covering 6,834, 68,936 and 79,736 shares of common stock were not
considered in computing diluted earnings per common share for 2003, 2002 and
2001, respectively, as they were anti dilutive. In addition, nonvested MRP
awards for 2,064, 3,725, and 3,687 shares of common stock were not considered in
computing diluted earnings per common share for 2003, 2002 and 2001,
respectively as they were antidilutive.
(Continued)
54
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables summarize selected quarterly results of operations for 2003
and 2002.
Three months ended
------------------
December 31, 2003 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Interest and dividend income $ 4,729 $ 4,634 $ 4,406 $ 4,787
Interest expense (2,336) (2,250) (2,235) (2,326)
----------- ----------- ----------- -----------
Net interest income 2,393 2,384 2,171 2,461
Provision for loan losses (84) (84) (63) (55)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,309 2,300 2,108 2,406
Non-interest income 825 781 1,044 1,086
Non-interest expense (2,246) (2,237) (2,252) (2,496)
----------- ----------- ----------- -----------
Income before income tax 888 844 900 996
Income tax expense (267) (229) (252) (318)
----------- ----------- ----------- -----------
Net income $ 621 $ 615 $ 648 $ 678
=========== =========== =========== ===========
Earnings per share
Basic $ 0.36 $ 0.36 $ 0.37 $ 0.35
=========== =========== =========== ===========
Diluted $ 0.36 $ 0.35 $ 0.37 $ 0.34
=========== =========== =========== ===========
Dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.25
=========== =========== =========== ===========
Three months ended
------------------
December 31, 2002 March 31, June 30, September 30, December 31
--------- -------- ------------- -----------
Interest and dividend income $ 5,469 $ 5,593 $ 5,290 $ 5,029
Interest expense (3,072) (2,967) (2,834) (2,589)
----------- ----------- ----------- -----------
Net interest income 2,397 2,626 2,456 2,440
Provision for loan losses (84) (84) (91) (84)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,313 2,542 2,365 2,356
Non-interest income 574 720 754 1,045
Non-interest expense (2,208) (2,302) (2,230) (2,396)
----------- ----------- ----------- -----------
Income before income tax 679 960 889 1,005
Income tax expense (230) (328) (298) (330)
----------- ----------- ----------- -----------
Net income $ 449 $ 632 $ 591 $ 675
=========== =========== =========== ===========
Earnings per share
Basic $ 0.26 $ 0.37 $ 0.34 $ 0.39
=========== =========== =========== ===========
Diluted $ 0.26 $ 0.36 $ 0.34 $ 0.39
=========== =========== =========== ===========
Dividends declared per share $ 0.25 $ 0.25 $ 0.25 $ 0.25
=========== =========== =========== ===========
55
Shareholder Information
Board of Directors of Western Ohio Financial Corporation and Cornerstone Bank
David L. Dillahunt
Senior Vice President, Advest, Inc.
John W. Raisbeck
President and Chief Executive Officer, Cornerstone Bank
Howard V. Dodds
Chief Executive Officer, Howard's Foods, Inc.
John E. Field
Chairman of the Board, Wallace & Turner, Inc.
Jeffrey L. Levine
President, Larry Stein Realty and Levine Realty Co.
William N. Scarff
Chairman of the Board, Scarff's Nursery, Inc.
Aristides G. Gianakopoulos
President, The Champion Corporation
Pete Hackett
Retired Managing Partner, Clark Shaffer Hackett & Co.
Officers of Western Ohio Financial Corporation
John W. Raisbeck
President and Chief Executive Officer
John R. Clemmer
Senior Vice President
William E. Whitmoyer
Senior Vice President
Robert P. Brezing
Senior Vice President
Robert A. Kuehl
Senior Vice President, Treasurer & Chief Financial Officer
Deborah S. Horton
Corporate Secretary
Officers of Cornerstone Bank
John W. Raisbeck
President and Chief Executive Officer
John R. Clemmer
Senior Vice President, Retail Banking
William E. Whitmoyer
Senior Vice President, Retail Lending
Robert P. Brezing
Senior Vice President, Business Banking
Robert A. Kuehl
Senior Vice President, Treasurer & Chief Financial Officer
Deborah S. Horton
Corporate Secretary
Annual Report on Form 10-K
56
A copy of the Corporation's Annual Report on Form 10-K filed with the Securities
and Exchange Commission will be available without charge upon request to:
Investor Relations
Western Ohio Financial Corporation
28 East Main Street
P.O. Box 509
Springfield, OH 45501-0509
(937) 325-9990
Annual Meeting
The Annual Meeting of Shareholders of Western Ohio Financial Corporation will be
held at 9:00 AM on Thursday, April 22, 2003, at the Springfield Inn, 100 South
Fountain Avenue, Springfield, OH 45502.
Transfer Agent
Computershare Trust Corporation, Inc. serves as the
transfer agent for Western Ohio Financial Corporation's shares. Communications
regarding change of address, transfer of shares, and lost certificates should be
sent to:
Computershare Trust Corporation, Inc.
350 Indiana St., Suite 800
Golden, CO 80401
Legal Counsel
Local Counsel
Martin Browne Hull & Harper
1 South Limestone Street
Springfield, OH 45502
Special Counsel
Katten Muchin Zavis Rosenman
1025 Thomas Jefferson St., N.W.
East Lobby, Suite 700
Washington, DC 20007-5201
57
Market Makers
Advest, Inc.
One Commercial Plaza
280 Trumbull Street
Hartford, CT 06103
(203) 525-1421
Dain Rauscher, Inc.
Suite 3000
500 West Madison Street
Chicago, IL 60604
(315) 855-7600
Friedman Billings Ramsey & Co.
Potomac Tower
18th Floor
1001 19th Street North
Arlington, VA 22209
(703) 312-9600
Keefe, Bruyette & Woods, Inc.
787 7th Ave., 4th Floor
New York, NY 10019
(800) 966-1559
McDonald Investments, Inc.
800 Superior Ave.
Cleveland, OH 44114-2603
(216) 443-2300
Sandler O'Neill & Partners, L.P.
919 Third Ave., 6th Floor
New York, NY 10022
(212) 466-7744
58
Office Locations
Visit any of our branch office locations!
We invite you to call on the Cornerstone Bank office nearest you for your
personal and business banking needs. Stop by the office in your community to
learn more, or call (800) 600-1884.
Main Springfield Office - (937) 325-4683
28 E Main Street
Springfield, OH 45502-1306
Upper Valley Office - (937) 323-8381
1480 Upper Valley Pike
Springfield, OH 45504-4024
New Carlisle Office - (937) 845-3256
210 N Main Street
New Carlisle, OH 45344-1837
Beavercreek Office - (937) 427-6361
3216 Seajay Drive
Beavercreek, OH 45430-1355
Yellow Springs Office - (937) 767-2060
50 Kahoe Lane
Yellow Springs, OH 45387-1237
Enon Office - (937) 864-1928
7601 Dayton Road
Fairborn, OH 45324-1903
Centerville Office - (937) 432-9705
6291 Wilmington Pike
Dayton, OH 45459-7108
59
(WESTERN OHIO LOGO)
March 30, 2004
Dear Fellow Shareholder:
On behalf of the Board of Directors and management of Western Ohio
Financial Corporation (the "Company"), I cordially invite you to attend the
Annual Meeting of Shareholders of the Company. The meeting will be held at 9:00
a.m., local time, on April 22, 2004 at the Springfield Inn located at 100 South
Fountain Avenue, Springfield, Ohio.
An important aspect of the meeting process is the shareholder vote on
corporate business items. I urge you to exercise your rights as a shareholder to
vote and participate in this process. Shareholders are being asked to elect
three directors of the Company and to ratify the appointment of auditors.
We encourage you to attend the meeting in person. Whether or not you plan
to attend, PLEASE READ THE ENCLOSED PROXY STATEMENT AND THEN COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING POSTPAID RETURN
ENVELOPE AS PROMPTLY AS POSSIBLE. This will save the Company additional expense
in soliciting proxies and will ensure that your shares are represented at the
meeting.
Very truly yours,
/s/ John W. Raisbeck
John W. Raisbeck
President and Chief Executive Officer
WESTERN OHIO FINANCIAL CORPORATION
28 East Main Street
P.O. Box 509
Springfield, Ohio 45501-0509
(937) 325-4683
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 22, 2004
Notice is hereby given that the Annual Meeting of Shareholders (the
"Meeting") of Western Ohio Financial Corporation (the "Company") will be held at
the Springfield Inn located at 100 South Fountain Avenue, Springfield, Ohio on
April 22, 2004 at 9:00 a.m., local time.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of three directors of the Company;
2. The ratification of the appointment of Crowe, Chizek and Company, LLP
as auditors for the Company for the fiscal year ending December 31,
2004;
and such other matters as may properly come before the Meeting, or any
adjournments or postponements thereof. The Board of Directors is not aware of
any other business to come before the Meeting.
Any action may be taken on the foregoing matters at the Meeting on the date
specified above, or on any date or dates to which the Meeting may be adjourned
or postponed. Shareholders of record at the close of business on March 1, 2004
are the shareholders entitled to vote at the Meeting, and any adjournments or
postponements thereof. A complete list of shareholders entitled to vote at the
Meeting will be available at the main office of the Company during the ten days
prior to the Meeting, as well as at the Meeting.
You are requested to complete and sign the enclosed Proxy Card which is
solicited on behalf of the Board of Directors, and to mail it promptly in the
enclosed envelope. The Proxy will not be used if you attend and vote at the
Meeting in person.
By Order of the Board of Directors
/s/ John W. Raisbeck
John W. Raisbeck
President and Chief Executive Officer
Springfield, Ohio
March 30, 2004
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED
WITHIN THE UNITED STATES.
PROXY STATEMENT
WESTERN OHIO FINANCIAL CORPORATION
28 East Main Street
P.O. Box 509
Springfield, Ohio 45501-0509
(937) 325-4683
ANNUAL MEETING OF SHAREHOLDERS
April 22, 2004
This Proxy Statement is furnished in connection with the solicitation on
behalf of the Board of Directors of Western Ohio Financial Corporation (the
"Company") of proxies to be used at the Annual Meeting of Shareholders (the
"Meeting") which will be held at the Springfield Inn located at 100 South
Fountain Avenue, Springfield, Ohio on April 22, 2004 at 9:00 a.m., local time,
and all adjournments and postponements of the Meeting. The accompanying Notice
of Annual Meeting of Shareholders and this Proxy Statement are first being
mailed to shareholders on or about March 30, 2004. Certain of the information
provided herein relates to Cornerstone Bank (the "Bank"), a wholly owned
subsidiary of the Company.
At the Meeting, shareholders of the Company are being asked to consider and
vote upon (i) the election of three directors of the Company; and (ii) the
ratification of the appointment of Crowe, Chizek and Company, LLP as the
Company's independent auditors for the fiscal year ending December 31, 2004.
VOTE REQUIRED AND PROXY INFORMATION
All shares of common stock of the Company, par value $.01 per share (the
"Common Stock"), represented at the Meeting by properly executed proxies
received prior to or at the Meeting and not revoked, will be voted at the
Meeting in accordance with the instructions thereon. If no instructions are
indicated, properly executed proxies will be voted for the director nominees and
for the ratification of the appointment of Crowe, Chizek and Company, LLP as the
Company's independent auditors for the fiscal year ending December 31, 2004. The
Company does not know of any matters, other than as described in the Notice of
Annual Meeting of Shareholders, which are to come before the Meeting. If any
other matters are properly presented at the Meeting for action, the persons
named in the enclosed Proxy Card and acting pursuant thereto will have the
discretion to vote on such matters in accordance with their best judgment.
Directors will be elected by a plurality of the votes present in person or
represented by proxy at the Meeting and entitled to vote on the election of
directors. In all matters other than the election of directors, the affirmative
vote of the majority of shares present in person or represented by proxy at the
Meeting and entitled to vote on the matter will be the act of the shareholders.
Proxies marked abstain with respect to a matter and broker non-votes have the
same effect as votes against the matter. One-third of the shares of the Common
Stock, present in person or represented by proxy, shall constitute a quorum for
purposes of the Meeting. Abstentions and broker non-votes will be treated as
shares present at the Meeting for purposes of determining a quorum.
Shareholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by such proxies will be voted at
the Meeting and all adjournments thereof. Proxies may be revoked by: (i) filing
with the Secretary of the Company at or before the Meeting a written notice of
revocation bearing a later date than the proxy, (ii) duly executing a subsequent
proxy relating to the same shares and delivering it to the Secretary of the
Company at or before the Meeting or (iii) attending the Meeting and voting in
person (although attendance at the Meeting will not in and of itself constitute
revocation of a proxy). Any written notice revoking a proxy should be delivered
to Deborah S. Horton, Secretary, at the address shown above.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Shareholders of record as of the close of business on March 1, 2004 will be
entitled to one vote for each share then held. As of that date, the Company had
1,779,822 shares of Common Stock issued and outstanding. The following table
sets forth, as of March 1, 2004, information regarding share ownership of: (i)
those persons or entities known by management to beneficially own more than five
percent of the Common Stock, (ii) the executive officers listed below and (iii)
all directors and executive officers of the Company and the Bank as a group. For
information regarding the beneficial ownership of Common Stock by directors of
the Company, see "Election of Directors -- General."
SHARES PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
Jewelcor Management, Inc. 145,168(1) 8.15%
Western Ohio Financial Corporation Employee Stock Ownership Plan 108,844(2) 6.12%
Robert P. Brezing, Senior Vice President 17,223(3) 0.97%
John R. Clemmer, Senior Vice President 4,410(4) 0.25%
Richard K. Smith, Senior Vice President/Treasurer 4,086(5) 0.23%
William E. Whitmoyer, Senior Vice President 7,185(6) 0.40%
All directors, nominees and executive officers (13 persons) as a group 322,008(7) 18.09%
----------
(1) As reported on a Schedule 13D (Amendment No. 2), (the "Schedule 13D/A")
filed with the SEC on December 19, 2003 jointly by Jewelcor Management,
Inc., Jewelcor Inc., S.H. Holdings, Inc., Seymour Holtzman and Evelyn
Holtzman. According to the Schedule 13D/A, Jewelcor Management, Inc. and
Seymour Holtzman have sole voting and dispositive power with regard to the
145,168 shares of common stock. As reported on the Schedule 13D/A, the
address of the beneficial owners is: Seymour Holtzman, c/o Jewelcor
Companies, 100 N. Wilkes-Barre Blvd., Wilkes-Barre, Pennsylvania 18702.
(2) The amount reported represents shares held by the Western Ohio Financial
Corporation Employee Stock Ownership Plan (the "ESOP"), 101,405 shares of
which have been allocated to accounts of participants. First Bankers Trust
Co., N.A., Quincy, Illinois, the trustee of the ESOP, may be deemed to
beneficially own the shares held by the ESOP which have not been allocated
to the accounts of participants.
(3) The amount reported consists of 5,196 shares indirectly held in ESOP
allocations, 66 shares directly held in 401(k) contributions, 1,938 shares
directly held in the Cornerstone Bank Deferred Compensation Plan, 4,000
2
directly held unrestricted shares, 23 directly held restricted shares as
well as 6,000 options to purchase shares of Common Stock which options are
exercisable within 60 days of March 1, 2004.
(4) The amount reported consists of 637 shares indirectly held in ESOP
allocations, 773 shares directly held in 401(k) contributions, 200 shares
directly held in the Cornerstone Bank Deferred Compensation Plan, 800
directly held restricted shares as well as 2,000 options to purchase shares
of Common Stock which options are exercisable within 60 days of March 1,
2004. Mr. Clemmer terminated his employment in February 2004.
(5) The amount reported consists of 357 shares directly held in 401(k)
contributions, 200 shares directly held in the Cornerstone Bank Deferred
Compensation Plan, 729 directly held unrestricted shares, 800 directly held
restricted shares as well as 2,000 options to purchase shares of Common
Stock which options are exercisable within 60 days of March 1, 2004. Mr.
Smith terminated his employment in January 2004.
(6) The amount reported consists of 1,525 shares indirectly held in ESOP
allocations, 400 shares directly held, 660 shares directly held in 401(k)
contributions, 600 directly held restricted shares as well as 4,000 options
to purchase shares of Common Stock which options are exercisable within 60
days of March 1, 2004.
(7) This amount includes shares held directly, including restricted shares and
shares allocated under the ESOP to the accounts of the executive officers,
as well as shares held in retirement accounts, in a fiduciary capacity or
by certain family members or affiliated entities, with respect to which
shares the respective directors and officers may be deemed to have sole
voting and/or investment powers. This amount also includes an aggregate of
144,188 shares subject to options granted under the Company's 1995 Stock
Option and Incentive Plan (the "Stock Option Plan") and the Company's 1998
Omnibus Incentive Plan (the "Omnibus Incentive Plan"), which are
exercisable within 60 days of March 1, 2004.
3
ELECTION OF DIRECTORS
GENERAL
The Company's Board of Directors currently consists of eight members, each
of whom is also a director of the Bank. The Board is divided into three classes,
and approximately one-third of the directors are elected annually. Directors of
the Company are generally elected to serve for a three-year term or until their
respective successors are elected and qualified.
The following table sets forth certain information, as of March 1, 2004,
regarding the composition of the Company's Board of Directors, including each
director's term of office. The Board of Directors acting as the nominating
committee has recommended and approved the nominees identified in the following
table. It is intended that the proxies solicited on behalf of the Board of
Directors (other than proxies in which the vote is withheld as to a nominee)
will be voted at the Meeting FOR the election of the nominees identified below.
If a nominee is unable to serve, the shares represented by all valid proxies
will be voted for the election of such substitute nominee as the Board of
Directors may recommend. At this time, the Board of Directors knows of no reason
why any nominee may be unable to serve, if elected. Except as disclosed herein,
there are no arrangements or understandings between the nominees and any other
person pursuant to which the nominees were selected.
SHARES OF
COMMON STOCK
POSITION(S) HELD DIRECTOR BENEFICIALLY PERCENT OF
NAME AGE IN THE COMPANY SINCE(1) TERM TO EXPIRE OWNED(2) CLASS
---- --- -------------- -------- -------------- -------- -----
NOMINEES
David L. Dillahunt 69 Chairman of the Board 1974 2007 34,946 1.96%
Howard V. Dodds 64 Director 1995 2007 29,376 1.65%
John W. Raisbeck 64 Director, President 1997 2007 86,441 4.86%
and Chief Executive
Officer
DIRECTORS CONTINUING IN OFFICE
Aristides G. Gianakopoulos 66 Director 1998 2005 19,383 1.09%
Jeffrey L. Levine 52 Director 1995 2005 30,700 1.72%
John E. Field 71 Director 1992 2006 35,427 1.99%
William N. Scarff 75 Director 1986 2006 45,271 2.54%
Peter J. Hackett 66 Director 2003 2006 3,560 0.20%
----------
(1) Includes service as a director of the Bank.
(2) Includes shares held directly, including restricted shares, as well as
shares held in retirement accounts, in a fiduciary capacity or by certain
family members or affiliated entities, with respect to which shares the
respective directors may be deemed to have sole voting and/or investment
powers. Included in the shares beneficially owned by the named individuals
are options to purchase shares of Common Stock which options are
exercisable within sixty days of March 1, 2004, totaling 14,170 for Mr.
Field; 8,170 for Mr. Scarff; 14,170 for Mr. Dillahunt; 7,170 for Mr. Dodds;
and 52,500 for Mr. Raisbeck; 17,004 for Mr. Gianakopoulos; 14,170 for Mr.
Levine and 2,834 for Mr. Hackett.
4
The principal occupation of each director of the Company and each of the
nominees for director is set forth below. All directors and nominees have held
their present position for at least five years unless otherwise indicated.
David L. Dillahunt. Mr. Dillahunt is Senior Vice President of Advest Inc.,
a regional stock brokerage firm based in Hartford, Connecticut. He is
responsible for sales and management of the Springfield, Ohio office.
Howard V. Dodds. Mr. Dodds is Chief Executive Officer of Howard's Foods
Inc., a five-store retail grocery chain headquartered in Springfield, Ohio. Mr.
Dodds is also Chief Executive Officer of Spring Creek Foods, Inc., a two-store
grocery chain with stores located in Springfield and London, Ohio and also a
Partner and 50% owner of Dodds/Wenrick Real Estate.
John W. Raisbeck. Mr. Raisbeck is President and Chief Executive Officer of
the Company and the Bank, a position he has held since May 7, 1997. Mr. Raisbeck
has been in the banking industry for over 30 years. Prior to joining the
company, Mr. Raisbeck was associated with several financial institutions,
including: Manufacturers Hanover Trust Company, New York, New York, where he was
Assistant Vice President, National Division; United States Trust Company, New
York, New York, where he was Vice President and Manager of the Southeastern
Region for Corporate Banking; Charleston National Bank, Charleston, West
Virginia, where he was an Executive Vice President of the Commercial and Retail
Banking Group; Bank One, Youngstown, Ohio, where he was Executive Vice President
and Credit Policy Officer; and most recently Liberty State Bank, Twinsburg,
Ohio, where he served as President and Chief Executive Officer.
Aristides G. Gianakopoulos. Mr. Gianakopoulos is President of (i) Rawac
Plating Company, a metal finishing company; (ii) The Kreider Corporation, a
metal stamping company; (iii) Corrotec, Inc., a plastics manufacturer; and (iv)
the Champion Company, a chemical manufacturer.
Jeffrey L. Levine. Mr. Levine is President of Larry Stein Realty and the
Levine Realty Company, commercial and industrial real estate brokerage firms
located in Dayton and Springfield, Ohio, respectively.
John E. Field. Mr. Field is Chairman of the Board of Wallace & Turner,
Inc., a full service insurance agency located in Springfield, Ohio, and a
Director of Cincinnati Financial Corporation, a holding company for The
Cincinnati Insurance Company.
William N. Scarff. Mr. Scarff is Chairman of the Board of Scarff's Nursery,
Inc., a major wholesale grower of nursery plants located in New Carlisle, Ohio.
While the bulk of the company's sales are wholesale, they are also involved in
landscaping and operate a garden center on site. Mr. Scarff is also President of
Scarff's Land Company, located in New Carlisle, which holds land and buildings
for lease.
Peter J. Hackett, CPA. Mr. Hackett was formerly Chairman and Managing
Partner of Clark Schaefer Hackett & Co. a regional Certified Public Accounting
firm. Mr. Hackett retired in July 2003, but continues to work as a consultant
for the firm. He specializes in tax, estate and succession planning services.
Mr. Hackett is a member of the American Institute of CPAs and Ohio Society of
CPAs. He has served two terms as Board Chairman of the Springfield Area
5
Chamber of Commerce and the Community Improvement Corporation. He has been
active on many professional and civic boards and is currently Vice Chairman of
Mercy Hospital Western Ohio and President Elect of the Springfield Rotary Club
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Meetings of the Company's Board of Directors are generally held on a
monthly basis. The Board of Directors met 16 times during fiscal year 2003. No
incumbent director of the Company attended fewer than 75% of the aggregate of
the total number of Board meetings and the total number of meetings held by the
committees of the Board on which he served during fiscal 2003.
The Board of Directors of the Company has standing Nominating, Audit and
MRP/Stock Option Committees.
Nominating Committee
The full Board of Directors of the Company acts as a Nominating Committee
for the annual selection of nominees for election as directors. Except for Mr.
Raisbeck, all of the members of the Nominating Committee are independent as
defined under Nasdaq listing standards. The Nominating Committee does not have a
charter. The Nominating Committee will consider director candidates recommended
by shareholders. Pursuant to the Company's Bylaws, nominations for directors by
shareholders must be made in writing and delivered to the Secretary of the
Company at least 30 days prior to the annual meeting and such written nomination
must contain certain information as provided in the Company's Bylaws. While the
Board of Directors will consider nominees recommended by shareholders, it has
not actively solicited nominations.
The Nominating Committee considers director candidates from a variety of
sources, including members of the Board and management, business contacts and
community leaders. All potential candidates should have the highest personal
integrity, meet all regulatory requirements and have a record of exceptional
ability and judgment. Other than as may exist in the Company's Bylaws, there is
no strict set of requirements; rather the Nominating Committee evaluates
director candidates with a view towards experience that is in the best interests
of the Company and its shareholders.
Audit Committee
The Audit Committee is composed of Directors Field, Scarff, Gianakopoulos,
Levine and Hackett and operates under a written charter that was adopted by the
full Board of Directors. Each of the members of the Audit Committee is
independent as defined under the National Association of Securities Dealers'
listing standards. The Board of Directors has determined that Peter J. Hackett
is an audit committee financial expert, as defined by SEC rules. The Audit
Committee currently meets at least quarterly and is responsible for reviewing
the annual audit report and making recommendations to the Board of Directors
with respect to the Bank's independent auditors. The Company currently has no
formal Audit Committee pre-approval procedures in place that permit management
to engage the auditors with respect to pre-approved services. It is the
Company's policy that the Audit Committee approves in advance all services to be
provided by the auditors. This committee met five times during fiscal year 2003.
6
MRP/Stock Option Committee
The MRP/Stock Option Committee is responsible for administering the Stock
Option Plan, the Management Recognition Plan (the "MRP") and the Omnibus
Incentive Plan, and is composed of Directors Field, Dodds and Dillahunt. During
fiscal year 2003, this committee met one time.
Shareholder Communication with the Board
Shareholders may communicate to the Board of Directors by putting
correspondence in writing and sending it to the attention of Deborah S. Horton,
Secretary, Western Ohio Financial Corporation, 28 E. Main Street, P.O. Box 509,
Springfield, Ohio 45501-0509. The Company Secretary will forward shareholder
communications to the member or members of the Board that can address the
matter.
Information Regarding the Bank
The Bank's Board of Directors generally meets monthly and may have
additional special meetings upon request of the Chairman of the Board, the
President or one-third of the directors. The Board of Directors of the Bank met
12 times during fiscal year 2003. No incumbent director of the Bank attended
fewer than 75% of the aggregate of the total number of Board meetings and the
total number of meetings held by the committees of the Board of Directors on
which he served during fiscal 2003.
The Board of Directors of the Bank has standing Executive and Compensation
Committees. The Board selects members for service on all committees.
The Bank's Executive Committee generally acts in lieu of the full Board of
Directors between Board meetings. This committee consists of Directors Dillahunt
and Levine, and President Raisbeck. During fiscal year 2003, this committee met
26 times.
The Bank's Compensation Committee makes recommendations to the Board with
respect to the salary and incentive compensation of the chief executive officer
and those executive officers named in the Summary Compensation Table whose
annual salary is in excess of $100,000. The current members of the Compensation
Committee are Directors Field, Dodds and Gianakopoulos, all of whom are deemed
independent as defined under Nasdaq listing standards. This committee met two
times during fiscal year 2003.
7
EXECUTIVE COMPENSATION
The Company has not paid any compensation to its executive officers since
its formation. The Company does not presently anticipate paying any compensation
to such persons until it becomes actively involved in the operation or
acquisition of a business other than the Bank and its subsidiaries.
The executive officers of the Company also hold the same positions with the
Bank and receive compensation from the Bank. The following table sets forth
information concerning the compensation for services in all capacities to the
Bank for fiscal year 2003 of its Chief Executive Officer, its Senior Vice
Presidents and its Senior Vice President, Treasurer and Chief Financial Officer
("Named Executive Officers"). No other executive officer of the Bank received
compensation of salary and bonus in excess of $100,000 in fiscal year 2003.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------- -----------------------------
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(4) (#) ($)
--------------------------- ---- --- --- --- ------ --- ---
John W. Raisbeck, 2003 $237,797 $58,577 -- -- -- $36,516(1)
President, Chief Executive 2002 $231,358 $55,819 -- $29,260(2) -- $33,816
Officer and Director 2001 $224,370 $29,660 -- -- -- $35,509
Robert P. Brezing, 2003 $138,070 $34,905 -- -- -- $32,261(3)
Senior Vice President 2002 $133,559 $32,593 -- -- -- $27,984
2001 $128,797 $17,100 -- -- -- $27,050
John R. Clemmer, 2003 $120,135 $28,037 -- -- -- $22,707(7)
Senior(11) Vice President 2002 $ 70,417 $16,539 -- $20,990(9) 2,000 $ 168
Richard K. Smith, 2003 $111,147 $26,778 -- -- -- $ 602(8)
Senior(12) Vice President, Treasurer
and CFO 2002 $ 14,151 -- -- $20,020(10) 2,000 $ 17
William E. Whitmoyer, 2003 $110,127 $26,248 -- -- -- $27,532(5)
Senior Vice President 2002 $ 99,701 $27,611 -- -- 2,000 $18,916
2001 $ 56,029 $ 8,500 -- $17,900(6) 2,000 $ 56
----------
(1) Includes group term life insurance payments of $1,481, ESOP allocations of
$29,866 and 401(k) contributions of $5,169 for Mr. Raisbeck for fiscal
2003.
(2) Represents the dollar value of an award of 1,540 shares of restricted stock
based upon the $19.00 closing price on February 13, 2002, the date of
grant. The shares of restricted stock fully vested on the date of grant.
Dividends are paid on the restricted shares to the extent and on the
same date as dividends that are paid on all other outstanding shares of
Common Stock. The aggregate holdings of restricted stock awards held by
Mr. Raisbeck on December 31, 2003 was 7,540 shares. Based on the closing
price of $32.08 on December 31, 2003, the aggregate value of the 7,540
shares of restricted stock was $241,883.
(3) Includes group term life insurance payments of $470, ESOP allocations of
$26,979 and 401(k) contributions of $4,812 for Mr. Brezing for fiscal 2003.
(4) The entire amount of an MRP (restricted stock) award is disclosed as
compensation in the year granted.
(5) Includes group term life insurance payment of $289, ESOP allocation of
$23,098 and 401(k) contribution of $4,145 for Mr. Whitmoyer for fiscal
2003.
8
(6) Represents the dollar value of an award of 1,000 shares of restricted stock
based upon the $17.90 closing price on June 21, 2001, the date of grant.
The shares of restricted stock shall vest in five equal annual installments
(the first two installments having vested on June 21, 2002 and June 21,
2003), provided that Mr. Whitmoyer maintains "Continuous Service" (as
defined in the MRP) with the Company. Dividends are paid on the restricted
shares to the extent and on the same date as dividends that are paid on all
other outstanding shares of Common Stock. The aggregate holdings of
restricted stock awards held by Mr. Whitmoyer on December 31, 2003 was
1,000 shares, of which 600 had not yet vested as of that date. Based on the
closing price of $32.08 on December 31, 2003, the aggregate value of the
1,000 shares of restricted stock was $32,080 ($12,832 for the fully vested
shares).
(7) Includes group term life insurance payments of $335, ESOP allocations of
$20,435 and 401(k) contributions of $1,937 for Mr. Clemmer for fiscal 2003.
(8) Includes group term life insurance payments of $106 and 401(k)
contributions of $496 for Mr. Smith for fiscal 2003.
(9) Represents the dollar value of an award of 1,000 shares of restricted stock
based upon the $20.99 closing price on May 28, 2002, the date of grant. The
shares of restricted stock shall vest in five equal annual installments
(the first installment having vested on May 28, 2003), provided that Mr.
Clemmer maintains "Continuous Service" (as defined in the MRP) with the
Company. Dividends are paid on the restricted shares to the extent and on
the same date as dividends that are paid on all other outstanding shares of
Common Stock. The aggregate holdings of restricted stock awards held by Mr.
Clemmer on December 31, 2003 was 1,000 shares, of which 800 had not yet
vested as of that date. Based on the closing price of $32.08 on December
31, 2003, the aggregate value of the 1,000 shares of restricted stock was
$32,080 ($6,416 for the fully vested shares).
(10) Represents the dollar value of an award of 1,000 shares of restricted stock
based upon the $20.02 closing price on November 4, 2002, the date of grant.
The shares of restricted stock shall vest in five equal annual installments
(the first installment having vested on November 4, 2003), provided that
Mr. Smith maintains "Continuous Service" (as defined in the MRP) with the
Company. Dividends are paid on the restricted shares to the extent and on
the same date as dividends that are paid on all other outstanding shares of
Common Stock. The aggregate holdings of restricted stock awards held by Mr.
Smith on December 31, 2003 was 1,000 shares, of which 800 had not yet
vested as of that date. Based on the closing price of $32.08 on December
31, 2003, the aggregate value of the 1,000 shares of restricted stock was
$32,080 ($6,416 for the fully vested shares).
(11) Mr. Clemmer terminated his employment in February 2004.
(12) Mr. Smith terminated his employment in January 2004.
9
There were no stock options or stock appreciation rights granted to the
Named Executive Officers in 2003. The following table summarizes for each of the
Named Executive Officers certain information relating to option exercises in the
last fiscal year and unexercised stock options held by them and the value of
such options at December 31, 2003. All options held by the Named Executive
Officers are exercisable. The value of an unexercised, in-the-money option at
fiscal year-end is the difference between its exercise or base price and the
fair market value of the underlying stock on December 31, 2003, which was $32.08
per share, based on the closing price of the Company's common stock as reported
on the Nasdaq National Market. These values have not been, and may never be,
achieved. Actual gains, if any, on exercise will depend on the value of the
Company's common stock on the date of such exercise. Unexercisable options are
those that have not yet vested.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END 2003 OPTION VALUES
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES ACQUIRED ON VALUE UNEXERCISED OPTIONS OPTIONS AT FY-END
NAME EXERCISE (#) REALIZED ($) AT FY-END (#) ($)
---- ------------ ------------ ------------- ---
EXERCISABLE EXERCISABLE
----------- -----------
John W. Raisbeck -- -- 52,500 $646,075
Robert P. Brezing 4,000 $ 40,240 6,000 $ 38,840
William E. Whitmoyer -- -- 4,000 $ 54,980
John R. Clemmer -- -- 2,000 $ 22,180
Richard K. Smith -- -- 2,000 $ 24,120
COMPENSATION OF DIRECTORS
Directors of the Company receive a fee of $500 per month for serving on the
Board, except for the Chairman of the Board who receives $650 per month. With
respect to the Board of Directors of the Bank, the Chairman of the Board
receives a monthly fee of $1,450, directors receive a monthly fee of $1,250 and
directors emeriti receive a monthly fee of $625. In addition, non-employee
directors receive $400 per month for service on the Executive Committee and $200
per meeting for service on all other committees. The Chief Executive Officer
does not receive any fees for his attendance at regularly scheduled Board
meetings.
Upon attainment of 75 years of age and after at least five years of service
as a director of the Bank, directors of the Bank may become directors emeriti by
a vote of the then existing Board of Directors and receive a fee equal to
one-half of the fee paid to regular directors per meeting attended. Directors
emeriti generally are elected to serve five year terms.
10
EMPLOYMENT AGREEMENTS
The Bank has employment agreements with each of Messrs. Raisbeck, Brezing
and Whitmoyer which are designed to assist the Bank in maintaining a stable and
competent management team. The continued success of the Bank depends to a
significant degree upon the skills and competence of its officers. The
employment agreements provide for an annual base salary in an amount not less
than the employee's current salary, and initial terms of four years for Mr.
Raisbeck, and two years for Mr. Brezing and Mr. Whitmoyer. Each agreement
provides for termination upon the employee's death, for cause or in certain
events specified by Office of Thrift Supervision ("OTS") regulations. The
employment agreements are also terminable by each employee upon 90 days notice
to the Bank.
In the event of an "involuntary termination", Mr. Raisbeck's employment
agreement provides for a monthly payment to him equal to one-twelfth of his
salary at his annual rate prior to termination and one-twelfth of the average of
his bonus and cash incentive compensation over the preceding two full fiscal
years, for the remaining term of his employment agreement or the period of three
years following his date of termination, whichever is shorter. In the event of
an "involuntary termination", Messrs. Brezing's and Whitmoyer's employment
agreements provide for payment to them of a lump sum amount equal to the greater
of their two year's salary or their applicable salary for the remaining term of
the employment agreement. The termination payments are subject to reduction by
the amount of all other compensation to the employee deemed for purposes of the
Code to be contingent on a "change in control," and may not exceed three times
the employee's average annual compensation over the most recent five year period
or be non-deductible by the Bank for federal income tax purposes.
Based upon their current salaries, if the employment of Messrs. Raisbeck,
Brezing and Whitmoyer were terminated involuntarily as of December 31, 2003,
under circumstances entitling them to severance pay as described above and
assuming such circumstances would constitute a "change in control" under Section
280G of the Internal Revenue Code, they would each have been entitled to receive
a lump sum cash payment of approximately $987,000 (which includes benefits due
under a deferred compensation plan), $326,000 and $220,000, respectively.
Messrs. Clemmer and Smith terminated their employment in February 2004 and
January 2004, respectively.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Bank's Board of Directors has furnished
the following report on executive compensation:
The Company has not paid any cash compensation to its executive
officers since its formation. All executive officers of the Company also
currently hold positions with the Bank and receive cash compensation from
the Bank. Decisions on cash compensation of the Bank's executive officers
who earn less than $100,000 per year were made by Mr. Raisbeck. For
executive officers who earn more than $100,000 per year, Mr. Raisbeck makes
recommendations to the Compensation Committee which then makes its
recommendations to the Full Board of Directors. The Compensation Committee
also makes recommendations to the full Board regarding salary, bonus and
incentive compensation of the chief executive officer.
11
This report addresses the compensation policies for 2003 as they affected
Mr. Raisbeck as the Chief Executive Officer of the Company and the Bank.
Compensation Policies Toward the Chief Executive Officer Generally. The
Compensation Committee's executive compensation policies are designed to provide
a competitive level of compensation that integrates pay with the Company's
annual and long-term performance goals, reward above average Company
performance, recognize individual initiative and achievements, and assist the
Company in attracting and retaining a qualified Chief Executive Officer. Target
levels of the Chief Executive Officer's overall compensation are intended to be
competitive with the compensation being paid to chief executive officers of a
peer group of publicly traded banks and thrifts in Ohio and the Midwest. The
Chief Executive Officer is also a participant in the Company's incentive
compensation plans. The Compensation Committee targeted Mr. Raisbeck's total
compensation at or near the total compensation paid to chief executive officers
of comparable thrifts.
In 1993, Section 162(m) was added to the Code, the effect of which was the
elimination of the deductibility of compensation over $1 million, with certain
exclusions, paid to certain highly compensated executive officers of publicly
held corporations, such as, in the Company's case, Mr. Raisbeck. Section 162(m)
applies to all remuneration (both cash and non-cash) that would otherwise be
deductible for tax years beginning on or after January 1, 1994, unless expressly
excluded. The compensation of Mr. Raisbeck was well below the $1 million
threshold during fiscal 2003.
Bonus Award and Determination of Chief Executive Officer's Compensation.
Mr. Raisbeck was awarded a cash bonus during the year based on a review of his
individual performance. The cash bonus awarded in 2003 was based upon Mr.
Raisbeck's success in focusing the activities of the Bank and improving the
Bank's overall performance.
John E. Field (Chairman)
Howard V. Dodds
Aristides G. Gianakopoulos
12
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings with the SEC that might incorporate this proxy
statement, in whole or in part, the following report shall not be deemed to be
incorporated by reference into any filing.
The Company's Audit Committee has reviewed and discussed with
management the audited financial statements of the Company for the year
ended December 31, 2003. In addition, the Committee has discussed with
Crowe, Chizek and Company LLP (Crowe Chizek), the independent auditing firm
for the Company, the matters required by Statements on Auditing Standards
No. 61, Communications with Audit Committees.
The Committee also has received the written disclosures from Crowe
Chizek required by Independence Standards Board Standard No. 1, and have
discussed with Crowe Chizek its independence from the Company.
Based on the foregoing discussions and reviews, the Committee has
recommended to the Company's Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003.
The table below shows fees for services rendered by Crowe Chizek to
the Company and its affiliates during fiscal year 2003.
Audit Fees $ 71,583.30
Audit-Related Fees -0-
Tax Fees $ 20,520.00
All Other Fees (Predominantly review of Bank Secrecy Act
procedures and professional fees associated with the Bank's
customer information file and related profitability reporting.) $ 11,905.28
The Committee has been provided with information regarding the
services provided by Crowe Chizek and has considered the compatibility of
such services with maintaining the auditors' independence. All of the above
services were approved by the Audit Committee.
Respectfully submitted,
The Audit Committee
John E. Field (Chairman)
Aristides G. Gianakopoulos
Jeffrey L. Levine
Peter J. Hackett
William N. Scarff
13
STOCK PERFORMANCE PRESENTATION
The line graph below compares the cumulative total shareholder return on
the Company's Common Stock (based on an assumed $100 investment) to the
cumulative total return of the Nasdaq Market Index, the SNL Thrift Index and the
SNL Midwest Thrift Index for the period December 31, 1998 through December 31,
2003.
(TOTAL PERFORMANCE GRAPH)
CERTAIN TRANSACTIONS
The Bank has followed a policy of granting loans to officers, directors and
employees, if such loans are made in the ordinary course of business and on the
same terms and conditions, including interest rates and collateral, as those of
comparable transactions prevailing at the time, in accordance with the Bank's
underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features. Loans to executive
officers and directors must be approved by a majority of the disinterested
directors and loans to other officers and employees must be approved by the
Bank's President or designate. All loans by the Bank to its directors and
executive officers are subject to OTS regulations restricting loan and other
transactions with affiliated persons of the Bank. Federal law currently requires
that all loans to directors and executive officers be made on terms and
conditions comparable to those for similar transactions with non-affiliates.
Loans to all directors and executive officers and their associates totaled
approximately $5,657,705 at December 31, 2003, which amount was 13% of
shareholders' equity at that date. All loans to directors and executive officers
were performing in accordance with their terms at December 31, 2003.
14
RATIFICATION OF THE APPOINTMENT OF AUDITORS
The Board of Directors has renewed the Company's arrangement for Crowe,
Chizek & Company LLP to be its auditors for the fiscal year ending December 31,
2004. Representatives of Crowe, Chizek & Company LLP are expected to attend the
Meeting to respond to appropriate questions and to make a statement if they so
desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF CROWE, CHIZEK AND COMPANY LLP AS THE
COMPANY'S AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2004.
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in the Company's proxy materials for
the next Annual Meeting of Shareholders, any shareholder proposal to take action
at such meeting must be received at the Company's main office located at 28 East
Main Street, Springfield, Ohio 45501-0509, no later than November 30, 2004. Any
such proposal shall be subject to the requirements of the proxy rules adopted
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Otherwise, any shareholder proposal to take action at such meeting must be
received at the Company's main office at 28 East Main Street, Springfield, Ohio
45501-0509 by February 21, 2005; provided, however, that in the event that the
date of the annual meeting is held before March 23, 2005, or after May 22, 2005,
the shareholder proposal must be received no later than the close of business on
the later of the 60thday prior to such annual meeting or the tenth day following
the day on which notice of the date of the annual meeting was mailed or public
announcement of the date of such meeting was first made. All shareholder
proposals must also comply with the Company's bylaws and Delaware law.
15
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who beneficially own more than 10% of a
registered class of the Company's securities to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership. Officers, directors and greater than 10% shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 2003, its
officers, directors and greater than 10% beneficial owners complied with all
applicable Section 16(a) filing requirements.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matter should properly come before the Meeting, it is
intended that holders of the proxies will act in accordance with their best
judgment.
The cost of solicitation of proxies will be borne by the Company. The
Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of Common Stock. In addition to solicitation by mail,
directors, officers and regular employees of the Company and/or the Bank may
solicit proxies personally or by telegraph or telephone without additional
compensation.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ John W. Raisbeck
John W. Raisbeck
President and Chief Executive Officer
Springfield, Ohio
March 30, 2004
16
ANNEX E
WESTERN OHIO FINANCIAL CORPORATION'S
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 2004
COMMISSION FILE NUMBER 0-24120
---------------------
WESTERN OHIO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-1403116
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
28 EAST MAIN STREET, SPRINGFIELD, OHIO 45501-0509
(Address of principal executive offices)
(Zip Code)
(937) 325-9990
(Registrant's telephone number, including area code)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class: Outstanding at May 15, 2004
Common stock, $.01 par value 1,810,552 common shares
Transitional Small Business Disclosure Format Yes [ ] No [X]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
E-1
WESTERN OHIO FINANCIAL CORPORATION
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION (UNAUDITED).......................... E-3
Item 1. Condensed Financial Statements.............................. E-3
Consolidated Balance Sheets................................. E-3
Consolidated Statements of Income and Comprehensive
Income...................................................... E-4
Consolidated Statements of Cash Flows....................... E-5
Notes to Condensed Consolidated Financial Statements........ E-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... E-12
Item 3. Quantitative and Qualitative Disclosure About Market Risk... E-18
Item 4. Controls and Procedures..................................... E-18
PART II -- OTHER INFORMATION.........................................
Item 1. Legal Proceedings........................................... E-19
Item 2. Changes in Securities and Use of Proceeds................... E-19
Item 3. Defaults Upon Senior Securities............................. E-19
Item 4. Submission of Matters to a Vote of Security Holders......... E-19
Item 5. Other Information........................................... E-19
Item 6. Exhibits and Reports on Form 8-K............................ E-20
SIGNATURES........................................................... E-21
E-2
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ITEM 1. CONDENSED FINANCIAL STATEMENTS
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents................................... $ 9,223 $ 6,853
Securities available for sale............................... 35,374 32,735
Federal Home Loan Bank stock................................ 9,428 9,335
Loans, net.................................................. 337,370 334,469
Real Estate Owned........................................... 162 323
Premises and equipment, net................................. 4,125 4,192
Bank owned life insurance................................... 9,196 9,122
Other assets................................................ 2,608 2,511
-------- --------
Total assets........................................... $407,486 $399,540
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.................................................... $257,530 $248,681
Borrowed funds.............................................. 101,834 103,473
Other liabilities........................................... 2,788 3,029
-------- --------
Total liabilities...................................... 362,152 355,183
-------- --------
Shareholders' equity
Common stock, $.01 par value, 7,250,000 shares authorized,
2,645,000 shares issued................................ 26 26
Additional paid-in capital................................ 40,777 40,709
Unearned employee stock ownership plan shares............. (60) (119)
Unearned management recognition plan shares............... (50) (51)
Shares held by deferred compensation plan................. (324) (325)
Treasury stock; 843,271 and 865,177 shares at cost,
respectively........................................... (16,981) (17,493)
Accumulated other comprehensive income.................... 257 (16)
Retained earnings......................................... 21,689 21,626
-------- --------
Total shareholders' equity............................. 45,334 44,357
-------- --------
Total liabilities and shareholders' equity........... $407,486 $399,540
======== ========
See accompanying notes condensed consolidated financial statements.
E-3
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
--------- ---------
(UNAUDITED)
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST AND DIVIDEND INCOME
Loans, including fees..................................... $4,541 $4,143
Securities................................................ 233 484
Interest-bearing deposits and overnight funds............. 8 14
Other interest and dividend income........................ 93 88
------ ------
4,875 4,729
------ ------
INTEREST EXPENSE
Deposits.................................................. 1,348 1,352
Borrowed funds............................................ 1,026 984
------ ------
2,374 2,336
------ ------
NET INTEREST INCOME......................................... 2,501 2,393
Provision for loan losses................................... 84 84
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 2,417 2,309
------ ------
NONINTEREST INCOME
Service charges........................................... 578 564
Net gain on sale of loans................................. 33 85
Net gain on sale of securities............................ 16 69
Bank Owned Life Insurance................................. 83 125
Other..................................................... 12 (18)
------ ------
722 825
NONINTEREST EXPENSE
Salaries and employee benefits............................ 1,200 1,162
Occupancy and equipment................................... 232 239
State franchise taxes..................................... 144 141
Professional services..................................... 181 149
Advertising............................................... 30 34
Loss on sale of REO....................................... 15 --
Data processing........................................... 193 200
Other..................................................... 374 321
------ ------
2,369 2,246
------ ------
Income before income taxes.................................. 770 888
Income tax expense.......................................... 258 267
------ ------
NET INCOME.................................................. 512 621
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain (loss) on securities available for sale
arising during this period............................. 284 (158)
Reclassification adjustment for amounts realized on
securities sales included in net income................ (11) (46)
------ ------
Total other comprehensive income, net of tax........... 273 (204)
------ ------
COMPREHENSIVE INCOME........................................ $ 785 $ 417
====== ======
Earnings per common share
Basic..................................................... $ .29 $ .36
Diluted................................................... $ .28 $ .35
Dividends per common share.................................. $ .25 $ .25
See accompanying notes condensed consolidated financial statements.
E-4
WESTERN OHIO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
--------- ---------
(UNAUDITED)
(AMOUNT IN THOUSANDS)
NET CASH FROM OPERATING ACTIVITIES.......................... $ 474 $ 605
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Maturities and principal payments...................... 3,604 2,891
Purchases.............................................. (8,250) --
Sales.................................................. 2,328 1,718
Net (increase) decrease in loans.......................... 14,276 (2,125)
Purchases of loans........................................ (17,340) (20,813)
Sales of real estate owned................................ 281 --
Premises and equipment expenditures....................... (59) (69)
Proceeds from sale of premises and equipment.............. -- 4
-------- --------
Net cash from investing activities................... (5,160) (18,394)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits.................................... 8,849 (2,218)
Net decrease in advances from borrowers for taxes and
insurance.............................................. (227) (282)
Purchase of treasury stock................................ -- --
Cash dividends paid....................................... (449) (433)
Proceeds from exercise of stock options................... 522 59
Net increase (decrease) in short-term borrowings.......... (16,500) 7,454
Proceeds from FHLB advances............................... 15,000 --
Repayments on FHLB advances............................... (139) (400)
-------- --------
Net cash from financing activities................... 7,056 4,180
-------- --------
Net change in cash and cash equivalents..................... 2,370 (13,609)
Cash and cash equivalents at beginning of period............ 6,853 19,312
-------- --------
Cash and cash equivalents at end of period.................. $ 9,223 $ 5,703
======== ========
See accompanying notes condensed consolidated financial statements.
E-5
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- PLAN OF MERGER INFORMATION
The Company entered into a definitive Agreement and Plan of Merger with
Wesbanco, Inc. ("Wesbanco") of Wheeling, West Virginia on April 1, 2004. Under
the terms of the Agreement and Plan of Merger, Wesbanco will exchange a
combination of its common stock and cash for the Company's common stock. The
Company's shareholders will be able to elect a fixed exchange ratio of 1.18
shares of Wesbanco common stock or $35.00 in cash subject to certain limitations
including that 55% of the Company's outstanding shares be exchanged for Wesbanco
common stock. Common stock received by the Company's shareholders is anticipated
to qualify as a tax-free exchange. Based upon a per share value of $35.00, the
transaction is valued at $65.2 million. The transaction, which is subject to
regulatory and the Company's shareholder approvals, is expected to be completed
in the fourth quarter of 2004.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance accounting principles
generally accepted in the United States of America for interim financial
reporting and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. These unaudited condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Corporation's annual report on Form 10-K for
the year ended December 31, 2003. The financial data and results of operations
for interim periods presented may not necessarily reflect the results to be
anticipated for the entire year. All operations are considered by management to
be aggregated in one reportable operating system.
Consolidation Policy: The financial statements include Western Ohio
Financial Corporation (Western) and its wholly-owned subsidiary Cornerstone Bank
(Cornerstone), together referred to as the Corporation. The financial statements
of Cornerstone include the accounts of its wholly-owned subsidiary,
CornerstoneBanc Financial Services, Inc. Intercompany transactions and balances
are eliminated in consolidation.
Use of Estimates: To prepare financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The
allowance for loan losses, fair values of financial instruments and the
valuation of retained interests, including mortgage and other servicing assets,
are particularly subject to change.
Income Taxes: Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized. Income tax
expense is based on the effective rate expected to be applicable for the entire
year.
Earnings Per Common Share: Basic earnings per common share is based on net
income divided by the weighted average number of common shares outstanding
during the period. Employee Stock Ownership Plan (ESOP) shares are considered to
be outstanding for the calculation unless unearned. Management Recognition Plan
(MRP) shares are considered outstanding as they become vested. Diluted earnings
per common share include the dilutive effect of additional potential common
shares issuable under stock options.
E-6
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense were measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock -- Based Compensation.
MARCH 31, MARCH 31,
2004 2003
--------- ---------
Net income:
As reported............................................... $512 $621
Pro forma................................................. 505 622
Earnings per share:
As reported
Basic..................................................... .29 .36
Diluted................................................... .28 .35
Pro forma
Basic..................................................... .28 .36
Diluted................................................... .28 .35
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2004 2003
-------- --------
Risk-free interest rate..................................... 2.72% --
Expected option life........................................ 5 Years --
Expected stock price volatility............................. 15.32 --
Dividend yield.............................................. 3.06% --
Estimated fair value of options granted..................... $ 3.61 --
New Accounting Standards: The Financial Accounting Standards Board (FASB)
revised Interpretation 46, "Consolidation of Variable Interest Entities", in
December 2003. The revised Interpretation changes the accounting model for
consolidation from the current method based on consideration of control through
voting interests to a model that considers who would incur the expected losses
or receive the expected returns. The decision to consolidate now considers
whether the entity has sufficient equity at risk to enable it to operate without
additional financial support, whether the equity owners in the entity lack the
obligation to absorb expected losses or the right to receive residual returns or
whether voting rights in the entity are proportional to the equity interest and
substantially all the entities activities are conducted for an investor with
minimal voting rights. The adoption of this standard did not have a material
impact on the Corporation's financial position or results of operations.
In December 2003, the FASB reissued Statement 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits," as
Statement 132R. This revised Statement requires additional disclosures as to
expense recorded, assets, obligations, and cash flows related to these benefits
or retirement plans. The adoption of this standard did not have a material
effect on the Corporation's financial position or results of operations.
In November 2003, the Emerging Issues Task Force (EITF) issued a consensus
requiring additional numerical and narrative disclosures for debt and marketable
equity securities that have unrealized losses. Issue
E-7
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments," was adopted by the Company in 2003 for these related
disclosure requirements.
In April 2003, the FASB issued Statement 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," requiring that commitments to
make mortgage loans be accounted for as derivatives if the loans are to be held
for sale. The commitment represents a written option and is therefore recorded
at the fair value. In March 2003, the FASB issued Statement 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equities," which requires reporting mandatorily redeemable shares as
liabilities. The Company adopted these Statements in 2003 and as of March 31,
2004, did not have financial instruments with these characteristics on the
balance sheet.
NOTE 3 -- SECURITIES
Securities available for sale were as follows:
GROSS GROSS
FAIR UNREALIZED UNREALIZED
VALUE GAINS LOSS
------- ---------- ----------
(AMOUNTS IN THOUSANDS)
MARCH 31, 2004
U.S. government agencies.................................. $ 2,100 $ 19 --
Municipal securities...................................... 7,053 80 --
Mortgage-backed securities................................ 26,221 307 (17)
------- ---- -----
Total.................................................. $35,374 $406 $ (17)
======= ==== =====
DECEMBER 31, 2003
U.S. government agencies.................................. $ 4,094 $ 8 (4)
Municipal securities...................................... 6,833 59 --
Mortgage-backed securities................................ 21,808 14 (100)
------- ---- -----
Total.................................................. $32,735 $ 81 $(104)
======= ==== =====
Gross proceeds from sales of securities during the quarter ended March 31,
2004 were $2.3 million, with gross gains of $16,000 included in earnings. Gross
proceeds from sales of securities during the three-month period ending March 31,
2003 were $1.7 million, with gross gains of $69,000 included in earnings. Gross
unrealized losses at March 31, 2004 are considered immaterial.
E-8
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LOANS
Loans were as follows:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
(AMOUNTS IN THOUSANDS)
First mortgage loans secured by:
One to four family residential............................ $185,996 $175,139
Other properties.......................................... 104,192 113,472
Construction properties................................... 6,171 3,473
Other loans
Home equity............................................... 24,915 24,426
Consumer.................................................. 668 749
Commercial................................................ 19,604 20,107
-------- --------
Total loans............................................ 341,546 337,366
Less:
Net deferred loan fees, premiums and discounts............ 361 217
Loans in process.......................................... (2,681) (1,313)
Allowance for loan losses................................. (1,856) (1,801)
-------- --------
$337,370 $334,469
======== ========
Activity in the allowance for loan losses was as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
-------- --------
(AMOUNT IN THOUSANDS)
Beginning balance........................................... $1,801 $1,806
Provision for loan losses................................... 84 84
Recoveries.................................................. 23 2
Charge-offs................................................. (52) (7)
------ ------
Ending balance......................................... $1,856 $1,885
====== ======
Nonperforming loans were $1.4 million at March 31, 2004 and December 31,
2003.
Impaired loans were as follows:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Loans with no allocated allowance for loan losses........... $835 293
Loans with allocated allowance for loan losses.............. -- --
Total.................................................. $835 $293
---- ----
Amount of the allowance for loan losses allocated to
impaired loans............................................ $ -- $ --
==== ====
E-9
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- DEPOSITS
Deposits were as follows:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
(AMOUNTS IN THOUSANDS)
Checking -- Noninterest bearing............................. $ 13,800 $ 13,149
Checking -- Interest bearing................................ 17,602 16,890
Money market accounts....................................... 75,628 66,945
Passbook and savings accounts............................... 12,263 11,885
Certificates of deposit:
In denominations under $100,000........................... 87,148 89,039
In denominations of $100,000 or more...................... 20,362 20,076
Brokered Certificates of Deposit............................ 30,727 30,697
-------- --------
Total.................................................. $257,530 $248,681
======== ========
NOTE 6 -- BORROWED FUNDS
Borrowed funds consisted of advances from the Federal Home Loan Bank of
Cincinnati ("FHLB") and are summarized by contractual maturity as follows:
MARCH 31, 2004 DECEMBER 31, 2003
----------------------- -----------------------
WEIGHTED WEIGHTED
BALANCE AVERAGE RATE BALANCE AVERAGE RATE
-------- ------------ -------- ------------
(AMOUNTS IN THOUSANDS)
FHLB advances maturing in:
One year or less...................... $ 7,701 4.63% $ 23,386 2.63%
Over 1 year to 3 years................ 28,629 2.51 13,656 2.90
Over 3 years to 5 years............... 50,705 4.72 50,754 4.72
Over 5 years.......................... 14,799 4.92 15,677 4.90
-------- ---- -------- ----
Total.............................. $101,834 4.12% $103,473 4.03%
======== ==== ======== ====
E-10
WESTERN OHIO FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- EARNINGS PER COMMON SHARE
The factors used in the earnings per share computation were as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
-------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
BASIC EARNINGS PER COMMON SHARE
Net income................................................ $ 512 $ 621
====== ======
Weighted average common shares outstanding................ 1,795 1,757
Less: Average unallocated ESOP shares..................... (7) (23)
Less: Average nonvested MRP shares........................ (1) (3)
------ ------
Average shares............................................ 1,787 1,731
====== ======
Basic earnings per common share........................... $ .29 $ .36
====== ======
DILUTED EARNINGS PER COMMON SHARE
Net income................................................ $ 512 $ 621
====== ======
Weighted average common shares outstanding for basic
earnings per common share.............................. 1,787 1,731
Add: Dilutive effects of average nonvested MRP shares..... -- --
Add: Dilutive effects of stock options.................... 42 22
------ ------
Average shares and dilutive potential common shares....... 1,829 1,753
====== ======
Diluted earnings per common share......................... $ .28 $ .35
====== ======
Stock options covering 2,000 and 66,936 shares of common stock were not
considered in computing diluted earnings per common share for the three months
ended March 31, 2004 and March 31, 2003, respectively, as they were
antidilutive. In addition, nonvested MRP awards for 642 and 2,908 shares of
common stock were not considered in computing diluted earnings per common share
for the three months ended March 31, 2004 and March 31, 2003, respectively.
E-11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discusses the financial condition of the Company as of March
31, 2004 as compared to December 31, 2003, and the results of operations for the
quarter ended March 31, 2004, compared with the comparable quarter of 2003. This
discussion should be read in conjunction with the interim financial statements
and footnotes included herein.
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Western Ohio's consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States and follow
general practices within the banking industry. Application of these principles
requires management to make estimates, assumptions and judgments that affect the
amounts reported in the financial statements and the accompanying notes. These
estimates, assumptions and judgments are based on information available as of
the date of the financial statements; accordingly, as this information changes,
the financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
The most significant policies followed by the Corporation are presented in
Note 1 to the consolidated financial statements. Management has identified the
determination of the allowance for loan losses and the valuation of retained
interests, including mortgage and other servicing assets, to be the accounting
areas that require the most subjective or complex judgments, and as such would
most likely be subject to subsequent revision as new information becomes
available.
The allowance for loan losses represents management's estimate of probable
credit losses incurred in the loan portfolio at a particular balance sheet date.
Determining the amount of the allowance for loan losses is considered a critical
accounting estimate because it requires significant judgment and the use of
estimates related to the amount and the timing of expected future cash flows on
impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends
E-12
and conditions and collateral values, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the consolidated balance sheet.
Retained interests, including Mortgage Servicing Rights (MSRs), are
established and accounted for based on discounted cash flow modeling techniques
which require management to make estimates regarding the amount and timing of
expected future cash flows, including assumptions about loan prepayment rates,
credit loss experience, and costs to service, as well as discount rates that
consider the risk involved. MSRs do not trade in an open market with active
trading with readily available market prices. Because the values of these assets
are sensitive to changes in assumptions, the valuation of retained interests,
which in part is provided by an independent third party, is considered a
critical accounting estimate. Management updates the valuation of MSRs
quarterly, in part due to the assumptions relating to the prepayment of loans
having a high degree of correlation with the movement of interest rates.
RECENT CORPORATE DEVELOPMENTS
The Company entered into a definitive Agreement and Plan of Merger with
Wesbanco, Inc. of Wheeling, West Virginia, on April 1, 2004. See Item 5, Part
II, of this Form 10Q.
ANALYSIS OF FINANCIAL CONDITION
Consolidated assets of the Company totaled $407.5 million at March 31,
2004, an increase of $8.0 million from the December 31, 2003 total of $399.5
million. The increase in assets was mainly comprised of an increase of $2.6
million in securities available for sale, an increase of $2.9 million in loans
and an increase of $2.4 million in cash and cash equivalents.
Net loans increased $2.9 million, or 0.9%, from $334.5 million at December
31, 2003 to $337.4 million at March 31, 2004. Traditional one-to-four family
residential mortgage loans increased $10.9 million to $186.0 million at March
31, 2004 from $175.1 million at December 31, 2003, primarily due to the purchase
of a mortgage loan pool totaling $15.2 million during the first quarter.
Cash and cash equivalents increased by $2.4 million to $9.2 million at
March 31, 2004, from $6.9 million at December 31, 2003. Cash and cash
equivalents consist of cash, checking deposits and federal funds deposited at
other financial institutions.
Securities available for sale amounted to $35.4 million at March 31, 2004,
and increased $2.6 million from $32.7 million at December 31, 2003. The increase
was due to the purchase of securities of $8.3 million, which was partially
offset by the sale of securities of $2.3 million and principal repayments and
prepayments amounting to $3.6 million.
Deposits at March 31, 2004 totaled $257.5 million, an increase of $8.8
million from $248.7 million at December 31, 2003. The increase occurred
primarily in money market accounts due to the Bank's promotional pricing and the
desire of retail banking customers to maintain balances in more liquid accounts
in anticipation of rising rates. Certificates of deposit, which amounted to
$138.2 million at March 31, 2004, declined by $1.6 million from the level at
December 31, 2003 resulting from maturing account balances being transferred to
money market accounts.
FHLB advances at March 31, 2004 totaled $101.8 million reflecting a slight
decline from $103.5 million at December 31, 2003. The majority of borrowed funds
are invested in loans to leverage the Company's excess capital with the intent
of improving the Company's return on equity over time.
Total shareholders' equity increased $977,000, or 2.2%, from $44.4 million
at December 31, 2003, to $45.3 million at March 31, 2004. This increase is
primarily attributable to net income for the current quarter, stock options
exercised and an increase in accumulated other comprehensive income for
unrecognized gains on the available for sale securities. This was partially
offset by dividend payments of $449,000 during the first quarter of 2004.
As of March 31, 2004, the Company had commitments to make $2.2 million of
residential loans and $7.9 million of non-residential real estate loans. It is
expected that these loans will be funded within
E-13
30-90 days. The Company also had $2.7 million in commitments to fund loans on
residential properties under construction as well as commitments to disburse
$3.5 million on other mortgage loans. These commitments are anticipated to be
filled within three to six months. Unused commercial lines of credit were $7.0
million and unused home equity lines of credit were $17.6 million. Commitments
to originate nonmortgage loans total $387,000.
RESULTS OF OPERATIONS
Operating results of the Company are affected by general economic
conditions, monetary and fiscal policies of federal agencies and policies of
agencies regulating financial institutions. The Company's cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by demand for real estate 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.
The Company's net income is primarily dependent on its net interest income
(the difference between interest income generated on interest-earning assets and
interest expense incurred on interest-bearing liabilities). Net income is also
affected by the provision for loan losses, service charges, gains on sale of
assets, other income, noninterest expense and income taxes. The Company's net
income of $512,000 for the quarter ended March 31, 2004, represented a decrease
of $109,000, or 17.6%, compared to the comparable quarter of 2003. The returns
on average assets and average shareholders' equity for the quarter ended March
31, 2004, on an annualized basis, were 0.52% and 4.55%, respectively, compared
to 0.73% and 5.77% for the same period in 2003. Earnings per share on a fully
diluted basis of $0.28 for the quarter ended March 31, 2004 declined $0.07 from
$0.35 for the comparable quarter of 2003.
Net interest income is the largest component of the Company's income and is
affected by the interest rate environment and volume and composition of
interest-earning assets and interest-bearing liabilities. Net interest income
totaled $2.5 million for the three months ended March 31, 2004 compared to $2.4
million for the same period in 2003. The year-over-year increase of $108,000 is
due to a higher level of average interest-earning assets, which was mostly
offset by a lower net interest margin. Average interest-earning assets of $376.4
million for the first quarter of 2004 exceeded the comparable quarter of 2003 of
$325.0 million, or 15.8%. However, the net interest margin of 2.66% for the
quarter ended March 31, 2004 declined by 33 basis points from 2.99% for the
quarter ended March 31, 2003. The net interest margin decline was mainly
attributable to the yield on average interest-earning assets of 5.18% for the
first quarter of 2004 declining by 64 basis points from the level of the prior
years' comparable quarter of 2003 while the rate paid on average
interest-bearing liabilities of 2.74% only declined by 44 basis points for the
comparable period of 2003.
The Company remains liability sensitive whereby its interest-bearing
liabilities will generally reprice more quickly than its interest-earning
assets. Therefore, the Company's net interest margin will generally increase in
periods of falling interest rates in the market and will decrease in periods of
rising interest rates. Cornerstone is more sensitive to rising rates than
declining rates. In a rising interest rate environment, because Cornerstone has
primarily fixed-rate loans in its loan portfolio, the amount of interest
Cornerstone would receive on its loans could increase relatively slowly as loans
are slowly prepaid and new loans at higher rates are made. Moreover, the
interest Cornerstone would pay on its deposits could increase more rapidly as
interest rates increase because Cornerstone's deposits generally have shorter
periods to repricing.
Interest and fees on loans totaled $4.5 million for the quarter ended March
31, 2004 compared to $4.1 million for the quarter ended March 31, 2003. The
increase was mainly associated with higher average loan balances in the first
quarter of 2004 versus the prior years' comparable quarter, which was partially
offset by lower yields on newly originated loans. The average yield earned on
the portfolio on an annualized basis, declined to 5.51% for the quarter ended
March 31, 2004 from 6.23% for the same period in 2003.
Interest and dividends on securities totaled $233,000 for the three months
ended March 31, 2004, and $484,000 for the three months ended March 31, 2003.
The decline was attributed to lower average balances in the first quarter of
2004 compared to the comparable quarter of 2003 coupled with accelerated
prepayments of collateralized mortgage obligations that resulted in accelerated
amortization of purchase premiums.
E-14
Interest on deposits totaled $1.3 million for the quarter ended March 31,
2004 and was essentially the same as the quarter ended March 30, 2003. Although
average interest-bearing liabilities of $347.8 million for the first quarter of
2004 increased by $49.8 million, or 16.7%, from the average for the comparable
quarter of 2003, interest expense on deposits remained flat. The benefit of
lower interest rates on all deposit products and the shift in mix from
certificates of deposits to more cost-effective checking and money market
accounts offset the increased cost associated with a higher level of
interest-bearing liabilities.
Interest on FHLB advances of $1.0 million for the quarter ended March 31,
2004 increased $42,000 compared to $984,000 for the quarter ended March 31,
2003. The increase was due to a higher average outstanding balance for FHLB
advances in the first quarter of 2004 versus the comparable quarter of 2003
partially offset by the lower cost of new advances.
The Company maintains an allowance for loan losses in an amount, which, in
management's judgment, is adequate to absorb probable losses in the loan
portfolio. While management utilizes its best judgment and information
available, ultimate adequacy of the allowance is dependent on a variety of
factors, including performance of the Company's loan portfolio, the economy,
changes in real estate values and interest rates and the view of the regulatory
authorities toward loan classifications. The provision for loan losses is
determined by management as the amount to be added to the allowance for loan
losses after net charge-offs have been deducted to bring the allowance to a
level considered adequate to absorb probable losses in the loan portfolio. The
amount of the provision is based on management's regular review of the loan
portfolio and consideration of such factors as historical loss experience,
changes in size and composition of the loan portfolio and specific borrower
considerations, including ability of the borrower to repay the loan and the
estimated value of the underlying collateral. The provision for loan losses
totaled $84,000 for the three months ended March 31, 2004, consistent with the
level for the three months ended March 31, 2003.
Net charge-offs amounted to $29,000 for the quarter ended March 31, 2004 as
compared to $5,000 for the quarter ended March 31, 2003. Based upon the current
level of charge-offs, the level of impaired and nonperforming loans and the
collateral supporting those loans, and the local and regional economic
conditions, management believes that the total allowance of $1.9 million on
total loans at March 31, 2004 is adequate. The Corporation will continue to
review its allowance for loan losses and make further provisions as required
dependent upon the economic and asset quality conditions.
Noninterest income totaled $722,000 for the three months ended March 31,
2004 compared to $825,000 for the comparable period of 2003, reflecting a
decline of $103,000, or 12.5%. An increase in service charges year-over-year was
more than offset by a decline in gains on the sale of loans and securities
coupled with a decline in Bank Owned Life Insurance (BOLI). Service charges on
loans and deposits increased $14,000, or 2.5%, from $564,000 for the quarter
ended March 31, 2003 to $578,000 for the quarter ended March 31, 2004. The
Company's overdraft honor program, which provides to most customers the courtesy
of honoring checks drawn on insufficient balances, up to limits established by
management, was the primary reason for the increase in service charges on
deposits. Additionally, the Company recognized loan sale gains of $33,000 on
loan sales of $1.4 million for the quarter ended March 31, 2004 compared to
$85,000 on loan sales of $4.5 million for the comparable quarter of 2003. Gains
on the sale of securities were $16,000 for the quarter ended March 31, 2004,
versus $69,000 for the comparable quarter of 2003. The BOLI income, which
amounted to $83,000 for the first quarter of 2004, reflected a decrease of
$42,000, or 33.6%, from the comparable quarter of 2003 due to the change from a
guaranteed rate from the insurance carriers in the initial year of the policies
to market rates in the current year.
Noninterest expense amounted to $2.4 million for the first quarter of 2004,
which amounted to an increase of $123,000, or 5.5% above the level of $2.2
million for the first quarter of 2003. The major expense increases were
comprised of an increase in employee stock ownership plan (ESOP) expense of
approximately $40,000 due to a significantly higher stock price during the first
quarter of 2004 relative to the comparable quarter of 2003 and an increase in
loan fees of approximately $44,000 for purchased mortgage loans. The resulting
income for the purchased mortgage loans more than offset the increased expense.
Professional services, which totaled $181,000 in the first quarter of 2004,
accounted for increased spending of $32,000, or 21.5%, relative to the prior
years' comparable quarter due to legal and internal audit expenses, which are
E-15
outsourced by the Company. Expenses associated with occupancy and equipment,
advertising, franchise taxes, and data processing in the first quarter of 2004
were little changed from the first quarter of 2003.
The change in income tax is primarily attributable to the change in income
before income taxes. Income tax expense totaled $258,000 and $267,000, or an
effective rate of 33.5% and 30.1%, for the three months ended March 31, 2004 and
March 31, 2003 respectively. This effective tax rate increase is due primarily
to a one-time adjustment in the first quarter of 2004 for $16,660.
LIQUIDITY
Office of Thrift Supervision ("OTS") regulations presently require
Cornerstone Bank to maintain sufficient liquidity to assure its safe and sound
operation. To that end, Cornerstone Bank maintains investments having maturities
of 5 years or less, sells loans into the secondary market and borrows funds from
the FHLB. These activities are intended to provide a source of relatively liquid
funds on which Cornerstone may rely, if necessary, to fund deposit withdrawals
or other short-term funding needs. At March 31, 2004 Cornerstone had commitments
to originate residential loans totaling $2.2 million and $7.9 million of non-
residential real estate loans. In addition, Cornerstone had $2.7 million in
commitments to fund loans on residential properties under construction as well
as $3.5 million in commitments to fund other mortgage loans. Unused commercial
lines of credit were $7.0 million and unused home equity lines of credit were
$17.6 million. Commitments to originate nonmortgage loans total $387,000.
Cornerstone considers its liquidity sufficient to meet its outstanding short and
long-term needs.
CAPITAL RESOURCES
Cornerstone is required by regulations to meet certain minimum capital
requirements, which must be generally as stringent as standards established for
commercial banks. Current minimum capital requirements call for tangible capital
of 1.5% of adjusted total assets, core capital (which, for Cornerstone, consists
solely of tangible capital) of 4.0% of adjusted total assets, except for
institutions with the highest examination rating and acceptable levels of risk,
and risk-based capital (which, for Cornerstone, consists of core capital and
general valuation allowances) of 8.0% of risk-weighted assets (assets are
weighted at percentage levels ranging from 0% to 100% depending on their
relative risk).
The following table summarizes Cornerstone's minimum regulatory capital
requirements and actual levels of tangible, core and risk-based capital at March
31, 2004.
EXCESS OF ACTUAL
MINIMUM CURRENT CAPITAL OVER CURRENT
ACTUAL CAPITAL REQUIREMENT REQUIREMENT
----------------- ----------------- --------------------- APPLICABLE
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ASSET TOTAL
------- ------- ------- ------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
Tangible capital..... $41,983 10.3% $ 6,106 1.5% $35,877 8.8% $407,091
Core capital......... 41,983 10.3 16,284 4.0 25,699 6.3 407,091
Risk-based capital... 43,781 15.1 23,166 8.0 20,615 7.1 289,580
Cornerstone also exceeded the minimum requirements to be considered well
capitalized under the prompt corrective action provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991.
E-16
The following table indicates the amounts of significant commitments at
March 31, 2004.
FIXED VARIABLE
RATE RATE TOTAL
------ -------- -------
First Mortgage Loans..................................... $2,200 $ -- $ 2,200
Consumer and Other Loans................................. -- 387 387
Commercial Loans......................................... -- 7,865 7,865
Home Equity Lines of Credit.............................. -- 17,644 17,644
Commercial Lines of Credit............................... -- 7,028 7,028
Stand-By Letters of Credit............................... -- 9,135 9,135
------ ------- -------
$2,200 $42,059 $44,259
====== ======= =======
E-17
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest rate risk is the risk that the Company's
financial condition will be adversely affected due to movements in interest
rates. The income of financial institutions is primarily derived from the excess
of interest earned on interest-earning assets over the interest paid on
interest-bearing liabilities. One method used to analyze the Company's
sensitivity to changes in interest rates is the "net portfolio value" ("NPV")
methodology. NPV is generally considered to be the present value of the
difference between expected incoming cash flows on interest-earning and other
assets and expected outgoing cash flows on interest-bearing and other
liabilities.
The following tables present an analysis of the potential sensitivity of
the Bank's net present value of its financial instruments to sudden and
sustained changes in the prevailing interest rates.
MARCH 31, 2004 DECEMBER 31, 2003
--------------------------- ---------------------------
$ CHANGE % CHANGE NPV $ CHANGE % CHANGE NPV
CHANGE IN INTEREST RATE (BASIS POINTS) IN NPV IN NPV RATIO IN NPV IN NPV RATIO
-------------------------------------- -------- -------- ----- -------- -------- -----
(DOLLARS IN THOUSANDS)
+200................................... $(6,015) (13)% 9.71% $(4,928) (11)% 11.72%
+100................................... (2,379) (5) 10.46 (4,089) (9) 12.57
--..................................... -- -- 10.91 -- -- 13.01
(100).................................. 953 2 11.04 1,019 2 13.17
(200).................................. (1,332) (3) 10.42 (1,318) (3) 13.40
During the past few years interest rates have declined to historically low
levels and as a result many of the Bank's deposits are priced within 100 basis
points of a zero interest rate floor. As the March 31, 2004 table suggests,
should overall rates and loan yields continue to decline, the Bank's inability
to reduce rates below the zero floor could negatively impact Cornerstone's NPV
and future earnings. The decline in NPV from prior periods is due to the
increase in prepayments in our loan portfolio and extended duration of our
Federal Home Loan Bank advances. Based upon the most recent movements in market
interest rates, increases in commodity prices and the general level of economic
activity, it appears that the greater risk for Cornerstone Bank within the next
year would be an increase in interest rates rather than a decrease.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making risk calculations.
ITEM 4. CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide
only reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934
E-18
(Exchange Act)) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13(a)-15(f) and
15(d)-15(f) under the Exchange Act) during the fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company and its subsidiary are involved from time to time as plaintiff
or defendant in various legal actions arising in the normal course of their
business. While the ultimate outcome of pending proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing the Company, the Bank or its subsidiary in the proceedings, that
the resolution of these proceedings should not have a material effect on the
Company's consolidated financial position or results of operation.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual Meeting of shareholders on April 22, 2004, David L.
Dillahunt, Chairman; John W. Raisbeck, President and Chief Executive Officer;
and Howard V. Dodds were elected to three-year terms as directors. In addition,
the shareholders ratified the appointment of Crowe, Chizek and Company LLC as
auditors for the fiscal year ending December 31, 2004. Total shares voted
amounted to 1,546,943, or 86.0% of the total outstanding shares of 1,799,788. Of
the total shares voted, Mr. Dillahunt received 1,522,705, or 98.4%, with 24,238,
or 1.6%, of the votes withheld; Mr. Raisbeck received 1,501,018, or 97.0%, with
45,925, or 3.0%, of the votes withheld; and Mr. Dodds received 1,522,305, or
98.4%, with 24,638, or 1.6%, of the votes withheld. The ratification of Crowe
Chizek as auditors received 1,525,053 votes, or 98.6% of the total shares voted,
with 14,688 votes, or 1.0% against, and 7,201 votes, or 0.4% abstaining.
ITEM 5 -- OTHER INFORMATION
The Company entered into a definitive Agreement and Plan of Merger with
Wesbanco, Inc. ("Wesbanco") of Wheeling, West Virginia on April 1, 2004. Under
the terms of the Agreement and Plan of Merger, Wesbanco will exchange a
combination of its common stock and cash for the Company's common stock. The
Company's shareholders will be able to elect a fixed exchange ratio of 1.18
shares of Wesbanco common stock or $35.00 in cash subject to certain limitations
including that 55% of the Company's outstanding shares be exchanged for Wesbanco
common stock. Common stock received by the Company's shareholders is anticipated
to qualify as a tax-free exchange. Based upon a per share value of $35.00, the
transaction is valued at $65.2 million. The transaction, which is subject to
regulatory and the Company's shareholder approvals, is expected to be completed
in the fourth quarter of 2004.
E-19
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification by the CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications by the CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.1 Western Ohio Corporation Nominating Committee Charter
(b) Western Ohio Financial Corporation issued a report on Form 8-K, dated
January 15, 2004, for a press release dated January 15, 2004 announcing the
Company's financial results and earnings for the fourth quarter and full year
2004.
(c) Western Ohio Financial Corporation issued a report on Form 8-K, dated
January 16, 2004, correcting the dates in the earnings press release originally
issued January 15, 2004.
(d) Western Ohio Financial Corporation issued a report on Form 8-K, dated
March 5, 2004, for a press release dated March 5, 2004, reissuing the earnings
for fourth quarter and full year 2004 .
(e) Western Ohio Financial Corporation issued a report on Form 8-K, dated
April 22, 2004, for a press release announcing the payment of the next
shareholder dividend.
E-20
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.
WESTERN OHIO FINANCIAL CORPORATION
(Registrant)
/s/ JOHN W. RAISBECK
--------------------------------------
John W. Raisbeck
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2004
/s/ ROBERT A. KUEHL
--------------------------------------
Robert A. Kuehl
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: May 15, 2004
E-21
EXHIBIT 31.1
CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-Q
I, John W. Raisbeck certify that:
1) I have reviewed this quarterly report on Form 10-Q of Western Ohio
Financial Corporation;
2) Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4) The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluations; and
c) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter, that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5) The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ JOHN W. RAISBECK
--------------------------------------
John W. Raisbeck
Chief Executive Officer
Date: May 15, 2004
E-22
EXHIBIT 31.2
CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-Q
I, Robert A. Kuehl certify that:
1) I have reviewed this quarterly report on Form 10-Q of Western Ohio
Financial Corporation;
2) Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4) The registrant's other certifying officer(s) and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluations; and
c) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter, that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5) The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ ROBERT A. KUEHL
--------------------------------------
Robert A. Kuehl,
Chief Financial Officer
Date: May 15, 2004
E-23
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Western Ohio
Financial Corporation (the "Company") for the quarterly period ending March 31,
2004 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, John W. Raisbeck, Chief Executive Officer of the Company,
certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ JOHN W. RAISBECK
--------------------------------------
John W. Raisbeck,
Chief Executive Officer
Date: May 15, 2004
In connection with the Quarterly Report on Form 10-Q of Western Ohio
Financial Corporation (the "Company") for the quarterly period ending March 31,
2004 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Robert A. Kuehl, Chief Financial Officer of the Company,
certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ ROBERT A. KUEHL
--------------------------------------
Robert A. Kuehl,
Chief Financial Officer
Date: May 15, 2004
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
E-24
EXHIBIT 99.1
NOMINATING COMMITTEE CHARTER
A. PURPOSE
The purpose of the Nominating Committee (the "Committee") of Western Ohio
Financial Corporation (the "Company") is to (a) identify individuals qualified
to become members of the Board of Directors (the "Board"), consistent with
criteria approved by the Board, and to select, or to recommend that the Board
select, the director nominees for each annual meeting of stockholders, (b)
oversee the evaluation of the Board and management, (c) recommend to the Board
the directors that shall serve on each committee of the Board, and (d) take such
other actions within the scope of this Charter (this "Charter") as the Committee
deems necessary or appropriate.
B. COMPOSITION AND TERM OF OFFICE
The Board shall designate annually three (3) or more of its members to
constitute members of the Committee, each of whom shall serve for a term of one
year. All members of the Committee shall be "independent," as required by
applicable securities laws, rules and regulations, the rules of the NASDAQ Stock
Market or of any securities exchange or market on which securities of the
Company are listed, and any other applicable requirements. The Board will
appoint the Chairperson of the Committee.
C. SCOPE OF POWERS AND FUNCTIONS
The Committee shall have such powers and functions as may be assigned to it
by the Board from time to time; however, such functions shall, at a minimum,
include the following, as well as any functions as shall be required of
nominating committees by applicable securities laws, rules and regulations, the
rules of the NASDAQ Stock Market or of any securities exchange or market on
which securities of the Company are listed, and any other applicable
requirement:
1. The Committee shall review, at least annually, the size and
structure of the Board to assure that the proper skills and experience are
represented on the Board. The composition of the Board shall include a
majority of "independent" directors as required by applicable securities
laws, rules and regulations, the rules of the NASDAQ Stock Market or of any
securities exchange or market on which securities of the Company are
listed, and any other applicable requirements.
2. The Committee shall review and develop the Board's criteria for
selecting new directors. Criteria that will be used in connection with
evaluating and selecting new directors will include factors relating to
whether the director candidate would meet the definition of "independent"
specified in applicable securities laws, rules and regulations, the rules
of the NASDAQ Stock Market or of any securities exchange or market on which
securities of the Company are listed, and any other applicable requirement,
as well as strength of character, mature judgment, career specialization,
relevant technical skills, diversity and the extent to which the candidate
would fill a present need on the Board. The Company's policy is not to
discriminate on the basis of race, gender or ethnicity and the Board is
supportive of any qualified candidate who would also provide the Board with
more diversity.
3. The Committee shall consider candidates for election to the Board
from any reasonable source, including stockholder recommendations, provided
such nominees are recommended in accordance with the nominating procedures
set forth in Company's By-Laws. The Committee shall not evaluate candidates
differently based on who has made the recommendation.
4. The Committee shall evaluate, propose and approve nominees for
election to the Board, and consider and evaluate stockholder nominees for
election to the Board.
5. The Committee shall recommend to the Board nominees to fill
vacancies on the Board. The Committee shall also consider matters relating
to the retirement of Board members.
E-25
6. The Committee shall review potential conflicts of prospective Board
members.
7. The Committee shall aid in attracting and maintaining a list of
persons who may be potential directors.
8. The Committee shall review the suitability of each Board member for
continued service when his or her term expires and when he or she has a
significant change in status.
9. The Committee shall make recommendations to the Board as to the
qualifications of members of the Board's committees, committee member
appointment and removal, and committee reporting to the Board.
10. The Committee shall take such steps as the Committee deems
necessary or appropriate with respect to oversight and evaluation of the
Board, management, and each Board committee.
11. The Committee shall periodically review the compensation of the
members of the Board for service as a director or member of any committee
of the Board and make recommendations to the Board concerning the fixing of
such compensation.
12. The Committee shall have the authority, in fulfilling its
responsibilities under this Charter, to obtain advice, reports or opinions
from internal or external counsel and expert advisors, including director
search firms and approve fees of such advisors.
13. The Committee shall annually review and re-examine this Charter to
make recommendations to the Board with respect to any proposed changes.
14. The Committee shall perform such other functions which from time
to time may be assigned by the Board of Directors.
D. MEETINGS
The Committee shall meet at least once annually or more frequently, as
circumstances dictate, upon the request of any member of the Committee and upon
the notice provided for in the Company's By-Laws. Members of senior management
or others may attend meetings of the Committee at the invitation of the
Committee and shall provide pertinent information as necessary. The Chairperson
of the Committee shall set the agenda of each meeting and arrange for the
distribution of the agenda, together with supporting material, to the Committee
members prior to each meeting.
E-26
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
WesBanco's Bylaws provide, and West Virginia law permits, the
indemnification of directors and officers against certain liabilities. Officers
and directors of WesBanco and its subsidiaries are indemnified generally against
expenses reasonably incurred in connection with proceedings in which they are
made parties by reason of their being or having been directors or offices of the
corporation, except in relation to matters as to which a recovery may be
obtained by reason of an officer or director having been finally adjudged
derelict in such action or proceeding in the performance of his duties.
Notwithstanding the general indemnification provisions, WesBanco's Bylaws
prohibit certain indemnification payments to any "institution affiliated party"
as that term is defined in 12 U.S.C. Section 1813(u). WesBanco does provide
indemnity insurance to its officers and directors. Such insurance will not,
however, indemnify officers or directors for willful misconduct or gross
negligence in the performance of a duty to WesBanco.
I. Article VI of the Bylaws of WesBanco provides:
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1. Each director and officer, whether or not then in office, shall
be indemnified by the corporation against all costs and expenses reasonably
incurred by and imposed upon him in connection with or resulting from any
action, suit or proceeding, to which he may be made a party by reason of his
being or having been a director or officer of the corporation, or of any other
company which he served at the request of the corporation, except in relation to
matters as to which a recovery shall be had against him by reason of his having
been finally adjudged derelict in such action, suit or proceeding, in the
performance of his duties as such director or officer, and the foregoing right
of indemnification shall not be exclusive of other rights to which he may be
entitled as a matter of law.
SECTION 2. Notwithstanding the provisions of Section 1 of this Article VI,
an "institution-affiliated party" may not receive a "prohibited indemnification
payment," which is defined as any payment or agreement to make a payment by the
corporation to an institution-affiliated party to pay or reimburse such person
for any liability or legal expenses in any administrative proceeding brought by
the appropriate federal banking agency that results in a final order or
settlement in which the institution- affiliated party is assessed a civil money
penalty, is removed or prohibited from banking, or is required to cease an
action or take any affirmative action, including making restitution, with
respect to the corporation.
SECTION 3. The corporation may purchase commercial insurance to cover
certain costs that the corporation incurs under the indemnification provisions
of Section 1 of this Article VI. Costs that may be covered include legal
expenses and restitution that an individual may be ordered to make to the
corporation. Such insurance may not, however, pay or reimburse an
institution-affiliated party for any final judgment or civil money penalty
assessed against such individual.
SECTION 4. The corporation may make or agree to make a reasonable
indemnification payment if all of the following conditions are met: (i) the
corporation's board of directors determines in writing that the
institution-affiliated party acted in good faith and the best interests of the
corporation; (ii) the board of directors determines that the payment will not
materially affect the corporation's safety and soundness; (iii) the payment does
not fall within the definition of a prohibited indemnification payment; and (iv)
the institution-affiliated party agrees in writing to reimburse the corporation,
to the extent not covered by permissible insurance, for payments made in the
event that the administrative action results in a final order or settlement in
which the institution-affiliated party is assessed a civil money penalty, is
removed or prohibited from banking, or is required, under a final order, to
cease an action or take any affirmative action.
II-1
II. W. Va. Code Section 31D-8-851 through Section 31D-8-856 provide:
SECTION 31D-8-851. PERMISSIBLE INDEMNIFICATION.
(a) Except as otherwise provided in this section, a corporation may
indemnify an individual who is a party to a proceeding because he or she is a
director against liability incurred in the proceeding if:
(1) (A) He or she conducted himself or herself in good faith; and
(B) He or she reasonably believed: (i) In the case of conduct in
his or her official capacity, that his or her conduct was in the best
interests of the corporation; and (ii) in all other cases, that his or
her conduct was at least not opposed to the best interests of the
corporation; and
(C) In the case of any criminal proceeding, he or she had no
reasonable cause to believe his or her conduct was unlawful; or
(2) He or she engaged in conduct for which broader indemnification has
been made permissible or obligatory under a provision of the articles of
incorporation as authorized by subdivision (5), subsection (b), section two
hundred two, article two of this chapter.
(b) A director's conduct with respect to an employee benefit plan for a
purpose he or she reasonably believed to be in the interests of the participants
in, and the beneficiaries of, the plan is conduct that satisfies the requirement
of subparagraph (ii), paragraph (B), subdivision (1), subsection (a) of this
section.
(c) The termination of a proceeding by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, is not
determinative that the director did not meet the relevant standard of conduct
described in this section.
(d) Unless ordered by a court under subdivision (3), subsection (a),
section eight hundred fifty-four of this article, a corporation may not
indemnify a director:
(1) In connection with a proceeding by or in the right of the
corporation, except for reasonable expenses incurred in connection with the
proceeding if it is determined that the director has met the relevant
standard of conduct under subsection (a) of this section; or
(2) In connection with any proceeding with respect to conduct for
which he or she was adjudged liable on the basis that he or she received a
financial benefit to which he or she was not entitled, whether or not
involving action in his or her official capacity.
SECTION 31D-8-852. MANDATORY INDEMNIFICATION.
A corporation must indemnify a director who was wholly successful, on the
merits or otherwise, in the defense of any proceeding to which he or she was a
party because he or she was a director of the corporation against reasonable
expenses incurred by him or her in connection with the proceeding.
SECTION 31D-8-853. ADVANCE FOR EXPENSES.
(a) A corporation may, before final disposition of a proceeding, advance
funds to pay for or reimburse the reasonable expenses incurred by a director who
is a party to a proceeding because he or she is a director if he or she delivers
to the corporation:
(1) A written affirmation of his or her good faith belief that he or
she has met the relevant standard of conduct described in section eight
hundred fifty-one of this article or that the proceeding involves conduct
for which liability has been eliminated under a provision of the articles
of incorporation as authorized by subdivision (4), subsection (b), section
two hundred two, article two of this chapter; and
(2) His or her written undertaking to repay any funds advanced if he
or she is not entitled to mandatory indemnification under section eight
hundred fifty-two of this article and it is ultimately determined under
section eight hundred fifty-four or eight hundred fifty-five of this
article that he or she has not met the relevant standard of conduct
described in section eight hundred fifty-one of this article.
II-2
(b) The undertaking required by subdivision (2), subsection (a) of this
section must be an unlimited general obligation of the director but need not be
secured and may be accepted without reference to the financial ability of the
director to make repayment.
(c) Authorizations under this section are to be made:
(1) By the board of directors:
(A) If there are two or more disinterested directors, by a majority
vote of all the disinterested directors, a majority of whom constitute a
quorum for this purpose, or by a majority of the members of a committee
of two or more disinterested directors appointed by a vote; or
(B) If there are fewer than two disinterested directors, by the
vote necessary for action by the board in accordance with subsection
(c), section eight hundred twenty-four of this article in which
authorization directors who do not qualify as disinterested directors
may participate; or
(2) By the shareholders, but shares owned by or voted under the
control of a director who at the time does not qualify as a disinterested
director may not be voted on the authorization; or
(3) By special legal counsel selected in a manner in accordance with
subdivision (2), subsection (b), section eight hundred fifty-five of this
article.
SECTION 31D-8-854. CIRCUIT COURT-ORDERED INDEMNIFICATION AND ADVANCE FOR
EXPENSES.
(a) A director who is a party to a proceeding because he or she is a
director may apply for indemnification or an advance for expenses to the circuit
court conducting the proceeding or to another circuit court of competent
jurisdiction. After receipt of an application and after giving any notice it
considers necessary, the circuit court shall:
(1) Order indemnification if the circuit court determines that the
director is entitled to mandatory indemnification under section eight
hundred fifty-two of this article;
(2) Order indemnification or advance for expenses if the circuit court
determines that the director is entitled to indemnification or advance for
expenses pursuant to a provision authorized by subsection (a), section
eight hundred fifty-eight of this article; or
(3) Order indemnification or advance for expenses if the circuit court
determines, in view of all the relevant circumstances, that it is fair and
reasonable:
(A) To indemnify the director; or
(B) To advance expenses to the director, even if he or she has not
met the relevant standard of conduct set forth in subsection (a),
section eight hundred fifty-one of this article, failed to comply with
section eight hundred fifty-three of this article or was adjudged liable
in a proceeding referred to in subdivision (1) or (2), subsection (d),
section eight hundred fifty-one of this article, but if he or she was
adjudged so liable his or her indemnification is to be limited to
reasonable expenses incurred in connection with the proceeding.
(b) If the circuit court determines that the director is entitled to
indemnification under subdivision (1), subsection (a) of this section or to
indemnification or advance for expenses under subdivision (2) of said
subsection, it shall also order the corporation to pay the director's reasonable
expenses incurred in connection with obtaining circuit court-ordered
indemnification or advance for expenses. If the circuit court determines that
the director is entitled to indemnification or advance for expenses under
subdivision (3) of said subsection, it may also order the corporation to pay the
director's reasonable expenses to obtain circuit court-ordered indemnification
or advance for expenses.
SECTION 31D-8-855. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION.
(a) A corporation may not indemnify a director under section eight hundred
fifty-one of this article unless authorized for a specific proceeding after a
determination has been made that indemnification of the
II-3
director is permissible because he or she has met the relevant standard of
conduct set forth in section eight hundred fifty-one of this article.
(b) The determination is to be made:
(1) If there are two or more disinterested directors, by the board of
directors by a majority vote of all the disinterested directors, a majority
of whom constitute a quorum for this purpose, or by a majority of the
members of a committee of two or more disinterested directors appointed by
a vote;
(2) By special legal counsel:
(A) Selected in the manner prescribed in subdivision (1) of this
subsection; or
(B) If there are fewer than two disinterested directors, selected
by the board of directors in which selection directors who do not
qualify as disinterested directors may participate; or
(3) By the shareholders, but shares owned by or voted under the
control of a director who at the time does not qualify as a disinterested
director may not be voted on the determination.
(c) Authorization of indemnification is to be made in the same manner as
the determination that indemnification is permissible, except that if there are
fewer than two disinterested directors or if the determination is made by
special legal counsel, authorization of indemnification is to be made by those
entitled under paragraph (B), subdivision (2), subsection (b) of this section to
select special legal counsel.
SECTION 31D-8-856. INDEMNIFICATION OF OFFICERS.
(a) A corporation may indemnify and advance expenses under this part to an
officer of the corporation who is a party to a proceeding because he or she is
an officer of the corporation:
(1) To the same extent as a director; and
(2) If he or she is an officer but not a director, to a further extent
as may be provided by the articles of incorporation, the bylaws, a
resolution of the board of directors or contract except for:
(A) Liability in connection with a proceeding by or in the right of
the corporation other than for reasonable expenses incurred in
connection with the proceeding; or
(B) Liability arising out of conduct that constitutes:
(i) Receipt by him or her of a financial benefit to which he or
she is not entitled;
(ii) An intentional infliction of harm on the corporation or
the shareholders; or
(iii) An intentional violation of criminal law.
(b) The provisions of subdivision (2), subsection (a) of this section apply
to an officer who is also a director if the basis on which he or she is made a
party to the proceeding is an act or omission solely as an officer.
(c) An officer of a corporation who is not a director is entitled to
mandatory indemnification under section eight hundred fifty-two of this article
and may apply to a court under section eight hundred fifty-four of this article
for indemnification or an advance for expenses in each case to the same extent
to which a director may be entitled to indemnification or advance for expenses
under those provisions.
Certain rules of the Federal Deposit Insurance Corporation limit the
ability of certain depository institutions, their subsidiaries and their
affiliated depository institution holding companies to indemnify affiliated
parties, including institution directors. In general, subject to the ability to
purchase directors' and officers' liability insurance and to advance
professional expenses under certain circumstances, the rules prohibit such
institutions from indemnifying a director for certain costs incurred with regard
to an administrative or enforcement action commenced by any federal banking
agency that results in a final order or settlement pursuant to which the
director is assessed a civil money penalty, removed from office, prohibited
II-4
from participating in the affairs of an insured depository institution or
required to cease and desist from or take an affirmative action described in
Section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. sec.1818(b)).
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith or incorporated herein by
reference as part of this Registration Statement:
EXHIBIT TITLE
------- -----
2.1 Agreement and Plan of Merger dated as of April 1, 2004 by
and between WesBanco, Inc., WOFC, Inc., and Western Ohio
Financial Corporation, (incorporated by reference to Annex A
of the proxy statement/prospectus included in this
Registration Statement)
2.2 First Amendment to Agreement and Plan of Merger dated as of
July 13, 2004 among WesBanco, Inc., WOFC, Inc., and Western
Ohio Financial Corporation, (incorporated by reference to
Annex A of the proxy statement/prospectus included in this
Registration Statement)
5.1 Opinion of Phillips, Gardill, Kaiser & Altmeyer, PLLC as to
the legality of the shares of common stock registered hereby
(previously filed)
8.1 Form of Opinion of Kirkpatrick & Lockhart LLP as to certain
tax matters (filed herewith)
8.2 Form of Opinion of Katten Muchin Zavis Rosenman as to
certain tax matters (filed herewith)
10.1 Non-competition and Confidentiality Agreement dated April 1,
2004 by and between WesBanco Bank, Inc., and Robert P.
Brezing (previously filed)
10.2 Agreement dated April 1, 2004 by and between WesBanco Bank,
Inc., WesBanco, Inc. and Robert P. Brezing (previously
filed)
10.3 Non-competition and Confidentiality Agreement dated April 1,
2004 by and between WesBanco Bank, Inc., and Philip R.
Teusink (previously filed)
10.4 Agreement dated April 1, 2004 by and between WesBanco Bank,
Inc., WesBanco, Inc. and Philip R. Teusink (previously
filed)
10.5 Non-competition and Confidentiality Agreement dated April 1,
2004 by and between WesBanco Bank, Inc., and William E.
Whitmoyer (previously filed)
10.6 Agreement dated April 1, 2004 by and between WesBanco Bank,
Inc., WesBanco, Inc. and William E. Whitmoyer (previously
filed)
10.7 Employment, Consulting and Non-Competition Agreement dated
April 1, 2004 by and between WesBanco, Inc. and John W.
Raisbeck (previously filed)
13.1 Western Ohio Financial Corporation's Annual Report on Form
10-K for the year ended December 31, 2003 (No. 0-24120), is
incorporated herein by reference
13.2 Western Ohio Financial Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004 (No.
0-24120), is incorporated herein by reference
23.1 Consent of Ernst & Young LLP (filed herewith)
23.2 Consent of Crowe Chizek and Company LLC (filed herewith)
23.3 Consent of Phillips, Gardill, Kaiser & Altmeyer, PLLC
(included in Exhibit 5.1)
23.4 Consent of Kirkpatrick & Lockhart LLP (included in Exhibit
8.1)
23.5 Consent of Katten Muchin Zavis Rosenman (included in Exhibit
8.2)
23.6 Consent of Friedman Billings Ramsey & Co., Inc. (filed
herewith)
24.1 Power of Attorney (previously filed)
99.1 Form of Proxy for Special Meeting of Western Ohio Financial
Corporation Stockholders (previously filed)
II-5
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(a) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(b) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended,
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(g) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wheeling, State of West
Virginia, on July 12, 2004.
WESBANCO, INC.
By: /s/ PAUL M. LIMBERT
------------------------------------
Paul M. Limbert
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Director
---------------------------------------------
James E. Altmeyer
* Director July 12, 2004
---------------------------------------------
Ray A, Byrd
* Director July 12, 2004
---------------------------------------------
R. Peterson Chalfant
* Director July 12, 2004
---------------------------------------------
John H. Cheffy
* Director July 12, 2004
---------------------------------------------
Christopher V. Criss
Director
---------------------------------------------
James D. Entress
* Director July 12, 2004
---------------------------------------------
Abigail M. Feinknopf
* Director July 12, 2004
---------------------------------------------
Ernest S. Fragale
* Director July 12, 2004
---------------------------------------------
Edward M. George
* Director July 12, 2004
---------------------------------------------
Vaughn L. Kiger
* Director July 12, 2004
---------------------------------------------
Robert E. Kirkbride
II-7
SIGNATURE TITLE DATE
--------- ----- ----
* Director July 12, 2004
---------------------------------------------
John W. Kepner
/s/ PAUL M. LIMBERT President, Chief Executive Officer & July 12, 2004
--------------------------------------------- Director
Paul M. Limbert (Principal Executive Officer)
Director
---------------------------------------------
Jay T. McCamic
* Director July 12, 2004
---------------------------------------------
Joan C. Stamp
* Director July 12, 2004
---------------------------------------------
Carter W. Strauss
* Director July 12, 2004
---------------------------------------------
Reed J. Tanner
* Director July 12, 2004
---------------------------------------------
Robert K. Tebay
/s/ ROBERT H. YOUNG Executive Vice President & July 12, 2004
--------------------------------------------- Chief Financial Officer
Robert H. Young (Principal Financial and Accounting
Officer)
*By: /s/ Paul M. Limbert
---------------------------------------------------------
Paul M. Limbert, as Attorney-in-Fact,
pursuant to Powers of Attorney previously filed
II-8
EXHIBIT INDEX
EXHIBIT TITLE
------- -----
2.1 Agreement and Plan of Merger dated as of April 1, 2004 by
and between WesBanco, Inc., WOFC, Inc., and Western Ohio
Financial Corporation, (incorporated by reference to Annex A
of the proxy statement/prospectus included in this
Registration Statement).
2.2 First Amendment to Agreement and Plan of Merger dated as of
July 13, 2004 among WesBanco, Inc., WOFC, Inc., and Western
Ohio Financial Corporation, (incorporated by reference to
Annex A of the proxy statement/prospectus included in this
Registration Statement)
5.1 Opinion of Phillips, Gardill, Kaiser & Altmeyer, PLLC as to
the legality of the shares of common stock registered hereby
(previously filed).
8.1 Form of Opinion of Kirkpatrick & Lockhart LLP as to certain
tax matters (filed herewith).
8.2 Form of Opinion of Katten Muchin Zavis Rosenman as to
certain tax matters (filed herewith).
10.1 Non-competition and Confidentiality Agreement dated April 1,
2004 by and between WesBanco Bank, Inc., and Robert P.
Brezing (previously filed).
10.2 Agreement dated April 1, 2004 by and between WesBanco Bank,
Inc., WesBanco, Inc. and Robert P. Brezing (previously
filed).
10.3 Non-competition and Confidentiality Agreement dated April 1,
2004 by and between WesBanco Bank, Inc., and Philip R.
Teusink (previously filed).
10.4 Agreement dated April 1, 2004 by and between WesBanco Bank,
Inc., WesBanco, Inc. and Philip R. Teusink (previously
filed).
10.5 Non-competition and Confidentiality Agreement dated April 1,
2004 by and between WesBanco Bank, Inc., and William E.
Whitmoyer (previously filed).
10.6 Agreement dated April 1, 2004 by and between WesBanco Bank,
Inc., WesBanco, Inc. and William E. Whitmoyer (previously
filed).
10.7 Employment, Consulting and Non-Competition Agreement dated
April 1, 2004 by and between WesBanco, Inc. and John W.
Raisbeck (previously filed).
13.1 Western Ohio Financial Corporation's Annual Report on Form
10-K for the year ended December 31, 2003 (No. 0-24120), is
incorporated herein by reference.
13.2 Western Ohio Financial Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004 (No.
0-24120), is incorporated herein by reference.
23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of Crowe Chizek and Company LLC (filed herewith).
23.3 Consent of Phillips, Gardill, Kaiser & Altmeyer, PLLC
(included in Exhibit 5.1).
23.4 Consent of Kirkpatrick & Lockhart LLP (included in Exhibit
8.1).
23.5 Consent of Katten Muchin Zavis Rosenman (included in Exhibit
8.2).
23.6 Consent of Friedman Billings Ramsey & Co., Inc. (filed
herewith).
24.1 Power of Attorney (previously filed).
99.1 Form of Proxy for Special Meeting of Western Ohio Financial
Corporation Stockholders (previously filed).