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This Filing is being made
pursuant to Rule 424(b)(3)
Registration No. 333-06369
CAMCO FINANCIAL CORPORATION
814 WHEELING AVENUE
CAMBRIDGE, OHIO 43275
(614) 432-5641
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Notice is hereby given that a Special Meeting of Stockholders of Camco
Financial Corporation, a Delaware corporation ("Camco"), will be held at
Pritchard Laughlin Civic Center, Cambridge, Ohio on September 23, 1996, at 2:00
p.m., Eastern Time (the "Special Meeting"), for the following purposes, each of
which is described in the accompanying Proxy Statement:
1. To consider and vote upon a proposed amendment to Section Fourth
of the Certificate of Incorporation of Camco to increase the
authorized number of shares of stock from 2,600,000 to 5,000,000,
of which 4,900,000 shares shall be common stock, $1.00 par value
per share, and 100,000 shares shall be preferred stock, $1.00 par
value per share, as set forth in the accompanying Prospectus and
Joint Proxy Statement;
2. To consider and vote upon the adoption of the Agreement and Plan
of Merger and Reorganization dated March 25, 1996, by and between
Camco and First Ashland Financial Corporation ("First Ashland")
providing for the merger of First Ashland with and into Camco;
and
3. To transact such other business as may properly come before the
Meeting or any adjournments thereof.
Only shareholders of Camco at the close of business on August 9, 1996,
will be entitled to receive notice of and to vote at the Special Meeting and at
any adjournments thereof. Whether or not you expect to attend the Special
Meeting, we urge you to consider the accompanying Proxy Statement carefully and
to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR SHARES MAY BE
VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM MAY BE
ASSURED. The giving of a Proxy does not affect your right to vote in person in
the event you attend the Meeting.
By Order of the Board of Directors
Larry A. Caldwell
President and Chief Executive Officer
Cambridge, Ohio
August 15, 1996
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FIRST ASHLAND FINANCIAL CORPORATION
1640 CARTER AVENUE
ASHLAND, KENTUCKY 41105
(606) 324-5138
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Notice is hereby given that a Special Meeting of Stockholders of First
Ashland Financial Corporation, a Delaware corporation ("First Ashland"), will be
held at the American Electric Power Auditorium, 701 Central Avenue, Ashland,
Kentucky on September 20, 1996, at 10:00 a.m., Eastern Time (the "Special
Meeting"), for the following purposes, each of which is described in the
accompanying Proxy Statement.
1. To consider and vote upon the adoption of the Agreement and
Plan of Merger and Reorganization dated March 25, 1996, by and
between Camco Financial Corporation ("Camco") and First
Ashland, providing for the merger of First Ashland with and
into Camco; and
2. To transact such other business as may properly come before
the Meeting or any adjournments thereof.
Only shareholders of First Ashland of record at the close of business
on August 9, 1996, will be entitled to receive notice of and to vote at the
Special Meeting and at any adjournments thereof. Whether or not you expect to
attend the Special Meeting, we urge you to consider the accompanying Proxy
Statement carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO
THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF
A QUORUM MAY BE ASSURED. The giving of a Proxy does not affect your right to
vote in person in the event you attend the Meeting.
By Order of the Board of Directors
Paul D. Leake
President and Chief Executive Officer
Ashland, Kentucky
August 15, 1996
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<TABLE>
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CAMCO FINANCIAL CORPORATION
AND
CAMCO FINANCIAL CORPORATION FIRST ASHLAND FINANCIAL CORPORATION
PROSPECTUS JOINT PROXY STATEMENT
for for
Par Value $1.00 Per Share, Camco Financial Corporation
To be Issued in Connection with the Merger of to be held on September 23, 1996,
First Ashland Financial Corporation at Pritchard Laughlin Civic Center,
with and into Camco Financial Corporation 7033 Glenn Highway, Cambridge, Ohio
(the "Camco Special Meeting")
and
The Special Meeting of Stockholders of
First Ashland Financial Corporation
to be held on September 20, 1996,
at American Electric Power ("AEP") Auditorium,
701 Central Avenue, Ashland, Kentucky
(the "First Ashland Special Meeting")
</TABLE>
This Prospectus and Joint Proxy Statement constitutes both a Prospectus
of Camco Financial Corporation, a Delaware corporation ("Camco"), in respect of
up to 987,434 shares of common stock of Camco to be issued in connection with
the proposed merger of First Ashland Financial Corporation, a Delaware
corporation ("First Ashland"), with and into Camco (the "Merger") and the Joint
Proxy Statement of Camco and First Ashland for use in connection with the
solicitation of proxies by the Boards of Directors of Camco and First Ashland to
be used at the Camco Special Meeting and the First Ashland Special Meeting,
respectively. Stockholders will be asked at the Camco Special Meeting and the
First Ashland Special Meeting to consider and act upon a proposal to adopt the
Agreement and Plan of Merger and Reorganization dated March 25, 1996 (the
"Agreement"), by and among Camco, First Ashland and First Federal Bank for
Savings, a federal savings bank (the "Bank"). First Ashland owns 100% of the
issued and outstanding shares of common stock of the Bank, which will become a
wholly owned subsidiary of Camco as a result of the Merger.
In accordance with the terms and subject to the conditions of the
Agreement, each of the outstanding shares of common stock of First Ashland will
be cancelled and extinguished at the time the Merger becomes effective, as
specified in the Certificate of Merger filed with the Secretary of State of
Delaware (the "Effective Time"), in consideration and exchange for $9.00 in cash
and .67492 shares of common stock of Camco (the "Per Share Merger
Consideration"), subject to certain adjustments based on changes in the market
value of Camco stock before the Effective Time and the amount of estimated
environmental remediation costs at certain offices of the Bank. See "THE MERGER
- - Exchange of First Ashland Shares."
In connection with the Merger, the stockholders of Camco will be asked
at the Camco Special Meeting to approve a proposed amendment to Article Fourth
of the Third Restated Certificate of Incorporation of Camco, as amended (the
"Camco Certificate"), to increase the authorized number of shares of stock which
Camco may issue from 2,600,000 shares, to 5,000,000 shares, consisting of
4,900,000 shares of common stock, $1.00 par value per share, and 100,000 shares
of preferred stock, $1.00 par value per share (the "Amendment"). Approximately
987,434 shares of common stock will be issued by Camco in connection with the
Merger. Camco currently has 350,683 authorized but unissued shares available and
requires 787,084 of the newly authorized shares of common stock in order to
consummate the Merger. The remaining additional authorized shares of common
stock would be available for issuance for possible acquisitions or for other
corporate purposes, such as stock dividends and stock options. See "PROPOSED
AMENDMENT TO THE CAMCO CERTIFICATE."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS AND JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE SHARES OF CAMCO COMMON STOCK WHICH ARE BEING OFFERED PURSUANT TO THIS
PROSPECTUS AND JOINT PROXY STATEMENT AND WILL BE ISSUED UPON THE CONSUMMATION OF
THE MERGER ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR
SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER STATE OR FEDERAL AGENCY.
A RETURNED CAMCO PROXY WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL BE VOTED
FOR THE AMENDMENT AND FOR THE ADOPTION OF THE AGREEMENT.
A RETURNED FIRST ASHLAND PROXY WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL
BE VOTED FOR THE ADOPTION OF THE AGREEMENT. ANY FIRST ASHLAND STOCKHOLDER WHO
WISHES TO EXERCISE DISSENTERS' RIGHTS ("FIRST ASHLAND DISSENTING STOCKHOLDERS")
MUST EITHER (I) NOT SIGN AND NOT RETURN THE PROXY OR, (II) SIGN AND RETURN THE
PROXY, VOTING AGAINST, OR ABSTAINING FROM VOTING ON, THE ADOPTION OF THE
AGREEMENT AND THE APPROVAL OF THE MERGER. SEE "RIGHTS OF FIRST ASHLAND
DISSENTING STOCKHOLDERS."
<PAGE> 4
The date of this Prospectus and Joint Proxy Statement is August 9, 1996.
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AVAILABLE INFORMATION
Camco is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Camco has filed with the
Commission a Registration Statement on Form S-4 (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), in respect
of the shares of Camco common stock to be issued to First Ashland stockholders
in the Merger. As permitted by the rules and regulations of the Commission, this
Prospectus and Joint Proxy Statement omits certain information, exhibits and
undertakings contained in the Registration Statement. Reference is made to the
Registration Statement and to the exhibits thereto for further information.
Statements contained herein concerning such documents are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto, as well as the
reports, proxy statements and other information filed with the Commission by
Camco under the Exchange Act, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and at 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND JOINT PROXY STATEMENT AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY CAMCO OR FIRST ASHLAND. NEITHER THIS PROSPECTUS AND
JOINT PROXY STATEMENT, NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT
TO THIS PROSPECTUS AND JOINT PROXY STATEMENT, CONSTITUTES AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROSPECTUS
AND JOINT PROXY STATEMENT OR THE SOLICITATION OF A PROXY IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION. THE DELIVERY OF THIS PROSPECTUS AND JOINT PROXY STATEMENT SHALL
NOT, UNDER ANY CIRCUMSTANCES,
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CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE AFFAIRS OF CAMCO OR FIRST ASHLAND SINCE THE DATE OF THIS
PROSPECTUS AND JOINT PROXY STATEMENT.
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TABLE OF CONTENTS
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PAGE
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<S> <C>
SUMMARY...................................................................................................................1
INTRODUCTION.............................................................................................................14
BACKGROUND AND REASONS FOR THE MERGER....................................................................................14
THE MERGER...............................................................................................................23
RIGHTS OF FIRST ASHLAND DISSENTING STOCKHOLDERS..........................................................................30
PROPOSED AMENDMENT TO CAMCO'S CERTIFICATE................................................................................31
SPECIAL MEETING OF CAMCO STOCKHOLDERS....................................................................................32
SPECIAL MEETING OF FIRST ASHLAND STOCKHOLDERS............................................................................34
</TABLE>
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<TABLE>
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PRO FORMA UNAUDITED CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS.................................................36
CAMCO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................................................................39
BUSINESS OF CAMCO........................................................................................................46
SECURITY OWNERSHIP OF CAMCO..............................................................................................47
MANAGEMENT OF CAMCO......................................................................................................48
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS OF CAMCO................................................................49
FIRST ASHLAND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................................................................52
BUSINESS OF FIRST ASHLAND................................................................................................64
BUSINESS OF THE BANK.....................................................................................................64
SECURITY OWNERSHIP OF FIRST ASHLAND......................................................................................84
</TABLE>
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<TABLE>
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MANAGEMENT OF FIRST ASHLAND..............................................................................................85
REGULATION OF FIRST ASHLAND..............................................................................................90
DESCRIPTION OF CAMCO SHARES..............................................................................................98
COMPARISON OF RIGHTS OF HOLDERS OF CAMCO SHARES AND HOLDERS OF
FIRST ASHLAND SHARES...............................................................................................100
ANTITAKEOVER STATUTES APPLICABLE TO CAMCO AND FIRST ASHLAND.............................................................101
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION......................................................................102
LEGAL MATTERS...........................................................................................................103
EXPERTS.................................................................................................................103
FINANCIAL STATEMENTS....................................................................................................F-1
<FN> Page
APPENDICES: ----
APPENDIX A Agreement and Plan of Merger and Reorganization A-1
dated March 25, 1996, by and among Camco Financial
Corporation, First Ashland Financial Corporation
and First Federal Bank for Savings
APPENDIX B Opinion of National Capital Companies, LLC A-33
APPENDIX C Opinion of Capital Resources Group, Inc. A-39
</TABLE>
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Page
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APPENDIX D Delaware General Corporation Law sec. 262 A-49
APPENDIX E Proposed Amendment to Camco's Third Restated A-52
Certificate of Incorporation
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SUMMARY
The following is a summary of some of the matters to be considered in
connection with the Camco Special Meeting and the First Ashland Special Meeting
and is qualified in its entirety by reference to the more detailed information
contained elsewhere in this Prospectus and Joint Proxy Statement, the Appendices
attached hereto and the other documents referred to herein.
INTRODUCTION
On March 25, 1996, Camco, First Ashland and the Bank entered into the
Agreement. If the Agreement is adopted and the Amendment is approved by the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Camco common stock (the "Camco Shares") and if the Agreement is
adopted by the affirmative vote of the holders of a majority of the issued and
outstanding shares of First Ashland common stock (the "First Ashland Shares")
and if all other conditions to the consummation of the Merger are satisfied,
First Ashland will merge with and into Camco. At the Effective Time of the
Merger, each of the outstanding First Ashland Shares will be cancelled and
extinguished in consideration and exchange for the Per Share Merger
Consideration, consisting of $9.00 in cash (the "Cash Consideration") and .67492
Camco Shares (the "Stock Consideration"), subject to the following adjustments:
(i) if the value of the Stock Consideration, based on the market value of Camco
Shares immediately prior to the Effective Time, is less than the Cash
Consideration, the Stock Consideration will be increased and the Cash
Consideration will be decreased to the extent necessary to cause the market
value of the Stock Consideration to exceed the Cash Consideration (the "Market
Value Adjustment"); (ii) if the market value of Camco Shares during the 20
trading days prior to the closing of the Merger (the "Market Average") is less
than $15.24 per share or more than $19.05 per share, the Stock Consideration
will be adjusted pursuant to a formula which could result in the Stock
Consideration decreasing to as low as .60767 Camco Shares or increasing to as
high as .75968 Camco Shares (the "Market Average Adjustment"); and (iii) if
estimated environmental remediation costs at certain offices of the Bank exceed
$25,000, the aggregate Cash Consideration would be decreased by 130% of such
costs (the "Environmental Adjustment"). See "THE MERGER - Exchange of First
Ashland Shares."
The Per Share Merger Consideration was determined as a result of
arms-length negotiations between the Boards of Directors of Camco and First
Ashland. Such negotiations commenced when Camco made an offer to First Ashland
based upon an analysis by Camco of a number of factors, including the book
values and earnings per share of Camco and First Ashland, the asset quality of
First Ashland and the per share consideration involved in similar transactions.
Following such negotiations and a due diligence review of each party by the
other, Camco and First Ashland agreed that First Ashland stockholders would
receive, in exchange for each First Ashland Share outstanding at the Effective
Time, the Per Share Merger Consideration, which, based on the average of the
high bid and low asked price of a Camco Share on March 25, 1996, was equal to
$20.49, or approximately 127.4% of the approximately $16.08 fully diluted
stockholders' equity per share of First Ashland on December 31, 1995. See
"BACKGROUND AND REASONS FOR THE MERGER."
In the event of a Market Average Adjustment, without giving effect to
the Environmental Adjustment, and assuming that the value of the Camco Shares
received by First Ashland stockholders is equal to the applicable Market
Average, the value of the Per Share Merger Consideration will vary and can
result in values lower than $19.13 per share or more than $21.73 per share,
depending on market conditions. If the Market Average is less than $13.33, First
Ashland may terminate the Agreement. If First Ashland does not elect to
terminate the Agreement, the Stock Consideration will be the same as if the
Market Average were $13.33, and the value of the Per Share Merger Consideration
will be less than $19.13. If the Market Average is more than $20.95, Camco may
terminate the Agreement. If Camco does not elect to terminate the Agreement, the
Stock Consideration will be the same as if the Market Average were $20.95,
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and the value of the Per Share Merger Consideration will be more than $21.73.
The Agreement establishes no minimum or maximum value for the Per Share Merger
Consideration.
The Stock Consideration has been adjusted to .67492 Camco Shares to
give effect to a stock dividend paid by Camco in July 1996. As of the date of
this Prospectus and Joint Proxy Statement, there were 1,463,039 First Ashland
Shares issued and outstanding, which would result in the issuance of 987,434
Camco Shares at the Effective Time.
On August 8, 1996, the last trading day before the date of this
Prospectus and Joint Proxy Statement, the average of the $18.00 high bid and the
$19.00 low asked prices of a Camco Share on Nasdaq equaled $18.50. If that is
still the value of a Camco Share at the Effective Time, the value of the Stock
Consideration will equal, $12.48, and the value of the entire Per Share Merger
Consideration per First Ashland Share surrendered would equal $21.48.
The Cash Consideration will be paid by Camco utilizing a portion of the
assets of First Ashland on a parent-company only basis and a loan from an
unrelated commercial bank. Camco has a loan commitment from a commercial bank in
the amount of $13.2 million to finance the payment of the Cash Consideration.
The amount of funds actually borrowed by Camco pursuant to the commitment will
depend upon the amount of First Ashland assets available immediately after the
Effective Time. See "THE MERGER - Payment of Cash Consideration."
PARTIES TO THE AGREEMENT
CAMCO. Camco is a multiple savings and loan holding company organized
under Delaware law in 1970. Through its wholly-owned subsidiaries, Cambridge
Savings Bank ("Cambridge Savings"), Marietta Savings Bank ("Marietta Savings")
and First Federal Savings Bank of Washington Court House ("First Federal"),
Camco is engaged in the savings institution business in Ohio. East Ohio Land
Title Agency, Inc. ("East Ohio Title"), another wholly-owned subsidiary of
Camco, is engaged in the title insurance agency business. Cambridge Savings and
Marietta Savings each own 50% of the outstanding stock of Camco Mortgage
Corporation ("CMC"), a service corporation engaged in mortgage lending and
related activities. Marietta Savings owns 100% of the outstanding stock of
WestMar Mortgage Company ("WestMar"), a service corporation engaged in mortgage
lending activities, primarily in Wood County, West Virginia.
Cambridge Savings, which was acquired by Camco in 1971, was
incorporated under Ohio law in 1885. The main office of Cambridge Savings is in
Cambridge, Ohio. Cambridge Savings has branch offices in Cambridge, Byesville
and Uhrichsville, Ohio. In July 1994, Cambridge Savings converted its charter
from an Ohio savings and loan association to an Ohio savings bank.
Established in 1923 under Ohio law, Marietta Savings was acquired by
Camco in 1973. Marietta has its main office in Marietta, Ohio, and a branch in
Belpre, Ohio. In July 1994, Marietta Savings converted its charter from an Ohio
savings and loan association to an Ohio savings bank.
First Federal, a federal savings bank, was acquired by Camco in 1988.
First Federal has its main office in Washington Court House, Ohio, and loan
origination offices in Chillicothe, Circleville and Wilmington, Ohio.
Cambridge Savings, Marietta Savings and First Federal (collectively,
the "Banking Subsidiaries") are members of the Federal Home Loan Bank (the
"FHLB") of Cincinnati, and the accounts of each are insured up to applicable
limits by the Federal Deposit Insurance Corporation (the "FDIC") in the Savings
Association Insurance
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Fund (the "SAIF"). First Federal is subject to regulation, examination and
supervision by the Office of Thrift Supervision (the "OTS") and the FDIC.
Cambridge Savings and Marietta Savings are regulated by the Ohio Division of
Financial Institutions (the "Division") and the FDIC. Camco is regulated by the
OTS as a savings and loan holding company.
The principal source of revenue for Camco on an unconsolidated basis is
dividends from the Banking Subsidiaries. Camco, through the Banking
Subsidiaries, is principally engaged in the business of making first mortgage
loans to finance the purchase, construction or improvement of residential or
other real property. Camco also invests in United States Government guaranteed
mortgage-backed securities and securities issued by the United States Government
and agencies thereof. Funds for loans and investments are obtained primarily
from savings deposits, loan principal repayments and borrowings from the FHLB of
Cincinnati.
FIRST ASHLAND. First Ashland is a Delaware corporation, organized by
the Bank in 1995 for the purpose of becoming the savings and loan holding
company of the Bank. First Ashland owns all the outstanding stock of the Bank
issued on April 7, 1995, in connection with the Bank's conversion from the
mutual to the stock form of organization (the "Conversion"). First Ashland
issued 1,408,750 shares of common stock in the Conversion at $10.00 per share.
The Bank was originally chartered as a federal savings and loan
association in 1936. The Bank serves the financial needs of communities in its
market area through its main office located at 1640 Carter Avenue, Ashland,
Kentucky, and two branch offices located in Summit and Russell, Kentucky.
The business of the Bank is primarily attracting deposits from the
general public and using such deposits to originate one- to four-family
residential mortgages and, to a significantly lesser extent, consumer,
commercial real estate and multi-family loans, primarily in its market area. The
Bank's revenues are derived principally from interest earned on loans and, to a
lesser extent, from interest earned on investments and mortgage-backed and
mortgage-related securities. The operations of the Bank are influenced
significantly by general economic conditions and by policies of financial
institution regulatory agencies, including the OTS and the FDIC. The Bank's cost
of funds is influenced by interest rates on competing investments and general
market interest rates. Lending activities are affected by the demand for
financing of real estate and other types of loans, which in turn is affected by
the interest rates at which such financing may be offered.
SPECIAL MEETING OF CAMCO STOCKHOLDERS
The Camco Special Meeting will be held at 2:00 p.m., local time, on
September 23, 1996, at Pritchard Laughlin Civic Center, 7033 Glenn Highway,
Cambridge, Ohio. At the Camco Special Meeting, stockholders of Camco will be
asked to consider and act upon (i) a proposed amendment to the Camco Certificate
to increase authorized shares of stock which Camco may issue from 2,600,000
shares to 5,000,000 shares, consisting of 4,900,000 shares of common stock,
$1.00 par value per share, and 100,000 shares of preferred stock, $1.00 par
value per share, a copy of which is attached hereto as Appendix E; (ii) a
proposal to adopt the Agreement, and (iii) such other business as may properly
come before the Camco Special Meeting and any adjournment thereof. Only the
holders of record of Camco Shares outstanding at the close of business on August
9, 1996 (the "Camco Record Date"), will be entitled to notice of and to vote at
the Camco Special Meeting and any adjournment thereof. As of the Camco Record
Date, 2,075,641.1 Camco Shares were outstanding and entitled to vote and held of
record by approximately 569 stockholders. The affirmative vote of the holders of
a majority of the outstanding Camco Shares, voting in person or by proxy, will
be necessary to approve the Amendment and to adopt the Agreement and approve the
Merger. The affirmative vote, therefore, of the holders of 1,037,821.6 Camco
Shares will be necessary to approve the Amendment and to adopt the Agreement.
As of the Camco Record Date, the directors and executive officers of
Camco owned, in the aggregate, 335,345.7 Camco Shares, or 16.2% of the
outstanding Camco Shares. The directors and executive officers of Camco and
their respective affiliates have indicated that they intend to vote all such
Camco Shares for the approval of the Amendment and for the adoption of the
Agreement and the approval of the Merger. Assuming the
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<PAGE> 14
affirmative vote of all Camco Shares owned by the directors and executive
officers of Camco, the affirmative vote of an additional 702,475.9 Camco Shares,
representing an additional 33.84% of the outstanding Camco Shares, will be
necessary to approve the Amendment and to adopt the Agreement. See "SPECIAL
MEETING OF CAMCO STOCKHOLDERS Shares Outstanding and Entitled to Vote and Record
Date, and - Vote Required."
The presence, in person or by proxy, of the holders of a majority of
the outstanding Camco Shares entitled to vote at the Camco Special Meeting will
be necessary to constitute a quorum at the Camco Special Meeting. Each Camco
stockholder will be entitled to one vote for each Camco Share held. Under
applicable law, shares which are held by a nominee for a beneficial owner and
which are represented in person or by proxy at the Camco Special Meeting, but
which are not voted with respect to the approval of the Amendment and the
adoption of the Agreement ("Non-votes"), will be counted as present for purposes
of establishing a quorum. The effect of an abstention or Non-vote will be the
same as a vote against the adoption of the Agreement.
The Camco Shares represented by each properly executed proxy received
before the Camco Special Meeting and not revoked prior to use will be voted at
the Camco Special Meeting, or any adjournment thereof, as specified on such
proxy or, in the absence of specific instructions to the contrary, will be voted
for the Amendment and for the adoption of the Agreement. Any Camco stockholder
who has executed and returned a proxy may revoke such proxy at any time before
it is voted by executing and returning to Camco a proxy bearing a later date or
by giving notice of revocation to Camco in writing or at the Camco Special
Meeting. The mere presence at the Camco Special Meeting of a Camco stockholder
who has executed and returned a proxy will not revoke the proxy. See "SPECIAL
MEETING OF CAMCO STOCKHOLDERS - Voting and Solicitation and Revocation of
Proxies."
SPECIAL MEETING OF FIRST ASHLAND STOCKHOLDERS
The First Ashland Special Meeting will be held at 10:00 a.m., local
time, on September 20, 1996 at AEP Auditorium, 701 Central Avenue, Ashland,
Kentucky. At the First Ashland Special Meeting, First Ashland stockholders will
be asked to consider and act upon (i) a proposal to adopt the Agreement, and
(ii) such other business as may properly come before the First Ashland Special
Meeting and any adjournment thereof. Only the holders of record of First Ashland
Shares outstanding at the close of business on August 9, 1996 (the "First
Ashland Record Date"), will be entitled to notice of and to vote at the First
Ashland Special Meeting and any adjournment thereof. The affirmative vote of the
holders of a majority of the outstanding First Ashland Shares, voting in person
or by proxy, is required to adopt the Agreement and approve the Merger. As of
the First Ashland Record Date, 1,463,039 First Ashland Shares were outstanding
and entitled to vote and were held of record by approximately 302 stockholders.
The affirmative vote, therefore, of the holders of 731,521 First Ashland Shares
will be necessary to adopt the Agreement.
As of the First Ashland Record Date, the directors and executive
officers of First Ashland owned, in the aggregate, 222,560 First Ashland Shares,
or 15.2% of the outstanding First Ashland Shares, including shares allocated to
them in First Ashland's Employee Stock Ownership Plan ("ESOP") over which those
individuals have voting power. Unallocated ESOP shares are voted in the same
proportion as allocated ESOP shares, including the 7,409 ESOP shares allocated
to directors and executive officers. The directors and executive officers of
First Ashland and their respective affiliates have agreed to or indicated that
they intend to vote all such First Ashland Shares for the adoption of the
Agreement. Assuming the affirmative vote of all First Ashland Shares owned by
the directors and executive officers of First Ashland, the affirmative vote of
the holders of an additional 508,961 First Ashland Shares, representing an
additional 34.79% of the outstanding First Ashland Shares, will be necessary to
adopt the Agreement. See "SPECIAL MEETING OF FIRST ASHLAND STOCKHOLDERS -
Shares Outstanding and Entitled To Vote and Record Date, and - Vote Required."
The First Ashland stockholders present, in person or by proxy, at the
First Ashland Special Meeting will constitute a quorum at the First Ashland
Special Meeting. Each First Ashland stockholder will be entitled to one vote for
each First Ashland Share held. Under applicable law, shares which are held by a
nominee for a beneficial owner and which are represented in person or by proxy
at the First Ashland Special Meeting, but which are Non-
4
<PAGE> 15
votes, will be counted as present for purposes of establishing a quorum. The
effect of an abstention or Non-vote will be the same as a vote against the
adoption of the Agreement.
The First Ashland Shares represented by each properly executed proxy
received before the First Ashland Special Meeting and not revoked prior to use
will be voted at the First Ashland Special Meeting, or any adjournment thereof,
as specified on such proxy or, in the absence of specific instructions to the
contrary, will be voted for the adoption of the Agreement. Any First Ashland
stockholder who has executed and returned a proxy may revoke such proxy at any
time before it is voted by executing and returning to First Ashland a proxy
bearing a later date or by giving notice of revocation to First Ashland in
writing or at the First Ashland Special Meeting. The mere presence at the First
Ashland Special Meeting of a First Ashland stockholder who has executed and
returned a proxy will not revoke the proxy. See "SPECIAL MEETING OF FIRST
ASHLAND STOCKHOLDERS - Voting and Solicitation and Revocation of Proxies."
BACKGROUND AND REASONS FOR THE MERGER
CAMCO. Camco's strategic plan is to deliver a wide array of financial
products and services through a network of community-based financial
institutions which benefit from the centralized support provided by the holding
company structure while operating autonomously in their respective markets under
the direction of management personnel who maintain close ties to the communities
they serve. In pursuing growth, Camco has paid particular attention to
opportunities in geographic areas contiguous to its existing market areas, which
currently consist of portions of central and southeastern Ohio.
Expansion into the Ashland area offers Camco the unique opportunity to
achieve geographic diversification while maintaining geographic proximity to the
existing Camco markets. Camco believes that market conditions in the Ashland
area are conducive to increased mortgage lending and deposit growth and that the
Bank will be able to accomplish this as a member of the Camco group more
competitively than it could have done independently.
In pursuing growth opportunities, Camco's Board of Directors is
committed to increasing shareholder value in the intermediate and long term. The
Board carefully analyzed the potential dilutive effects of the Merger.
Considering the potential benefits of the Merger, including growth and earnings,
the directors concluded that the dilution attributable to the Merger in the
short term would be acceptable in view of the intermediate and longer-term
potential for enhanced shareholder value. Another potential benefit of the
Merger is additional liquidity in the market for Camco Shares. As a result of
the Merger, the number of Camco stockholders will increase by approximately 63%
and the number of outstanding Camco Shares will increase by approximately 48%.
See "BACKGROUND AND REASONS FOR THE MERGER - Camco" for a more complete
discussion of Camco's reasons for entering into the Agreement.
Based upon all of the foregoing and the receipt and review of the
opinion of National Capital Companies, LLC ("NCC"), the directors of Camco
concluded that the terms of the Merger, as set forth in the Agreement, were fair
to, and in the best interests of, the Camco stockholders and, on March 25, 1996,
authorized the appropriate officers of Camco to execute the Agreement. See
"BACKGROUND AND REASONS FOR THE MERGER - Opinion of NCC."
FIRST ASHLAND. The Board of Directors of First Ashland has unanimously
adopted the Merger Agreement and approved the transactions contemplated thereby
and has determined that the Merger is in the best interests of First Ashland and
its stockholders. The First Ashland Board therefore recommends that stockholders
vote FOR approval of the Agreement at the Special Meeting.
For a discussion of the factors considered by the First Ashland Board
in reaching its decision to adopt the Agreement and approve the transactions
contemplated thereby, see "BACKGROUND AND REASONS FOR THE MERGER First Ashland".
Based on such factors
5
<PAGE> 16
and the receipt and review of the opinion of Capital Resources Group, Inc.
("CRG"), the directors of First Ashland concluded that the terms of the Merger,
as set forth in the Agreement, were fair to, and in the best interests of, the
First Ashland stockholders and, on March 25, 1996, authorized the appropriate
officers of First Ashland to execute the Agreement. See "BACKGROUND AND REASONS
FOR THE MERGER Opinion of CRG."
OPINION OF NCC
NCC has delivered its written opinion to the Board of Directors of
Camco to the effect that, as of March 25, 1996, and as of August 8, 1996, the
terms of the Merger in respect of the Per Share Merger Consideration were fair
to Camco stockholders from a financial point of view. A copy of the opinions of
NCC, dated as of March 25, 1996 and August 8, 1996, are attached hereto as
Appendix B. The opinions should be read in their entirety for a description of
the procedures followed, assumptions and qualifications made and matters
considered by NCC and for a description of the limitations of the opinions. See
"BACKGROUND AND REASONS FOR THE MERGER - Opinion of NCC."
OPINION OF CRG
CRG has delivered its written opinion to the Board of Directors of
First Ashland to the effect that, as of March 22, 1996, and as of August 5,
1996, the Per Share Merger Consideration was fair to First Ashland stockholders
from a financial point of view. A copy of the opinions of CRG, dated as of
March 25, 1996, and August 5, 1996, are attached hereto as Appendix C. The
opinions should be read in their entirety for a description of the procedures
followed, assumptions and qualifications made and matters considered by CRG and
for a description of the limitations of the opinions. See "THE MERGER - Opinion
of CRG."
TERMS OF THE MERGER
EXCHANGE OF FIRST ASHLAND SHARES. At the Effective Time, First Ashland
will merge with and into Camco and Camco will be the continuing and surviving
corporation. As a result of the consummation of the Merger, each of the First
Ashland Shares will be cancelled and extinguished in consideration and exchange
for the Per Share Merger Consideration. On August 8, 1996, the last trading
date before the date of this Prospectus and Joint Proxy Statement, none of the
adjustments provided for in the Agreement would have been required to be made to
the Per Share Merger Consideration.
As of the date of this Prospectus and Joint Proxy Statement, there were
1,463,039 First Ashland Shares issued and outstanding and 129,598 First Ashland
Shares subject to outstanding options, the exercise price of each of which was
$14.25 (the "First Ashland Options").
Each of the First Ashland Options will be assumed by Camco and become
an option to purchase a number of Camco Shares equal to the product of the
number of shares subject to the First Ashland Option, multiplied by the Option
Exchange Ratio (hereinafter defined) and the exercise price of each such option
shall be an amount equal to the quotient of $14.25 divided by the Option
Exchange Ratio. The Option Exchange Ratio is the value of the Per Share Merger
Consideration, giving effect to applicable adjustments, if any, on the last day
of trading prior to the date of the closing of the Merger (the "Closing Date"),
divided by the Market Value (hereinafter defined) of Camco Shares on such date.
See "THE MERGER - Exchange of First Ashland Shares."
FRACTIONAL SHARES. No fractional shares of Camco will be issued in the
Merger. In lieu of any such fractional shares, Camco will pay to each holder of
First Ashland Shares who otherwise would be entitled to receive a fraction of a
Camco Share an amount in cash based on the Market Value of Camco Shares.
6
<PAGE> 17
REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of Camco, First Ashland
and the Bank has made certain representations and warranties in the Agreement in
respect of various matters, including, but not limited to, the corporate
organization and financial condition of each. In addition, First Ashland and the
Bank have made certain covenants in respect of various matters, including, but
not limited to, the conduct of its business between the date of the Agreement
and the Effective Time. See "THE MERGER - Representations, Warranties and
Covenants."
CONDITIONS AND EFFECTIVE TIME. The consummation of the Merger is
subject to the satisfaction or waiver of a number of conditions, including, but
not limited to the approval of the Amendment by Camco stockholders, the adoption
of the Agreement by the affirmative vote of the holders of a majority of the
issued and outstanding Camco Shares and by the affirmative vote of the holders
of a majority of the issued and outstanding First Ashland Shares, the receipt of
all necessary regulatory approvals, the exercise of dissenters' rights by the
holders of no more than 5% of the outstanding First Ashland Shares, the absence
of any material adverse change in the business, operations, properties, assets
or financial condition of Camco, First Ashland or the Bank since March 25, 1996,
and First Ashland having stockholders' equity immediately prior to the Effective
Time of at least $23.8 million, exclusive of certain expenses of the Merger and
accounting and other adjustments described in the Agreement. Following the
satisfaction or waiver of all such conditions, a Certificate of Merger will be
filed as soon as practicable with the Secretary of State of Delaware (the
"Secretary of State"), after which the Merger will be effective. See "THE MERGER
- - Conditions, and - Effective Time."
Camco has submitted an application to the OTS seeking approval of
Camco's acquisition of the Bank as a result of the Merger. Such approval is
expected to be received by late September, and it is currently anticipated that
the Merger will be consummated in October 1996.
TERMINATION. The Agreement may be terminated and the Merger abandoned
upon the occurrence of certain events, including, but not limited to, the mutual
agreement of the parties, the failure to satisfy or waive all conditions or the
failure to consummate the Merger on or before February 28, 1997. See "The MERGER
- - Termination and Amendment."
TAX AND ACCOUNTING TREATMENT. The following is a summary discussion of
the material federal income tax consequences of the Merger. This summary does
not purport to discuss all aspects of federal income taxation that may be
applicable to particular stockholders, some of whom may be subject to special
rules, nor does it address any aspects of state, local or foreign tax laws. This
summary is based upon current federal law, which is subject to change. First
Ashland stockholders are advised to consult their own tax advisors.
The consummation of the Merger is conditioned upon the receipt of an
opinion of Camco's counsel to the effect that the Merger will constitute a
tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended (the "Code"). Camco has received the opinion of Vorys,
Sater, Seymour and Pease that the Merger will constitute a non-taxable
reorganization for federal income tax purposes and that no gain or loss will be
recognized by the stockholders of First Ashland upon the issuance of Camco
Shares as the Stock Consideration. A gain or loss may be recognized, however, on
the Cash Consideration and cash received pursuant to the exercise of dissenters'
rights by any First Ashland stockholders. Neither the opinion of counsel nor the
discussion of federal income tax consequences in this Prospectus and Joint Proxy
Statement is binding upon either the Internal Revenue Service (the "IRS") or the
courts. See "THE MERGER - Income Tax Consequences" and "RIGHTS OF FIRST ASHLAND
DISSENTING STOCKHOLDERS".
The Merger will be subject to the purchase method of accounting,
resulting in the creation of approximately $3.5 million in goodwill, which will
be amortized over a period of 25 years. See "THE MERGER - Accounting Treatment."
7
<PAGE> 18
INCREASE IN CAMCO'S AUTHORIZED SHARES
The Camco Certificate currently authorizes 2,600,000 shares of capital
stock, $1.00 par value, consisting of 2,500,000 common shares, $1.00 par value
per share, and 100,000 preferred shares, $1.00 par value per share. As of August
8, 1996, there were 2,075,641.1 common shares issued and outstanding, $1.00 par
value per share, and 73,675 common shares reserved for issuance upon the
exercise of options granted by Camco. Therefore, only 350,683 common shares are
available for issuance in the Merger.
At the Effective Time, Camco will be obligated to issue up to 987,434
shares and will need to reserve additional shares for Camco options issued to
holders of First Ashland Options. Pursuant to the Option Exchange Ratio, based
on the value of Camco Shares on August 8, 1996, the last trading date before
the date of this Prospectus and Joint Proxy Statement, approximately 150,333
shares will have to be reserved for Camco options issued in exchange for First
Ashland Options. Therefore, the number of authorized common shares must be
increased to enable Camco to effect the Merger. In addition, the Board of Camco
believes it is advisable to authorize additional common shares to be available
for any possible acquisitions of other financial institutions or for other
corporate purposes, such as stock dividends or stock options.
The stockholders of Camco must approve the Amendment by an affirmative
vote of a majority of the outstanding Camco Shares on the Camco Record Date.
Failure to approve the Amendment will result in the termination of the Agreement
and the Merger and the payment of a termination fee of $200,000 by Camco. See
"THE MERGER - Termination and Amendment" and "PROPOSED AMENDMENT TO THE CAMCO
CERTIFICATE."
RECOMMENDATION OF THE BOARDS OF DIRECTORS OF CAMCO AND FIRST ASHLAND
The Board of Directors of Camco unanimously recommends that Camco
stockholders vote FOR the approval of the Amendment. In addition, the Boards of
Directors of Camco and First Ashland believe that the consummation of the Merger
is in the best interests of their respective institutions and stockholders.
Accordingly, the Boards of Directors of Camco and First Ashland unanimously
recommend that the stockholders of their respective institutions vote FOR the
adoption of the Agreement.
COMPARISON OF RIGHTS OF HOLDERS OF CAMCO SHARES AND FIRST ASHLAND SHARES
The rights of the holders of First Ashland Shares are currently
governed by Delaware law and by First Ashland's Certificate of Incorporation and
Bylaws. Upon the consummation of the Merger, First Ashland's stockholders,
except holders who exercise and perfect dissenters' rights, will become
stockholders of Camco and their rights will be governed thereafter by Delaware
law and by the Camco Certificate and the By-laws of Camco.
The rights of holders of First Ashland Shares and those of holders of
Camco Shares differ in some respects, but are similar in most material respects.
The differences are attributable to variations between the Camco Certificate and
Bylaws and First Ashland's Certificate of Incorporation and Bylaws. See
"DESCRIPTION OF CAMCO SHARES" and "COMPARISON OF RIGHTS OF HOLDERS OF CAMCO
SHARES AND HOLDERS OF FIRST ASHLAND SHARES."
EXCHANGE OF CERTIFICATES EVIDENCING FIRST ASHLAND SHARES
As soon as practicable after the consummation of the Merger, each First
Ashland stockholder will be advised of such consummation by a letter accompanied
by instructions for use in surrendering the certificate or certificates
evidencing First Ashland Shares to Registrar and Transfer Company, the exchange
agent for the Merger (the "Exchange Agent"). CERTIFICATES FOR FIRST ASHLAND
SHARES SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL AFTER RECEIPT OF THE
LETTER OF TRANSMITTAL AND SHOULD NOT BE RETURNED TO CAMCO OR FIRST ASHLAND WITH
THE ENCLOSED PROXY. See "THE MERGER - Exchange of Certificates Evidencing First
Ashland Shares."
8
<PAGE> 19
RESALE OF CAMCO SHARES
The Camco Shares to be issued upon the consummation of the Merger have
been registered with the Commission under the Securities Act and will be freely
transferable, except for Camco Shares received by persons who may be deemed to
be affiliates of First Ashland or Camco. The term "affiliate" is defined in Rule
145 of the Commission under the Securities Act and generally includes executive
officers, directors and controlling stockholders. Affiliates may not sell their
Camco Shares, except pursuant to an effective registration statement under the
Securities Act covering the Camco Shares or in compliance with Rule 145 or
another applicable exemption from the registration requirements of the
Securities Act. See "THE MERGER - Resale of Camco Shares."
FIRST ASHLAND DISSENTERS' RIGHTS
Any stockholder of First Ashland who does not vote in favor of the
adoption of the Agreement and who delivers a written demand for an appraisal by
the Delaware Court of Chancery (the "Chancery Court") of the fair value of such
stockholder's shares prior to the First Ashland Special Meeting and in the
manner provided by Delaware General Corporation Law ("DGCL") ss. 262, a copy of
which is attached hereto as Appendix D, shall be entitled, if and when the
Merger is consummated, and upon strict compliance with certain procedures set
forth in DGCL ss. 262, to receive the fair value of the holders' First Ashland
Shares, if such dissenter is a stockholder of First Ashland at the Effective
Time. A First Ashland stockholder who wishes to submit a written demand for an
appraisal of the fair cash value of First Ashland Shares should deliver such
notice to First Ashland Financial Corporation, 1640 Carter Avenue, Ashland,
Kentucky, 41105 Attention: Paul D. Leake. See "RIGHTS OF FIRST ASHLAND
DISSENTING STOCKHOLDERS."
MARKET PRICES
Camco Shares are quoted on Nasdaq under the symbol "CAFI". At the Camco
Record Date, there were approximately 569 holders of record of the Camco
Shares.
The following table sets forth the high and low bid prices for Camco
Shares on Nasdaq for the periods indicated and the cash dividends per Camco
Share declared during such periods:
<TABLE>
<CAPTION>
Cash Dividends
Quarter Ended(1) High Low Declared(2)
- ---------------- ---- --- -----------
<S> <C> <C> <C>
March 31, 1994 $10.73 $10.29 $ -
June 30, 1994 11.14 10.93 0.1544
September 30, 1994 12.19 12.19 -
December 31, 1994 13.09 13.09 0.1624
March 31, 1995 13.99 12.19 0.0858
June 30, 1995 13.54 13.09 0.0903
September 30, 1995 17.58 13.54 0.0950
</TABLE>
9
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
December 31, 1995 17.58 15.91 0.0998
March 31, 1996 18.05 15.91 0.1045
- ---------------------------
<FN>
(1) Amounts have been restated to give effect to 5% stock dividends in June
1994 and 1995 and July 1996.
(2) The ability of Camco to pay dividends to its stockholders is
significantly impacted by the amount of dividends the Banking
Subsidiaries, and after the Merger, the Bank, can pay to Camco. The
Banking Subsidiaries and the Bank may not pay dividends that would
reduce their capital to below regulatory limits and both First Federal
and the Bank are subject to OTS regulations which limit the level of
dividends each institution may pay. See "REGULATION OF FIRST ASHLAND -
Limitations on Dividends and Other Capital Distributions."
</TABLE>
First Ashland Shares are quoted on the Nasdaq Small Cap Market
("NSCM") under the symbol "FSBS". At the First Ashland Record Date, there were
approximately 302 holders of First Ashland Shares.
The following table sets forth the high and low bid prices for First
Ashland common shares on the NSCM for the periods indicated:
<TABLE>
<CAPTION> Cash Dividends
Quarter Ended High Low Declared
- ------------- ---- --- --------------
<S> <C> <C> <C>
June 30, 1995(1) $14.00 $12.00 -
September 30, 1995 14.75 13.00 -
December 31, 1995 14.75 12.00 -
March 31, 1996 19.25 14.25 $.30
- ------------------------------
<FN>
(1) Reflects the period from April 7, 1995, the initial issuance of First
Ashland Shares, to June 30, 1995.
</TABLE>
First Ashland has agreed that it will not pay any additional dividends
prior to the Merger. The ability of First Ashland to pay dividends, in any
event, depends, in part, on the ability of the Bank to pay dividends to First
Ashland. See "REGULATION OF FIRST ASHLAND - Limitations on Dividends and Other
Capital Distributions."
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for
(a) Camco for each of the three years in the period ended December 31, 1995, and
for the three months ended March 31, 1996 and 1995, (b) First Ashland for each
of the three years in the period ended September 30, 1995 and for the six months
ended March 31, 1996 and 1995, and (c) Camco and First Ashland combined on a pro
forma basis for the fiscal year ended December 31, 1995 and for the three months
ended March 31, 1996, as if the Merger had been effective on January 1, 1995,
and January 1, 1996, respectively. The data for the period ended March 31, 1996,
is derived from unaudited consolidated financial statements. However, in the
opinion of the respective managements of Camco and First Ashland, all
adjustments necessary for a fair presentation of financial condition and results
of operations have been made.
10
<PAGE> 21
The following tables should be read in conjunction with the
consolidated financial statements and other financial information of Camco and
First Ashland, respectively, included herein and the pro forma unaudited
condensed combined consolidated financial information giving effect to the
Merger included elsewhere in this Prospectus and Joint Proxy Statement. THE PRO
FORMA COMBINED INFORMATION PRESENTED BELOW IS NOT NECESSARILY INDICATIVE OF THE
RESULTS WHICH ACTUALLY WOULD HAVE BEEN OBTAINED IF THE MERGER HAD BEEN
CONSUMMATED IN THE PAST OR WHICH MAY BE OBTAINED IN THE FUTURE.
19
<PAGE> 22
<TABLE>
<CAPTION>
Three months ended March 31, Year ended December 31,
---------------------------- -----------------------
1996 1995 1995 1994 1993
-------- -------- ------- -------- --------
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
CAMCO
Balance sheet data (period end):
Assets $343,711 $333,585 $346,469 $324,627 $277,098
Investment securities - at cost 16,498 24,559 19,283 27,333 29,104
Investment securities available for
sale - at market 3,141 3,025 3,131 2,978 -
Mortgage-backed securities - at cost 4,847 5,353 5,002 5,452 9,315
Mortgage-backed securities
available for sale - at market 857 1,420 985 1,464 -
Loans receivable - net 286,438 274,772 291,233 260,991 192,299
Deposits 290,301 277,333 286,574 266,861 252,219
FHLB advances 20,069 26,603 26,078 26,511 -
Stockholders' equity, restricted 28,625 25,232 27,693 24,741 19,826
Income statement data:
Total interest income $ 6,643 $ 5,969 $ 25,440 $ 19,759 $ 18,990
</TABLE>
11
<PAGE> 23
<TABLE>
<S> <C> <C> <C> <C> <C>
Total interest expense 3,602 3,291 14,257 10,233 9,752
Net interest income 3,041 2,678 11,183 9,526 9,238
Provision for loan losses 21 35 143 97 310
Other income 944 502 3,293 2,578 3,106
General, administrative and other
expense 2,208 2,201 8,775 8,154 6,963
Net earnings $ 1,159 $ 623 $ 3,648 $ 2,542 $ 3,324
Stockholders' equity to total assets 8.3% 7.6% 8.0% 7.6% 7.2%
</TABLE>
<TABLE>
<CAPTION>
Six months ended March 31, Year ended September 30,
-------------------------- ------------------------
1996 1995 1995 1994 1993
-------- -------- ------- -------- --------
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FIRST ASHLAND(1)
Balance sheet data (period end):
Assets $86,860 $87,979 $88,888 $75,135 $73,700
Investment securities - at cost 5,768 4,255 13,008 3,622 (?)
Investment securities available
for sale - at market 5,207 1,445 1,487 - -
Mortgage-backed securities - at
cost 7,242 7,930 7,652 8,247 10,992
Loans receivable - net 62,536 58,211 61,641 56,587 51,525
Deposits 60,646 57,609 59,915 59,808 61,557
FHLB Advances 2,003 6,030 5,017 4,793 2,232
Stockholders' equity, restricted(2) 23,631 10,486 23,484 10,206 9,589
Income statement data:
Total interest income $ 3,194 $ 2,663 $ 5,802 $ 5,332 $ 5,424
Total interest expense 1,661 1,529 3,221 2,728 2,839
Net interest income 1,533 1,134 2,581 2,604 2,585
Provision for loan losses 20 7 - 41 22
Other income (loss) 49 34 86 (107) 70
General, administrative and other
expense 971 741 1,638 1,587 1,191
Net earnings $ 410 $ 278 $ 716 $ 585 $ 979
Stockholders' equity to total
assets 27.2% 11.9% 26.4% 13.6% 13.0%
- ----------------------------
<FN>
(1) First Ashland completed its public offering and purchased all of the
outstanding stock of the Bank on April 7, 1995. All periods prior to
April 7, 1995, reflect information representing only the Bank as a
mutual institution without any stock or stockholders.
</TABLE>
12
<PAGE> 24
<TABLE>
<CAPTION>
Three months Year ended
ended March 31, 1996 December 31, 1995(1)
--------------------- --------------------
<S> <C> <C>
PRO FORMA COMBINED
Statement of condition data (period end):
Assets $423,261 $429,375
Deposits 351,481 348,618
Loans receivable - net 349,649 355,472
Stockholders' equity, restricted 45,285 44,483
Income statement data:
Net interest income $ 3,739 $ 13,589
Provision for loan losses 36 141
Net earnings 1,361 4,282
Stockholders' equity to total assets 10.7% 10.4%
- -----------------------------
<FN>
(1) The pro forma data as of and for the year ended December 31, 1995, has
been computed by applying the March 31, 1996, fair value adjustments to
the historic amounts of the combined entities. See "PRO FORMA UNAUDITED
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS" for a discussion
of such fair value adjustments.
</TABLE>
COMPARATIVE PER SHARE DATA
The following table sets forth the net earnings, cash dividends paid
and book value per common share, of (a) Camco on a historical basis, (b) First
Ashland on a historical basis, and (c) Camco on a pro forma basis adjusted to
give effect to the Merger as if the Merger had been consummated as of the dates
and at the beginning of the periods presented. The following information should
be read in conjunction with the historical consolidated audited financial
statements and consolidated unaudited financial information of Camco and First
Ashland included herein and the pro forma unaudited condensed combined
consolidated financial information giving effect to the Merger included
elsewhere in this Prospectus and Joint Proxy Statement. See "AVAILABLE
INFORMATION" and "PRO FORMA UNAUDITED CONDENSED COMBINED CONSOLIDATED FINANCIAL
STATEMENTS." THE INFORMATION PRESENTED BELOW IS NOT NECESSARILY INDICATIVE OF
THE RESULTS WHICH ACTUALLY WOULD HAVE BEEN OBTAINED IF THE MERGER HAD BEEN
CONSUMMATED IN THE PAST OR WHICH MAY BE OBTAINED IN THE FUTURE.
13
<PAGE> 25
<TABLE>
<CAPTION>
Three months Year ended
ended March 31, 1996 December 31,
-------------------- --------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C> <C>
CAMCO HISTORICAL DATA(1)
Earnings per common share $ .56 $ 1.76 $ 1.40 $ 1.83
Cash dividends paid per common share .1045 .3708 .3168 .2615
Book value per common share
(at period end) 13.79 13.35 12.53 12.03
</TABLE>
<TABLE>
<CAPTION>
Three months Year ended
ended March 31, 1996 September 30,
-------------------- --------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C> <C>
FIRST ASHLAND HISTORICAL DATA(2)
Earnings per common share $ .17 $ .57 - -
Cash dividends paid per common share .30 - - -
Book value per common share
(at period end) 16.15 16.67 - -
</TABLE>
<TABLE>
<CAPTION>
Three months Year ended
ended March 31, 1996 December 31, 1995
-------------------- -----------------
<S> <C> <C>
PRO FORMA COMBINED(2)(3)
Earnings per common share $ .45 $ 1.40
Cash dividends per common share .1045 .3708
Book value per common share 14.77 14.78
Tangible book value per common share(4) 13.72 13.70
- ------------------------------
<FN>
(1) Earnings per share, dividends and book value per common share have been
adjusted to give effect to 5% stock dividends paid during the years
ended or ending December 31, 1996, 1995 and 1994, and a two-for-one
stock split paid in the form of a 100% stock dividend in the year ended
December 31, 1993. Earnings per common share and cash dividends paid
per common share are based on weighted average common shares
outstanding totaling 2,070,050 for the three months ended March 31,
1996, and 2,068,866, 1,814,227 and 1,810,946 for each of the years
ended December 31, 1995, 1994 and 1993, respectively.
(Footnotes continued on next page)
(2) First Ashland completed its public offering and purchased all the
shares of the Bank on April 7, 1995. Prior to that date, neither First
Ashland or the Bank had any common shares issued and outstanding (other
than shares issued for purposes of organizing First Ashland). For the
three months ended March 31, 1996, and the year ended September 30,
1995, First Ashland is deemed to have 1,313,868 and 1,307,150 weighted
average shares outstanding for purposes of computing earnings per share
and cash dividends paid per common share.
(3) Pro forma combined earnings per common share and dividends per share
are determined using weighted average common shares of 3,057,409 and
3,056,299 for the three months ended March 31, 1996, and the year ended
December 31, 1995, respectively. Book value and tangible book value per
common share are computed based upon 2,911,894 shares of common stock
outstanding. Pro forma book value per common share and tangible book
value per common share as of December 31, 1995, have been computed by
applying the March 31, 1996, fair value adjustments to the historic
amounts of the
</TABLE>
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<PAGE> 26
combined entities. See "PRO FORMA UNAUDITED CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS" for a discussion of such fair value
adjustments.
(4) Tangible book value per common share is stockholders' equity less
goodwill divided by outstanding shares.
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<PAGE> 27
INTRODUCTION
This Prospectus and Joint Proxy Statement constitutes both a Prospectus
of Camco with respect to the issuance of up to 987,434 Camco Shares to be issued
in connection with the Merger and the Joint Proxy Statement of Camco and First
Ashland for use in connection with the solicitation of proxies by the Boards of
Directors of Camco and First Ashland to be used at the Camco Special Meeting and
the First Ashland Special Meeting. This Prospectus and Joint Proxy Statement is
being mailed to stockholders of Camco and First Ashland commencing on or about
August 15, 1996.
All information contained in this Prospectus and Joint Proxy Statement
relating to Camco has been furnished by Camco. All information relating to First
Ashland and the Bank has been furnished by First Ashland. The party furnishing
any such information is responsible for the accuracy thereof.
BACKGROUND AND REASONS FOR THE MERGER
CAMCO
Camco's strategic plan is to deliver a wide array of financial products
and services through a network of community-based financial institutions which
benefit from the centralized support provided by the holding company structure
while operating autonomously in their respective markets under the direction of
management personnel who maintain close ties to the communities they serve.
Since adopting the holding company structure in 1970 with a single thrift
charter, the Camco group has expanded over the years to include three distinct
financial institution charters and several subsidiaries engaged in
mortgage-related activities.
In pursuing growth, Camco has paid particular attention to
opportunities in geographic areas contiguous to its existing market areas, which
currently consist of portions of central and southeastern Ohio. Camco identified
northeastern Kentucky as a potential market for Camco for a variety of reasons,
including geographic considerations, the competitive features of the
northeastern Kentucky market and recent developments in interstate banking
generally.
Expansion into the Ashland area offers Camco the unique opportunity to
achieve geographic diversification while maintaining geographic proximity to the
existing Camco markets. Despite its geographic proximity to Ohio, the Ashland
economy is distinct from the Ohio markets in which Camco operates. Ashland's
major employers are in the industries of fuel and steel production, medical
services, transportation, and public utilities. Camco's markets include the
chemical and ferro alloy production industries, fabrication plants for plastics,
metal and detergent products, assembly plants for office filing systems and
medical and industrial research equipment and agriculture. The economic
diversity of the Camco markets lessens the impact on Camco's net income of
downturns in an individual industry. The economic characteristics of First
Ashland's market will add to that diversity. The geographic proximity will
enable Camco to provide holding company support, such as data processing, human
resources, accounting, regulatory compliance and reporting and marketing
assistance, with greater efficiency.
The Ashland market is served by five savings institutions and six
commercial banks. At March 31, 1996, the Bank accounted for 16% of the loans
originated in its market area. Camco believes that market conditions in the
Ashland area are conducive to deposit growth and increased mortgage lending.
First Ashland has historically been a portfolio lender, whereas Camco has been a
very active seller of loans in the secondary market in recent years through its
mortgage-banking subsidiaries. Camco believes that its consolidated
mortgage-banking revenue can be enhanced through the effective implementation of
Camco's mortgage-banking operation at the Bank. Introduction of Camco's
"Advantage Banking" program offers an additional opportunity to expand the
Bank's lending and deposit relationships with its existing customer base and to
attract new customers. The Bank has an experienced management team which will
enable it to maintain a strong relationship with the local community,
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<PAGE> 28
while Camco management provides the support necessary to the local management
group to expand the range of products and services.
In pursuing growth opportunities, Camco's Board of Directors is
committed to increasing shareholder value in the intermediate and long term. In
evaluating the Merger, the Board carefully analyzed the potential dilutive
effects of the Merger. At March 31, 1996, and December 31, 1995, Camco's
stockholders' equity was $28.6 million and $27.7 million, respectively, or
$13.79 and $13.35 per share, respectively. Net earnings for the three months
ended March 31, 1996, and the year ended December 31, 1995, were $1.2 million
and $3.6 million, respectively, or $.56 and $1.76 per share, respectively. After
giving effect to the Merger, including all pro forma adjustments consistent with
generally accepted accounting principles ("GAAP"), the fully-diluted
stockholders' equity of Camco on a pro forma combined basis is $45.3 million, or
$14.77 per share, at March 31, 1996, and the fully-diluted earnings per share on
a pro forma combined basis is $.45 for the three-months ended March 31, 1996.
GAAP adjustments do not give effect to intangible assets created in the Merger
and to anticipated cost savings as a result of operating efficiencies, revenue
enhancements and growth opportunities which Camco believes can be achieved
through the Merger. After considering such factors, the Board of Directors
concluded that, in view of the intermediate and longer-term prospects for
enhanced shareholder value, the Merger is in the best interests of Camco and
its stockholders, notwithstanding the dilution to earnings per share on a
pro forma basis.
Another potential benefit of the Merger is additional liquidity in the
market for Camco Shares. As a result of the Merger, the number of Camco
stockholders will increase by approximately 63% and the number of outstanding
Camco Shares will increase by approximately 48%.
Based upon all of the foregoing and the receipt and review of the
opinion NCC, the directors of Camco concluded that the terms of the Merger, as
set forth in the Agreement, were fair to, and in the best interests of, the
Camco stockholders and, on March 25, 1996, authorized the appropriate officers
of Camco to execute the Agreement. See "THE MERGER - Opinion of NCC."
FIRST ASHLAND
The Bank has operated for 60 years as a community-oriented savings
institution primarily serving the personal banking needs of residents of the
Ashland, Kentucky area. The Bank's emphasis on accepting deposits from the
general public and originating loans secured by single family residential
properties located in its market area has remained relatively constant over the
years. In recent years, however, the financial markets of which the Bank is a
part, and especially the regulatory environment in which the Bank operates, have
become increasingly complex and uncertain. In April 1995, the Bank converted
from the mutual to the stock form of organization and simultaneously reorganized
with First Ashland becoming its holding company. Since the Conversion,
management of First Ashland has focused its attention primarily on increasing
its core business while reviewing its strategic alternatives in light of its
size, the increasing consolidation of the banking industry, and other relevant
considerations.
In January 1996, Camco contacted First Ashland and expressed an
interest in a possible business combination. This contact was followed by a
written indication of interest presented to the Board of Directors of First
Ashland (the "First Ashland Board"), outlining general terms of a possible
merger of First Ashland and Camco. At the January meeting of the First Ashland
Board, Camco's inquiry was discussed, and representatives of CRG presented an
overview of several strategic alternatives available to First Ashland with
Camco, including a preliminary analysis of the inquiry from Camco. Among the
topics discussed were whether First Ashland and the Bank should remain
independent or merge with a larger institution and, if First Ashland were to
seek a merger, how First Ashland would develop and evaluate merger
opportunities. The First Ashland Board authorized CRG to continue its strategic
analysis of First Ashland and of the Camco expression of interest.
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<PAGE> 29
Subsequently, representatives of CRG presented further analysis of
First Ashland's strategic alternatives, including comparative estimates of the
returns to stockholders of First Ashland if, on one hand, First Ashland were to
remain an independent savings institution or, on the other hand, First Ashland
were to merge with a larger institution, such as Camco. The CRG representatives
also supplemented their preliminary analysis of the inquiry from Camco with
additional information regarding Camco and possible terms of a merger. Upon
consideration of the information presented and discussed at the meeting, the
First Ashland Board concluded that a merger on the terms generally described in
the expression of interest might be in the best interests of shareholders and
authorized management to direct CRG to conduct a thorough review of First
Ashland's available strategic options and, in particular, to develop a detailed
evaluation of a possible merger with Camco.
Thereafter, First Ashland's management and CRG performed a review of
Camco and its management. During the months of February and March 1996, Silver,
Freedman & Taff, L.L.P., First Ashland's outside legal counsel, and CRG
conducted discussions and negotiations with Camco and its outside legal counsel,
Vorys, Sater, Seymour and Pease, regarding terms of a proposed merger and
agreement. During this period, Camco's representatives made it very clear that
it would withdraw its expression of interest if an agreement could not be
concluded within 60 days. The First Ashland Board continued to meet regarding
the proposed merger, with CRG and Silver, Freedman & Taff, L.L.P. participating
either in person or by telephone, while the status and progress with respect to
various issues in connection with the discussions and negotiations with Camco
continued to be considered.
On March 25, 1996, upon the completion of negotiations between First
Ashland and Camco, the First Ashland Board met to consider approval of the
Agreement and the Merger. At this meeting, CRG presented analyses of First
Ashland, Camco and the financial terms of the proposed merger and Silver,
Freedman & Taff, L.L.P., First Ashland's legal counsel, described certain terms
and conditions of the Agreement. After discussion, the First Ashland Board
concluded that the Merger was in the best interests of stockholders and approved
the Merger, authorizing the execution of the Agreement. Following the meeting,
the Agreement was executed by the respective parties and a joint press release
was issued announcing the agreement.
The terms of the Agreement, including the Per Share Merger
Consideration to be paid to First Ashland's stockholders, were the result of
arm's-length negotiations between the representatives of Camco and First
Ashland. In the course of reaching its determination to approve the Agreement
and recommend it to the stockholders of First Ashland, the First Ashland Board,
without assigning any relative or specific weights, considered a number of
factors, including, among other things (i) the financial and valuation analyses
prepared by CRG, (ii) the fairness opinion rendered by CRG, (iii) the terms of
the Agreement as negotiated (including the transaction structure, the form and
amount of the Per Share Merger Consideration, and the potential impact the
termination fees included in the proposed Agreement would have on other
institutions that might have an interest in a business combination with First
Ashland) and the negotiation process, (iv) the financial condition, operations
and prospects of Camco and the anticipated effect thereon of the proposed
transaction, (v) industry and economic factors, (vi) the nature and
compatibility of Camco's management and business philosophy, (vii) the prospects
for growth and expanded products and services, and other anticipated impact on
depositors, employees, customers and communities served by First Ashland, and
(viii) regulatory and other factors.
In approving the Merger, the First Ashland Board was aware that (i)
the Agreement contains certain provisions prohibiting First Ashland from
soliciting, facilitating or accepting other offers or agreements to acquire
First Ashland and (ii) Camco would be entitled to receive a termination fee from
First Ashland in certain circumstances generally relating to a failure of First
Ashland to consummate the Merger because of another offer for First Ashland or a
material change or potential material change in the ownership of First Ashland.
See "THE MERGER - Representations, Warranties and Covenants, and - Termination
and Amendment." However, the First Ashland Board was also aware that such terms
were specifically bargained for and insisted upon by Camco as inducements to
enter into the Agreement, and that the First Ashland Board's obligations under
the Agreement to recommend that First Ashland's stockholders approve the
Agreement and to use its reasonable best efforts to obtain such approval were
explicitly made subject to the First Ashland Board's fiduciary duties upon
advice of counsel to First Ashland. Accordingly, the Agreement expressly permits
the First Ashland Board, in the exercise of its
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<PAGE> 30
fiduciary duties, to withdraw or change its recommendation of the Agreement and
to suspend or terminate its efforts to obtain stockholder approval of the
Agreement at the First Ashland Special Meeting, although in such circumstances
Camco will still be entitled to the payment of the termination fee. In addition,
in connection with its approval of the proposed Merger, the First Ashland Board
was advised by CRG that (i) the Per Share Merger Consideration exceeded the
upper end of CRG's range of estimates of the net present value of the discounted
cash flow attributable to each First Ashland Share based upon an acquisition of
First Ashland at a later date and (ii) CRG believed that the process followed by
First Ashland in negotiating the Agreement had been fair and effective and
that it had obtained as high a price for First Ashland as could have been
obtained through other techniques. CRG's fairness opinion is described below
and included as Appendix C to this Prospectus and Joint Proxy Statement.
See "- Opinion of CRG."
Based on all of the foregoing and the receipt and review of the opinion
of CRG, the directors of First Ashland concluded that the terms of the Merger,
as set forth in the Agreement were fair to, and in the best interests of, the
First Ashland stockholders and, on March 25, 1996, authorized the appropriate
officers of First Ashland to execute the Agreement. See "- Opinion of CRG."
OPINION OF NCC
Camco retained NCC to act as its financial advisor in connection with
the Merger. NCC was selected to act as Camco's financial advisor based upon its
qualifications, expertise and reputation, as well as NCC's prior investment
banking relationship and familiarity with Camco. On March 25, 1996, the day upon
which Camco executed the Agreement, NCC rendered its oral opinion to the Board
of Directors of Camco that, as of such date, the Per Share Merger Consideration
to be paid for each of the First Ashland Shares was fair to the stockholders of
Camco from a financial point of view. The oral opinion was subsequently
confirmed in writing. The written opinion has been updated to August 8, 1996. A
copy of these written opinions of NCC are included in Appendix B to this
Prospectus and Joint Proxy Statement. NCC has consented to the inclusion of
these opinions and the related disclosure in this Prospectus and Joint Proxy
Statement.
NCC'S OPINIONS ARE DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL
POINT OF VIEW, OF THE CONSIDERATION TO BE PAID BY CAMCO BASED ON CONDITIONS AS
THEY EXISTED AND COULD BE EVALUATED AS OF THE DATE OF THE OPINIONS. NCC'S
OPINIONS DO NOT CONSTITUTE A RECOMMENDATION TO ANY CAMCO STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE CAMCO SPECIAL MEETING, NOR DO NCC'S
OPINIONS ADDRESS THE UNDERLYING BUSINESS DECISION TO EFFECT THE MERGER. THIS
SUMMARY OF NCC'S OPINION AS OF MARCH 25, 1996, IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE TEXT OF THAT OPINION AND THE UPDATED OPINION, WHICH ARE
ATTACHED TO THIS PROSPECTUS AND JOINT PROXY STATEMENT AS APPENDIX B. THE
STOCKHOLDERS OF CAMCO ARE URGED TO READ NCC'S OPINIONS IN THEIR ENTIRETY FOR A
DESCRIPTION OF THE ASSUMPTIONS MADE AND MATTERS CONSIDERED AND THE LIMITS ON
THE REVIEW UNDERTAKEN IN RENDERING SUCH OPINIONS.
In rendering its Opinion as of March 25, 1996, NCC has made inquiries
of members of Camco's and First Ashland's management, representatives of the
accounting firm Grant Thornton LLP and Camco's legal counsel, the firm of
Vorys, Sater, Seymour and Pease, and has reviewed, among other matters with
respect to Camco and First Ashland: (1) the Agreement, (2) audited consolidated
financial statements of Camco as of December 31, 1995 and December 31, 1994 and
for the years then ended, and financial reports filed with appropriate
regulatory agencies by Camco and the Banking Subsidiaries through December 31,
1995; (3) unaudited consolidated financial statements of First Ashland as of
December 31, 1995, and audited financial statements of First Ashland as of
September 30, 1995, and September 30, 1994, and for the years then ended, and
financial reports filed with the
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<PAGE> 31
appropriate regulatory agencies by First Ashland and the Bank through December
31, 1995; (4) economic conditions in Camco's and First Ashland's respective
market areas; (5) the financial performance of Camco and First Ashland as
compared to selected comparable publicly held companies; (6) conditions in the
securities market in general and the market for thrift and banking institutions
specifically: (7) merger and acquisition transactions with similar terms and
conditions; and (8) such other information, documents and matters NCC considered
appropriate.
The summary set forth below reflects all material analyses, factors and
assumptions considered by NCC and the material evaluation methodologies used by
NCC in arriving at its fairness opinion as described herein. The preparation of
a fairness opinion is a complex process involving subjective judgments, various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefor, such opinions are not readily susceptible to summary description.
In arriving at its opinion, NCC believes that its analyses must be considered as
a whole and that selecting portions of such analyses and the factors considered
therein, without considering all factors and analyses, could create an
incomplete view of the process underlying NCC's opinion. In rendering its
opinion, NCC did not specifically assign a greater factor to any portion of its
analyses.
In connection with its review, NCC relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information regarding Camco and First Ashland provided to NCC by the
companies and their representatives. NCC did not independently verify but
assumed that the allowance for loan losses set forth in the balance sheets of
First Ashland at December 31, 1995, was adequate and complied fully with all
applicable laws, regulatory policies and sound banking practices, as of the date
of such financial statements. NCC was not retained to conduct, nor did it
conduct, a physical inspection of any properties or facilities of First Ashland
or make any independent evaluation or appraisal of First Ashland's assets or
liabilities. NCC reviewed certain historical data provided by First Ashland and
reviewed certain historical financial data and financial and operating forecasts
and projections (and the assumptions and bases therefor) provided by Camco. The
projections were based upon numerous variables and assumptions which are
inherently uncertain, including, without limitation, factors relating to future
economic and competitive conditions, the future financial condition and
operating results of Camco and First Ashland and future cost savings and income
enhancements associated with the acquisition. Accordingly, actual results could
vary significantly from those reflected in such projections. NCC also assumed
that the acquisition in all respects is, and will be, undertaken and consummated
in compliance with all laws and regulations that are applicable to Camco and
First Ashland.
In its analyses, NCC made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of Camco or First Ashland. Any estimates contained in
NCC's analyses are not necessarily indicative of future results or values, which
may be significantly more or less favorable than such estimates. Estimates of
values of companies do not purport to be appraisals or necessarily reflect the
prices at which the underlying companies or their securities may actually be
sold.
The following is a brief summary of the analyses and procedures which
were performed by NCC in the course of arriving at the opinion and were
presented to Camco's Board of Directors. The following summary does not purport
to be a complete description of such analyses and procedures.
COMPARABLE TRANSACTION ANALYSIS. NCC performed an analysis of prices
and premiums offered in connection with pending and recently completed
acquisitions involving institutions grouped according to capital levels and
asset size. The group of institutions grouped on the basis of capital consisted
of highly capitalized savings institutions (those with a tangible net worth
ratio in excess of 14%) located throughout the United States, which included
eleven pending and five completed transactions. Multiples of earnings and fully
diluted book value implied by the consideration to be received by First
Ashland's stockholders in the Merger were compared with multiples offered in
such comparable transactions. The median offer price to book value for pending
transactions was 124.3%, while the median offer price to book value for the
completed transactions was 125.3%. The equivalent offer price to fully diluted
book value for First Ashland was 127.4%. The median multiple of offer price
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<PAGE> 32
to latest twelve months earnings for the pending transactions was 27.6 times
earnings, while the median offer price to latest twelve months earnings for the
completed transactions was 29.2 times earnings, as compared to a multiple of
32.0 times earnings, based on First Ashland's earnings per share for the six
months ended December 31, 1995, annualized, and the $17.875 average of the high
bid and low ask prices for Camco Shares on March 25, 1996. NCC also reviewed the
profitability of the institutions in the comparable transactions, which had a
median return on average assets for the twelve-month period preceding the sale
announcement of .80% for the pending transactions and 1.46% for the completed
transactions compared to First Ashland's ratio of .86% as of December 31, 1995.
NCC performed an analysis of prices and premiums offered in connection
with pending and recently completed acquisitions of savings institutions located
throughout the United States which had total assets ranging from $75 million to
$100 million. Multiples of earnings and fully diluted book value implied by the
consideration to be received by First Ashland's stockholders in the Merger were
compared with multiples offered in such transactions, which included eleven
pending and eleven completed transactions. The median offer price to book value
for the pending transactions was 151.8%, while the median offer price to book
value for the completed transactions was 136.7%. The equivalent offer price to
fully diluted book value for First Ashland was 127.4%, as noted above. The
median multiple of offer price to latest twelve months earnings for the pending
transactions was 20.1 times earnings, while the median of offer price to latest
twelve months earnings for completed transactions was 18.7 times earnings, as
compared to a multiple of 32.0 times earnings, based upon First Ashland's
earnings per share for the six months ended December 31, 1995, annualized, and
the $17.875 Camco market value. NCC also reviewed the profitability of the
comparable group, which had a median return on average assets for the prior
twelve-month period preceding the sale announcement of .91% for the pending
transactions and .85% for the completed transactions compared to First Ashland's
ratio of .86% as of December 31, 1995.
None of the companies or transactions analyzed, as described above, are
identical to First Ashland or the transaction contemplated by the Agreement.
Accordingly, NCC's analyses are not based solely on arithmetic calculations but
involve considerations and judgments concerning differences in financial and
operating characteristics of the relevant companies, the timing of the relevant
transactions and prospective buyer interest, as well as other factors that could
affect the public trading values of the company or companies to which they are
compared.
NCC also compared the Camco Shares high bid and low ask quotations of
$17.25 and $18.50 per share as of March 22, 1996, noting that the average,
$17.875, represents 127.2% of Camco's December 31, 1995, tangible book value and
9.7 times Camco's earnings per share for the year ended December 31, 1995, as
compared to the median trading multiples of all Ohio publicly-traded savings
institutions of 102.6% of tangible book value and 14.6 times the latest
twelve-month earnings as of March 22, 1996.
COMPARABLE COMPANIES ANALYSIS. NCC compared the financial condition and
operating performance of First Ashland as of and for the period ended December
31, 1995, to that of other publicly traded savings institutions headquartered in
Kentucky. The group consisted of nine publicly traded savings institutions with
total assets between $57 million and $342 million. The comparable companies
reported equity-to-assets ratios between 13.4% and 35.8%, with a median of
28.4%. NCC compared First Ashland with members of the comparable group based
upon selected operating fundamentals, including capital adequacy, profitability
and asset quality. Using pricing data as of March 22, 1996, the median price to
the last quarter earnings multiple was 17.1 for the comparable group. The median
stated price to tangible book value was 92.9% for the comparable group. The
implied market trading values derived from such comparable company analysis
resulted in a calculation ranging from approximately $9.58 to $15.67 per share
for First Ashland Shares based upon First Ashland's reported book value of
$16.87 as of December 31, 1995, and First Ashland's earnings per share for the
quarter ended December 31, 1995, of $.14. At December 31, 1995, the median
equity to assets ratio of 28.4% for the group of comparable savings institutions
was slightly higher than the 26.3% for First Ashland. The median return on
average equity for the twelve months ending December 31, 1995, was 4.7% for the
group of comparable savings institutions and 3.7% for First Ashland.
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<PAGE> 33
MERGER DILUTION ANALYSIS. NCC calculated Camco's post-merger pro forma
tangible book value, earnings per share, return on average assets and return on
average equity based on the Per Share Merger Consideration based on (1)
projected income as provided by Camco's management; (2) net income for the
twelve months ended December 31, 1995, for First Ashland; and, (3) cost savings
and revenue enhancements anticipated as a result of the acquisition as provided
by Camco's management. Such projections were based on numerous variables and
assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. NCC then
compared Camco's post-merger pro forma book value, pro forma earnings per share,
pro forma return on average assets and pro forma return on average equity with
Camco's December 31, 1995, book value per share and its pre-merger actual
earnings per share, pre-merger return on average assets and pre-merger return on
average equity for the year ended December 31, 1995. Assuming certain
anticipated cost savings and revenue enhancements as a result of the Merger, as
provided by Camco's management, the Merger would result in dilution in the first
year after the Effective Time of approximately 5.4 % of Camco's tangible book
value per share and 21.1% of Camco's earnings per share and would result in a
decrease in return on average assets of approximately 6.6% and a decrease in
return on average equity of approximately 24.6%.
RETURN ON INVESTMENT ANALYSIS. NCC performed a pro forma return on
investment analysis based upon the projected cash flow contributions of First
Ashland as compared to the acquisition cost of First Ashland. The cash flow
contributions were based on: (1) First Ashland's net income for the twelve
months ended December 31, 1995, adjusted for Camco management's projected growth
in assets; (2) cost savings and revenue enhancements anticipated as a result of
the Merger as provided by Camco's management; (3) a seven-year investment
period; and (4) a residual valuation of First Ashland equal to twelve times
Camco's pro forma net income in year seven. Based upon these assumptions, the
pro forma return on investment was approximately 10.5%.
NCC'S WRITTEN OPINION DATED MARCH 25, 1996 WAS BASED SOLELY UPON THE
INFORMATION AVAILABLE TO NCC AND THE ECONOMIC, MARKET AND OTHER CIRCUMSTANCES
THAT EXISTED AS OF THE DATE OF SUCH OPINION. EVENTS OCCURRING AFTER SUCH DATE
COULD MATERIALLY AFFECT THE ASSUMPTIONS AND CONCLUSIONS CONTAINED IN THAT
OPINION.
The summary set forth does not purport to be a complete description,
but is a brief summary of the material analyses and procedures performed by NCC
in the course of arriving at its opinion dated March 25, 1996. NCC updated its
opinion as of August 8, 1996. Events occurring after such date could materially
affect the assumptions and conclusions contained in that opinion.
Pursuant to the terms of an engagement letter dated January 25, 1996,
Camco has agreed to pay NCC $35,000 for acting as financial advisor in
connection with the Merger (including rendering its initial opinion). Camco also
will pay $5,000 to NCC for each opinion update. Whether or not the Merger is
consummated, Camco also has agreed to reimburse NCC for reasonable out-of-pocket
expenses and to indemnify NCC and certain related persons against certain
liabilities relating to or arising out of its engagement.
OPINION OF CRG
First Ashland retained CRG as its financial advisor in connection with
the Merger and requested that CRG render its opinion with respect to the
fairness, from a financial point of view, of the Per Share Merger Consideration,
to the holders of First Ashland Shares. CRG rendered its written opinion to the
First Ashland Board of Directors on March 22, 1996, that, as of the date of such
opinion, the Per Share Merger Consideration was fair, from a financial point of
view, to the holders of First Ashland Shares. CRG has provided First Ashland
with an update of that opinion as of August 5, 1996. CRG has consented to the
inclusion of their opinions and the related disclosure in this Prospectus and
Joint Proxy Statement.
THE FULL TEXT OF THE OPINIONS OF CRG, WHICH SET FORTH CERTAIN
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEWS UNDERTAKEN,
ARE ATTACHED AS APPENDIX C TO THIS PROSPECTUS AND JOINT PROXY STATEMENT, AND
SHOULD BE READ IN THEIR ENTIRETY. THE SUMMARY OF THE OPINION OF CRG AS OF
MARCH 25, 1996, SET FORTH IN THIS PROSPECTUS AND JOINT PROXY STATEMENT IS
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<PAGE> 34
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THAT OPINION AND THE UPDATED OPINION.
CRG'S OPINIONS SHOULD NOT BE CONSTRUED BY HOLDERS OF FIRST ASHLAND'S SHARES AS
A RECOMMENDATION AS TO HOW SUCH HOLDERS SHOULD VOTE AT THE SPECIAL MEETING.
CRG is an investment banking and financial consulting firm which, as
part of its specialization in financial institutions, is regularly engaged in
providing financial valuations and analyses of business enterprises and
securities in connection with mergers, acquisitions, mutual-to-stock
conversions, initial and secondary stock offerings and other corporate
transactions. First Ashland has utilized the services of CRG in the past. The
First Ashland Board chose CRG because of its expertise, experience and
familiarity with First Ashland and the financial institution industry. CRG
reviewed the terms of the Agreement and the related financial data and reviewed
these issues with the First Ashland Board and executive management of First
Ashland. No limitations were imposed on CRG by the First Ashland Board with
respect to the investigation made or procedures followed by it in rendering its
opinion. CRG participated in the negotiations between First Ashland and Camco in
which the amount of consideration for the First Ashland's shares was agreed
upon.
In the course of rendering its fairness opinions, the following factors
were considered by CRG:
(1) The proposed terms of the Agreement;
(2) The audited consolidated financial statements of First Ashland
for the fiscal years ended September 30, 1991 through 1995, the
unaudited consolidated financial statements of First Ashland for
the three months ended December 31, 1995 and the three months
ended March 31, 1996, as reported in its Report on Form 10-QSB,
certain quarterly reports to the OTS including the report for
the quarter ended December 31, 1995 and March 31, 1996, the
latest available asset/liability reports and other
miscellaneous internally-generated management information
reports and business plan, as well as other publicly available
information;
(3) Annual Report to Stockholders for 1995, which provides a
discussion of First Ashland's business and operations and a
review of various financial data and trends;
(4) Discussions with executive management of First Ashland regarding
the business, operations, recent financial condition and
operating results and future prospects of First Ashland;
(5) Comparisons of First Ashland's consolidated financial condition
and operating results with those of similarly sized thrift
institutions operating in Kentucky and the United States;
(6) Comparisons of First Ashland's consolidated financial condition
and operating performance with the published financial
statements and market price data of publicly traded thrift
institutions in general and publicly traded thrift institutions
in First Ashland's region of the United States specifically;
(7) The relevant market information regarding the First Ashland
Shares including trading activity and information on options to
purchase First Ashland Shares;
(8) Other financial and pricing analyses and investigations as
deemed necessary, including a comparative financial analysis and
review of the financial terms of other pending and completed
acquisitions of companies considered to be generally similar to
First Ashland;
(9) Examination of First Ashland's economic operating environment
and the competitive environment of First Ashland's market
area;
(10) Available financial reports and financial data for Camco,
including annual reports to stockholders and Form 10-KSB reports
covering the fiscal years 1992 through 1995, quarterly
regulatory reports, Form 10-QSB reports, other internal and
regulatory financial reports provided by
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<PAGE> 35
management of Camco and other published financial data;
Camco's banking office network; and the pricing trends of
Camco Shares, as reported on Nasdaq, and dividend payment
history; and
(11) Interviews with senior management of Camco, including a
discussion of Camco's business and prospects.
The fairness opinions state that CRG has relied on the accuracy and
completeness of the information provided by the parties to the Agreement and the
representations and warranties in the Agreement, without independent
verification. CRG did not make an independent evaluation or appraisal of the
assets of First Ashland or Camco.
The summary set forth below describes the approaches utilized by CRG in
support of its March 22, 1996 fairness opinion. It does not purport to be a
complete description of the analyses performed by CRG in this regard.
OVERVIEW OF VALUATION METHODOLOGY. In preparing its fairness opinion, CRG
evaluated whether the financial proposal for acquisition was fair from a
financial point of view to the stockholders of First Ashland. The fairness of
the acquisition offer was determined by comparing the offer to acquisition
offers received by other comparable types of companies over a time-frame that
reflects a similar economic environment. The comparison included an examination
of key financial characteristics of the comparative acquisition companies,
including balance sheet, earnings and credit risk characteristics.
First Ashland's key operating statistics and ratios through December 31,
1995, were compared to a select group of thrift institutions that have also
been the subject of a proposed or completed acquisition. It is important to
note that the comparative group utilized in the fairness opinion was comprised
only of thrift institutions (rather than commercial banks), given the
distinctive financial, operating and regulatory characteristics of the thrift
industry. These thrift institutions were divided into two broad categories for
purposes of the analysis: (1) institutions that have recently completed an
acquisition; and (2) institutions subject to a pending acquisition. CRG
reviewed relevant acquisition pricing ratios, notably offer price-to-earnings,
offer price-to-book value (and price-to-tangible book value), offer
price-to-market value (or trading price, before the announcement, where
available), offer price-to-deposits, and offer price-to-assets of the
comparative group and compared these ratios to those of First Ashland. The
analysis included a review and comparison of the mean and median pricing ratios
represented by a sample of 27 comparative group thrifts concentrated in the
midwestern, mid-Atlantic, and southeastern United States.
PRICING COMPARISON. Based on an assumed offer price of $20.49 for each
outstanding First Ashland Share (which is based on Camco's average of the bid
and asked prices on March 22, 1996, of $17.88 per share), there resulted the
following acquisition pricing ratios for First Ashland relative to those of the
comparative group:
- First Ashland's price/earnings multiple of 35.95x substantially
exceeded the mean and median price/earnings multiples of the
comparative group. The mean and median price/earnings multiples of
the comparative group were 25.90x and 23.20x, respectively;
- First Ashland's price/tangible book value ratio of 127.4% compared
to the mean and median price/tangible book value ratios of 146.9% and
143.1%, respectively, for the comparative group;
- First Ashland's price/deposits ratio of 48.7% compared to the mean
and median price/deposits ratios of 29.9% and 28.3%, respectively,
for the comparative group;
- First Ashland's price/assets ratio of 33.2% compared to the mean and
median price/assets ratios of 23.4% and 22.5%, respectively, for the
comparative group; and
- First Ashland's offer price/trading price ratio of 134% compared to
the mean and median offer price/trading price ratios of the
comparative group of 120% and 119%, respectively.
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<PAGE> 36
As part of its pricing analysis, CRG noted that First Ashland had a
particularly high level of capital (consolidated net worth equaled over 26%).
Acquirers are usually willing to pay a premium for a normal level of capital and
only dollar-for-dollar for excess capital. Therefore, this generally results in
below average price/tangible book value ratios for highly capitalized companies.
Partly due to this reason, CRG placed greater emphasis on the price/earnings
approach versus the price/book value (and price/tangible book value) approach.
In analyzing the reasonableness of First Ashland's acquisition pricing
ratios relative to those of the comparative group, CRG considered the following
factors:
- First Ashland reported a lower level of profitability compared to
that of the comparative group. First Ashland's return on assets
("ROA") of 87 basis points compared to an average ROA of 103 basis
points for the comparative group;
- First Ashland's lower level of profitability was attributable to
a moderately lower net interest margin and non-interest income
level, partially offset by modestly lower non-interest operating
expenses relative to the comparative group;
- First Ashland's lower ROA and higher net worth ratio translated
into a substantially lower return on equity ("ROE"). First
Ashland's ROE of 4.08% compared to an average and median ROE for
the peer group of 6.67% and 6.17%, respectively; and
- A review of other important financial ratios indicated that First
Ashland's non-performing asset level compared unfavorably to that
of the peer group.
Therefore, based on the above financial comparisons, CRG believed that,
on balance, First Ashland's acquisition pricing ratios were reasonable when
compared to the comparative group's acquisition pricing ratios.
Also, CRG noted that at the time of its initial public offering in
April 1995, First Ashland's conversion price was $10.00 per share. In March
1996, prior to the public announcement of First Ashland's agreement to be
acquired by Camco, First Ashland's stock was mostly trading in a price range of
$15.00 to $15.50 per share. Thus the acquisition price of $20.49 per share was
significantly above First Ashland's recent historical trading prices.
DISCOUNTED DIVIDEND STREAM AND TERMINAL VALUE ANALYSIS. CRG also
performed an analysis of potential returns to stockholders of First Ashland,
which was based on an estimate of the First Ashland's future cash dividend
streams to stockholders and First Ashland's future stock price and sell-out
price (terminal value). This analysis assumed First Ashland was not acquired but
remained independent for at least three to five years. The analysis utilized
certain key assumptions for First Ashland, including the most likely asset
growth and earnings level scenario. The analysis also incorporated stock
repurchases by First Ashland of between zero and 10 percent annually and assumed
regular, periodic dividend payments.
To approximate the range of terminal values of First Ashland common
stock at the end of a three-year and five-year period, CRG applied a
price-to-earnings multiple of 26x, and a price/tangible book value ratio of
147%. The resulting terminal values and dividend streams were then discounted to
present values using different discount rates (ranging from 10% to 15%) chosen
to reflect different assumptions regarding required rates of return of holders
or prospective buyers of First Ashland common stock.
The analysis indicated a present value for the First Ashland Shares and
future dividend payments ranging from $15.29 per share (based on a 15% discount
rate) to $17.45 per share (based on a 10% discount rate), assuming First Ashland
is acquired after three years, and a present value ranging from $13.85 per share
(based on a 15% discount rate) to $17.21 per share (based on a 10% discount
rate) assuming First Ashland is acquired after five years.
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<PAGE> 37
The results of the above described analysis confirmed that the Per
Share Merger Consideration being offered by Camco to First Ashland stockholders
was reasonable.
SUMMARY OF UPDATED OPINION OF AUGUST 5, 1996. In support of its updated
opinion of August 5, 1996, CRG updated its comparative financial and acquisition
pricing analysis previously described under "- Overview of Valuation
Methodology" and "- Pricing Comparison". The updated analysis reflected First
Ashland's financial data through March 31, 1996 and considered other relevant
acquisition transactions which were announced subsequent to the date of CRG's
original opinion of March 22, 1996. The updated analysis also reflected the
trading prices for Camco's Shares through August 5, 1996, and the revised Stock
Consideration based on the 5% stock dividend paid by Camco in July 1996.
Based on an assumed offer price of $21.49 for each outstanding First
Ashland share (which is based on Camco's average of the bid and asked prices on
August 5, 1996, of $18.50 per share), the updated analysis reflected the
following acquisition pricing ratios for First Ashland:
- Price/earnings multiple of 33.06x
- Price/tangible book value ratio of 134.3%
- Price/deposits ratio of 51.8%
- Price/assets ratio of 36.2%
- Price/trading price ratio of 141%
Pursuant to the terms of an engagement letter dated January 18, 1996,
First Ashland has agreed to pay CRG an hourly rate ranging from $50 to $300 for
acting as financial advisor in connection with the Merger, $40,000 for issuing
its opinion and $2,500 for each update of that opinion. Whether or not the
Merger is consummated, First Ashland also has agreed to reimburse CRG for
reasonable out-of-pocket expenses and to indemnify CRG and certain related
persons against certain liabilities relating to or arising out of its
engagement.
Also, CRG delivered to the management of First Ashland a due diligence
report dated March 4, 1996, which provided a financial review of Camco and
presented a pricing comparison of Camco to a peer group of other publicly-traded
thrift institutions. Such report was considered by CRG as part of the total
analysis supporting its fairness opinion conclusion.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS OF CAMCO AND FIRST ASHLAND
The Board of Directors of Camco unanimously recommends that the
stockholders of Camco vote FOR the adoption of the Agreement. The Board of
Directors of Camco believes that the terms of the Merger are fair to, and in the
best interests of, Camco's stockholders.
The Board of Directors of First Ashland unanimously recommends that the
stockholders of First Ashland vote FOR the adoption of the Agreement. The Board
of Directors of First Ashland believes that the terms of the Merger are fair to,
and in the best interests of, First Ashland's stockholders.
THE MERGER
EXCHANGE OF FIRST ASHLAND SHARES
If the Agreement is adopted by the affirmative vote of the holders of a
majority of the issued and outstanding Camco Shares and by the affirmative vote
of the holders of a majority of the issued and outstanding First Ashland Shares,
if all necessary regulatory approvals are received and if certain other
conditions to the consummation of the Merger, including the approval of the
Amendment, are satisfied or waived, First Ashland will merge with and into Camco
and Camco will be the continuing and surviving corporation in the Merger. At the
Effective Time, each First Ashland Share will be cancelled and extinguished in
consideration and exchange for the Per Share Merger Consideration.
The Per Share Merger Consideration, consisting of the Cash
Consideration of $9.00 and the Stock Consideration of .67492 Camco Shares, is
subject to possible adjustment, as follows:
(1) In accordance with the Market Value Adjustment, if, based on
the average bid and asked price quotes of Camco Shares on
Nasdaq National Market ("Nasdaq") on the last day of trading
prior to the date of the closing of the Merger (the "Market
Value"), the value of the Cash Consideration exceeds the value
of the Stock Consideration, then the Cash Consideration shall
be reduced until it equals 48% of the Per Share Merger
Consideration and the Stock Consideration shall be increased
until it equals 52% of the Per Share Merger Consideration,
after taking into account any cash payments to First Ashland
Dissenting Stockholders;
(2) In accordance with the Market Average Adjustment, if the
Market Average, which is the average of the bid and asked
quotes for Camco Shares on Nasdaq for the 20 consecutive full
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<PAGE> 38
trading days ending on the day prior to the date of the
closing of the Merger, is less than $15.24 per share or more
than $19.05 per share, the Per Share Merger Consideration will
be adjusted. If the Market Average is less than $15.24, but
not less than $13.33, then the Stock Consideration shall be
the quotient of (a) 11.57 divided by (b) 17.14 minus the
difference between $15.24 and the Market Average, carried to
five decimal places. If the Market Average is less than
$13.33, First Ashland may terminate the Agreement and the
Merger, or the Market Average will be presumed to be $13.33
for purposes of this calculation. If the Market Average is
more than $19.05 but not more than $20.95, then the Stock
Consideration shall be the quotient of (a) 11.57 divided by
(b) 17.14 plus the difference between $19.05 and the Market
Average, carried to five decimal places. If the Market Average
is more than $20.95, Camco may terminate the Agreement and the
Merger, or the Market Average will be presumed to be $20.95
for purposes of this calculation; and
(3) In accordance with the Environmental Adjustment, if the
estimated environmental clean-up and remediation costs for the
Bank's main office and Russell branch office (as determined
pursuant to the Agreement) exceed $25,000, then the Cash
Consideration shall be reduced by 130% of the quotient of (a)
such environmental costs divided by (b) the number of
outstanding First Ashland Shares.
As used in this Prospectus and Joint Proxy Statement, the term "Per Share Merger
Consideration" shall include the foregoing adjustments, to the extent applicable
at the Effective Time in accordance with the Agreement. The Market Average
levels of $15.24 and $19.05 in the Market Average Adjustment are designed to
protect both the Camco stockholders and the First Ashland stockholders from a
significant change in the value of the Camco Shares beyond what had been the
recent range of market values prior to the date of the Agreement. The Market
Value Adjustment protects First Ashland stockholders from recognizing gain on
the stock portion of the Per Share Merger Consideration. The Environmental
Adjustment protects Camco in the event of environmental remediation and clean-up
costs in excess of a level deemed acceptable by Camco.
On July 10, 1996, Camco paid a 5% stock dividend. Pursuant to the terms
of the Agreement, which provides for an adjustment of the Stock Consideration
upon the occurrence of certain specified events, including a stock dividend, the
Stock Consideration has been increased by 5% to .67492 Camco Shares and the
prescribed values in the Market Average Adjustment have been adjusted
proportionately from the levels reflected in the Agreement to $13.33, $15.24,
$19.05 and $20.95.
On August 8, 1996, the last day of trading before the date of this
Prospectus and Joint Proxy Statement, the Market Value Adjustment, Market
Average Adjustment and the Environmental Adjustment would not have affected the
Per Share Merger Consideration. No assurance can be given, however, that none of
the adjustments will be required at the Effective Time.
The impact of the Market Value Adjustment depends on the Market Value
and whether the Market Average Adjustment is in effect. If no Market Average
Adjustment is required, and the Stock Consideration is .67492 Camco Shares, the
Market Value Adjustment would not be required unless the Market Value of Camco
Shares is less than or equal to $13.33 per share. The Market Value of Camco
Shares at which the Market Value Adjustment is required will change if the Stock
Consideration is below or above .67492 Camco Shares as a result of the Market
Average Adjustment.
Pursuant to the Market Average Adjustment and without consideration of
the impact of the Market Value Adjustment or the Environmental Adjustment, the
amount of the Stock Consideration and the Value of the Per Share Merger
Consideration could change as follows:
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<PAGE> 39
<TABLE>
<CAPTION>
Value of Per Share Merger
Market Average Stock Consideration Consideration (1)
-------------- ------------------- -----------------
<S> <C> <C> <C>
Less than $13.33 .75968 Less than $19.13
$13.33 .75968 $19.13
14.29 .71464 19.21
15.24-19.05 .67492 19.29 - 21.86
20.00 .63958 21.79
20.95 .60767 21.73
More than 20.95 .60767 More than 21.73
<FN>
- -----------------------------
(1) Includes the Cash Consideration of $9.00 per share and assumes that the
value of the Camco Shares received is equal to the stated Market
Average. In the event of a Market Average Adjustment, without giving
effect to the Environmental Adjustment, the value of the Per Share
Merger Consideration will vary and can result in values lower than
$19.13 per share or more than $21.73 per share, depending on market
conditions. If the Market Average is less than $13.33, First Ashland
may terminate the Agreement. If First Ashland does not elect to
terminate the Agreement, the Stock Consideration will be the same as if
the Market Average were $13.33, and the value of the Per Share Merger
Consideration will be less than $19.13. If the Market Average is more
than $20.95, Camco may terminate the Agreement. If Camco does not elect
to terminate the Agreement, the Stock Consideration will be the same as
if the Market Average were $20.95, and the value of the Per Share
Merger Consideration will be more than $20.73 The Agreement establishes
no minimum or maximum value for the Per Share Merger Consideration.
</TABLE>
The amount of estimated environmental clean-up and remediation costs
included in the Environmental Adjustment shall be determined based on the
analysis of such properties conducted by environmental experts retained by Camco
and First Ashland. If the reports of such experts provide alternative
remediation methods with differing costs, the least costly method required to
meet applicable regulatory standards, consistent with the highest and best use
of the property will be the amount of the costs for purposes of calculating the
Environmental Adjustment. If the resultant Environmental Adjustment exceeds a
$.2734 reduction to the Cash Consideration, the Bank may terminate the
Agreement. In order for the Environmental Adjustment to reach that level, the
estimated environmental clean-up and remediation costs would have to exceed
$307,744. Based on initial reports received from the environmental experts,
Camco and First Ashland do not believe the estimated environmental costs will
reach that level.
As of the date of this Prospectus and Joint Proxy Statement, there were
1,463,039 First Ashland Shares issued and outstanding and 129,598 First Ashland
Shares subject to outstanding First Ashland Options, the exercise price of each
of which was $14.25. Each First Ashland Option not exercised prior to the
Effective Time will be assumed by Camco and become an option to purchase a
number of Camco Shares equal to the product of the number of the First Ashland
Shares subject to the option times the Option Exchange Ratio. Based on the
Market Value of Camco Shares and the value of the Per Share Merger Consideration
on August 8, 1996, the options for approximately 150,333 Camco Shares will be
issued to holders of First Ashland Options. The exercise price for such options
will equal the quotient of the $14.25 exercise price of the First Ashland
Options divided by the Option Exchange Ratio which, based on the Market Value of
Camco Shares and the value of the Per Share Merger Consideration on August _,
1996, the last trading date prior to the date of this Prospectus and Joint Proxy
Statement, would be $12.28 per share.
Due to restrictions on the exercise of First Ashland Options under the
terms of the Stock Option and Incentive Plan of First Ashland, it is unlikely
that any First Ashland Options will be exercised prior to the Effective Time.
Assuming that none of the First Ashland Options is exercised before the
Effective Time, there will be
29
<PAGE> 40
1,463,039 First Ashland Shares issued and outstanding at the Effective Time.
Assuming none of the potential adjustments to the Per Share Merger Consideration
are in effect, the aggregate Per Share Merger Consideration to First Ashland
stockholders would consist of $13.2 million in cash and 987,434 Camco Shares.
This would increase total outstanding Camco Shares, assuming no outstanding
Camco options are exercised prior to the Effective Time, to 3,063,075.1, of
which 32.2% would be held by former First Ashland stockholders.
FRACTIONAL SHARES
No fractional shares of Camco will be issued in the Merger. In lieu of
any such fractional shares, Camco will pay to each holder of First Ashland
Shares who otherwise would be entitled to receive a fraction of a Camco Share an
amount in cash based on the Market Value of Camco Shares at the Closing Date. No
dividend or distribution with respect to Camco Shares will be payable on or with
respect to any fractional share and such fractional share interests will not
entitle the owner thereof to vote or to exercise any other rights of a
stockholder of Camco.
PAYMENT OF CASH CONSIDERATION
The Cash Consideration will be paid by Camco utilizing approximately
$6.6 million of the assets of First Ashland on a parent-company only basis and a
loan from an unrelated commercial bank. Camco has a loan commitment from a
commercial bank in the amount of $13.2 million to finance the payment of the
Cash Consideration. The amount of funds actually borrowed by Camco pursuant to
the commitment will depend upon the amount of First Ashland assets available
immediately after the Effective Time.
The loan will have a term of 60 days with no amortization schedule and
no prepayment penalty. The floating interest rate will be the prime rate for the
lending bank less one quarter of 1% and the commitment fee was $10,000. The
collateral for the loan will be the voting stock of the Banking Subsidiaries.
Camco intends to repay the loan within 60 days after the Effective Time
utilizing cash and liquid assets currently held directly by First Ashland and
the $6.7 million or more available for the payment of dividends by the Bank
without regulatory approval.
EXCHANGE OF CERTIFICATES EVIDENCING FIRST ASHLAND SHARES
As soon as practicable after the Effective Time, the Exchange Agent
will mail to each holder of record of a certificate or certificates which
immediately before such consummation evidenced outstanding First Ashland Shares
(the "Certificates") a form letter of transmittal. The letter of transmittal
will contain instructions for effecting the surrender of the Certificates in
exchange for cash and certificates evidencing Camco Shares. Upon surrender of a
Certificate, together with such letter of transmittal, duly executed, to the
Exchange Agent for exchange and cancellation, the holder of such Certificate
will be entitled to receive cash and a certificate evidencing the number of
Camco Shares to which such Certificate holder will have become entitled pursuant
to the provisions of the Agreement. Unless and until Certificates are
surrendered for exchange, no dividend or other distribution declared or payable
to holders of record of Camco Shares as of any time subsequent to the
consummation of the Merger will be paid to the holder of any such unsurrendered
Certificate, and such holder's other rights as a stockholder of Camco will be
suspended.
Any stockholder of First Ashland who has lost or misplaced a
Certificate should immediately contact Sandra S. Smith, First Ashland Financial
Corporation, 1640 Carter Avenue, Ashland, Kentucky 41101 at (606)
30
<PAGE> 41
324-5138. A written statement detailing the procedures for replacing the lost
Certificate will be mailed to the stockholder following such contact.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Each of Camco, First Ashland and the Bank has made certain
representations and warranties in the Agreement with respect to various matters.
Such matters include, as to each of Camco, First Ashland and the Bank,
representations and warranties regarding corporate organization and authority,
capital, financial condition, past conduct of business, legal proceedings and
business condition. In addition, First Ashland and the Bank have each made
certain other representations and warranties regarding investments, properties,
taxes, contracts, employee benefit plans and other matters.
Camco, First Ashland and the Bank have also each made certain covenants
in the Agreement. First Ashland and the Bank have agreed to conduct their
business during the period between March 25, 1996, and the Effective Time only
in the ordinary course consistent with past practice, except to the extent
authorized in writing by Camco. In addition, First Ashland and the Bank must not
solicit or initiate any proposals or offers from any person, or discuss or
negotiate with any such person or entity, in respect of any acquisition or
purchase of all or a material amount of the assets of, any equity security of,
or any merger, consolidation or business combination with, First Ashland or the
Bank (collectively, an "Acquisition Transaction"), subject to the good faith
exercise of the fiduciary duties of the Board of Directors of First Ashland. In
the event that First Ashland accepts in any manner an Acquisition Transaction,
First Ashland must pay to Camco $200,000 in immediately available federal funds
upon the execution of any agreement in respect of such Acquisition Transaction.
First Ashland has also agreed to establish and take, at the request of
Camco and to the extent permitted by law and consistent with GAAP and the
fiduciary duties of the directors of First Ashland, such reserves and accruals
to conform First Ashland's loan, accrual and reserve policies to Camco's
policies; to implement such policies with respect to excess facilities and
equipment capacity, severance costs, litigation matters, write-offs or
write-downs of various assets and other appropriate accounting adjustments; and
to recognize for financial accounting purposes such expenses of the Merger and
restructuring charges related to or to be incurred in connection with the
Merger. First Ashland does not have to establish and take such reserves and
accruals, however, unless certain conditions to closing have been satisfied and
unless Camco certifies to First Ashland in writing that Camco is not aware of
any facts or circumstances which would permit Camco to terminate the Agreement.
In addition, Camco has agreed to indemnify the officers and directors
of First Ashland from and against certain liabilities for a three-year period
beginning at the Effective Time upon a determination that the appropriate
standard of conduct under the Camco Certificate, the By-laws of Camco and
applicable law has been met and that indemnification is permissible under
applicable law.
CONDITIONS
The obligation of each of Camco and First Ashland to consummate the
Merger is subject to a number of conditions, including, but not limited to, the
approval of the Amendment by the holders of a majority of the outstanding Camco
Shares, the adoption of the Agreement by the affirmative vote of the holders of
a majority of the issued and outstanding Camco Shares and by the affirmative
vote of the holders of a majority of the issued and outstanding First Ashland
Shares and the receipt of all necessary regulatory approvals.
The obligation of Camco to consummate the Merger is also subject to a
number of conditions, including, but not limited to, the truth, in all material
respects, of all of First Ashland's and the Bank's representations and
warranties in the Agreement; the performance and compliance by First Ashland and
the Bank of all agreements, covenants and conditions in the Agreement; the
absence of a material adverse change in the financial condition, assets,
liabilities, obligations, properties or prospects of First Ashland after the
date of the Agreement; the exercise of dissenters' rights by the holders of not
more than 5% of the First Ashland Shares; First Ashland stockholders'
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<PAGE> 42
equity at the Effective Time, as calculated in accordance with GAAP in an amount
not less than $23.8 million, exclusive of expenses related to the Merger,
certain material adverse changes defined in the Agreement and reserves, accruals
and charges taken or established by First Ashland at the request of Camco; and a
Market Average of Camco Shares just prior to the Closing Date of no more than
$20.95.
The obligation of First Ashland to consummate the Merger is also
subject to a number of conditions, including, but not limited to, the truth, in
all material respects, of all of Camco's representations and warranties in the
Agreement; the material performance and compliance of Camco of all agreements,
covenants and conditions in the Agreement; the absence of a material adverse
change in the financial condition, assets, liabilities, obligations, properties,
business or prospects of Camco after the date of the Agreement; and a Market
Average of Camco Shares prior to Closing equal to or greater than $13.33.
Any of the foregoing conditions may be waived by the party which is
entitled to the benefits thereof.
EFFECTIVE TIME
Following the satisfaction or waiver of all conditions set forth in the
Agreement, a Certificate of Merger in respect of the Merger will be filed as
soon as practicable with the Secretary of State, after which the Merger will be
consummated. It is currently anticipated that the Merger will be consummated in
October 1996.
TERMINATION AND AMENDMENT
The Agreement may be terminated and the Merger abandoned by either
Camco or First Ashland upon the occurrence of certain events, including the
mutual agreement of Camco and First Ashland and the failure to consummate the
Merger on or before February 28, 1997. In addition, either Camco or First
Ashland may terminate the Agreement if any event occurs which, in the reasonable
opinion of either Camco or First Ashland, precludes compliance with any one of
the conditions to the obligation to consummate the Merger.
If the Agreement is terminated because the Board of Directors of First
Ashland is authorized pursuant to the Agreement to recommend an Acquisition
Transaction to the First Ashland stockholders or the First Ashland stockholders
do not adopt the Agreement, First Ashland shall pay to Camco, within two
business days, $200,000. If the Agreement is terminated because the Camco
stockholders do not approve the Amendment or adopt the Agreement, Camco shall
pay First Ashland, within two business days, $200,000.
The Agreement may be amended by Camco, First Ashland and the Bank by
action of their respective Boards of Directors and in an instrument in writing
signed by Camco, First Ashland and the Bank. The Agreement may be amended at any
time before or after the Camco Special Meeting or the First Ashland Special
Meeting. An amendment of the Agreement which materially and adversely affects
the rights of the stockholders of either or both of Camco and First Ashland and
which takes place after the Camco Special Meeting or the First Ashland Special
Meeting, however, will not be made without further approval of the affected
stockholders. If necessary, such approval would be sought at a subsequent
meeting of the affected stockholders.
INTERESTS OF CERTAIN PERSONS
The Board of Directors and executive officers of Camco have indicated
their intention to vote the Camco Shares held by them in favor of the approval
of the Amendment and the adoption of the Agreement. On the Camco Record Date,
such executive officers and directors, as a group, owned an aggregate of
335,345.7 Camco Shares. At such date, the executive officers and directors of
Camco also held options to purchase 36,664 Camco Shares. The total of the Camco
Shares owned by, and options to purchase Camco Shares held by, the executive
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officers and directors of Camco on the Camco Record Date represented 17.35% of
the total of issued and outstanding Camco Shares and outstanding options.
The directors and executive officers of First Ashland have indicated
their intention to vote the First Ashland Shares held by them in favor of the
adoption of the Agreement and have executed agreements to that effect. On the
First Ashland Record Date, such executive officers and directors, as a group,
owned an aggregate of 222,560 First Ashland Shares. At such date, the executive
officers and directors of First Ashland also held options to purchase 129,598
First Ashland Shares. The total of the First Ashland Shares owned by, and
options to purchase First Ashland Shares held by, the executive officers and
directors of First Ashland on the First Ashland Record Date represented 22.11%
of the total of issued and outstanding First Ashland Shares and outstanding
options.
The Agreement provides for certain benefits to directors, officers and
employees of First Ashland. All participants in First Ashland's ESOP who are
involuntarily terminated, without cause, prior to receiving a complete
distribution from the ESOP will receive a cash bonus equal to the amount such
distribution would have been if received. Paul D. Leake, President of First
Ashland and the Bank will have an employment contract with the Bank after the
Merger. See "MANAGEMENT OF FIRST ASHLAND - Executive Compensation - Employment
Agreement." The Bank's Management Incentive Compensation Plan (the "Incentive
Plan") will be amended to ensure certain levels of bonuses at specified earnings
levels of the Bank. See "MANAGEMENT OF FIRST ASHLAND - Executive Compensation -
Incentive Compensation." The officers of the Bank will enter into severance
agreements for one year's salary in the event of any change of control
acquisition, other than the Merger. See "MANAGEMENT OF FIRST ASHLAND - Executive
Compensation - Severance Compensation." After the Merger, through December 31,
2000, Camco has agreed to maintain an Ashland Kentucky Advisory Board (the
"Advisory Board") consisting of any directors of the Bank who cease serving as
directors prior to December 31, 2000, and any of the fifteen current employees
of the Bank who are involuntarily terminated prior to December 31, 2000, if any.
Such Advisory Board shall meet at least twice a year, as determined by Camco,
and its members will be paid $100 per meeting attended.
MANAGEMENT AND OPERATIONS OF CAMCO FOLLOWING THE CONSUMMATION OF THE MERGER
After the Effective Time, the Board of Directors and executive officers
of Camco will consist of the same persons who presently serve on the Board of
Directors and as executive officers of Camco, except that Paul D. Leake, a
Director and President of First Ashland and the Bank, will serve on Camco's
Board.
RESALE OF CAMCO SHARES
The Camco Shares to be issued upon the consummation of the Merger have
been registered with the Commission under the Securities Act and will be freely
transferable, except for Camco Shares received by persons who may be deemed to
be affiliates of First Ashland or Camco. The term "affiliate" is defined in Rule
145 promulgated under the Securities Act and generally includes executive
officers and directors. Affiliates may not sell their Camco Shares, except
pursuant to an effective registration statement under the Securities Act
covering such Camco Shares or in compliance with Rule 145 or another applicable
exemption from the registration requirements of the Securities Act.
FEDERAL INCOME TAX CONSEQUENCES
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED
FOR GENERAL INFORMATION ONLY. FIRST ASHLAND STOCKHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND
OTHER TAX LAWS. NEITHER CAMCO NOR FIRST ASHLAND HAS REQUESTED OR OBTAINED A
RULING FROM THE IRS.
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It is anticipated that the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Code. Even
though the Merger will be a "tax-free" reorganization, First Ashland
stockholders will receive tax free only Camco Shares in accordance with Section
354 of the Code. Section 356(a)(1) of the Code provides that if a stockholder of
the acquired corporation in a reorganization receives "boot" as well as
nonrecognition property, his or her gain, if any, is to be recognized, but in an
amount not in excess of the boot. Since First Ashland stockholders will receive
cash boot for each First Ashland Share in addition to receiving Camco Shares,
their gain, if any, must be recognized, but not in excess of the cash received.
Section 356(c), however, precludes a First Ashland stockholder from recognizing
any loss which may be realized on the exchange of First Ashland Shares for both
Camco Shares and cash.
Section 356 also determines whether any gain realized will be
taxed as ordinary income or as capital gain. Section 356(a)(2) provides that, if
the exchange has the "effect of the distribution of a dividend," the taxpayer's
recognized gain must be so treated to the extent of his ratable share of
earnings and profits. Such dividend will qualify for the dividends-received
deduction generally allowed to corporations, subject to certain limitations
under the Code. In determining whether the receipt of boot has the effect of the
distribution of a dividend, the courts and the IRS agree that the principles
developed in interpreting the redemption provisions of Section 302 of the Code
are applicable to cases under Section 356. Furthermore, the precise formula for
the application of a Section 302(b)-type analysis to acquisitive reorganizations
was prescribed by the United States Supreme Court in Commissioner v. Clark. In
Clark, the Court treated a tax-free exchange of stock accompanied by cash boot
as though the stockholder of the acquired corporation had received only stock of
the acquiring corporation, part of which stock was immediately redeemed by the
acquiring corporation for cash. The IRS reflected this conclusion in Rev. Rul.
93-61, 1993-2 C.B. 188. This ordering almost always will produce a
disproportionate redemption under Section 302(b)(2) or at least a meaningful
reduction under Section 302(b)(1) and, therefore, result in a capital gain
treatment.
In general, in order for a holder of First Ashland Shares to
qualify for substantially disproportionate redemption treatment under Section
302(b)(2), the following conditions must be satisfied immediately after the
Merger: such stockholder's percentage ownership of the total number of Camco
Shares outstanding after the Merger is less than 80 percent of the percentage of
ownership that he or she would have had of the total number of Camco Shares that
would have been outstanding after the Merger if all First Ashland stockholders
(including such stockholders) had received solely Camco Shares with no cash
boot.
This determination must take into account First Ashland Shares
or Camco Shares actually owned by a First Ashland stockholder or constructively
owned by such stockholder under the constructive ownership rules of Section 318
of the Code. Under Section 318, a stockholder is considered to own shares that
are directly or indirectly owned by certain members of his family or by certain
trusts, partnerships or corporations in which he or she has an ownership or
beneficial interest. He or she is also considered to own any shares with respect
to which he or she holds options. The constructive ownership rules are important
in determining whether the tests contained in Section 302 are met. In certain
cases, a holder of First Ashland Shares may be deemed to own constructively
Camco Shares held by persons who do not own First Ashland Shares and do not
participate in the Merger. GIVEN THE COMPLEXITY OF THESE RULES, EACH FIRST
ASHLAND STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR.
In the case of a First Ashland stockholder who receives solely
cash in exchange for First Ashland Shares, such cash will be treated as having
been received by the First Ashland stockholder as a distribution in a redemption
of his or her stock subject to the provisions of Section 302. Such a stockholder
will qualify for capital gain treatment under Section 302(b)(3) as a complete
termination of interest if he or she does not constructively own any stock of
the acquiring corporation within the meaning of Section 318.
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Camco and First Ashland have received an opinion of Vorys,
Sater, Seymour and Pease that the Merger will produce the following material
federal income tax consequences:
1. The Merger will constitute a reorganization under Section
368(a)(1)(A) of the Code. Camco and First Ashland will each be a party
to the reorganization.
2. No gain or loss will be recognized to First Ashland upon
the transfer of its assets to Camco in exchange for Camco's shares,
cash boot, and the assumption by Camco of liabilities of First Ashland.
3. No gain or loss will be recognized to Camco on the receipt
of the assets of First Ashland in exchange for Camco Shares and cash.
4. The basis of the assets of First Ashland in the hands of
Camco will be the same as the basis of such assets in the hands of
First Ashland immediately prior to the merger.
5. The holding period of the assets of First Ashland to be
received by Camco will include the period during which the assets were
held by First Ashland.
6. The gain, if any, to be realized by a First Ashland
stockholder who receives Camco Shares and cash in exchange for his or
her First Ashland Shares will be recognized, but not in excess of the
amount of cash received. If the exchange has the effect of the
distribution of a dividend (determined with the application of Section
318), then the amount of gain recognized that is not in excess of such
stockholder's ratable share of undistributed earnings and profits will
be treated as a dividend. The determination of whether the exchange has
the effect of a distribution of a dividend will be made on a
stockholder-by-stockholder basis in accordance with the principals set
forth in Commissioner v. Clark and Rev. Rul. 93-61, 1993-2 C.B. 188. No
loss will be recognized pursuant to Section 356(c).
7. The basis of the Camco Shares to be received by a First
Ashland stockholder will be the same as the basis of the First Ashland
Shares surrendered in exchange therefor, decreased by the amount of
cash received, and increased by the amount of gain which was recognized
on the exchange. The holding period of Camco Shares to be received by
such First Ashland stockholder will be the same as the holding period
of the First Ashland Shares surrendered in exchange therefor.
8. If a First Ashland stockholder dissents to the Merger and
receives solely cash in exchange for such stockholder's First Ashland
Shares, such cash will be treated as having been received by such
stockholder as a distribution in redemption of such stockholder's First
Ashland Shares, subject to the provisions and limitations of Section
302 of the Code. See "RIGHTS OF FIRST ASHLAND DISSENTING STOCKHOLDERS."
Such stockholder will recognize gain or loss measured by the difference
between the amount of cash received and the proportional tax basis of
the First Ashland Shares so redeemed. Any such loss will be treated as
a loss from the sale of stock and will be taxed as a capital loss if
the First Ashland Shares were held by such stockholder as a capital
asset at the time of the Merger. As discussed below, depending upon the
particular circumstances of each First Ashland stockholder, any such
gain from the sale of stock will be taxable as capital gain or as a
dividend taxable as ordinary income. If, after the receipt of the cash,
a dissenting First Ashland stockholder has completely terminated such
stockholder's actual and constructive ownership interest in First
Ashland or Camco within the meaning of Section 302(b)(3) of the Code,
then any gain recognized on the receipt of cash will be treated as
capital gain if First Ashland Shares were held by such stockholder as a
capital asset at the Effective Time of the Merger. If a dissenting
First Ashland stockholder receiving a cash payment for such
stockholder's First Ashland Shares does not thereby completely
terminate such stockholder's ownership interest in First Ashland or
Camco within the meaning of Section 302(b)(3) of the Code, any gain
recognized on the receipt of cash may be treated as a dividend and
taxed at ordinary income rates unless
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the cash payment received by such stockholder qualifies for treatment
as capital gain under the substantially disproportionate redemption
exemption of Section 302(b)(2) of the Code, discussed above, or under
one of the other exceptions to dividend treatment contained in Section
302. In order to determine whether there has been a complete
termination of actual and constructive interests in Camco, it is
necessary to consider Camco Shares owned by persons from whom ownership
is attributed to such dissenting stockholder under the rules of Section
318 of the Code, discussed above.
BECAUSE OF THE COMPLEXITIES OF THE FEDERAL, STATE AND LOCAL TAX LAWS,
IT IS RECOMMENDED THAT STOCKHOLDERS OF FIRST ASHLAND CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE APPLICABLE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES
RESULTING FROM THE MERGER.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase for accounting purposes.
Accordingly, the assets of First Ashland acquired and liabilities of First
Ashland assumed by Camco in the Merger will be recorded on the books of Camco at
fair value. The excess of the fair value of the assets received over the fair
value of the liabilities assumed will be assigned to specific and unidentified
intangible assets. The resulting intangible assets will be amortized to
operations over the estimated useful life, presently estimated to be 25 years.
RIGHTS OF FIRST ASHLAND DISSENTING STOCKHOLDERS
Holders of First Ashland Shares who so desire are entitled to relief as
dissenting stockholders under DGCL sec. 262. A stockholder of First Ashland will
be entitled to such relief, however, only if the stockholder complies strictly
with all of the procedural and other requirements of DGCL sec. 262. The
following summary does not purport to be a complete statement of the method of
compliance with DGCL sec. 262 and is qualified in its entirety by reference to
the copy of DGCL sec. 262 attached hereto as Appendix D.
A First Ashland stockholder who wishes to perfect his rights as a
dissenting stockholder in the event the Agreement is adopted:
(a) must have been a record holder of the First Ashland Shares
as to which he seeks relief on the First Ashland Record Date and at the
Effective Time;
(b) must not have voted his First Ashland Shares in favor of
adoption of the Agreement; and
(c) must deliver to First Ashland, prior to the First Ashland
Special Meeting, a written demand for an appraisal from the Chancery
Court of the fair cash value of the First Ashland Shares as to which he
seeks relief. Such written demand must state the name of the
stockholder, his address and the number of shares as to which he seeks
relief.
A vote against the adoption of the Agreement will not satisfy the
requirements of a written demand for payment. Any written demand for payment by
a First Ashland Dissenting Stockholder must be mailed or delivered to First
Ashland Financial Corporation at 1640 Carter Avenue, Ashland, Kentucky 41105,
Attention: Paul D. Leake. Because the written demand must be delivered prior to
the First Ashland Special Meeting, it is recommended, although not required,
that a stockholder using the mail should use certified or registered mail,
return receipt requested, to confirm that he or she has made a timely delivery.
Unless the First Ashland Dissenting Stockholder and First Ashland agree
on the fair cash value per share of the First Ashland Shares, either party may,
within 120 days after the service of the written demand by the stockholder, file
a petition in the Chancery Court for an appraisal of the fair cash value of the
First Ashland Shares. As part of such proceeding, the Chancery Court shall
appraise the dissenting shares, determining their fair value exclusive of any
element of value arising from expectation of the Merger, with a fair interest
rate on such
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amount, based on all relevant factors. The costs of the proceeding may be
assessed upon the First Ashland Dissenting Stockholders or Camco, as determined
equitable by the Chancery Court.
First Ashland Dissenting Stockholders will have no voting rights with
respect to their dissenting First Ashland Shares nor will they receive any
dividends or distributions on those shares from First Ashland or Camco.
The rights of any First Ashland Dissenting Stockholder will terminate
if the dissenting stockholder has not complied with DGCL ss.262. For a
discussion of the tax consequences to a stockholder who exercises dissenters'
rights, see "THE MERGER - Income Tax Consequences". In addition, a dissenting
stockholder may withdraw the demand for appraisal within 60 days of the
Effective Time and receive the Per Share Merger Consideration for his or her
First Ashland Shares.
Because a proxy which does not contain voting instructions will be
voted for the adoption of the Agreement, a First Ashland stockholder who wishes
to exercise dissenters' rights must either (i) not sign and return his proxy or,
(ii) if he signs and returns his proxy, vote against or abstain from voting on
the adoption of the Agreement.
PROPOSED AMENDMENT TO THE CAMCO CERTIFICATE
The Camco Certificate currently authorizes 2,600,000 shares of capital
stock, $1.00 par value per share, consisting of 2,500,000 common shares, $1.00
par value, and 100,000 shares of preferred stock, $1.00 par value. As of the
Camco Record Date, there were 2,075,641.1 Camco Common Shares issued and
outstanding, 73,675 Camco Shares reserved for issuance upon the exercise of
options and no shares of preferred stock issued. Therefore, only 350,683 common
shares are available for issuance in the Merger. Each Camco Share entitles the
holder thereof to one vote on each matter properly submitted to the stockholders
for their vote.
In connection with the Merger, Camco will issue 987,434 Camco Shares to
First Ashland stockholders and will have to reserve approximately 149,038 shares
for Camco options issued to holders of First Ashland Options. Additional Camco
Shares may be issued as a result of the impact, if any, of the Market Value
Adjustment or the Market Average Adjustment. Camco does not have adequate
authorized shares to effect the Merger. Camco must authorize at least an
additional 785,789 Camco Shares prior to the Effective Time. If such shares are
not authorized for issuance, the Agreement and Merger will be terminated and
Camco will have to pay a $200,000 termination fee to First Ashland. See "THE
MERGER - Termination and Amendment."
The Amendment provides for the authorization of 1,614,211 Camco Shares
above the level required to effect the Merger. The Board believes an increase in
the total authorized Camco Shares will enable Camco to better meet its future
business needs. In order to have sufficient authorized but unissued shares
available to effect the Merger and for any other possible acquisitions of
financial institutions or for other corporate purposes, such as stock dividends
or stock options, the Board of Directors believes it is advisable to increase
the authorized number of Camco Shares by 2,400,000 to 5,000,000. The proposed
increase in the number of authorized shares will give Camco greater flexibility
in responding quickly to advantageous business opportunities. Any acquisition of
another financial institution would be subject to the approval of one or more
financial institution regulators. Depending on the means by which the
acquisition is completed, Camco's stockholders may not be required to vote on
the acquisition. Other issuances of authorized Camco Shares also may not be
subject to stockholder vote. The stockholders need to approve any proposed
amendment to the Camco Certificate before it can be effective. Therefore, the
Board of Directors of Camco recommends that the stockholders approve the
Amendment, which is included in Appendix E hereto.
Since authorized shares of capital stock of Camco can be issued without
further stockholder approval or pre-emptive rights in existing stockholders, the
Board of Directors could dilute the voting power of existing
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stockholders and the voting power of the shares of Camco Shares and increase the
number of shares which would have to be purchased to obtain control of Camco.
One effect of the Amendment may be to discourage certain potential business
combinations which some stockholders may believe to be in their best interest
and to make more difficult management changes which might occur if the potential
business combination were successful. In addition, the Camco Certificate and the
By-laws of Camco contain provisions that could delay, defer or prevent a change
in control of Camco. See "DESCRIPTION OF CAMCO SHARES - Certain Antitakeover
Provisions in the Camco Certificate and By-laws of Camco."
All Camco Shares, including those now authorized and those which would
be authorized by the Amendment, are equal in rank and have the same voting,
dividend and liquidation rights. Holders of Camco Shares do not have preemptive
rights.
The affirmative vote of the holders of a majority of the outstanding
shares of Camco Shares is required for the adoption of the Amendment.
THE BOARD OF DIRECTORS OF CAMCO RECOMMENDS THAT THE STOCKHOLDERS OF
CAMCO VOTE FOR THE AMENDMENT TO THE CAMCO CERTIFICATE. UNLESS A CONTRARY CHOICE
IS SPECIFIED, PROXIES SOLICITED BY THE BOARD WILL BE VOTED FOR THE AMENDMENT.
SPECIAL MEETING OF CAMCO STOCKHOLDERS
DATE, TIME AND PLACE
The Camco Special Meeting will be held on September 23, 1996,
commencing at 2:00 p.m. local time, at the Pritchard Laughlin Civic Center, 7033
Glenn Highway, Cambridge, Ohio.
PURPOSES OF MEETING
The purpose of the Camco Special Meeting is to consider and act upon
(i) a proposal to vote upon the Amendment, (ii) a proposal to adopt the
Agreement and (ii) such other business as may properly come before the Camco
Special Meeting and any adjournment thereof.
SHARES OUTSTANDING AND ENTITLED TO VOTE AND RECORD DATE
The close of business on August 9, 1996 has been fixed by the Board of
Directors of Camco as the Camco Record Date for the determination of holders of
Camco Shares entitled to notice of and to vote at the Camco Special Meeting and
any adjournment thereof. At the close of business on the Camco Record Date,
there were 2,075,641.1 Camco Shares outstanding and entitled to vote and held of
record by approximately 569 stockholders. Each Camco Share entitles the holder
thereof to one vote on each matter to be submitted to the stockholders of Camco
at the Camco Special Meeting.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
Camco Shares, voting in person or by proxy, will be necessary to approve the
Amendment and to adopt the Agreement. The affirmative vote, therefore, of the
holders of 1,037,821.6 Camco Shares will be necessary to approve the Amendment
and to adopt the Agreement. As of the Camco Record Date, the directors and
executive officers of Camco owned in the aggregate 335,345.7 Camco Shares, or
16.2% of the outstanding Camco Shares. The directors and executive officers of
Camco have indicated that they intend to vote all such Camco Shares for the
Amendment and for the adoption of the Agreement. Assuming the affirmative vote
of all Camco Shares owned by the directors and executive officers of
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Camco, the affirmative vote of an additional 702,475.9 Camco Shares,
representing an additional 33.84% of the outstanding Camco Shares, will be
necessary to approve the Amendment and to adopt the Agreement.
The presence, in person or by proxy, of the holders of a majority of
the outstanding Camco Shares entitled to vote at the Camco Special Meeting is
necessary to constitute a quorum at the Camco Special Meeting. Each Camco
stockholder is entitled to one vote for each Camco Share held. Under applicable
law, shares which are Non-votes will be counted as being present for purposes of
establishing a quorum. The effect of an abstention or Non-vote will be the same
as a vote against the approval of the Amendment and the adoption of the
Agreement. If a proxy is signed and dated by a stockholder but no vote is
specified thereon, the shares represented by such proxy will be voted for the
Amendment and for the adoption of the Agreement.
VOTING AND SOLICITATION AND REVOCATION OF PROXIES
A proxy for use by Camco stockholders at the Camco Special Meeting
accompanies this Prospectus and Joint Proxy Statement and is solicited by the
Board of Directors of Camco. Whether or not a Camco stockholder plans to attend
the Camco Special Meeting, we urge each stockholder to sign, date and return the
enclosed proxy. Without affecting any vote previously taken, any stockholder of
Camco who has executed a proxy may revoke the executed proxy at any time before
the vote by filing with the Secretary of Camco, at the address of Camco set
forth on the Notice of Special Meeting, written notice of such revocation, by
executing a later-dated proxy which is received by Camco before the Camco
Special Meeting, or by attending the Camco Special Meeting and voting in person.
ATTENDANCE AT THE CAMCO SPECIAL MEETING WILL NOT, IN AND OF ITSELF, REVOKE A
PROXY. The Camco Shares represented by each properly executed proxy received
before the Camco Special Meeting and not revoked will be voted at the Camco
Special Meeting, or any adjournment thereof, as specified on such proxy or, in
the absence of specific instructions to the contrary, will be voted for the
Amendment and for the adoption of the Agreement.
As of the date of this Prospectus and Joint Proxy Statement, the Board
of Directors of Camco did not know of any business to be brought before the
Camco Special Meeting, other than as set forth in this Prospectus and Joint
Proxy Statement. If, however, any matters other than those referred to in this
Prospectus and Joint Proxy Statement should properly come before such Camco
Special Meeting, or any adjournment thereof, the persons named as proxies in the
enclosed proxy intend to vote the Camco Shares represented by such proxy on such
matters in accordance with their best judgment in light of the conditions then
prevailing.
Camco will pay its expenses incurred in connection with preparing and
mailing this Prospectus and Joint Proxy Statement, the accompanying proxy and
any other related materials to the stockholders of Camco and all other costs
incurred in connection with the solicitation of proxies on behalf of the Board
of Directors of Camco. Proxies will be solicited by mail and also may be
solicited, for no additional compensation, by officers, directors or employees
of Camco and its subsidiaries by further mailing, by telephone or by personal
contact. Camco will also pay the standard charges and expenses of brokerage
houses, voting trustees, banks, associations and other custodians, nominees and
fiduciaries, who are record holders of Camco Shares not beneficially owned by
them, for forwarding such materials to and obtaining proxies from the beneficial
owners of Camco Shares entitled to vote at the Camco Special Meeting.
SPECIAL MEETING OF FIRST ASHLAND STOCKHOLDERS
DATE, TIME AND PLACE
The First Ashland Special Meeting will be held on September 20, 1996,
commencing at 10:00 a.m., local time, at the AEP Auditorium, 701 Central Avenue,
Ashland, Kentucky.
PURPOSE OF MEETING
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The purpose of the First Ashland Special Meeting is to consider and act
upon (i) a proposal to adopt the Agreement and (ii) such other business as may
properly come before the First Ashland Special Meeting and any adjournment
thereof.
SHARES OUTSTANDING AND ENTITLED TO VOTE AND RECORD DATE
The close of business on August 9, 1996, has been fixed by the Board of
Directors of First Ashland as the First Ashland Record Date for the
determination of holders of First Ashland Shares entitled to notice of and to
vote at the First Ashland Special Meeting and any adjournment thereof. At the
close of business on the First Ashland Record Date, there were 1,463,039 First
Ashland Shares outstanding and entitled to vote and held of record by
approximately 302 stockholders. Each First Ashland Share entitles the holder
thereof to one vote on each matter to be submitted to First Ashland stockholders
at the First Ashland Special Meeting.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
First Ashland Shares, voting in person or by proxy, will be necessary to adopt
the Agreement. The affirmative vote, therefore, of the holders of 731,521 First
Ashland Shares will be necessary to adopt the Agreement. As of the First Ashland
Record Date, the directors and executive officers of First Ashland owned, in the
aggregate, 222,560, or 15.2%, of the outstanding First Ashland Shares. The
directors and executive officers of First Ashland have indicated that they
intend to vote all such First Ashland Shares for the adoption of the Agreement.
Assuming the affirmative vote of all First Ashland Shares owned by the directors
and executive officers of First Ashland, the affirmative vote of the holders of
an additional 508,961 First Ashland Shares, representing an additional 34.79% of
the outstanding First Ashland Shares, will be necessary to adopt the Agreement.
The First Ashland stockholders present, in person or by proxy, at the
First Ashland Special Meeting will constitute a quorum at the First Ashland
Special Meeting. Each First Ashland stockholder is entitled to one vote for each
First Ashland Share held. Under applicable law, shares which are held by a
nominee for a beneficial owner and which are represented in person or by proxy
at the First Ashland Special Meeting but which are Non-votes will be counted as
being present for purposes of establishing a quorum. The effect of an abstention
or Non-vote will be the same as a vote against the adoption of the Agreement. If
a proxy is signed and dated by a stockholder, but no vote is specified thereon,
the shares represented by such proxy will be voted for the adoption of the
Agreement.
VOTING AND SOLICITATION AND REVOCATION OF PROXIES
A proxy for use by First Ashland Stockholders at the First Ashland
Special Meeting accompanies this Prospectus and Joint Proxy Statement and is
solicited by the Board of Directors of First Ashland. Whether or not a First
Ashland Stockholder plans to attend the First Ashland Special Meeting, we urge
each stockholder to use the proxy. Without affecting any vote previously taken,
any stockholder of First Ashland who has executed a proxy may revoke the
executed proxy at any time before the vote by filing with First Ashland, at the
address of First Ashland set forth on the Notice of Special Meeting, written
notice of such revocation, by executing a later-dated proxy which is received by
First Ashland prior to the First Ashland Special Meeting, or by attending the
First Ashland Special Meeting and giving voting in person. ATTENDANCE AT THE
FIRST ASHLAND SPECIAL MEETING WILL NOT, IN AND OF ITSELF, REVOKE A PROXY. The
First Ashland Shares represented by each properly executed proxy received prior
to the First Ashland Special Meeting and not revoked will be voted at the First
Ashland Special Meeting, or any adjournment thereof, as specified on such proxy
or, in the absence of specific instructions to the contrary, will be voted for
the Agreement.
As of the date of this Prospectus and Joint Proxy Statement, the Board
of Directors of First Ashland did not know of any business to be brought before
the First Ashland Special Meeting, other than as set forth in this Prospectus
and Joint Proxy Statement. If, however, any matters other than those referred to
in this Prospectus and
40
<PAGE> 51
Joint Proxy Statement should properly come before such First Ashland Special
Meeting, or any adjournment thereof, the persons named as proxies in the
enclosed proxy intend to vote the First Ashland Shares represented by such proxy
on such matters in accordance with their best judgment in light of the
conditions then prevailing.
First Ashland will pay its expenses incurred in connection with
preparing and mailing this Prospectus and Joint Proxy Statement, the
accompanying proxy and any other related materials to the stockholders of First
Ashland and all other costs incurred in connection with the solicitation of
proxies on behalf of the Board of Directors of First Ashland. First Ashland will
pay the costs and expenses incurred by First Ashland in connection with
preparing and printing this Prospectus and Joint Proxy Statement. Proxies will
be solicited by mail and may be further solicited, for no additional
compensation, by officers, directors or employees of First Ashland by further
mailing, by telephone or by personal contact. First Ashland will also pay the
standard charges and expenses of brokerage houses, voting trustees, banks,
associations and other custodians, nominees and fiduciaries, who are record
holders of First Ashland Shares not beneficially owned by them, for forwarding
such materials to and obtaining proxies from the beneficial owners of First
Ashland Shares entitled to vote at the First Ashland Special Meeting.
41
<PAGE> 52
PRO FORMA UNAUDITED CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
The following are the unaudited condensed combined consolidated
statements of financial condition for Camco and First Ashland at March 31, 1996,
and the pro forma unaudited condensed combined consolidated statement of
financial condition as if the Merger had occurred on March 31, 1996. The
acquisition will be accounted for using the purchase method of accounting which
requires assets acquired and liabilities assumed be recorded at the fair value
at the Effective Date.
<TABLE>
<CAPTION>
At March 31, 1996
-----------------------------------------------------------------------------
Acquisition Pro forma Footnote
Camco First Ashland adjustments combined References
----- ------------- ----------- -------- ----------
Dr. (Cr.)
(Dollars in thousands)
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 17,518 $ 2,909 $ 938 $ 21,365 (1)
Investment securities 19,639 10,975 (12,678) 17,936 (1)(2)
Mortgage-backed securities 5,704 7,242 41 12,987 (3)
Loans receivable - net 286,438 62,536 675 349,649 (4)
Goodwill net of accumulated
amortizations - - 3,250 3,250 (5)
Other assets 14,412 3198 484 18,094 (3)
-------- ------ ------ -------
Total assets $343,711 $86,860 ($ 7,290) $423,281
======== ======= ========= ========
Liabilities:
Total deposits $290,301 $60,646 $(534) $351,481 (3)
Advances from the FHLB 20,069 2,003 873 21,199 (1)
Other liabilities 4,716 580 (20) 5,316
-------- -------- ---------- ----------
Total liabilities 315,086 63,229 319 377,996
Stockholders' equity:
Common stock - 5,000,000 shares,
$1.00 par value, assumed
authorized; 3,057,485 shares
assumed outstanding 2,070 15 (972) 3,057 (2)
Additional paid-in capital 7,683 14,347 (1,311) 23,291 (2)
Employee benefit plans - (1,654) (1,654) - (1)(2)(6)
Retained earnings - substantially
restricted 18,881 10,951 10,951 18,881 (2)
Unrealized gain (loss) on
investment securities
designated as available for sale 41 (28) (28) 41 (2)
--------- ----------- --------- -----------
Total stockholders' equity 28,625 23,631 6,971 45,285
------- -------- ------ ---------
Total liabilities and
stockholders' equity $343,711 $86,860 $7,290 $423,281
======== ======= ====== ========
- ----------------------------
<FN>
(1) Reflects the retirement of the ESOP loan.
(2) Reflects the issuance of additional Camco Shares to consummate the
Merger (as adjusted for a 5% stock dividend effected in July 1996) and
the elimination of First Ashland's stockholders' equity, including
</TABLE>
42
<PAGE> 53
payment of the acquisition indebtedness and the cash portion of the Per
Share Merger Consideration, along with the accrual of acquisition
expenses.
(Footnotes continued on next page)
(3) The pro forma financial statements depict the acquisition of 100% of
the First Ashland Shares for the Per Share Merger Consideration of
.67492 Camco Shares and $9.00 cash. In the Merger, pro forma fair value
adjustments have been effected to reflect mortgage-backed securities at
fair value, total deposits at fair value and premises and equipment,
which are included in other assets, at fair value.
(4) Reflects the adjustment of the loan portfolio to fair value at March
31, 1996.
(5) Goodwill arising from the Merger.
(6) Reflects the termination of First Ashland's ESOP and elimination of
future expense related to First Ashland's Recognition and Retention
Plan ("RRP").
The following are pro forma unaudited condensed combined consolidated
statements of earnings for Camco and First Ashland for the three months ended
March 31, 1996, and on a pro forma basis as if the Merger had occurred at
January 1, 1996.
<TABLE>
<CAPTION>
Three months ended March 31, 1996
--------------------------------------------------------------------
Pro forma
First Acquisition combined after Footnote
Camco Ashland adjustments acquisition references
----- ------- ----------- ----------- ----------
Dr. (Cr.)
(Dollars in thousands, except per share data)
Interest income:
<S> <C> <C> <C> <C> <C>
Loans $6,079 $1,236 $14 $7,301 (7)
Mortgage-backed securities 98 131 - 229
Investment securities 313 174 147 340 (8)
Interest-bearing deposits and
other 153 53 3 203 (9)
------- -------- ----- -------
Total interest income 6,643 1,594 164 8,073
Interest expense:
Deposits 3,237 771 (80) 3,928 (10)
Borrowings 365 41 - 406
------- ------- ----- ------
Total interest expense 3,602 812 (80) 4,334
----- ------ ------- -----
Net interest income 3,041 782 84 3,739
Provision for loan losses 21 15 - 36
------- ------ ------- --------
Net interest income after
provision for loan losses 3,020 767 84 3,703
Other income 944 35 - 979
General, administrative and other
expenses 2,208 485 (59) 2,634 (11)
----- ------ ------- -----
Earnings before income taxes 1,756 317 25 2,048
Income taxes 597 92 (2) 691 (12)
------- ------- ------ -------
Net earnings $ 1,159 $ 225 $ 23 $1,361
======= ===== ==== ======
Earnings per common share $ .56 $ .17 (13)
======= =====
Pro forma earnings per common share $ .45 (14)
======
</TABLE>
43
<PAGE> 54
- -----------------------------
(7) Reflects three months amortization expense of the fair value adjustment
to the loan portfolio using the interest method.
(8) Reflects three months of foregone income on investment securities at a
weighted average rate of 4.64%.
(Footnotes continued on next page)
(9) Reflects three months amortization of the fair value adjustment applied
to the investment portfolio using the interest method.
(10) Reflects three months amortization of the fair value adjustment applied
to the savings deposits, using the interest method.
(11) Reflects cost savings arising primarily from the termination of benefit
plans and other expense reductions, net of three months amortization
expense related to goodwill (25-year term).
(12) Tax effects of pro forma adjustments for notes 7 to 11 above.
(13) Historic weighted average of Camco Shares outstanding totaled 2,070,051
for the three-month period ended March 31, 1996, after giving effect to
the July 1996 5% stock dividend, while historic weighted average of
First Ashland Shares outstanding totaled 1,313,868 for the six-month
period ended March 31, 1996.
(14) Pro forma earnings per common share is based on 3,010,963 weighted
average pro forma shares outstanding, which gives effect to the July
1996 5% stock dividend.
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<PAGE> 55
The following are pro forma unaudited condensed combined consolidated
statements of earnings for Camco and First Ashland for the year ended December
31, 1995, and on a pro forma basis as if the Merger had occurred on January 1,
1995.
<TABLE>
<CAPTION>
Year ended December 31, 1995
------------------------------------------------------------------------
Pro forma
Acquisition combined after Footnote
Camco First Ashland adjustments acquisition references
----- ------------- ----------- ----------- ----------
Dr. (Cr.)
(Dollars in thousands, except per share data)
Interest income:
<S> <C> <C> <C> <C> <C>
Loans $22,939 $4,606 $ 56 $27,489 (15)
Mortgage-backed securities 423 562 - 985
Investment securities 1,570 749 588 1,731 (16)
Interest-bearing deposits and other 508 162 12 658 (17)
--------- ------- ---- --------
Total interest income 25,440 6,079 656 30,863
Interest expense:
Deposits 12,478 3,030 (320) 15,188 (18)
Borrowings 1,779 307 - 2,086
-------- ------- ------ -----
Total interest expense 14,257 3,337 (320) 17,274
------ ----- ----- ------
Net interest income 11,183 2,742 336 13,589
Provision for loan losses (recoveries) 143 (2) - 141
-------- --------- ------ --------
Net interest income after provision for 11,040 2,744 336 13,448
loan losses
Other income 3,293 82 - 3,375
General, administrative and other expense 8,775 1,759 (234) 10,300 (19)
----- ----- ----- ------
Earnings before income taxes 5,558 1,067 102 6,523
Income taxes 1,910 322 10 2,242 (20)
------- ------- ----- -----
Net earnings $ 3,648 $ 745 $112 $4,281
======= ====== ==== ======
Earnings per common share $ 1.76 (21)
=======
Pro forma earnings per common share $ 1.42 (22)
<FN> ======
- --------------------------------
(Footnotes on next page)
(15) Reflects one year amortization expense of the fair value adjustment to
the loan portfolio using the interest method.
(16) Reflects foregone income on investment securities at the weighted
average weight of 4.64% for one year.
(17) Reflects one year amortization of the fair value adjustment applied to
the investment portfolio using the interest method.
(18) Reflects one year amortization of the fair value adjustment applied to
the savings deposits using the interest method.
(19) Reflects cost savings arising primarily from the termination of benefit
plans, net of one year's amortization related to goodwill (25-year
term).
</TABLE>
45
<PAGE> 56
(20) Tax effects of pro forma adjustments for notes 15 to 19 above.
(21) Historic weighted average of Camco Shares outstanding totaled 2,069,104
for the year ended December 31, 1995, after giving effect to the July
1996 5% stock dividend, while historic weighted average of First
Ashland Shares outstanding totaled 1,308,975 for the three-month period
ended December 31, 1995.
(22) Pro forma earnings per common share is based on 3,009,516 weighted
average pro forma Camco Shares outstanding, which gives effect to the
July 1996 5% stock dividend.
CAMCO MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Camco's profitability depends primarily on the level of net interest
income, which is the difference between interest income on interest-earning
assets, principally loans, mortgage-backed securities and investment securities,
and interest expense on deposit accounts and borrowings. In recent years,
Camco's net earnings has also been heavily influenced by the level of other
income, including gains on sale of loans, loan servicing fees and other fees.
Camco's operations are also influenced by the level of general, administrative
and other expenses, including salaries and employee benefits, occupancy and
federal deposit insurance premiums, and federal income tax expense.
Since its incorporation in 1970, Camco has evolved into a full service
provider of financial products to the communities served by its Banking
Subsidiaries. Utilizing a common marketing theme based on Camco's commitment to
personalized customer service, Camco and its affiliates have grown from $22.4
million of consolidated assets in 1970 to $346.5 million of consolidated assets
at December 31, 1995. Camco's rate of growth is largely attributable to its
acquisitions of Marietta Savings and First Federal and the continued expansion
of product lines from the limited deposit and loan offerings which could be
offered in the heavily regulated environment of the 1970s to the wider array of
financial service products that were the previous domain of commercial banking
subsidiaries. Additionally, Camco's operational growth has been enhanced by
vertical integration of the residential lending function through establishing
mortgage banking operations in the Banking Subsidiaries' primary market areas
and, to a lesser extent, by chartering a title insurance agency.
Camco's management believes that continued success in the financial
services industry will be achieved by those institutions with a rigorous
dedication to building value-added customer-oriented organizations. Toward this
end, each of the Banking Subsidiaries' operations are decentralized, with a
separate Board of Directors and management team focusing on consumer preferences
for financial products in the respective communities served. Based on such
consumer preferences, Camco's management designs financial service products with
a view towards differentiating each of the constituent Banking Subsidiaries from
the competition. It is management's opinion that the Banking Subsidiaries'
abilities to rapidly adapt to consumer needs and preferences is essential to
community-based financial institutions in order to compete against the larger
regional and money-center bank holding companies.
FINANCIAL CONDITION AT MARCH 31, 1996
At March 31, 1996. Camco's consolidated assets totaled $343.7 million,
a decrease of $2.8 million, or .8% from the December 31, 1995 total of $346.5
million. The decrease in the current quarter's consolidated assets is primarily
attributable to a decrease of $6.0 million in FHLB advances, which was partially
offset by an increase in deposits of $3.7 million and undistributed net earnings
of $942,000.
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<PAGE> 57
Liquid assets (cash, interest-bearing deposits in other financial
institutions and investment securities) totaled $37.2 million at March 31, 1996,
a decline of $585,000, or 1.6%, from December 31, 1995 levels. Management
elected to utilize excess liquidity to fund repayments on FHLB advances.
Mortgage-backed securities totaled $5.7 million at March 31, 1996, a
decrease of $283,000 from December 31, 1995, due primarily to principal
repayments during the quarter. Loans receivable and loans held for sale
decreased by $2.0 million, or .7%, during the three months ended March 31, 1996,
to a total of $290.7 million. The decrease was primarily attributable to loan
sales of $26.8 million and principal repayments of $15.7 million, which exceeded
loan disbursements of $40.5 million.
Nonperforming loans (90 days or more delinquent plus nonaccrual loans),
totaled $1.3 million and $1.1 million at March 31, 1996 and December 31, 1995,
constituting .45% and .37% of the loan portfolio at those dates. The
consolidated allowance for loan losses totaled $1.1 million and $1.0 million at
March 31, 1996 and December 31, 1995, presenting 84.6% and 95.4% of
nonperforming loans at the respective dates. The provision for loan losses for
the three months ended March 31, 1996 is primarily attributable to growth in the
loan portfolio during that period.
Deposits totaled $290.3 million at March 31, 1996, an increase of $3.7
million, or 1.3%, over December 31, 1995 levels. The increase resulted primarily
from management's continuing efforts to achieve a moderate rate of growth
through advertising and pricing strategies. The proceeds from deposit growth and
excess liquidity were used to repay advances from the Federal Home Loan Bank,
which declined by $6.0 million, or 23.0%, to a total of $20.1 million at March
31, 1996.
The Bank Subsidiaries are required to maintain minimum regulatory
capital pursuant to federal regulations. At March 31, 1996, the Bank
Subsidiaries' regulatory capital exceeded all regulatory capital requirements.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1996 AND MARCH 31, 1995
GENERAL. Camco's net earnings for the three months ended March 31, 1996
totaled $1.2 million, an increase of $536,000, or 86.0%, over the $623,000 of
net earnings reported in the comparable 1995 period. The increase in earnings in
the 1996 period is primarily attributable to an increase in net interest income
of $410,000, in increase in other income of $442,000 and a decrease in the
provision for loan losses of $14,000, which were partially offset by an increase
in general, administrative and other expense of $54,000 and an increase in the
provision for Federal income taxes of $276,000.
NET INTEREST INCOME. Total interest income for the three months ended
March 31, 1996, increased by $721,000, or 12.2%, reflecting the effects of
growth in average interest-earning assets outstanding, coupled with an increase
in yield year-to-year. Interest income on loans and mortgage-backed securities
totaled $6.2 million for the three months ended March 31, 1996, an increase of
$833,000, or 15.6%, over the comparable 1995 quarter. The increase resulted
primarily from the $22.1 million, or 8.0%, increase in the average balance
outstanding year-to-year. Interest income on investments and interest-bearing
deposits declined by $112,000, or 19.4%, due to a decrease in average balances
of $9.5 million. Interest expense on deposits increased by $401,000, or 14.1%,
to a total of $3.2 million for the three months ended March 31, 1996, due
primarily to a $16.3 million increase in the average balance of deposits
outstanding.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans
totaled $21,000 for the three months ended March 31, 1996, a decrease of $14,000
from the comparable period in 1995. The current period provision generally
reflects the effects of loan portfolio growth integrated with a stable level of
nonperforming loans.
OTHER INCOME. Other income increased for the three months ended March
31, 1996 by $442,000, or 88.0%, from the comparable 1995 period. The increase in
other income is primarily attributable to a $376,000 increase in gains on sale
of loans and an increase of $83,000, or 50.6%, in late charges, rent and other,
which was
47
<PAGE> 58
primarily offset by a $13,000 decrease in service charges and other fees on
deposits. The increase in gains on sale of loans reflects an increase in sales
volume year-to-year, coupled with the recognition of mortgage servicing rights,
totaling $310,000 in accordance with SFAS No. 122. The increase in late charges,
rent and other was primarily attributable to a $51,000 increase in fee volume at
East Ohio Title and an increase in fees on loans and deposit accounts as a
result of the growth in the respective portfolios.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased for the three months ended March 31, 1996 by $54,000, or
2.5%. The increase is due primarily to a $35,000, or 15.6%, increase in
occupancy of premises, a $10,000, or 11.1%, increase in data processing, an
$11,000, or 7.2%, increase in federal deposit insurance premiums, a $13,000, or
2.8%, increase in other operating costs and a $16,000, or 17.8%, increase in
franchise taxes, which were partially offset by a $10,000, or 1.0%, decrease in
employee compensation and benefits and a $21,000, or 19.6%, decrease in
advertising. The increase in occupancy of premises is attributable to
depreciation expense on office equipment purchased in 1995 and general repairs
of office buildings. The decrease in employee compensation and benefits is
attributable to increased deferred loan origination costs as a result of the
higher origination volume in 1996. Overall, the net increase of $54,000, or
2.5%, generally reflects management's control over general and administrative
expenses.
FEDERAL INCOME TAX. The provision for federal income taxes increased in
the three months ended March 31, 1996 by $276,000, or 86.0%. This increase is
solely attributable to an $812,000 increase in pre-tax earnings, as the
effective tax rate remained unchanged at 34% for both periods.
FINANCIAL CONDITION AT DECEMBER 31, 1995
Camco's total assets amounted to $346.5 million as of December 31,
1995, an increase of $21.8 million, or 6.7%, over the $324.6 million total as of
December 31, 1994. The increase in the current year follows asset growth of
$47.5 million, or 17.2%, in 1994. The increase in 1995 was funded primarily
through growth in the deposit portfolio of $19.7 million and an increase in
stockholders' equity of approximately $3.0 million.
Cash, interest-bearing deposits and investment securities totaled $37.7
million at December 31, 1995, a decrease of $9.3 million, or 19.7%, from the
1994 total. The decline reflects management's decision to utilize proceeds from
the maturity of investment securities to partially fund loan originations.
Mortgage-backed securities declined by $929,000, or 13.4%, to a total of $6.0
million at December 31, 1995, as a result of principal repayments during the
year.
Loans receivable totaled $292.8 million at December 31, 1995, an
increase of $31.3 million, or 12.0%, over the $261.5 million total at December
31, 1994. The increase resulted primarily from loan originations in excess of
principal repayments of $70.6 million which were partially offset by loan sales
totaling $38.9 million. During 1995 Camco's volume of loan sales in the
secondary market remained relatively consistent with that of the prior year, as
1994 sales totaled $41.3 million.
Asset quality, as measured by the amount of nonperforming loans (90
days or more delinquent plus non-accrual loans), showed improvement in 1994 and
1995. Specifically, nonperforming loans totaled $1.1 million, $1.3 million and
$2.0 million at December 31, 1995, 1994 and 1993, respectively, representing
.37%, .50% and 1.03%, of the loan portfolio at those dates. The consolidated
allowance for loan losses totaled $1.0 million, $943,000 and $1.0 million at
December 31, 1995, 1994 and 1993, respectively, representing 95.4%, 71.5% and
50.3% of nonperforming loans at those respective dates. As a result of the
overall decline in nonperforming loans over the two year time frame, the
provision for loan losses for the years ended December 31, 1995 and 1994 were
primarily attributable to the $101.3 million in loan portfolio growth during
that period.
Deposits increased by $19.7 million, or 7.4%, during the year ended
December 31, 1995, to a total of $286.6 million, compared to the $266.9 million
total at December 31, 1994. During 1994 Camco experienced deposit portfolio
growth of $14.6 million, or 5.8%. The increases in 1995 and 1994 resulted
primarily from
48
<PAGE> 59
management's continuing marketing efforts, coupled with pricing strategies
employed to achieve a moderate rate of growth.
The Banking Subsidiaries are required to maintain minimum regulatory
capital levels pursuant to federal regulations. At December 31, 1995, the
Banking Subsidiaries' regulatory capital collectively exceeded the most
stringent of these regulations by approximately $10.7 million.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995
AND DECEMBER 31, 1994
GENERAL. Camco's net earnings for the year ended December 31, 1995,
totaled $3.6 million, an increase of $1.1 million, or 43.5%, over the $2.5
million in net earnings recorded for the year ended December 31, 1994. The
increase resulted primarily from a $1.7 million increase in net interest income
and a $715,000 increase in other income, which were partially offset by a
$46,000 increase in the provision for losses on loans, a $621,000 increase in
general, administrative and other expense, and a $599,000 increase in the
provision for federal income taxes.
NET INTEREST INCOME. Total interest income for the year ended December
31, 1995, amounted to $25.4 million, an increase of $5.7 million, or 28.8%, over
the amount recorded in 1994. Interest income on loans and mortgage-backed
securities increased by $6.2 million, or 36.5%. The increase resulted primarily
from a $62.4 million increase in the average portfolio outstanding, coupled with
a 52 basis point increase in the average yield, from 7.59% in 1994 to 8.11% in
1995. Interest income on investment securities and interest-bearing deposits
decreased by $562,000, or 21.3%, to a total of $2.1 million in 1995. The
decrease was due primarily to a reduction in the average balance outstanding of
$16.4 million, which was partially offset by an 84 basis point increase in
yield, to 6.02% in 1995. The decline in the average balance during the year
reflects management's decision to redeploy excess liquidity to fund loan
originations, thereby obtaining a more favorable yield.
Interest expense increased during the year ended December 31, 1995, by
$4.0 million, or 39.3%, to a total of $14.3 million, compared to 1994. Interest
expense on deposits increased by $3.0 million, or 31.4%, to a total of $12.5
million in 1995. The increase resulted primarily from growth in the average
portfolio outstanding of $25.1 million, coupled with an increase in the average
rate paid on deposits of 73 basis points, from 3.72% in 1994 to 4.45% in 1995.
Interest expense on borrowings increased by $1.0 million, or 141.7%, to a total
of $1.8 million in 1995. The increase was due primarily to a $16.3 million
increase in the average balance of borrowings outstanding.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by approximately $1.7 million, or 17.4%,
to a total of $11.2 million for the year ended December 31, 1995. The net
interest rate spread declined by 5 basis points during the year, from 3.32% in
1994 to 3.27% in 1995, while the net interest margin increased by 2 basis
points, from 3.45% in 1994 to 3.47% in 1995.
PROVISIONS FOR LOSSES ON LOANS. The provision for losses on loans
amounted to $143,000 for the year ended December 31, 1995, an increase of
$46,000, or 47.4%, over the $97,000 total recorded in 1994. As stated
previously, the current year provision is primarily attributable to growth in
the loan portfolio, as nonperforming loans declined during the period, totaling
$1.1 million at December 31, 1995, compared to $1.3 million at December 31,
1994.
OTHER INCOME. Other income totaled $3.3 million for the year ended
December 31, 1995, an increase of $715,000, or 27.7%, over the $2.6 million
total for 1994. The increase resulted primarily from a $163,000, or 21.7%,
increase in late charges, rent and other and a $625,000, or 124.8%, increase in
gain on sale of loans, which were partially offset by a $140,000 decline in gain
on sale of real estate acquired through foreclosure. The increase in gain on
sale of loans can be attributed primarily to Camco's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 122 on "Accounting for Mortgage
Servicing Rights" during the current year. SFAS No. 122 provides for recognition
of rights to service mortgage loans as separate assets. Camco adopted SFAS No.
122
49
<PAGE> 60
as of April 1, 1995, and recorded mortgage servicing rights totaling $655,000
during the year ended December 31, 1995.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $8.8 million for the year ended December 31, 1995, an
increase of $621,000, or 7.6%, over the $8.2 million recorded in 1994. The
increase resulted primarily from a $592,000, or 16.4%, increase in employee
compensation and benefits, a $51,000, or 8.9%, increase in federal deposit
insurance premiums and a $31,000, or 10.7%, increase in franchise taxes, which
were partially offset by a decline of $28,000, or 3.0%, in occupancy expense.
The increase in employee compensation and benefits resulted primarily from
normal merit increases and an increase in staffing levels as a result of growth.
The increase in federal deposit insurance premiums can be attributed to growth
in the deposit portfolio year-to-year, while the increase in franchise taxes
resulted from an increase in stockholders' equity following Camco's stock
offering during 1994.
The deposit accounts of Cambridge Savings, Marietta Savings and First
Federal and of other savings associations are insured by the SAIF administered
by the FDIC. The reserves of the SAIF are below the level required by law,
because a significant portion of the assessments paid into the fund are used to
pay the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the Bank Insurance Fund (the "BIF") administered by the FDIC,
except to the extent such banks have acquired SAIF deposits. The reserves of the
BIF met the level required by law in May 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in late 1995 and are expected to exceed
them by $.23 per $100 in deposits in 1996. This premium disparity could have a
negative competitive impact on Cambridge Savings, Marietta Savings and First
Federal and other institutions with SAIF deposits.
A legislative proposal is under consideration by Congress to
recapitalize the SAIF and eliminate the significant premium disparity.
Currently, that recapitalization plan provides for the payment of a special
assessment of approximately $.85 per $100 of SAIF deposits held at December 31,
1995, in order to increase SAIF reserves to the level required by law. Certain
banks holding SAIF deposits would pay a lower special assessment. In addition,
the cost of prior thrift failures would be shared by both the SAIF and the BIF.
Such cost sharing might increase BIF assessments by $.02 to $.025 per $100 in
deposits. SAIF assessments for healthy institutions would be set at a
significantly lower level, but could never be reduced below the level for
healthy BIF institutions.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1998. However, legislative proposals contemplate an
elimination of the federal thrift charter and of the separate federal regulation
of thrifts prior to the merger of the deposit insurance funds. Cambridge Savings
and Marietta Savings are state savings banks, which are not considered thrifts
for these purposes. However, First Federal is a federal thrift and would have to
convert to a bank charter. As a result, First Federal would become subject to
the more restrictive activity limits imposed on national banks, but it would
have a specified period of time to divest of any non-conforming assets. If First
Federal is required to convert to a commercial bank charter, it would have to
recapture approximately $2.7 million of its bad debt reserve, unless Congress
amends these recapture provisions. Such a proposal is currently under
consideration. That proposal would eliminate the special thrift method of tax
accounting for bad debt reserves, which all three financial institution
subsidiaries have relied on, effective in 1996. In addition, Camco would become
a bank holding company, which would subject it to more restrictive activity
limits and to capital requirements similar to those imposed on its financial
institution subsidiaries. These more restrictive activity limits would prohibit
the title insurance activities of Camco's subsidiary, East Ohio Title, after the
end of a time specified to divest of non-conforming assets.
Camco's three financial institution subsidiaries had $277.3 million in
deposits at March 31, 1995. If the special assessment is $.85 per $100 in
deposits, those three institutions will pay an aggregate additional assessment
of $2.4 million. This assessment should be tax deductible, but it will reduce
earnings and capital for the quarter in which it is reported. It is expected
that quarterly SAIF assessments would be reduced significantly after such
special assessment is paid.
50
<PAGE> 61
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, Camco can give
no assurances that the disparity between BIF and SAIF assessments will be
eliminated and cannot be certain of the impact of its being regulated as a bank
holding company, First Federal being converted to or regulated as a bank, or the
change in tax accounting for bad debt reserves, until the legislation requiring
such change is enacted.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$1.9 million for the year ended December 31, 1995, an increase of $599,000, or
45.7%, over the $1.3 million total recorded in 1994. The increase resulted
primarily from the increase in net earnings before taxes of $1.7 million, or
44.3%. The effective tax rates were 34.4% and 34.0% for the years ended December
31, 1995 and 1994, respectively.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994
AND DECEMBER 31, 1993
GENERAL. Camco's net earnings for the year ended December 31, 1994,
totaled $2.5 million, a decline of $782,000, or 23.5%, from the $3.3 million in
net earnings reported for the year ended December 31, 1993. The reduction in
earnings in 1994 was almost solely attributable to a decline in secondary market
activities and an increase in general, administrative and other expense of $1.2
million, which were partially offset by a $352,000 increase in other forms of
fee-based income, a $288,000 increase in net interest income as well as a
decline in the provision for federal income taxes.
NET INTEREST INCOME. Total interest income for 1994 increased by
$769,000, or 4.0%, generally reflecting an $18.2 million increase in weighted
average interest-earning assets, which was partially offset by the effects of
lower yields due to the significant degree of loan refinancing that continued
throughout 1993. Total interest expense increased by $481,000, generally
reflecting the effects of deposit growth during the year, as well as an increase
in the cost of deposits due to the rising rate environment that began in 1994.
As interest rates began to rise, management carefully monitored the
bond markets, while 1994 net interest income began to fall. As interest rates
continued to increase, management developed several loan programs to stimulate
loan demand, primarily funding the $68.7 million in portfolio growth with FHLB
advances and deposit growth at approximate interest rate spreads ranging from
2.0% to 4.0%. The utilization of this growth strategy had the effect of
increasing net interest income by $288,000, or 3.1%, notwithstanding an increase
in the weighted average cost of deposits.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans
totaled $97,000 for the year ended December 31, 1994, a decline of $213,000 from
1993. As stated previously, the 1994 provision was solely attributable to growth
in the loan portfolio over the two year period ended December 31, 1994, as
nonperforming loans have declined.
OTHER INCOME. Other income declined for the year ended December 31,
1994 by $528,000, or 17.0%. The decline in other income was primarily
attributable to a $1.0 million decline in gains on sale of loans, which was
partially offset by a $165,000 increase in gains on sale of real estate acquired
through foreclosure and a $352,000 increase in all other operating categories.
The decline in gains on sale of loans generally reflected the impact of interest
rate increases on secondary marketing activities. A $148,000 increase in loan
servicing fee income generally reflected $105.0 million growth in the loan
servicing portfolio since December 31, 1992. The Bank servicing the loan
generally receives an annual fee totaling .25% to .38% of the principal balance
of the serviced loan. At December 31, 1994 and 1993, loans serviced for others
totaled $240.5 million and $197.1 million, respectively.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense increased for the year ended December 31, 1994, by $1.2 million,
or 17.1%. The increase was due primarily to a $744,000, or 26.0%, increase in
salaries and employee benefits, and a $156,000 increase in occupancy expense.
The increase in salaries and benefits generally reflected normal merit increases
for existing employees, as well as hiring of additional personnel due to the
opening of three loan production offices in 1993. Similarly, the increase in
51
<PAGE> 62
occupancy expense reflected the expenses associated with opening of these
offices, as well as the full year's expense attendant to renovating two banking
offices in the prior year.
PROVISION FOR FEDERAL INCOME TAXES. The provision for federal income
taxes declined for the year ended December 31, 1994, by $436,000. This decline
was solely attributable to the $1.2 million decline in pre-tax earnings, as the
effective tax rate remained unchanged at 34% for 1994 and 1993.
ASSET AND LIABILITY MANAGEMENT
Net interest income, the difference between asset yields and the cost
of interest-bearing liabilities, is the principal component of Camco's net
earnings. The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in the prevailing level of interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing "gap",
provides an indication of the extent to which a financial institution's interest
rate spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income. Conversely, during a period of falling interest
rates, a negative gap within shorter maturities would result in an increase in
net interest income, while a positive gap within shorter maturities would have
the opposite effect.
In recognition of the foregoing factors, the Board of Directors of each
of the Banking Subsidiaries has implemented an asset and liability management
strategy directed toward improving each Bank's interest rate sensitivity. The
principal common elements of such strategies include 1) meeting the consumer
preference for fixed-rate loans over the past several years by selling such
loans in the secondary market, 2) maintaining higher levels of liquid assets,
such as cash, short-term interest-bearing deposits and short-term investment
securities as a hedge against rising interest rates in the lower interest rate
environment and utilizing FHLB advances and longer term certificates of deposit
as funding sources when available.
LIQUIDITY AND CAPITAL RESOURCES
Savings associations are generally required to maintain specified
minimum levels of liquid investments, including cash and qualifying types of
U.S. Government and agency obligations and other specified instruments. The
primary sources of funds to the banking subsidiaries are deposits, principal and
interest payments made on the portfolio loans, proceeds from the sale of
mortgage loans, maturing investments, FHLB advances and funds provided by
operating activities. Principal uses of funds include deposit withdrawals, loan
originations, investment purchases, repayment of FHLB advances, payment of
interest on deposits and payment of operating expenses. While certain of these
sources and uses of funds are relatively predictable, deposit flows, loan
originations and prepayment of loans are influenced by external factors such as
interest rates, economic conditions, competition and consumer confidence in
financial service industries.
Camco attempts to maintain a stable retail deposit base which does not
utilize brokered deposits. During the years ended December 31, 1995 and 1994,
Camco maintained its deposit balance goals by offering competitive, but not
excessive, interest rates on deposits. Deposit balances increased by $3.7
million during the three months ended March 31, 1996, and $19.7 and $14.6
million during the years ended December 31, 1995 and 1994, respectively. As
stated previously, management intends to pursue growth in the current interest
rate environment.
At March 31, 1996, and December 31, 1995, respectively, the Banking
Subsidiaries had total outstanding loan commitments of $19.8 million and $24.8
million, which included outstanding loan origination commitments to purchase
loans, undisbursed loans in process of $6.5 million and $8.7 million, and
borrower's unused lines of credit of $8.3 million and $9.4 million. Such
commitments can be funded from current excess liquidity.
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<PAGE> 63
Camco's principal source of income on an unconsolidated basis is
earnings and dividends from the banking subsidiaries. The ability of the banking
subsidiaries to pay dividends to Camco is subject to certain regulatory
restrictions. Each of the Banking Subsidiaries is currently able to pay
dividends to Camco to the fullest extent permitted by federal regulations.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars, without considering
changes in relative purchasing power of money over time due to inflation. Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than does the
effect of general levels of inflation. In the current interest rate environment,
the liquidity, the maturity structure and the quality of Camco's assets and
liabilities are critical to the maintenance of acceptable performance levels.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1993, the Financial Accounting Standards Board ("FASB") adopted
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This
promulgation, which is effective for fiscal years beginning after December 15,
1994, requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or fair value of
the collateral. Camco's loans which might be affected are collateral dependent,
and Camco's current procedures for evaluating impaired loans result in carrying
such loans at the lower of cost or fair value. Management adopted SFAS No. 114
on January 1, 1995, without a significant detrimental effect on Camco's overall
consolidated financial position or results of operations.
In March 1995, the FASB issued SFAS No. 121, "Accounting For the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." This
statement requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment was a recognized measurement of an impairment was for
long-lived assets and identifiable intangibles that an entity expects to hold
and use should be based on the fair value of the asset. This statement is
effective for financial statements for fiscal years beginning after December 15,
1995. Earlier application is encouraged. Camco adopted SFAS No. 121 on January
1, 1996, without material effect on the consolidated financial position or
results of operations.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which requires that Camco recognize as separate assets,
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. An institution that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells those
loans with servicing rights retained would allocate some of the cost of the
loans to the mortgage servicing rights. SFAS No. 122 requires that
securitization of mortgage loans be accounted for as sales of mortgage loans and
acquisitions of mortgage-backed securities. Additionally, SFAS No. 122 requires
that capitalized mortgage servicing rights and capitalized excess servicing
receivables be assessed for impairment. Impairment is measured based on fair
value. SFAS No. 122 was effective for years beginning after December 15, 1995,
(January 1, 1996, as to Camco) to transactions in which an entity acquires
mortgage servicing rights and to impairment evaluations of all capitalized
mortgage servicing rights and capitalized excess servicing receivables whenever
acquired. Retroactive application is prohibited, and earlier adoption is
encouraged. Management elected early adoption of SFAS No. 122 as of April 1,
1995, which resulted in the recognition of $655,000 in gains on sales of loans
during the year ended December 31, 1995.
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<PAGE> 64
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net earnings and, if presented, earnings per share, as if SFAS No. 123
had been adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management of
Camco does not believe the disclosure provision of SFAS 123 will have a material
adverse effect on its financial condition or results of operations.
BUSINESS OF CAMCO
Camco is a multiple savings and loan holding company organized under
Delaware law in 1970. Through its wholly-owned subsidiaries, Cambridge Savings,
Marietta Savings and First Federal, Camco is engaged in the savings institution
business in Ohio. East Ohio Title, another wholly-owned subsidiary of Camco, is
engaged in the title insurance agency business.
Cambridge Savings, which was acquired by Camco in 1971, was
incorporated under Ohio law in 1885. The main office of Cambridge Savings is in
Cambridge, Ohio. Cambridge Savings has branch offices in Cambridge, Byesville
and Uhrichsville, Ohio. In July 1994, Cambridge Savings converted its charter
from an Ohio savings and loan association to an Ohio savings bank.
Established in 1923 under Ohio law, Marietta Savings was acquired by
Camco in 1973. Marietta has its main office in Marietta, Ohio, and a branch in
Belpre, Ohio. In July 1994, Marietta Savings converted its charter from an Ohio
savings and loan association to an Ohio savings bank.
Cambridge Savings and Marietta Savings each own 50% of the outstanding
stock of CMC, a service corporation engaged in mortgage lending and related
activities. Marietta Savings owns 100% of the outstanding stock of WestMar, a
service corporation engaged in mortgage lending activities, primarily in Wood
County, West Virginia.
First Federal, a federal savings bank, was acquired by Camco in 1988.
First Federal has its main office in Washington Court House, Ohio, and loan
origination offices in Chillicothe, Circleville and Wilmington, Ohio.
The Banking Subsidiaries are members of the FHLB of Cincinnati, and the
accounts of each are insured up to applicable limits by the SAIF administered by
the FDIC. First Federal is subject to regulation, examination and supervision by
the OTS and the FDIC. Cambridge Savings and Marietta Savings are regulated by
the Division and the FDIC. Camco is regulated by the OTS as a savings and loan
holding company.
The principal source of revenue for Camco on an unconsolidated basis is
dividends from the Banking Subsidiaries. Camco, through the Banking
Subsidiaries, is principally engaged in the business of making first mortgage
loans to finance the purchase, construction or improvement of residential or
other real property. Camco also invests in United States Government guaranteed
mortgage-backed securities and securities issued by the United States Government
and agencies thereof. Funds for loans and investments are obtained primarily
from savings deposits, loan principal repayments and borrowings from the FHLB of
Cincinnati.
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<PAGE> 65
SECURITY OWNERSHIP OF CAMCO
The following table sets forth certain information with respect to the
only persons known to Camco to own beneficially more than 5% of the outstanding
shares of common stock of Camco as of April 1, 1996:
<TABLE>
<CAPTION>
Amount and nature of Percentage of
Name and address beneficial ownership(1) shares outstanding(1)
<S> <C> <C>
Larry A. Caldwell 103,5635.3(2) 5.26%
10491 Rock Hill Road
Cambridge, Ohio 43725
John H. Heiby 99,749(3) 5.06%
106 Chippewa Drive
Marietta, Ohio 45750
- -----------------------------
<FN>
(1) Amounts and percentages not adjusted for the July 1996 stock dividend.
The numbers in this table do not include shares subject to options
which have been awarded, but were not yet exercisable at April 1, 1996,
pursuant to the Camco Financial Corporation 1995 Stock Option and
Incentive Plan (the "1995 Stock Option Plan"). See "COMPENSATION OF
EXECUTIVE OFFICERS AND DIRECTORS OF CAMCO - Stock Option Plans"
regarding terms of and number of shares subject to options issued under
the 1995 Stock Option Plan. Those options became exercisable in May
1996.
(2) Includes 98,998.9 shares owned directly by Mr. Caldwell, 3,665 shares
owned by Carol J. Caldwell, Mr. Caldwell's spouse, 230.5 shares held
indirectly by Mr. Caldwell through Camco's 401(k) Plan, and 740.9
shares which Mr. Caldwell may acquire pursuant to immediately
exercisable options granted to Mr. Caldwell under the Camco Financial
Corporation 1982 Incentive Stock Option Plan (the "1982 Stock Option
Plan").
(3) Includes 3,149 shares owned by Mr. Heiby directly and 96,600 shares
owned by Virginia L. Heiby, Mr. Heiby's spouse.
</TABLE>
The following table sets forth certain information with respect to the
number of shares of common stock of Camco beneficially owned by each director of
Camco and by all directors and executive officers of Camco as a group as of
April 1, 1996:
<TABLE>
<CAPTION>
Amount and nature of Percentage of
Name and address(1) beneficial ownership(2) shares outstanding(2)
- ---------------- -------------------- ------------------
<S> <C> <C>
Larry A. Caldwell 103,635.3(3) 5.26%
Robert C. Dix, Jr. 3,100.0 .16%
James R. Hanawalt 3,395.0 .17%
John H. Heiby 99,749.0(4) 5.06%
Anthony J. Popp 38,590.7(5) 1.96%
Samuel W. Speck 9,771.0 .50%
Jeffrey T. Tucker 7,344.0 .37%
All directors and executive
officers as a group (8 persons) 316,956.2(6) 16.08%
- -----------------------------
(Footnotes continued on next page)
</TABLE>
55
<PAGE> 66
(1) Each of the persons listed in this table may be contacted at the
address of Camco, 814 Wheeling Avenue, Cambridge, Ohio 43725.
(2) Amounts and percentages not adjusted for the July 1996 stock dividend.
All shares are owned directly unless otherwise noted. The numbers in
this table do not include shares subject to options which have been
awarded, but were not yet exercisable at April 1, 1996, pursuant to the
1995 Stock Option Plan. See "COMPENSATION OF EXECUTIVE OFFICERS AND
DIRECTORS OF CAMCO - Stock Option Plans" regarding terms of and number
of shares subject to options issued under the 1995 Stock Option Plan.
Those options became exercisable in May 1996.
(3) Includes 3,665 shares owned by Carol J. Caldwell, Mr. Caldwell's
spouse, 183.3 shares held indirectly by Mr. Caldwell through Camco's
401(k) Plan, and 740.9 shares which Mr. Caldwell may acquire pursuant
to immediately exercisable options granted to Mr. Caldwell under the
1982 Stock Option Plan.
(4) Includes 96,600 shares owned by Virginia L. Heiby, Mr. Heiby's spouse.
(5) Includes 331.3 shares allocated to Mr. Popp's account under Camco's
401(k) Plan and 370.4 shares which Mr. Popp may acquire pursuant to
immediately exercisable options granted to Mr. Popp under the 1982
Stock Option Plan.
(6) Includes 1,481.7 shares which may be acquired pursuant to immediately
exercisable options granted under the 1982 Stock Option Plan.
MANAGEMENT OF CAMCO
DIRECTORS
The following table presents certain information respecting persons who
are the members of the Board of Directors of Camco:
<TABLE>
<CAPTION>
Other Director Term
Name Age(1) Position(s) Held Since Expires
- ---- ----- ---------------- -------- -------
<S> <C> <C> <C> <C>
Robert C. Dix, Jr. 56 -- 1994 1997
John H. Heiby 68 Vice President 1973 1997
James R. Hanawalt 66 -- 1991 1998
Anthony J. Popp 58 Senior Vice President, Chief 1985 1998
Financial Officer and Secretary
Larry A. Caldwell 59 President, Chief Executive Officer 1970 1999
and Chairman of the Board
Samuel W. Speck 59 -- 1991 1999
Jeffrey T. Tucker 38 -- 1987 1999
- -----------------------------
<FN>
(1) At April 1, 1996.
</TABLE>
Larry A. Caldwell is the President of Camco, a position he has held
since Camco was organized in 1970, and was appointed Chief Executive Officer and
Chairman of the Board in January 1996. Mr. Caldwell is also a director of each
of Camco, Marietta Savings, First Federal, Cambridge Savings and East Ohio
Title.
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<PAGE> 67
Robert C. Dix, Jr. is Publisher of The Daily Jeffersonian, Cambridge,
Ohio, and is one of the five principals of the group known as Dix Communication.
Mr. Dix is Executive Vice President of Wooster Republican Printing Company,
which owns a group of newspapers and radio stations. Mr. Dix is also President
of MDM Broadcasting, a television station holding company, which is a
wholly-owned subsidiary of Wooster Republican Printing Company.
James R. Hanawalt retired in 1990 after 37 years of service to Armco
Building Systems ("Armco"). At the time of his retirement, Mr. Hanawalt was
Armco's director of manufacturing. Mr. Hanawalt serves as a director and the
Chairman of the Board of First Federal.
John H. Heiby is a retired independent sales representative for funeral
supply products. Mr. Heiby serves as a a director and the Chairman of the Board
of Marietta Savings.
Anthony J. Popp is the Chief Financial Officer, a Senior Vice President
and the Secretary of Camco and Chief Executive Officer of Marietta Savings, a
position he has held since 1972. Mr. Popp also serves as a member of the boards
of directors of First Federal, Marietta Savings and East Ohio Title.
Samuel W. Speck is President of Muskingum College, New Concord, Ohio.
Prior to joining Muskingum College in 1986, Dr. Speck was Associate Director of
the Federal Emergency Management Agency. Mr. Speck is also a director of
Cambridge Savings.
Jeffrey T. Tucker is a certified public accountant and a partner in the
accounting firm of Tucker & Tucker, Cambridge, Ohio.
EXECUTIVE OFFICERS
The following table presents certain information in respect of the
executive officer of Camco who is not on the Board of Directors:
Name Age(1) Position
---- ------ --------
D. Edward Rugg 41 Treasurer
[FN]
(1) At April 1, 1996.
D. Edward Rugg has been Treasurer of Camco since 1982 and is the
President and Chief Executive Officer of Cambridge Savings. He has also been
Chairman, Treasurer and a director of CMC since 1985 and Treasurer, Secretary
and a director of East Ohio Title since 1983. Mr. Rugg is also a director of
WestMar.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
chief executive officer of Camco and each executive officer of Camco who
received cash and cash equivalent compensation in excess of $100,000 from Camco
and its subsidiaries for services rendered to Camco and its subsidiaries during
the year ended December 31, 1995:
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------
Annual Compensation Long Term Compensation
- -------------------------------------------------------------------------------------------------------------------------
Awards
-------------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
57
<PAGE> 68
<TABLE>
<CAPTION>
Name and Principal Position Year Salary ($) Bonus ($) Securities Underlying All Other
Options/ SARs(#) Compensation(1)
- --------------------------------- --------- ------------- ------------- ------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Larry A. Caldwell, 1995 $137,730 $24,463 12,346 (2) $29,884
President, Chief 1994 131,000 20,835 -- 29,342
Executive Officer and 1993 124,800 19,618 -- 26,024
Chairman of
the Board of Camco
Anthony J. Popp, 1995 $96,028 $15,004 9,696 (2) $22,444
Secretary, Chief Financial 1994 92,300 13,463 -- 25,360
Officer and Senior Vice 1993 88,215 12,730 -- 19,061
President of Camco and
President of Marietta Savings
- -----------------------------
<FN>
(Footnotes continued on next page)
(1) Consists of directors' fees and employer contributions to the Camco
401(k) Plan.
(2) Represents the number of shares of common stock of Camco underlying
options granted pursuant to the 1995 Stock Option Plan. "SARs" stands
for "Stock Appreciation Rights." Camco does not have a plan that
provides for the grant of SARs.
</TABLE>
STOCK OPTION PLANS
Camco has options outstanding pursuant to its 1982 Stock Option Plan
and the Camco (formerly First Cambridge Corporation) 1972 Stock Option Plan (the
"1972 Stock Option Plan"). The outstanding options granted under the 1982 Stock
Option Plan are ISOs and will expire on May 26, 2002. The outstanding options
granted under the 1972 Stock Option Plan do not qualify as ISOs and are also
exercisable until May 26, 2002. All of the options under both plans have been
granted and the exercise price for shares of Camco common stock under both plans
is $5.18 per share.
The following table sets forth information regarding all grants of
options to purchase shares of Camco common stock made to Mr. Caldwell and Mr.
Popp during fiscal year 1995:
Option/SAR Grants In Last Fiscal Year
Individual Grants
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#)(1) 1995 Fiscal Year Price ($/Share) Date
- ---- -------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Larry A. Caldwell 12,346 22.2% $17.00 September 23, 2005
Anthony J. Popp 9,696 17.5% $17.00 September 23, 2005
- ----------------------------
</TABLE>
58
<PAGE> 69
(1) The options were granted on September 23, 1995. These options are
intended to qualify as Incentive Stock Options ("ISOs").
The following table sets forth certain information with respect to the
persons listed in the Summary Compensation Table above and their options
outstanding during the fiscal year ended December 31, 1995, under the 1995 Stock
Option Plan and the 1982 Stock Option Plan:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 12/31/95 Option /SAR Values
Number of Securities
Underlying Unexercised Value of Unexercised In-The-Money
Shares Acquired Value Options/SARs at 12/31/95 (#) Options/SARs at 12/31/95($)(1)
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Larry A. Caldwell -0- N/A 740.9/12,346 $8,943(2)/$3,087(3)
Anthony J. Popp 352.8 $3,196(4) 370.4/9,696 $4,471(2)/$2,424(3)
- -----------------------------
<FN>
(Footnotes continued on next page)
(1) An option is "in-the-money" if the fair market value of the underlying
stock exceeds the exercise price of the option.
(2) For purposes of this table, the value of the option was determined by
multiplying the number of unexercised options by the difference between
the $5.18 exercise price and the fair market value of the common stock,
which was $17.25 on December 29, 1995, based on the closing bid price
reported by the Nasdaq.
(3) For purposes of this table, the value of the option was determined by
multiplying the number of unexercised options by the difference between
the $17.00 exercise price and the fair market value of the common
stock, which was $17.25 on December 29, 1995, based on the closing bid
price reported by the Nasdaq.
(4) For purposes of this table, the value realized was determined by
multiplying the number of exercised options by the difference between
the $5.44 exercise price and the fair market value of the Camco Shares,
which was $14.50 on June 15, 1995, based on the closing bid price
reported by the Nasdaq.
</TABLE>
Camco has options outstanding pursuant to the 1995 Stock Option Plan,
which plan was approved by Camco's stockholders in May 1996. The Board of
Directors of Camco granted options to purchase the 70,000 shares of common
stock, subject to the approval of the 1995 Stock Option Plan by the stockholders
in May 1996. These options became immediately exercisable upon the approval of
the 1995 Stock Option Plan by the stockholders of Camco in May 1996. Options
issued to executive officers and employees of Camco and its subsidiaries are
intended to be ISOs within the meaning of Section 422 of the Internal Revenue
Code of 1986 (the "Code"); provided, however, that the recipient of an ISO (a)
must remain employed by Camco or a subsidiary of Camco at least until three
months before the option is exercised (or one year, in the case of an ISO
recipient who is deemed disabled under the 1995 Stock Option Plan); (b) may not
dispose of the shares of Camco common stock acquired pursuant to the ISO for two
years after the date of the grant and one year after the exercise of the ISO;
and (c) the aggregate fair market value of shares of common stock awarded
pursuant to ISOs exercisable under all benefit plans of Camco or any subsidiary
for the first time during any calendar year shall not exceed $100,000, or such
other limit as required by the Code. Options issued to directors who are not
executive officers or employees are not ISOs. The outstanding options granted
under
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<PAGE> 70
the 1995 Stock Option Plan will expire on September 25, 2005, and the
exercise price for these options is $17.00 per share. Additional options for
23,000 shares may be issued under the 1995 Stock Option Plan.
The following table sets forth certain information with respect to the
options which were granted to directors and executive officers of Camco
pursuant to the 1995 Stock Option Plan. Such options were not exercisable
until after the May 1996 Annual Meeting of Camco stockholders.
Name Shares Subject To Options
---- -------------------------
Larry A. Caldwell 12,346
Anthony J. Popp 9,696
All current executive officers, as a group
(3 persons) 26,842
All current directors who are not
executive officers, as a group (5 9,822
persons)
EMPLOYMENT AGREEMENTS
Camco entered into an employment agreement with Mr. Caldwell effective
in January 1996 and an employment agreement with Mr. Popp effective in January
1994 (the "Employment Agreements "). The Employment Agreements each provide for
a term of three years and a salary and performance review by the Board of
Directors not less often than annually, as well as inclusion of Mr. Caldwell and
Mr. Popp in any formally established employee benefit, bonus, pension and
profit-sharing plans for which senior management personnel are eligible. The
Employment Agreements also provide for vacation and sick leave.
The Employment Agreements are terminable by Camco at any time. In the
event of termination by Camco for "just cause," as defined in the Employment
Agreements, Mr. Caldwell and Mr. Popp will have no right to receive any
compensation or other benefits for any period after such termination. In the
event of termination by Camco other than for (1) just cause, (2) retirement at
or after the normal retirement age under a qualified pension plan maintained by
Camco, (3) at the end of the term of each of the Employment Agreements or (4) in
connection with a "change of control," as defined in the Employment Agreements,
Mr. Caldwell and Mr. Popp will each be entitled to (i) a continuation of salary
payments for the remainder of the term of his Employment Agreement plus an
additional twelve months, not to exceed 36 months and (ii) a continuation of
benefits substantially equal to those being provided at the date of termination
of employment until the earliest to occur of the end of the term of the
Employment Agreement, the date the individual becomes 65 years of age, or the
date the individual becomes employed full-time by another employer. In addition,
Mr. Caldwell and Mr. Popp will each be entitled to a continuation of fees as a
director of Camco or any Camco subsidiary (other than Marietta Savings with
respect to Mr. Popp) for the remainder of the term of his Employment Agreement
plus an additional 12 months, not to exceed 36 months.
The Employment Agreements also contain provisions with respect to the
occurrence within one year after a "change of control" of (1) the termination of
employment for any reason other than just cause, retirement or termination at
the end of the term of the agreement, (2) a change in the capacity or
circumstances in which Mr. Caldwell or Mr. Popp is employed or (3) a material
reduction in Mr. Caldwell's or Mr. Popp's responsibilities, authority,
compensation or other benefits provided under each Employment Agreement without
the written consent of Mr. Caldwell or Mr. Popp. In the event of any such
occurrence under his respective Employment Agreement, Mr. Caldwell and Mr. Popp
will be entitled to payment of an amount equal to (i) the amount of compensation
to which he would be entitled for the remainder of the term of the Employment
Agreement, plus (ii) the difference between (a) three times his average annual
compensation for the three taxable years immediately preceding the termination
of employment, less (b) the amount paid as compensation for the remainder of the
employment term. In addition, Mr. Caldwell and Mr. Popp would be entitled to
continued coverage under all benefit plans until the earliest of the end of the
term of the Employment Agreement, the date the individual becomes 65 years of
age, or the date on which the
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<PAGE> 71
individual is included in another employer's benefit plans as a full-time
employee. The maximum which either man may receive, however, is limited to an
amount which will not result in the imposition of a penalty tax pursuant to
Section 280G(b)(3) of the Code. A "change of control," as defined in each
Employment Agreement, generally refers to the acquisition by any person or
entity of the ownership or power to vote 10% or more of the voting stock of
Camco or its subsidiaries, the control of the election of a majority of the
directors of Camco or its subsidiaries or the exercise of a controlling
influence over the management or policies of Camco or its subsidiaries.
DIRECTOR COMPENSATION
During the year ended December 31, 1995, each director of Camco
received $835 for each meeting of the Board of Directors of Camco attended,
except in the case of any special meeting of the Board with a duration of one
hour or less the fee was $418. In addition, directors who are not executive
officers of Camco received a fee of $300 for each committee meeting attended,
except that if the committee meeting was held on the same day as a Board of
Directors' meeting the fee was $150.
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<PAGE> 72
FIRST ASHLAND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Ashland is a savings and loan holding company located in
northeastern Kentucky with a fiscal year end of September 30. First Ashland's
net interest income is dependent primarily upon the difference or spread
between the average yield earned on loans and investments and the average rate
paid on deposits, as well as the relative amounts of such assets and
liabilities. The interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. The Bank, like other thrift institutions, is subject to interest rate
risk to the degree that its interest-bearing liabilities mature or reprice at
different times, or on a different basis, than its interest-earning assets.
Net income is also affected by, among other things, gains and losses on
sales of real estate and investments, mortgage-backed and related securities,
investment securities and foreclosed assets, provisions for loan losses, service
charges and other fees, operating expenses and income taxes.
FINANCIAL CONDITION AT MARCH 31, 1996
Total assets decreased $2.0 million, or 2.3%, to $86.9 million at March
31, 1996, from $88.9 million at September 30, 1995. The decrease was primarily
attributable to a net decrease in investments of 24.0%, or $3.5 million,
partially offset by an increase in loans receivable-net of $895,000 and an
increase in cash of $663,000.
Cash and cash equivalents increased $663,000, or 32.4%, to $2.7 million
at March 31, 1996, from $2.0 million at September 30, 1995. This increase was
the result of increased deposits and decreased investment securities, each of
which will be discussed separately.
Mortgage-backed securities decreased $410,000, or 5.4%, to $7.2 million
at March 31, 1996 from $7.7 million at September 30, 1995, through normal
principal repayments. Investment securities held to maturity and available for
sale decreased $3.5 million, to $11.0 million at March 31, 1996, from $14.5
million at September 30, 1995. This decline was due to the maturity of a U.S.
Treasury security of $1.7 million and the sale of certain available for sale
securities of $1.8 million. The proceeds from the maturity and the sale of
investment securities were used to fund loan growth and to provide additional
liquidity.
Net deposits increased $731,000, or 1.2%, to $60.6 million at March 31,
1996, from $59.9 million at September 30, 1995. The increase in deposits was
primarily attributable to a special deposit program which offered increased
rates for a limited period.
Advances from FHLB of Cincinnati decreased $3,014,000, or 60.1%, to
$2.0 million at March 31, 1996, from $5.0 million at September 30, 1995. This
decrease was the result of scheduled principle payments as well as payoffs of
adjustable rate advances.
FINANCIAL CONDITION AT SEPTEMBER 30, 1995
Total assets increased $13.8 million, or 18.4%, from $75.1 million at
September 30, 1994 to $88.9 million at September 30, 1995. Loans receivable,
net, increased $5.0 million from $56.6 million at September 30, 1994 to $61.6
million at September 30, 1995 due to loan demand in the Bank's market area.
Investment securities to be held to maturity increased $9.4 million due to
management's decision to invest a portion of the net conversion proceeds in
relatively short-term, high quality, U.S. government and government agency
securities. Cash, including interest-bearing deposits, increased $754,000, from
$1.3 million at September 30, 1994 to $2.0 million at September 30, 1995. The
levels of cash and cash equivalents, certificates of deposit in other financial
institutions, and investment securities vary based on management's assessment of
expected interest rates and loan demand. Mortgage-backed and related securities
decreased $595,000 from $8.2 million at September 30, 1994 to $7.6 million at
September 30, 1995 due to principal repayments.
The Bank's allowance for loan loss decreased $50,000 from $138,000 at
September 30, 1994 to $88,000 at September 30, 1995, due primarily to the
charge-off of one-to-four residential real estate loans of $29,000, consumer
loans of $14,000 and commercial real estate loans of $7,000. Nonperforming loans
decreased $175,000, or 31.7%, from $552,000 at September 30, 1994 to $377,000 at
September 30, 1995.
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<PAGE> 73
Deposits increased $100,000 from $59.8 million at September 30, 1994 to
$59.9 million at September 30, 1995, due to management's pricing of deposit
account rates to maintain acceptable interest rate margins. Advances from the
FHLB of Cincinnati increased $200,000 from $4.8 million at September 30, 1994 to
$5.0 million at September 30, 1995. Management utilizes the FHLB where the
overall cost is less than retail deposits or when additional funds are required
to fund loans or maintain liquidity. Accounts payable and accrued expenses
increased due to increases in accrued incentive compensation and directors'
retirement expenses.
Stockholders' equity increased $13.3 million from $10.2 million at
September 30, 1994 to $23.5 million at September 30, 1995. The increase resulted
primarily from the Bank's conversion from a mutual savings and loan association
to a stock savings bank on April 7, 1995, wherein all of the Bank's common stock
was issued to First Ashland. Concurrently with the conversion, First Ashland
issued 1,408,750 shares of First Ashland Shares resulting in net proceeds of
approximately $13.5 million. Stockholders' equity has been reduced by unearned
ESOP shares of approximately $1.0 million.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1996
AND MARCH 31, 1995
GENERAL. First Ashland reported net income before income taxes of
$591,000 during the six month ended March 31, 1996, compared to $420,000 during
the six months ended March 31, 1995. The increase in income between the six
months ended March 31, 1996 and 1995 was the result of the net effect of an
increase in net interest income of $386,000 after provision for loss on loans,
and an increase in other income of $15,000, partially offset by an increase in
other expenses of $230,000. First Ashland reported net income of $410,000 and
$278,000 for the six month period ended March 31, 1996 and 1995, respectively.
Increases in other expenses were primarily attributable to the cost of employee
benefit plans and administrative cost of operations associated with the
conversion from mutual to stock form of organization.
The flattening of the yield curve has affected the results of
operations of the Bank. Due to the repricing of interest-bearing liabilities at
a faster pace than interest-earning assets, the Bank's net interest margin has
continued to decline. The Bank experienced increases in the average cost of
interest-bearing liabilities from 4.69% during the six month period ended March
31, 1995 to 5.16% during the same period ended March 31, 1996. The yield earned
on interest-earning assets increased from 7.38% during the six month period
ending March 31, 1995 to 7.68% during the same period ended March 31, 1996.
INTEREST INCOME. Interest income increased $531,000, or 19.9%, from
$2.7 million during the six months ended March 31, 1995, to $3.2 million during
the six months ended March 31, 1996. This increase resulted from the net effect
of increases in interest on loans of $280,000, investment securities of
$225,000, and other interest-earning assets of $46,000, offset by a decrease in
interest income earned on mortgage-backed securities of $20,000. The increases
are the result of increased average balances in loans as well as investment
securities and other interest earning assets.
The increase in interest income on loans resulted from the increase in
the average balance of net loans outstanding from $57.7 million in the six month
period for 1995 to $62.7 million in the 1996 period. Loan volume has increased
as a result of management's continuing efforts to stimulate loan demand.
The increase in interest income on investment securities resulted
principally from the increase in the average balance of such securities from
$5.0 million for the six month period ended March 31, 1995, to $12.1 million for
the six month period ended March 31, 1996. The decrease in interest income on
mortgage-backed securities for the six month period ended March 31, 1996,
resulted from decreases due to normal amortization of principal resulting in the
decline of average balance of such securities from $8.1 million for the six
month period ended March 31, 1995, to $7.5 million for the six month period
ended March 31, 1996.
INTEREST EXPENSE. Interest expense increased $132,000, or 8.6%, for the
six month period ended March 31, 1996, from the six month period ended March 31,
1995. The increase resulted primarily from an increase of $181,000 in the
interest paid on deposits, due to the increase in the average rates paid on
deposits, and the higher average balance of deposits for the period. Average
deposits for the period ended March 31, 1996, were $60.6 million, compared to
$59.6 million for the period ended March 31, 1995. Average rates paid on
deposits increased from 4.59% for the period ended March 31, 1995, to 5.11% for
the period ended March 31, 1996.
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<PAGE> 74
PROVISION FOR LOAN LOSSES. 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 which is
considered adequate to absorb losses inherent in the loan portfolio in
accordance with generally accepted accounting principles. During the six month
period ended March 31, 1996, the Bank recorded a $20,000 provision for loan
losses compared to $7,000 during the six month period ended March 31, 1995. Loan
losses have been minimal due to the Bank's primary emphasis on single family
residential lending and the relatively stable economy in the Ashland area.
During the six month period ended March 31, 1996, non-performing loans increased
$393,000, or 88.9%, from $442,000 at September 30, 1995 to $835,000 at March 31,
1996. No loans were charged off during the six month period ended March 31,
1996, compared to $19,000 charged off during the six month period ended March
31, 1995. Future additions to the Bank's allowance for loan losses are dependent
upon the performance of the Bank's loan portfolio, the economy, changes in real
estate values and interest rates, the view of the regulatory authorities toward
adequate reserve levels and inflation.
NONINTEREST EXPENSES. Noninterest expenses consist of compensation and
benefits, occupancy and equipment expense, federal deposit insurance premiums
and other general and administrative expenses. Noninterest expenses increased
$230,000, or 31.0% during the six month period ended March 31, 1996, primarily
due to an increase in compensation and benefits of $114,000 (as expenses
associated with the establishment of an ESOP and an RRP in conjunction with the
Bank's Conversion were recorded in the first half of fiscal 1996 with no
charge for these plans in the previous year), an increase in other general and
administrative expenses of $99,000, and a decrease in gain of foreclosed real
estate.
INCOME TAXES. The provision for income tax expense increased $39,000
during the six month period ended March 31, 1996 to $181,000, from $142,000 for
the period ended March 31, 1995. The increase during the period resulted
primarily from an increase in income before income taxes of $171,000.
COMPARISON OF THE RESULTS OF OPERATION FOR THE YEARS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 30, 1994
NET INCOME. Net income increased by $131,000, or 22.4%, from $585,000
for the year ended September 30, 1994 to $716,000 for the year ended September
30, 1995. The increase was due to an increase in noninterest income of $193,000,
and a decrease in provision for loan losses of $41,000, partially offset by an
increase in noninterest expense and a decrease in net interest income.
NET INTEREST INCOME. Net interest income remained virtually unchanged
for September 30, 1995 compared to September 30, 1994. Total interest income
increased $470,000 as a result of a higher average balance in interest earning
assets. The increase in total interest income was more than offset by a $493,000
increase in interest expense resulting from a higher average balance in interest
bearing liabilities and a higher average yield on deposits and borrowed funds.
The interest rate spread decreased from 3.14% for September 30, 1994 to 2.34%
for September 30, 1995, due primarily to a higher average yield paid on deposits
and FHLB advances. The weighted average yield on interest bearing liabilities
increased from 4.23% for 1994 to 4.94% for 1995. The yield on interest earning
assets decreased from 7.37% for 1994 to 7.28% for 1995.
The average yield on deposits increased from 4.24% for the year ended
September 30, 1994 to 4.85% for the year ended September 30, 1995. The average
balance of deposits was $60.1 million for 1995 and $60.7 million for 1994.
PROVISION FOR LOSS ON LOANS. The provision for loss on loans decreased
by $41,000 from $41,000 for 1994 to none for 1995. Net charge-offs, primarily
residential loans, amounted to $50,000 in 1995 as compared to $77,000 in 1994.
Management maintains the allowance for loan losses based on the analysis of
various factors, including the market value of the underlying collateral, growth
and composition of the loan portfolio, the relationship of the allowance for
loan losses to outstanding loans, historical loss experience, delinquency trends
and prevailing and projected economic conditions. Although the Bank maintains
its allowance for loan losses at a level it considers adequate to provide for
losses, there can be no assurance that such losses will not exceed the estimated
amounts or that additional substantial provisions for loan losses will not be
required in future periods.
NONINTEREST INCOME. Noninterest income increased approximately $193,000
from a loss of $107,000 in 1994 to income of $86,000 in 1995. The primary reason
was a decrease in losses on the sale of securities from $175,000 for 1994 to
none in fiscal 1995. Income from service charges increased to $24,000 for 1995
from $23,000 for 1994.
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<PAGE> 75
NONINTEREST EXPENSE. Noninterest expense increased by $51,000, or 3.2%,
from 1994 to 1995. Compensation and benefits increased from $772,000 for 1994 to
$900,000 for 1995 due to the implementation of the Bank's Incentive Plan, normal
salary increases as well as an increase in the number of employees in 1995.
Occupancy and equipment expense decreased by $1,000 from $174,000 for
1994 to $173,000 for 1995. Deposit insurance premiums increased by $3,000 from
$139,000 for 1994 to $142,000 for 1995.
Other general and administrative expenses and loss on foreclosed real
estate decreased by $78,000 from $501,000 for 1994 to $423,000 for 1995. The
decrease was due to a $20,000 decrease in loss on foreclosed real estate, and a
decrease in advertising of $41,000. Other expenses decreased by a net of $17,000
primarily as a result of the absence in 1995 of legal and accounting expenses
associated with an abandoned merger/conversion transaction. Other operating
expenses such as data processing, insurance and supplies were generally higher.
Management expects that noninterest expense will increase in the future as a
result of stock benefit plans and other costs associated with being a public
company.
INCOME TAX EXPENSE. Income tax expense increased $14,000 due to
higher before tax income and cumulative effect of change in accounting
principle.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1994
AND SEPTEMBER 30, 1993
NET INCOME. Net income decreased by $394,000 or 40% from $979,000 for
the year ended September 30, 1993 to $585,000 for the year ended September 30,
1994. The decrease was due to a loss of $175,000 on the sale of a mutual fund,
as well as higher noninterest expenses in 1994.
NET INTEREST INCOME. Net interest income was virtually unchanged for
1994 compared to 1993. Interest on loans decreased due to a lower average yield
which more than offset a higher average balance. The average yield decreased
from 8.67% for the year ended September 30, 1993 to 7.68% for the year ended
September 30, 1994. The average balance for fiscal 1993 and 1994 was $49.2
million and $54.9 million, respectively. Market interest rates reached historic
lows in the latter part of calendar year 1993. Market interest rates steadily
increased in 1994. Interest on deposits decreased due to lower weighted average
yield offset by a $1.9 million increase in the average balance. However,
interest on FHLB advances increased due to substantially higher average balances
of advances.
The average yield on deposits decreased from 4.75% for the year ended
September 30, 1993 to 4.24% for the year ended September 30, 1994. The average
balance of deposits was $58.8 million for 1993 and $60.7 million for 1994,
despite a decline in deposits at fiscal year end.
PROVISION FOR LOSS ON LOANS. The provision for loss on loans increased
by $19,000 from $22,000 for 1993 to $41,000 for 1994. Net charge-offs, primarily
residential loans, amounted to $77,000 in 1994 as compared to $10,000 in 1993.
Management maintains the allowance for loan losses based on the analysis of
various factors, including the market value of the underlying collateral, growth
and composition of the loan portfolio, the relationship of the allowance for
loan losses to outstanding loans, historical loss experience, delinquency trends
and prevailing and projected economic conditions. Although the Bank maintains
its allowance for loan losses at a level it considers adequate to provide for
losses, there can be no assurance that such losses will not exceed the estimated
amounts or that additional substantial provisions for loan losses will not be
required in future periods.
NONINTEREST INCOME. Noninterest income decreased approximately $177,000
from $70,000 in 1993 to a net loss of $107,000 in 1994. The primary reason was
the loss of $175,000 on the sale of a mutual fund. The fund, consisting
primarily of long-term U.S. Government and agency obligations and
mortgage-backed and related securities was sold because its performance
characteristics were far different than expected. Income from service charges
increased from $15,000 for 1993 to $23,000 for 1994.
NONINTEREST EXPENSE. Noninterest expense increased by $396,000, or 33%,
from approximately $1.2 million for 1993 to approximately $1.6 million for 1994.
Compensation and benefits increased from $568,000 for 1993 to $772,000 for 1994
due to the implementation of the Bank's Incentive Plan, normal salary increases
as well as an increase in the number of employees in 1994.
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<PAGE> 76
Occupancy and equipment expense increased by $30,000 from $144,000 for
1993 to $ 174,000 for 1994 as a result of the introduction of automated teller
machines ("ATMs") at each of the Bank's offices. Deposit insurance premiums
increased by $16,000 from $123,000 for 1993 to $139,000 for 1994 as a result of
application of the remaining credit from the former Federal Savings and Loan
Insurance Corporation secondary reserve against the semi-annual FDIC assessment
in 1993. Deposit insurance premiums subsequent to 1993 reflect the full
insurance premium.
Other general and administrative expenses and loss on foreclosed real
estate increased by $145,000 from $356,000 for 1993 to $501,000 for 1994. The
increase was due to operating costs associated with the ATMs of $29,000, and
professional fees of $38,000 (associated with a merger/conversion abandoned
because of regulatory changes). Other expenses also increased due to higher data
processing, advertising and generally higher operating expenses. Management
expects that noninterest expense will increase in the future as a result of
stock benefit plans and other costs associated with being a public company.
INCOME TAX EXPENSE. Income tax expense decreased $164,000 due to lower
pre-tax income and cumulative effect of change in accounting principle,
partially offset by a higher tax rate due to the tax treatment of certain
losses.
ASSET/LIABILITY MANAGEMENT
In an attempt to manage its exposure to changes in interest rates,
management monitors the Bank's interest rate risk. Management meets periodically
to review the Bank's interest rate risk position and profitability and to make
adjustments in operations as needed, consistent with the Bank's operating
strategy. Management also reviews the Bank's portfolio, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
In managing its asset/liability mix, and depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, and in view of its substantial capital position, the Bank may place
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.
To the extent consistent with its interest rate spread objectives, the
Bank attempts to manage its interest rate risk and has taken several steps in
this regard. First, the Bank focuses a major portion of its one- to four-family
residential lending on adjustable-rate mortgage loans ("ARMs"). While many such
ARMs are based on indices which lag behind leading interest rate indicators when
general interest rates rapidly change, they do increase the interest rate
sensitivity of the Bank's assets. At September 30, 1995, the Bank had $35.8
million of ARMs. Second, a portion of the Bank's investment portfolio includes
assets with short and intermediate terms. Third, the Bank occasionally uses
deposit marketing strategies and FHLB advances to extend the terms of its
liabilities.
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<PAGE> 77
Presented below, as of March 31, 1996, is an analysis of the Bank's
interest rate risk as measured by changes in net portfolio value ("NPV") (i.e.,
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts) for instantaneous and sustained parallel shifts in
the yield curve, in 100 basis point increments, up and down 400 basis points.
<TABLE>
<CAPTION>
Change in
interest rate $ Amount $ Change % Change
------------- -------- -------- --------
(Basis Points) (Dollars in thousands)
<S> <C> <C> <C>
400 $12,617 $(4,856) (28)%
300 14,042 (3,431) (20)
200 15,417 (2,056) (12)
100 16,625 (848) (5)
0 17,473
-100 17,890 417 2
-200 17,965 493 3
-300 18,056 583 3
-400 18,359 886 5
</TABLE>
Certain assumptions were utilized in preparing the previous table
regarding interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under the various interest rate scenarios. It
was also assumed that delinquency rates will not change as a result of changes
in interest rates although there can be no assurance that this will be the case.
In the event that interest rates do not change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above. In addition, a change in Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
significantly different changes to the NPV than indicated above.
LIQUIDITY AND CAPITAL RESOURCES
First Ashland's most liquid assets are cash and cash equivalents. First
Ashland's levels of these assets are dependent on the Bank's operating,
financing, and investing activities. At September 30, 1995 and March 31, 1996,
cash and cash equivalents totaled $2.0 million and $2.7 million, respectively.
The Bank's primary sources of funds include principal and interest payments on
loans (both scheduled and prepayments), maturities of investment securities and
principal payments from mortgage-backed securities.
While scheduled loan repayments and proceeds from maturing investing
securities and principal payments on mortgage-backed securities are relatively
predictable, deposit flows and early repayments are more influenced by interest
rates, general economic conditions and competition. The Bank attempts to price
its deposits to meet asset-liability objectives discussed above, consistent with
local market conditions.
Liquidity management is both a short- and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected purchases of
investment and mortgage-backed securities, (iii) expected deposit flows, (iv)
yields available on interest-bearing deposits, and (v) liquidity of its
asset/liability management program. Excess liquidity is generally invested in
interest-bearing overnight deposits and other short-term liquid asset fund. If
the Bank requires funds beyond its ability to generate them internally, it has
the ability to borrow funds from the FHLB. The Bank may borrow from the FHLB
under a blanket agreement which assigns all investments in FHLB stock as well as
qualifying first mortgage loans equal to 150% of the outstanding balance as
collateral to secure the amounts borrowed. At March 31, 1996, the Bank had
approximately $13.2 million available to it under the above-mentioned pledge
agreement. At March 31, 1996, the Bank had borrowings of $2.0 million from the
FHLB.
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 5.0%. The Bank's liquidity ratios have
67
<PAGE> 78
consistently been maintained at levels in excess of regulatory requirements and
at September 30, 1995 and March 31, 1996, were 16.4% and 13.9%, respectively.
Management of the Bank believes its liquidity ratio will be maintained at or
above 6.0%, in the future.
At September 30, 1995 and March 31, 1996, the Bank had outstanding
commitments to originate loans of $1.2 million and $923,000, respectively. The
Bank anticipates that it will have sufficient funds available to meet its
current commitments principally through the use of current liquid assets and
through its borrowing capacity discussed above.
The OTS's minimum capital standards generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as tangible capital requirement, the core capital requirement and the
risk-based capital requirement. The tangible capital requirement provides for
minimum tangible capital (defined as retained earnings less all intangible
assets) equal to 1.50% of adjusted total assets. The core capital requirement
provides for minimum core capital (tangible capital plus certain forms of
supervisory goodwill and other qualifying intangible assets) equal to 3% of
adjusted total assets. The risk-based capital requirements provide for the
maintenance of core capital plus a portion of unallocated loss allowances equal
to 8% of risk-weighted assets. In computing risk-weighted assets the Bank
multiplies the value of each asset on its balance sheet by a defined
risk-weighting factor (e.g., one- to four-family residential loans carry a
risk-weighted factor of 50%).
At March 31, 1996, the Bank's tangible capital totaled $16.4 million,
or 20.15% of the Bank's adjusted total assets, which exceeded the minimum 1.5%
requirement by $15.2 million. The Bank's core capital at March 31, 1996 totaled
$16.4 million, or 20.15%, which was approximately $14.0 million above the
minimum requirement of 3.0%. The Bank's risk-based capital at that date totaled
$16.5 million, which is $13.3 million above the 8.0% fully phased-in
requirement.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk 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 assets, liabilities and
off-balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
OTS recently announced that it will delay the effectiveness of the rule until it
adopts the process by which savings associations may appeal an interest rate
risk deduction determination. Any savings association 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.
68
<PAGE> 79
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. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31,1996
-------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $62,684 $2,453 7.83%
Mortgage backed securities 7,479 267 7.13
Investment securities 12,780 398 6.23
Other interest-earning 3,186 76 4.77
------- ------ ------
Total interest-earning assets 86,129 3,194 7.42%
------- ------ ======
Non-interest-earning assets 2,431
-------
Total assets $88,560
=======
Interest-bearing liabilities:
Savings accounts $60,554 $1,548 5.11%
FHLB Advances 3,859 113 5.86%
------- ------ ------
Total interest-bearing liabilities 64,413 1,661 5.16%
------- ------ ======
Non-interest-bearing liabilities 502
-------
Total liabilities 64,915
-------
Retained earnings(2) 23,645
-------
Total liabilities and retained
earnings $88,560
=======
Net interest income $1,533
======
Interest rate spread(3) 2.26%
======
Net yield on interest-earning
assets(4) 3.56%
======
Ratio of average interest-earning
assets to average interest-bearing
liabilities 133.71%
======
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------ ----------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $58,789 $4,464 7.59% $54,901 $4,217 7.68% $49,278 $4,272 8.67%
Mortgage backed securities 7,906 569 7.20 9,337 634 6.79% 9,632 725 7.53%
Investment securities 10,255 628 6.12 6,661 425 6.38% 5,712 337 5.90%
Other interest-earning assets 2,724 141 5.18% 1,404 56 3.99% 2,564 90 3.51%
------- ------ ------ ------ ------ ------ ------- ------ ------
Total interest-earning assets 79,674 5,802 7.28% 72,303 5,332 7.37% 67,186 5,424 8.07%
------- ------ ====== ------- ------ ====== ------- ------ ======
Non-interest-earning assets 2,908 2,633 2,236
------- ------- -------
Total assets $82,582 $74,936 $69,422
======= ======= =======
Interest-bearing liabilities:
Savings accounts $60,106 $2,916 4.85% $60,730 $2,573 4.24% $58,843 $2,795 4.75%
FHLB Advances 5,154 305 5.92% 3,805 155 4.07% 1,164 44 3.78%
------- ------ ------ -------- ------ ------ ------- ------ ------
Total interest-bearing liabilities 65,260 $3,221 4.94% 64,535 2,728 4.23% 60,007 $2,839 4.73%
------- ------ ====== ------- ------ ====== ------- ------ ======
Non-interest-bearing liabilities 537 530 367
------- ------- -------
Total liabilities 65,797 65,065 60,374
------- ------- -------
Retained earnings(2) 16,785 9,871 9,048
-------- ------- -------
Total liabilities and retained
earnings $82,582 $74,936 $69,422
======= ======= =======
Net interest income $2,581 $2,604 $2,585
====== ====== ======
Interest rate spread(3) 2.34% 3.14% 3.34%
====== ====== ======
Net yield on interest-earning
assets(4) 3.24% 3.60% 3.85%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities 122.09% 112.04% 111.96%
======= ====== ======
</TABLE>
[FN]
- ----------------------------------
(1) Average balances include non-accrual loans.
(2) Retained earnings for the year ended September 30, 1995 include all
stockholders' equity accounts.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
69
<PAGE> 80
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
1996 vs. 1995(1) 1995 vs. 1994
----------------------------------------- -----------------------------------
Increase (decrease) Increase (decrease)
due to due to
----------------------------------------- -----------------------------------
Rate/ Rate/
Volume Rate volume Net Volume Rate volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 296 $141 $5 $442 $299 $ (49) $ (3) $247
Mortgage-backed securities (30) (5) - (35) (97) 38 (6) (65)
Investment securities 155 11 2 168 229 (17) (9) 203
Other interest earning assets 24 (11) (2) 11 53 17 15 85
----- ---- --- ---- ---- ----- ---- ----
Total interest-earning assets 445 136 5 586 484 (11) (3) 470
---- ---- -- ----- ---- ----- ---- ----
Interest expense:
Savings accounts 22 156 2 180 (25) 371 (3) 343
Other liabilities (76) (3) - (79) 55 70 25 150
------ ------- --- ----- ----- ------ ----- ----
Total interest-bearing
liabilities (54) 153 2 101 30 441 22 493
----- ---- -- ---- ----- ----- ---- ----
Net change in interest income $ 499 $(17) $3 $485 $454 $(452) $(25) $(23)
===== ==== == ===== ==== ===== ==== ====
<CAPTION>
1994 vs. 1993
-----------------------------------------
Increase (decrease)
due to
-----------------------------------------
Rate/
Volume Rate volume Net
------ ---- ------ ---
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $488 (488) $(55) $ (55)
Mortgage-backed securities (22) (71) 2 (91)
Investment securities 56 27 5 88
Other interest earning assets (41) 12 (5) (34)
---- ----- ---- -----
Total interest-earning assets 481 (520) (53) (92)
---- ----- ---- -----
Interest expense:
Savings accounts $ 90 $(300) $(12) $(222)
Other liabilities 100 3 8 111
---- ----- ---- -----
Total interest-bearing
liabilities 190 (297) (4) (111)
---- ----- ---- -----
Net change in interest income $291 $(223) $(49) $ 19
==== ===== ==== =====
<FN>
(1) Reflects changes for the six months ended March 31, 1996 annualized
from the changes for the six months ended March 31, 1995.
</TABLE>
70
<PAGE> 81
The following table sets forth the weighted average yields on
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between the weighted average yields and
rates at March 31, 1996, and September 30, 1995. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
At At
March 31, September 30,
1996 1995
---------- -------------
<S> <C> <C>
Weighted average yield on:
Loans receivable 7.87% 7.91%
Mortgage-backed and related securities 7.13 7.31
Investment securities 6.15 6.18
FHLB stock 7.00 7.00
Other interest-earning assets 4.64 5.38
Combined weighted average yield on interest-earning assets 7.48 7.56
Weighted average rate paid on:
NOW accounts 2.33 2.57
Savings accounts 3.00 3.24
Money market accounts 3.11 3.29
Certificates of deposit 5.79 5.93
FHLB advances 5.45 5.89
Combined weighted average rate paid on interest-bearing
liabilities 4.58 5.20
Interest rate spread 2.90 2.36
</TABLE>
IMPACT OF INFLATION
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of First Ashland and the Bank is reflected in
increased operating costs. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates, generally, have a more significant impact on a
financial institution's performance than does inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
REGULATORY DEVELOPMENTS
The Bank is a member of the SAIF, which is administered by the FDIC.
The FDIC is authorized to increase assessment rates, on a semi-annual 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.
As in the case with SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
The FDIC revised the premium schedule for BIF insured institutions to provide a
range of 0.04% to 0.31% of deposits in anticipation of the BIF reaching the
required reserve ratio. The revisions became effective in the third quarter of
1995.
The FDIC also noted that the SAIF is not expected to attain the
designated reserve ratio until the year 2002 due to the shrinking deposit base
for SAIF assessments and the requirement that SAIF premiums be used to make the
interest payments on bonds issue by the Financing Corporation ("FICO") in order
to finance the costs of resolving thrift failures in the 1980's. As a result,
SAIF insured members will generally be subject to higher deposit insurance
premiums than banks until, all things being equal, the SAIF attains the required
reserve ratio.
71
<PAGE> 82
The effect of this potential disparity on the Bank and other SAIF
members is uncertain at this time. It may have the effect of permitting
BIF-insured banks to offer loan and deposit products on more attractive terms
than SAIF members due to the cost savings achieved through lower deposit
premiums, thereby placing SAIF members at a competitive disadvantage. Proposed
legislation currently under consideration in the Congress provides for a
one-time assessment of 0.85% to 0.90% to be imposed on all SAIF insured deposits
as of March 31, 1995, including those held by commercial banks, and BIF deposit
insurance premiums to be used to pay the FICO bond interest on a pro-rata basis
together with SAIF premiums. Based upon the Bank's deposits at March 31, 1995
(the date currently utilized in the proposed legislation) and assuming the
legislation is adopted as proposed, the Bank's assessment would be approximately
$600,000.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." Certain provisions of SFAS No. 114 were amended in
October 1994 by the issuance of SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114
requires that loans individually and specifically evaluated for impairment,
uncollateralized as well as collateralized, except loans that are measured at
fair value or at the lower of cost or fair value, should be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, at the loan's observable market price or fair value
of the collateral if the loan is dependent on the collateral. SFAS No. 118
eliminates the provisions of SFAS No. 114 which describes how a creditor should
report income on an impaired loan and amends disclosure requirements for
recorded investment and income recognition. SFAS No. 114 and SFAS No. 118 amend
SFAS No. 5, "Accounting for Contingencies," to clarify that a creditor should
evaluate the collectibility of both contractual interest and contractual
principal of a receivable when assessing the need to accrue a loss. SFAS No. 114
and SFAS No. 118 also amend SFAS No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings," to require a creditor to account for a
troubled debt restructuring involving a modification of terms with the
provisions of this statement. SFAS No. 114 and SFAS No. 118 are effective for
fiscal years
72
<PAGE> 83
beginning after December l 5, 1994. The implementation of SFAS No.
114 and SFAS No. 118 is not expected to have a material effect on First
Ashland's or the Bank's financial position or results of operations.
In November 1993, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." SOP 93-6 supersedes SOP 76-3, "Accounting Practices for
Certain Employee Stock Ownership Plans," and affects certain Emerging Issues
Task Force (EITF) consensuses. SOP 93-6 requires that employers report the
issuance of new shares or the sale of treasury shares to the ESOP when the
issuance or sale occurs and should report a corresponding charge to unearned
ESOP shares, a contra-equity account. For ESOP shares committed to be released
to compensate employees directly, employers should recognize compensation cost
equal to the average fair value of the shares committed to be released during
the period. SOP 93-6 also requires that employers should credit unearned ESOP
shares as the shares are committed to be released based on the cost of shares to
the ESOP. The difference between the average fair value of the shares committed
to be released and the cost of the shares to the ESOP should be credited or
charged to additional paid in capital. The SOP is effective for fiscal years
beginning after December 15, 1993. Employers are required to apply the
provisions of the SOP to shares purchased by ESOPs after December 31, 1992 that
have not been committed to be released as of the beginning of the year of
adoption.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122 ("SFAS 122"), "Accounting for Mortgage Servicing Rights." This
statement amends Statement of Financial Accounting Standards No. 65 ("SFAS 65"),
"Accounting for Certain Mortgage Banking Activities," to require that a mortgage
banking enterprise recognize as separate assets rights to service mortgage loans
for others, however those servicing rights are acquired. Institutions that sell
loans and retain the servicing rights will be required to allocate the total
cost of the loans to servicing rights and loans based on their relative fair
value if that value can be estimated. SFAS 122 requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights. SFAS 122 is effective for fiscal years
beginning after December 15, 1995. Management does not believe the adoption of
SFAS 122 will have a material effect on the Bank's financial position or results
of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost
of all employee stock compensation plans based on the estimated fair value of
the award at the date it is granted. Companies are, however, allowed to
continue to measure compensation cost for those plans using the intrinsic
value based method of accounting, which generally does not result in
compensation expense recognition for most plans. Companies that elect to
remain with the existing accounting are required to disclose in a footnote to
the financial statements pro forma net earnings and, if presented, earnings per
share, as if this Statement had been adopted. The accounting requirements of
SFAS No. 123 are effective for transactions entered into during fiscal years
that begin after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994. Management of First Ashland does not believe the disclosure
provision will have a material adverse effect on its financial condition or
results of operations.
73
<PAGE> 84
In April 1995, the FASB issued SOP 94-6, "Disclosure of Certain
Significant Risks and Uncertainties." This SOP applies to financial statements
prepared in conformity with generally accepted accounting principles by all
nongovernmental entities. The disclosure requirements in SOP 94-6 focus
primarily on risks and uncertainties that could significantly affect the amounts
reported in the financial statements in the near-term functioning of the
reporting entity. The risks and uncertainties discussed in SOP 94-6 stem from
the nature of the entity's operations, from the necessary use of estimates in
the preparation of the entity's financial statements, and from significant
concentrations in certain aspects of the entity's operations. SOP 94-6 is
effective for financial statements issued for fiscal years ending after December
15, 1995 and is not expected to have any impact on First Ashland's operations.
BUSINESS OF FIRST ASHLAND
First Ashland is a Delaware corporation which was organized in 1995 by
the Bank for the purpose of becoming the savings and loan holding company of the
Bank. First Ashland owns all of the outstanding stock of the Bank issued on
April 7, 1995 in connection with the Bank's Conversion. First Ashland issued
1,408,750 shares of common stock at $10.00 per share in the Conversion.
At March 31, 1996, First Ashland had total assets of $86.9 million,
deposits of $60.6 million and stockholders' equity of $23.6 million. The
First Ashland Shares are quoted on the NSCM under the symbol "FSBS."
First Ashland's business involves attracting deposits from the general
public and using such deposits to originate one- to four-family residential
mortgages and, to a much lesser extent, consumer, commercial real estate and
multi-family loans primarily in its market area. See "THE BUSINESS OF THE BANK -
Lending Activities." At March 31, 1996, $58.3 million, or 93.2% of First
Ashland's total loan portfolio consisted of residential mortgage loans.
First Ashland also invests in mortgage-backed and related securities
and investment securities and other permissible investments. See "BUSINESS OF
THE BANK -Investment Activities - Investment Securities and - Mortgage-Backed
and Related Securities."
The executive offices of First Ashland are located at 1640 Carter
Avenue, Ashland, Kentucky 41101. The telephone number at that address is
(606) 324-5138. First Ashland is subject to regulation by the OTS as a savings
and loan holding company. See "REGULATION OF FIRST ASHLAND."
BUSINESS OF THE BANK
The Bank, First Ashland's only operating subsidiary, was originally
chartered as a federal savings and loan association in 1936. First Ashland
serves the financial needs of communities in its market area through its main
office located at 1640 Carter Avenue, Ashland, Kentucky, and two branch offices
located in Summit and Russell, Kentucky.
The Bank's operations are regulated by the OTS. The Bank is a member
of the FHLB of Cincinnati. Its deposit accounts are insured up to applicable
limits by the FDIC in the SAIF. See "REGULATION OF FIRST ASHLAND."
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Bank is originating for
its portfolio conventional first mortgage loans secured by one- to four-family
residences located in First Ashland's market area. In addition, in order to
provide more comprehensive financial services to families in its market area,
the Bank also originates a limited amount of consumer, commercial real estate
and multi-family loans, primarily in its market area. See "- Originations,
Purchases and Sales of Loans."
All of the Bank's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's appraisal policy). The loan applications are designed primarily
to determine the borrower's ability to repay and the
74
<PAGE> 85
more significant items on the application are verified through use of credit
reports, financial statements, tax returns or confirmations.
Under the Bank's loan policy, the loan officer processing an
application is responsible for ensuring that all documentation is obtained prior
to the submission of the application to the Loan Committee. In addition, the
loan officer verifies that the application meets the Bank's underwriting
guidelines described below. All loan applications are then considered by the
Bank's Loan Committee and those loans which meet the Bank's lending policies are
submitted to the Bank's Board of Directors for ratification.
The Bank requires title opinions on real estate loans as well as
casualty insurance (fire and extended coverage) in amounts at least equal to the
principal amount of the loan or the value of improvements on the property,
depending on the type of loan. The Bank also requires flood insurance to protect
the property securing its interest when the property is located in a designated
flood hazard area.
75
<PAGE> 86
LOAN PORTFOLIO COMPOSITION. The following information sets forth the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------
At March 31, 1996 1995 1994 1993
------------------ ----------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOANS:
Residential $58,269 93.18% $58,339 94.64% $54,122 95.64% $49,850 96.75%
Commercial real estate 2,483 3.97 1,877 3.04 1,323 2.33 1,023 1.99
Savings account loans 645 1.03 694 1.13 627 1.11 512 .99
Home improvement loans - - - - - - - -
Automobile loans 451 .72 315 .51 345 .61 142 .28
Other consumer loans: Secured 713 1.14 308 .50 412 .73 434 .84
Unsecured 644 1.03 715 1.16 670 1.18 506 .98
LESS:
Unearned discounts 37 .06 44 .07 59 .10 87 .17
Dealer reserves 13 .02 13 .02 13 .02 13 .02
Loans in process 335 .54 273 .44 506 .89 484 .94
Deferred loan origination 176 .28 189 .31 196 .35 184 .36
fees and costs
Allowance for loan losses 108 .17 88 .14 138 .24 174 .34
------- ------ ------- ------ ------- ------ ------- ------
Total loans, net $62,536 100.00% $61,641 100.00% $56,587 100.00% $51,525 100.00%
======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY:
Residential real estate:
1-4 family(1) $57,101 91.31% $57,152 92.72% $53,129 93.89% $49,663 96.39%
Multi-family 1,168 1.87 1,187 1.92 993 1.75 187 .36
Commercial real estate 2,483 3.97 1,877 3.04 1,323 2.33 1,023 1.99
Savings accounts 645 1.03 694 1.13 627 1.11 512 .99
Home improvement - - - - - - - -
Automobiles 451 .72 315 .51 345 .61 142 .28
Other consumer loans: Secured 713 1.14 308 .50 412 .73 434 .84
Unsecured 644 1.03 715 1.16 670 1.18 506 .98
LESS:
Unearned discounts 37 .06 44 .07 59 .10 87 .17
Dealer reserves 13 .02 13 .02 13 .02 13 .02
Loans in process 335 .54 273 .44 506 .89 484 .94
Deferred loan origination 176 .28 189 .31 196 .35 184 .36
fees and costs
Allowance for loan losses 108 .17 88 .14 138 .24 174 .34
------- ------ ------- ------ ------- ------ ------- ------
Total loans, net $62,536 100.00% $61,641 100.00% $56,587 100.00% $51,525 100.00%
======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
At September 30,
------------------------------------------
1992 1991
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
TYPE OF LOANS:
Residential $43,775 96.23% $41,614 93.85%
Commercial real estate 1,151 2.53 1,873 4.22
Savings account loans 380 .83 396 .89
Home improvement loans 3 .01 4 .01
Automobile loans 26 .06 32 .07
Other consumer loans: Secured 538 1.18 627 1.41
Unsecured 279 .62 229 .52
LESS:
Unearned discounts 103 .23 138 .31
Dealer reserves 15 .03 20 .04
Loans in process 249 .55 96 .21
Deferred loan origination 132 .29 83 .19
fees and costs
Allowance for loan losses 162 .36 98 .22
------- ------ ------- ------
Total loans, net $45,491 100.00% $44,340 100.00%
======= ====== ======= ======
TYPE OF SECURITY:
Residential real estate:
1-4 family(1) $43,664 95.98% $41,249 93.03%
Multi-family 111 .25 365 .82
Commercial real estate 1,151 2.53 1,873 4.22
Savings accounts 380 .83 396 .89
Home improvement 3 .01 4 .01
Automobiles 26 .06 32 .07
Other consumer loans: Secured 538 1.18 627 1.41
Unsecured 279 .62 229 .52
LESS:
Unearned discounts 103 .23 138 .31
Dealer reserves 15 .03 20 .04
Loans in process 249 .55 96 .21
Deferred loan origination 132 .29 83 .19
fees and costs
Allowance for loan losses 162 .36 98 .22
------- ------ ------- ------
Total loans, net $45,491 100.00% $44,340 100.00%
======= ====== ======= ======
<FN>
(1) Includes $37.1 million and $35.9 million of one-to-four family
adjustable-rate mortgage loans at March 31, 1996, and September 30, 1995,
respectively.
</TABLE>
76
<PAGE> 87
The following schedule sets forth the weighted average
interest rate by contractual maturity of the Bank's loan portfolio at March 31,
1996. The table does not reflect prepayments, scheduled principal repayments or
enforcement of due-on-sale clauses. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due.
<TABLE>
<CAPTION>
Real estate
------------------------------------------
Multi-family and
One-to four-family commercial real estate Consumer Total
------------------ ---------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted
average average average average
Amount rate Amount rate Amount rate Amount rate
-------- -------- -------- -------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans maturing:
- --------------
Within one year $ 119 7.8% $ 5 7.5% $1,105 8.0% $ 1,229 8.0%
1 to 2 years 126 9.0 - - 222 9.9 348 9.5
2 to 3 years 211 9.4 77 7.9 281 10.1 569 9.5
3 to 5 years 663 8.9 4 10.2 549 9.1 1,216 9.0
5 to 10 years 6,901 8.4 615 9.2 239 11.6 7,755 8.6
10 to 15 years 13,037 7.8 1,411 8.7 - - 14,448 7.9
Over 15 years 35,481 7.6 1,280 8.2 50 8.7 36,811 7.6
Non-performing 563 259 7 829
------- ------ ------ -------
Total amount due $57,101 $3,651 $2,453 $63,205
======= ====== ====== ========
</TABLE>
The aggregate amount of loans that the Bank is permitted to make to any
one borrower is generally limited to 15% of unimpaired capital and surplus (25%
if the security for such loan has a "readily ascertainable" value or 30% for
certain residential development loans). At March 31, 1996, based on the 15%
limit, the Bank's regulatory loans-to-one borrower limit was approximately
$2.5 million. On the same date, the Bank had no borrowers with outstanding
balances in excess of this amount. As of March 31, 1996, the largest dollar
amount outstanding to one borrower or, group of related borrowers, was
$826,000. These loans are secured by commercial and residential properties
located in the Bank's market area and in North Carolina and Florida, and, as of
March 31, 1996, were performing in accordance with their terms.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of
the Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. At March 31, 1996, $57.1 million,
or 91.3% of the Bank's loan portfolio consisted of mortgage loans on one- to
four-family residences. At that date, the average outstanding residential loan
balance was approximately $37,000. Virtually all of the residential loans
originated by the Bank are secured by properties located in the Bank's market
area. Substantially all mortgage loans originated by the Bank are retained and
serviced by it.
The Bank offers conventional fixed-rate loans with maximum terms of up
to 30 years as a central part of its lending portfolio. While most of its
fixed-rate loans carry terms of 15 years, in order to reduce its vulnerability
to changes in interest rates, the Bank also originates a modest volume of
fixed-rate residential loans with terms as short as 10 years. The interest rate
on the Bank's conventional fixed-rate loans is generally set based on
competitive factors. At March 31, 1996, $20.0 million or 35.0% of the Bank's net
loan portfolio consisted of fixed-rate loans. On the same date, such loans had a
weighted average remaining contractual term of 16.0 years.
As a part of its asset/liability management program, the Bank also
originates one year ARMs for retention in its own portfolio. The interest rates
on substantially all of the ARMs held by the Bank are subject to adjustment at
one year intervals with interest rates generally set at a margin above the Cost
of Funds Index ("COFI") or the one-year Constant Maturity Treasury Index.
Because the COFI is considered to be a relatively slow moving index compared to
some other indices (including the Constant Maturity Treasury Index), the Bank's
COFI ARMs may be somewhat slower to react to changes in general interest rates
than ARMs based on the Constant Maturity Treasury Index. Substantially all of
the ARMs currently originated by the Bank are set at a margin above the one-year
Constant Maturity Treasury Index.
77
<PAGE> 88
Increases or decreases in the interest rates of the Bank's ARMs are
generally limited to 1% per year and 5% over the life of the loan. At March 31,
1996, one- to four-family ARMs totaled $37.1 million or 65.0% of the Bank's net
loan portfolio. The Bank's ARMs do not permit negative amortization of principal
and are not convertible into fixed-rate loans. The Bank's ARMs originated after
September 30, 1994 contain prepayment penalties.
In underwriting one- to four-family residential real estate loans, the
Bank evaluates both the borrower's ability to make principal, interest and
escrow payments, the value of the property that will secure the loan and debt to
income ratios. Properties securing one- to four-family residential real estate
loans made by the Bank are appraised by independent appraisers. The Bank
originates virtually all of its residential mortgage loans with loan-to-value
ratios of less than 90%. Loans with loan-to-value ratios in excess of 80% carry
higher origination fees and interest rates. While its loan sales are minimal,
the Bank generally seeks to underwrite its loans in accordance with secondary
market standards.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving it the right to declare the loan immediately due and payable in
the event that, among other things, the borrower sells or otherwise disposes of
the property subject to the mortgage and the loan is not repaid.
CONSUMER LENDING. The Bank originates a variety of different types of
consumer loans, including primarily loans secured by deposit accounts, and to a
lesser extent automobile, and other loans for household and personal purposes.
At March 31, 1996, consumer loans totaled $2.5 million, or 3.9% of net loans
outstanding.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The Bank's consumer
loans are made at fixed interest rates, with terms of up to 10 years for secured
loans and up to 5 years for unsecured loans. The Bank's consumer loans have
increased somewhat in recent years as a result of the opening of the new Summit
branch office headed by a manager with significant consumer loan experience. For
the same reason, subject to market conditions, the Bank anticipates a modest
increase of its consumer loan portfolio in the future.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of 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 which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. 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 or depreciation.
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. At March 31, 1996, $7,000 or 0.3% of the
consumer loan portfolio, was non-performing. There can be no assurance that
delinquencies will not increase in the future.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING. From time to time, the
Bank originates permanent commercial real estate and multi-family loans secured
by properties generally located in its market area. At March 31, 1996, the Bank
had $2.5 million in commercial real estate loans, representing 4.0% of the
Bank's total loan portfolio, and $1.2 million in multi-family loans, or 1.9% of
the Bank's total loan portfolio.
The Bank's commercial real estate and multi-family loan portfolio
includes loans secured by local businesses, churches and other non-residential
building properties, substantially all of which are located within the Bank's
market area.
Permanent commercial real estate and multi-family loans are generally
originated for a maximum term of 15 years and may have fixed or adjustable
rates. Commercial real estate and multi-family loans are written in amounts of
up to 75% of the appraised value of the property.
Commercial and multi-family loans originated by the Bank are appraised
by an independent appraiser prior to the time the loan is made and are reviewed
by the Bank's loan committee. The Bank's underwriting policy requires loan
applicants to provide credit, income and employment information. When necessary,
financial statements and income tax returns are also requested. The Bank
generally requires personal guarantees on loans secured by commercial real
estate.
78
<PAGE> 89
At March 31, 1996, the Bank's two largest commercial real estate or
multi-family loans totaled $528,000 and $500,000, respectively. The first loan
is secured by a commercial warehouse located in the Bank's market area and the
second is a participation in a loan made with other financial institutions
secured by various commercial properties located in the Bank's market area. Both
of these loans were performing at March 31, 1996.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. 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. At March 31,
1996, the Bank had $258,000 in commercial real estate loans and in multi-family
loans and no commercial real estate which were 90 days or more delinquent.
ORIGINATIONS, PURCHASES AND SALES OF LOANS
Real estate loans are originated by the Bank's staff of salaried loan
officers through referrals from real estate brokers and walk-in customers. Loan
applications are taken and processed at all branch offices and generally
approved at the main office of the Bank.
The Bank's ability to originate loans is dependent upon customer demand
for loans in its market and to a limited extent, various marketing efforts.
Demand is affected by both the local economy and the interest rate environment.
The Bank occasionally sells loan participations to other lenders in
order to meet its portfolio objectives. When loans are sold, the Bank typically
retains the responsibility for collecting and remitting loan payments, and
otherwise servicing the loans. The servicing fee is recognized as income over
the life of the loans. At March 31, 1996, the Bank serviced $330,000 of mortgage
loans it had originated.
From time to time, in order to supplement loan demand in the Bank's
market area and geographically diversify the Bank's loan portfolio, the Bank
purchases a very limited amount of real estate loan participations from selected
sellers, with yields to the Bank based upon current market rates. The Bank
carefully reviews and underwrites all loans to be purchased to insure that they
meet the Bank's underwriting standards. During fiscal 1994, the Bank purchased a
$500,000 loan participation secured by an interest in an apartment complex
located in Louisville, Kentucky. In 1995 and 1996, respectively, the Bank
purchased $531,000 in loan participations secured by commercial property in the
Bank's market area and a $250,000 loan participation secured by commercial
property located near Middlesburo, Kentucky.
79
<PAGE> 90
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Three months
ended March 31, Year ended September 30,
--------------- ------------------------------------
1996 1995 1994 1993
------------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Total gross loans receivable at beginning of period $62,248 $57,499 $52,467 $46,152
------- ------- ------- -------
LOANS ORIGINATED:
1 to 4 family residential 4,278 9,939 11,892 13,229
Commercial real estate and multi-family 30 813 424 355
Consumer loans 1,538 2,089 1,674 1,415
Commercial business loans - - 35 45
------- ------- ------- -------
Total loans originated 5,846 12,841 14,025 15,044
------- ------- ------- -------
LOANS PURCHASED:
Commercial real estate and multi-family 750 31 500 -
------- ------- ------- -------
Total loans purchased 750 31 500 -
------- ------- ------- -------
LOANS SOLD:
Whole loans - - - 103
Total loans sold - - - 103
------- ------- ------- -------
Less loan principal repayments (5,528) (8,375) (9,639) (8,713)
------- ------- ------- -------
Other (net) (111) 252 146 87
------- ------- ------- -------
Net loan activity 957 4,749 5,032 6,315
------- ------- ------- -------
Total gross loans receivable at end of period $63,205 $62,248 $57,499 $52,467
======= ======= ======= =======
</TABLE>
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the delinquency by contacting the
borrower. A late notice is sent on all loans over 15 days delinquent. Additional
written and verbal contacts are made with the borrower between 30 and 90 days
after the due date. If the loan is contractually delinquent 90 days, the Bank
through its Chief Executive Officer either arranges payment with the borrower or
initiates foreclosure proceedings on the property securing the loan. If
foreclosed, the property is sold at the Master Commissioner's sale and may be
purchased by the Bank. Delinquent consumer loans are generally handled in a
similar manner. The Bank's procedures for repossession and sale of consumer
collateral are subject to various requirements under Kentucky consumer
protection laws.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until it is sold. When
property is acquired by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or estimated fair value less estimated selling
cost. After acquisition, all costs incurred in maintaining the property are
expensed. Costs relating to the development and improvement of the property,
however, are capitalized.
80
<PAGE> 91
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at March 31, 1996.
<TABLE>
<CAPTION>
Loans delinquent for:
------------------------------------------------------------
60-89 Days 90 Days and over Total delinquent loans
---------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of loan of loan of loan
Number Amount category Number Amount category Number Amount category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
real estate 15 $406 .71% 16 $563 .99% 31 $ 969 1.70%
Consumer 3 9 .37 3 7 .29 6 16 .65
Commercial real estate
and multi-
family 1 261 7.15 2 259 7.09 3 520 14.24
--- ----- -- ----- --- -------
Total 19 $676 21 $829 40 $1,505
== ==== == ==== == ======
</TABLE>
CLASSIFICATION OF ASSETS. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that First Ashland will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of Substandard assets, with the additional characteristics that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as Loss is considered uncollectible and
of such little value that continuance as an asset on the balance sheet of the
institution is not warranted. Assets classified as Substandard or Doubtful
require the institution to establish prudent general allowances for loan losses.
If an asset or portion thereof is classified as Loss, the institution must
charge off the portion of the asset classified as Loss. If an institution does
not agree with an examiner's classification of an asset, it may appeal this
determination to the District Director of the OTS.
On the basis of management's review of its assets, at March 31, 1996,
the Bank had classified a total of $838,000 of its loans and other assets as
follows:
<TABLE>
<CAPTION>
At
March 31,
1996
-----------
(In thousands)
<S> <C>
Special Mention $ 13
Substandard 782
Doubtful assets 43
Loss assets -
----
Total $838
General loss allowance $108
Specific loss allowance $ -
====
Charge-offs $ -
====
</TABLE>
81
<PAGE> 92
The Bank's classified assets consist of the non-performing loans and
loans and other assets of concern discussed herein. As of the date hereof, these
asset classifications are materially consistent with those of the OTS and FDIC.
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of non-performing assets in the Bank's portfolio. Loans are reviewed
monthly and any loan whose collectibility is doubtful is placed on non-accrual
status. Loans are placed on non-accrual status when either principal or interest
is 90 days or more past due, unless, in the judgment of management, the loan is
well collateralized and in the process of collection. Interest accrued and
unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan. Restructured loans include troubled
debt restructurings (which involved forgiving a portion of interest or principal
on any loans or making loans at a rate materially less than the market rate). At
March 31, 1996, the Bank had $15,000 in restructured loans. Real estate owned
includes assets acquired through voluntary deed and foreclosure proceedings.
<TABLE>
<CAPTION>
At September 30,
At March 31, --------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
LOANS ACCOUNTED FOR ON A NON-ACCRUAL BASIS:
One- to four-family real estate $ 264 $204 $227 $457 $ - $ 2
Consumer 2 3 2 - - -
Commercial real estate and multi-family 258 65 - - - -
------- ---- ---- ---- ---- ------
Total 524 272 229 457 - 2
------ ---- ---- ---- ---- ------
ACCRUING LOANS WHICH ARE CONTRACTUALLY PAST DUE
90 DAYS OR MORE:
Mortgage loans:
One- to four-family real estate 299 91 310 172 347 1,076
Commercial real estate and multi-family 1 - 4 - 159 1
Consumer 5 14 9 3 - 1
------ ---- ---- ---- ---- ------
Total 305 105 323 175 506 1,078
------ ---- ---- ---- ---- ------
Total non-accrual and accrual loans 829 377 552 632 506 1,080
------ ---- ---- ---- ---- ------
Real estate owned 186 46 53 - 4 36
------ ---- ---- ---- --- ------
Other non-performing assets - - - - - -
------ ---- ---- ---- ---- ------
Total non-performing assets $1,015 $423 $605 $632 $510 $1,116
====== ==== ==== ==== ==== ======
Total non-accrual and accrual loans to net loans 1.33% .61% .98% 1.23% 1.11% 2.70%
====== ==== ==== ==== ==== ======
Total non-accrual and accrual loans to total assets .95% .42% .73% .86% .79% 1.95%
====== ==== ==== ==== ==== ======
Total non-performing assets to total assets 1.17% .48% .81% .86% .80% 2.02%
====== ==== ==== ==== ==== ======
</TABLE>
For the six months ended March 31, 1996, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $22,000. The amount that was
included in interest income on such loans for the six months ended March 31,
1995, was approximately $12,000.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set
forth in the table above, as of March 31, 1996, there were $9,000 of loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the secured properties have caused management to
have concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Management has considered the Bank's non-performing and "of concern"
assets in establishing its allowance for loan losses.
82
<PAGE> 93
ALLOWANCE FOR LOSSES ON LOANS. The following table sets forth
information with respect to the Bank's allowance for loan losses for the periods
indicated. During each of the periods presented, there were no recoveries of
amounts charged off.
<TABLE>
<CAPTION>
September 30,
March 31, -----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding $63,205 $62,248 $57,499 $52,467 $46,152 $44,475
======= ======= ======= ======= ======= =======
Average loans outstanding $62,684 $58,789 $54,901 $49,278 $44,952 $41,789
======= ======= ======= ======= ======= =======
Allowance balances (at beginning of
period) 88 138 174 162 98 92
Provision (credit):
One- to four-family residential 20 - 12 22 67 22
Commercial real estate - - 10 - - -
Consumer - - 19 - - -
Charge-offs: -
One- to four-family residential - 29 71 10 3 16
Consumer - 14 - - - -
Commercial real estate - 7 6 - - -
------- ------- ------- ------- ------- -------
Allowance balance (at end of
period) $ 108 $ 88 $ 138 $ 174 $ 162 $ 98
======= ======= ======= ======= ======= =======
Allowance for loan losses as a
percent of net loans outstanding
before allowance for loan loss .17% .14% .24% .33% .35% .22%
Net loans charged off as a percent
of average loans outstanding - .09% .14% .02% .01% .04%
</TABLE>
83
<PAGE> 94
The following table sets forth the allocation of the Bank's allowance
for loan losses by loan category and the percent of loans in each category to
total loans receivable, net, at the end of the periods indicated. The portion of
the loan loss allowance allocated to each loan category does not represent the
total available for future losses which may occur within the loan category since
the total loan loss allowance is a valuation reserve applicable to the entire
loan portfolio.
<TABLE>
<CAPTION>
At March 31,
1996
------------------------------
% of
Allowance
to gross
% of loans loans in
in each each
category to category
total to total
Amount loans(1) loans
------ ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
One- to four-family
residential $ 60 90.34% .11%
Commercial real estate and
multi-family 32 5.78 .88
Consumer 16 3.88 .65
------ ------
Total allowance $108 100.00%
==== ======
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ ------------------------------ ------------------------------
% of % of % of
Allowance Allowance Allowance
to gross to gross to gross
% of loans loans in % of loans loans in % of loans loans in
in each each in each each in each each
category to category category category to category category to
total to total total to total to total total
Amount loans(1) loans Amount loans(1) loans Amount loans(1) loans
------ ----------- --------- ------ --------- ----------- ------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
residential $40 91.81% .07% $115 92.50% .22% $174 94.81% .35%
Commercial real estate and
multi-family 32 4.92 1.04 4 4.03 .17 - 2.31 -
Consumer 16 3.27 .79 19 3.47 .95 - 2.88 -
--- ----- ---- ----- ---- -----
Total allowance $88 100.00% $138 100.00% $174 100.00%
=== ====== ==== ====== ==== ======
<FN>
(1) Before reduction for loans in process, allowance for loan losses, dealer reserves, and deferred income.
</TABLE>
84
<PAGE> 95
The following table sets forth information with respect to the Bank's
allowance for losses on real estate owned at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
March 31, ---------------------------------
1996 1995 1994 1993
----------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Total real estate owned and in judgment, net $186 $46 $ 53 $ -
==== === ==== =====
Allowance balances - beginning $ - $ 4 $ - $ -
Provision - - 4 -
Net charge-offs 4 - -
--- ---- -----
Allowance balances - ending $ - $ $ 4 $ -
==== === ==== =====
Allowance for losses on real estate owned and in judgment
to net real estate owned and in judgment - - 7.55% -
==== === ==== =====
</TABLE>
The allowance for losses on loans is established through a provision
for losses charged to earnings based on management's evaluation of the risk
inherent in its entire loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers specific
occurrences, general and local economic conditions, loan portfolio composition,
historical and local experience and other factors that warrant recognition in
providing for an adequate allowance for loan losses. In determining the general
reserves under these policies, historical charge-offs and recoveries, changes in
the mix and levels of the various types of loans, net realizable values, the
current loan portfolio and current economic conditions are considered. The Bank
also requires additional reserves for all classified loans.
While management believes that it uses the best information available
to determine the allowance for losses on loans, unforeseen market conditions
could result in adjustments to the allowance for losses on loans, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination.
INVESTMENT ACTIVITIES
First Ashland invests in a variety of securities and other investments
including investment securities, mortgage-backed securities and liquid assets.
In general, the purpose of these activities is to supplement loan products and
to provide liquidity.
INVESTMENT SECURITIES. To date, First Ashland's and the Bank's
investment strategy has been directed toward high-quality assets (primarily U.S.
Government agency securities) with various terms to maturity. In addition to
U.S. Government agency securities, First Ashland and the Bank invest in
obligations of state and political subdivisions, mutual funds and FHLB stock. At
March 31, 1996, First Ashland's investment securities portfolio totaled $11.6
million. At March 31, 1996, First Ashland did not own any investment securities
of a single issuer which exceeded 10% of First Ashland's stockholders' equity,
other than U.S. Government agency securities. See Notes 1 and 4 of the Notes to
Consolidated Financial Statements for the fiscal year ended September 30, 1995,
for additional information regarding First Ashland's securities portfolio.
The Bank owns one structured note issued by the FHLB of Cincinnati. The
note has an amortization cost of $500,000 and an interest rate based on the
ten-year treasury constant rate, plus 2.75%, less six months LIBOR, adjusted
annually. The note matures in September 2005. At March 31, 1996, the estimated
market and carrying value was $435,000. Such notes are subject to significant
price volatility in certain circumstances, such as a decrease in the difference
between short term and long term interest rates.
The Bank invests its liquid assets primarily in interest-earning
overnight deposits of the FHLB of Cincinnati. The Bank is required by federal
regulations to maintain a minimum amount of liquid assets that may be invested
in specific securities. Liquidity may increase or decrease depending on the
availability of funds and comparative yields on investments in relation to the
return on loans. Cash flow projections are regularly reviewed to assure that
adequate liquidity is maintained. At March 31, 1996, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings deposits and current
borrowings) was 16.4% as compared to the OTS requirement of 5%. See "FIRST
ASHLAND'S
85
<PAGE> 96
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Asset/Liability Management," and "- Liquidity and
Capital Resources" and "REGULATION OF FIRST ASHLAND - Liquidity."
The following table sets forth the carrying value of the Company's
investment securities portfolio, short-term investments and FHLB stock at the
dates indicated. At March 31, 1996 and September 30, 1995, respectively, the
market value of the Company's investment securities portfolio was $14.1 and
$16.4 million, respectively.
<TABLE>
<CAPTION>
At September 30,
March 31, -----------------------------------------
1996 1995 1994 1993
------- ------- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury Securities $ 4,216 $ 4,203 $ - $ -
U.S. Government Agency Securities 3,991 7,294 2,252 2,807
Obligations of State and Political
subdivisions
1,265 1,511 1,370 1,066
Other Securities(1) 1,503 1,487 1,427 2,306
FHLB Stock 662 640 599 558
------- ------- ------ ------
Total Investment Securities 11,637 15,135 5,648 6,737
------- ------- ------ ------
Liquid Assets:
Interest-bearing Deposits 2,370 1,193 1,377 698
Federal Funds Sold - - - 1,475
------- ------- ------ ------
Total Investments $14,007 $16,328 $7,025 $8,910
======= ======= ====== ======
<FN>
- ------------------------------
(1) Other securities at March 31, 1996 and September 30, 1995, 1994 and 1993 consists of investments in mutual funds.
</TABLE>
86
<PAGE> 97
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of fixed income
securities in First Ashland's investment in debt securities at March 31, 1996.
See Note 4 of the Notes to Consolidated Financial Statements for the fiscal
year ended September 30, 1995, for a discussion of First Ashland's investment
securities portfolio.
<TABLE>
<CAPTION>
One year or less One to five years Five to ten years
------------------- ------------------ -------------------
Carrying Average Carrying Average Carrying Average
value yield value yield value yield
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $1,000 5.50% $3,216 6.16% $ - - %
U. S. Government Agency
Obligations - - 3,556 6.81% 435 3.99%
Municipal Obligations - - 40 4.95% 195 6.81%
------ ------ ------
Total $1,000 5.50% $6,812 6.49% $630 4.86%
====== ====== ====
<CAPTION>
More than ten years Total investment securities
------------------- ---------------------------
Carrying Average Carrying Average Market
value yield value yield value
-------- ------- -------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ - % $ 4,216 6.00% $ 4,261
U. S. Government Agency
Obligations - - 3,991 6.50% 3,993
Municipal Obligations 1,030 6.01% 1,265 6.10% 1,297
----- ------- ------
Total $1,030 6.01% $ 9,472 6.22% $ 9,551
====== ======= =======
</TABLE>
87
<PAGE> 98
MORTGAGE-BACKED AND RELATED SECURITIES. In order to supplement
investment activities and achieve its asset/liability management goals, First
Ashland and the Bank invest in mortgage-backed and related securities. All of
the mortgage-backed and related securities owned by First Ashland and the Bank
are issued, insured or guaranteed either directly or indirectly by a federal
agency or are rated "AA" or higher. At March 31, 1996, First Ashland had $7.2
million of mortgage-backed and related securities, or 8.3% of total assets.
Consistent with its asset/liability management strategy, a portion of the
mortgage-backed and related securities have adjustable interest rates. For
information regarding First Ashland's mortgage-backed and related securities
portfolio, see Notes 1 and 5 of the Notes to Consolidated Financial Statements
for the fiscal year ended September 30, 1995.
At March 31, 1996, the Bank did not have any mortgage-backed or related
securities in excess of 10% of stockholders' equity except for Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") issues, amounting to $3.6 million and $3.2 million, respectively, at
March 31, 1996.
In addition to its mortgage-backed securities portfolio, the Bank from
time to time invest in a limited amount of collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMICs"). CMOs and
REMICs are securities derived by reallocating the cash flows from
mortgage-backed securities or pools of mortgage loans in order to create
multiple classes, or tranches, of securities with coupon rates and average term
that differ from the underlying collateral as a whole. The terms to maturity of
any particular tranche is dependent upon the prepayment speed of the underlying
collateral as well as the structure of the particular CMO or REMIC. As a result,
the cash flow, and hence the value, of CMOs and REMICs are subject to change.
The Bank invests in these securities as an alternative to mortgage loans and
conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that CMOs and REMICs may represent
attractive investment alternatives relative to other investments due to the wide
variety of maturity and repayment options available through such investments. At
March 31, 1996, First Ashland held $3.5 million of CMOs and REMICs.
Substantially all mortgage derivatives owned by the Bank are not
classified as "high-risk" under regulatory guidelines and are subject to normal
effects of changes in interest rates. At March 31, 1996, the Bank held two
"principal only" mortgage derivatives classified as "high risk" with a carrying
value of $82,000 and a market value of $104,000. Principal only derivatives are
adversely affected by an increase in interest rates. Mortgage loans from which
the derivatives are created are less likely to prepay, thus adversely changing
the yield expected in a lower rate environment. Recoverability of the investment
is not affected. The Bank's principal only derivatives are classified as held to
maturity since management has the ability and intent to hold such derivatives to
maturity. The Bank does not purchase mortgage derivatives at a premium in order
to minimize prepayment risk, and generally purchases mortgage derivatives issued
by government agencies to minimize credit risk.
To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires First Ashland to annually test its CMOs and other
mortgage-related securities to determine whether they are high-risk or
nonhigh-risk securities. At March 31, 1996, First Ashland had $82,000 of CMOs
that did not meet the criteria established by the FFIEC policy.
The following table sets forth the scheduled principal maturities of
the Bank's mortgage-backed and related securities portfolio as of March 31,
1996. CMOs are assumed to mature when the underlying mortgage loans mature even
though the Bank's CMO interests are structured to mature much more quickly.
<TABLE>
<CAPTION>
Scheduled Principal Maturities Due in Year(s) Ended March 31,
-------------------------------------------------------------
1999 to 2004 to 2014 and
1997 1998 2003 2013 thereafter
------- ------ ------ ------- ----------
<S> <C> <C> <C> <C>
$ - $210 $609 $1,397 $5,026
=== ==== ==== ====== ======
</TABLE>
88
<PAGE> 99
The following table set forth the dollar amount of all mortgage-backed
and related securities due one year after March 31, 1996, which have fixed
interest rates and have floating or adjustable rates.
<TABLE>
<CAPTION>
Interest rate terms on amounts
due after 1 year: At March 31, 1996
------------------------------ -----------------
(In thousands)
<S> <C>
Fixed $4,152
Adjustable 3,090
------
Total $7,242
======
</TABLE>
The following table sets forth certain information with respect to
mortgage-backed and related securities at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
At March 31, -------------------------------------------------------------
1996 1995 1994 1993
------------------- ------------------- ------------------ -----------------
Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value
-------- -------- --------- -------- -------- ------ --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC Certificates $1,989 $2,046 $2,442 $2,478 $2,860 $2,826 $ 4,243 $ 4,439
FNMA Certificates 1,504 1,466 1,414 1,387 1,494 1,379 2,146 2,219
GNMA Certificates 204 225 235 255 272 288 466 511
REMICs and CMOs:
FHLMC, FNMA and GNMA 3,525 3,541 3,539 3,576 3,566 3,443 3,986 4,085
Other 20 21 22 23 55 54 151 159
------ ------- ------ ------ ------ ------ ------- -------
$7,242 $7,299 $7,652 $7,719 $8,247 $7,990 $10,992 $11,413
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
SOURCES OF FUNDS
GENERAL. First Ashland's primary sources of funds are deposits,
payments (including prepayments) of loan principal, interest earned on loans and
securities, repayments of mortgage-related securities, borrowings and funds
provided from operations.
DEPOSITS. The Bank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook,
NOW, money market and various certificate accounts. The Bank relies
primarily on competitive pricing policies and customer service to attract and
retain these deposits.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. As customers have become more interest rate conscious, the Bank
has become more susceptible to short-term fluctuations in deposit flows. The
Bank manages the pricing of its deposits in keeping with its asset/liability
management, profitability and growth objectives. Based on its experience, the
Bank believes that its passbook and NOW accounts are relatively stable sources
of deposits. However, the ability of the Bank to attract and maintain
certificate deposits, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions. For information
regarding the amount of the Bank's deposit accounts at recent fiscal year ends,
see Note 10 of the Notes to the Consolidated Financial Statements of First
Ashland for the fiscal year ended September 30, 1995.
During recent years, the Bank has opened a new office and introduced
ATMs in an effort to increase its transaction accounts. Also, the Bank has, from
time to time, utilized marketing and pricing strategies to increase the average
term of its certificate accounts.
89
<PAGE> 100
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year ended September 30,
March 31, -----------------------------------------
1996 1995 1994 1993
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Opening balance $59,915 $59,808 $61,557 $54,965
Deposits 30,708 65,205 41,592 37,493
Withdrawals (31,011) (67,189) (44,972) (32,607)
-------- ------- ------- -------
Net increase (decrease) before interest
credited (303) (1,984) (3,380) 4,886
Interest credited 1,034 2,091 1,631 1,706
----- ------- ------- -------
Net increase (decrease) in savings deposits
$ 731 $ 107 ($1,749) $ 6,592
======= ======= ======= =======
</TABLE>
Deposits in the Bank as of March 31, 1996, were represented by various
types of savings programs described below.
<TABLE>
<CAPTION>
Weighted Balance as of
Category average Minimum March 31, Percentage of
-------- Term interest rate(1) balance amount 1996 total deposits
---- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Now accounts None 2.33% $ 100 $ 3,303 5.45%
Savings accounts None 3.00 25 3,558 5.87
Money market accounts None 3.11 2,500 8,146 13.43
Certificates of deposit:
Fixed term, fixed rate 1-3
Months 5.64 500 6,301 10.39
Fixed term, fixed rate 4-6
Months 5.28 500 8,194 13.51
Fixed term, fixed rate 7-12
Months 5.71 500 8,057 13.29
Fixed term, fixed rate 13-36
Months 5.99 500 20,696 34.12
Fixed term, fixed rate 36-60
Months 6.41 500 2,391 3.94
--------- --------
Total $60,646 100.00%
======= ======
<FN>
(1) Weighted average interest rate as of March 31, 1996.
</TABLE>
90
<PAGE> 101
The following table sets forth the time deposits in the Bank classified
by interest rate as of the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
As of March 31, ------------------------------------------
1996 1995 1994 1993
----------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
INTEREST RATE:
2.26% - 3.25% $ - $ - $ - $ -
3.26 - 4.25% 1,727 3,526 11,619 13,760
4.26 - 5.25% 11,266 8,343 19,616 18,000
5.26 - 6.25% 17,760 12,216 5,727 3,629
6.26 - 7.25% 13,449 17,415 297 2,154
7.26 - 8.25% 1,436 1,593 797 1,959
8.26 - 9.25% - - 1,129 1,750
9.26 - 10.25% - - - 297
------- ------- ------- -------
TOTAL $45,638 $43,093 $39,185 $41,549
======= ======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at March 31, 1996.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------------------
After
March 31, March 31, March 31, March 31,
INTEREST RATE: 1997 1998 1999 2000 Total
-------- -------- -------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
3.25% - 4.25% $ 1,727 $ - $ - $ - $ 1,727
4.26 - 5.25% 8,046 1,083 1,764 373 11,266
5.26 - 6.25% 6,321 6,510 4,098 831 17,760
6.26 - 7.25% 5,412 7,044 329 664 13,449
7.26 - 8.25% 803 110 - 523 1,436
8.26 - 9.25% - - - - -
------- ------- ------ ------ -------
Total $22,309 $14,747 $6,191 $2,391 $45,638
======= ======= ====== ====== =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of March 31,
1996.
<TABLE>
<CAPTION>
Certificates
of Deposit
------------
(In thousands)
<S> <C>
MATURITY PERIOD:
Within three months $ 835
Three through six months 1,934
Six through twelve months 1,643
Over twelve months 6,490
-------
$10,902
=======
</TABLE>
For additional information regarding the composition of the Bank's
deposits, see Note 10 of the Notes to the Consolidated Financial Statements
of First Ashland for the fiscal year ended September 30, 1995.
BORROWINGS. The Bank's other available sources of funds include
advances from the FHLB of Cincinnati and other borrowings. As a member of the
FHLB of Cincinnati, the Bank is required to own capital stock in the FHLB of
Cincinnati and is authorized to apply for advances from the FHLB of Cincinnati.
Each FHLB credit program has its own interest rate,
91
<PAGE> 102
which may be fixed or variable, and range of maturities. The FHLB of Cincinnati
may prescribe the acceptable uses for these advances, as well as limitations on
the size of the advances and repayment provisions.
Consistent with its asset/liability management strategy, the Bank has
utilized FHLB advances from time to time to extend the term to maturity of its
liabilities. Also, the Bank has used FHLB borrowings to fund loan demand and
other investment opportunities and to offset deposit outflows. At March 31,
1996, the Bank had $2.0 million of FHLB advances outstanding. On such date,
First Ashland had a collateral pledge arrangement with FHLB of Cincinnati
pursuant to which the Bank may borrow up to an additional $11.2 million for
liquidity purposes. See Note 11 of the Notes to Consolidated Financial
Statements of First Ashland.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
March 31, --------------------------------
1996 1995 1994 1993
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
MAXIMUM BALANCE:
FHLB advances $5,017 $5,154 $4,793 $2,327
AVERAGE BALANCE:
FHLB advances 3,859 3,767 3,805 1,164
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
<TABLE>
September 30,
March 31, ---------------------------------
1996 1995 1994 1993
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLB advances $2,003 $5,017 $4,793 $2,320
Weighted average interest rate of FHLB advances 5.50% 5.89% 4.97% 3.68%
</TABLE>
SERVICE CORPORATION ACTIVITIES
As a federally chartered savings bank, the Bank is permitted by OTS
regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. At March 31, 1996, the Bank's investment in its
service corporation totaled $15,000. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
bank may engage in directly.
At March 31, 1996, the Bank had one wholly owned service corporation,
First S&L Corporation ("First S&L"). First S&L, a Kentucky corporation, was
incorporated in 1975 for the purpose of acquiring stock in Savings & Loan Data
Corporation, a data processing company located in Cincinnati, Ohio. First S&L
has not conducted any other business and has been inactive since its acquisition
of Savings & Loan Data Corporation stock.
92
<PAGE> 103
PROPERTY
The following table sets forth information concerning the main office
and each branch office of First Ashland at March 31, 1996. At March 31, 1996,
First Ashland's premises had an aggregate net book value of approximately
$1,369,000.
<TABLE>
<CAPTION> Net book value at
Year Owned or March 31, 1996
Location acquired leased in thousands
--------- -------- -------- -------------
<S> <C> <C> <C>
Main office:
1640 Carter Avenue 1961 Owned $404
Ashland, Kentucky
Full Service Branches:
U.S. 60 - Summit 1992 Owned 885
Ashland, Kentucky
Greenup Mall 1980 Owned 80
Russell, Kentucky
</TABLE>
First Ashland believes that its current facilities are adequate to meet
the present and foreseeable future needs of the Bank and First Ashland.
First Ashland's depositor and borrower customer files are maintained by
an independent data processing company. The net book value of the data
processing and computer equipment utilized by the Bank at March 31, 1996 was
approximately $42,000.
COMPETITION
The Bank faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating loans comes primarily
from commercial banks, credit unions, mortgage bankers and other savings
institutions, which also make loans secured by real estate located in the Bank's
market area. At March 31, 1996, there were five savings institutions and six
commercial banks located in the Bank's market area. On that date, First Ashland
accounted for approximately 16% of the loans originated in its market area. The
Bank competes for loans principally on the basis of the interest rates and loan
fees it charges, the types of loans it originates and the quality of services it
provides to borrowers.
Competition for those deposits is principally from commercial banks,
credit unions, mutual funds, securities firms and other savings institutions
located in the same communities. The ability of the Bank to attract and retain
deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Bank competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours and a customer oriented staff. At March 31, 1996, the Bank's share of
deposits in its market area was approximately 5.6%.
LEGAL PROCEEDINGS
From time to time, the Bank is involved as plaintiff or defendant in
various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on First Ashland's and the Bank's
financial position or results of operations.
93
<PAGE> 104
EMPLOYEES
At March 31, 1996, First Ashland had a total of 17 full-time and
1 part-time employees. None of First Ashland's employees are represented
by any collective bargaining. Management considers its employee relations to
be good.
SECURITY OWNERSHIP OF FIRST ASHLAND
Set forth below are those persons who were beneficial owners of greater
than 5% of First Ashland Shares at September 30, 1995:
<TABLE>
<CAPTION>
Beneficial Owners Shares Beneficially Owned Percent of Class
- ----------------- ------------------------- -----------------
<S> <C> <C>
Jerome H. Davis and Susan B. Davis 140,000 9.9%
200 Park Avenue, Suite 4515
New York, New York 10166 (1)
First Ashland Employee Stock Ownership Plan 112,700 8.0%
1640 Carter Avenue
Ashland, Kentucky 41101 (2)
<FN>
- ----------------------------
(1) As reported by Jerome H. Davis and Susan B. Davis in a Schedule 13D,
dated April 7, 1995, pursuant to which Mr. Davis reported shared voting
and dispositive power with respect to 140,000 shares of common stock
and Mrs. Davis reported sole voting and dispositive power with respect
to 15,000 shares of common stock and shared voting and dispositive
power with respect to 125,000 shares of common stock.
(2) The amount reported represents shares held by the First Ashland's ESOP,
11,138 of which has been allocated to accounts of participants as of
December 8, 1995. First Bankers Trust Company, N.A., Quincy, Illinois,
the trustee of the ESOP, may be deemed to beneficially own the shares
held by the ESOP which have been allocated to accounts of participants.
</TABLE>
Set forth below is the amount of First Ashland Shares beneficially
owned by each director and by all directors and officers as a group at September
30, 1995:
<TABLE>
<CAPTION>
Amount and Nature of Percentage of Shares of
Name and Address(1) Beneficial Ownership (2) Common Stock Outstanding
---------------- -------------------- ------------------------
<S> <C> <C>
Paul D. Leake, Director, President and 46,761 3.1%
Chief Executive Officer of First
Ashland and the Bank
J. Edward Maddox, Chairman of the Board 27,817 1.9
of First Ashland and the Bank
Robert G. Biggs, Director of First 32,817 2.2
Ashland and the Bank
T.N. Marshall, Director of First Ashland 32,817 2.2
and the Bank
Judy B. Thomas, Director of First 26,117 1.8
Ashland and the Bank
Wilbur E. Chellgren, Director of First 22,817 1.6
Ashland and the Bank(3)
Directors and executive officers of 274,389 17.2
First Ashland as a group (11 persons)
<FN>
- -----------------------------
(Footnotes on next page)
</TABLE>
94
<PAGE> 105
(1) All persons may be reached in care of First Ashland.
(2) Amounts include shares held directly, as well as shares held jointly
with family members, held in retirement accounts, held in a fiduciary
capacity or held by certain family members, with respect to which
shares the listed individuals may be deemed to have sole voting and/or
investment power. Amount also includes an aggregate of 52,189
restricted shares awarded under First Ashland's RRP over which holders
have voting, but not investment, power and an aggregate of 129,598
shares subject to options which are exercisable within 60 days.
(3) On October 23, 1995, Wilbur E. Chellgren retired as a director of
First Ashland and the Bank and became an advisory director.
MANAGEMENT OF FIRST ASHLAND
DIRECTORS
<TABLE>
<CAPTION>
Director Term
Name Age Position(s) Held Since Expires
- ---- --- ---------------- ------- ------
<S> <C> <C> <C> <C>
J. Edward Maddox 75 Chairman of the Board 1968 1997
Paul D. Leake 55 President, Chief Executive
Officer and Director 1977 1998
Robert G. Biggs 60 Director 1991 1998
T. N. Marshall 54 Director 1989 1998
Judy B. Thomas 51 Director 1990 1999
</TABLE>
The business experience of each director is set forth below. All
directors have held their present positions for at least the past five
years, except as otherwise indicated.
PAUL D. LEAKE. Mr. Leake has served as President and Chief
Executive Officer of First Ashland since its formation in 1995 and of the
Bank since 1976. Mr. Leake began his employment with the Bank in 1968 as a
lending officer.
J. EDWARD MADDOX. Mr. Maddox was employed as Manager of Human
Resources of Armco Steel Corp., a steel manufacturer located in Ashland,
Kentucky, until his retirement in 1985.
ROBERT G. BIGGS. Prior to his retirement in 1991, Mr. Biggs was a
real estate broker for Biggs Realty Co., located in Ashland, Kentucky.
T N. MARSHALL. Since 1992, Mr. Marshall has been the owner of a
McDonald's franchise restaurant located in West Virginia. Prior to 1992,
Mr. Marshall owned four retail supermarkets in the Ashland, Kentucky area.
JUDY B. THOMAS. Mrs. Thomas has been President of the Ashland
Foundation, a philanthropic arm of Ashland Inc., located in Ashland, Kentucky
since 1983.
DIRECTORS' COMPENSATION
Non-employee directors are paid a fee of $600 per month, except for
Chairman Maddox, who receives $600 per month as a director and an additional
$100 per month as Chairman of the Board. President Leake does not receive any
additional compensation for either board or committee meetings attended. In
addition, all non-employee Bank directors
95
<PAGE> 106
were eligible to receive a cash bonus, the amount of which was based on the
Bank's performance, pursuant to an Incentive Plan which was terminated effective
April 20, 1995. For fiscal 1995, each non-employee director of the Bank received
a bonus of $1,790, pursuant to the Bank's Incentive Plan. Bank directors are
also eligible to participate in the Bank's director retirement plan which
provides for retirement benefits of $400 per month payable when the directors
reach 70 years of age which is the mandatory retirement age. Mr. Maddox may be
permitted to serve until age 80. In addition, a Bank director's surviving
spouse may receive up to 50% of the benefits which would have been paid to the
Bank director had he or she survived.
EXECUTIVE OFFICERS
The following is a description of First Ashland's and the Bank's
executive officers who are not also directors as of March 31, 1996.
HAROLD L. RATLIFF. Mr. Ratliff, age 49, is a Vice President of
First Ashland and the Bank. Mr. Ratliff is primarily in charge of lending
operations. Mr. Ratliff has held such position with the Bank since 1990.
Mr. Ratliff began his career with First Federal in 1979 as a lending officer.
MARK R. CONLEY. Mr. Conley, age 37, is a Vice President of
First Ashland and the Bank, a position he has held since 1992. Mr. Conley is
manager of the Bank's Summit branch office. Prior to his employment with the
Bank, Mr. Conley served as assistant vice president of a commercial bank located
in Ashland, Kentucky.
SANDRA A. SMITH. Mrs. Smith, age 46, is Assistant Vice
President and Secretary of First Ashland and the Bank, positions she has held
with the Bank since 1993. Mrs. Smith has held various positions since
beginning her career with First Federal in 1978.
JANE A. BUGG. Mrs. Bugg, age 51, has been an employee of the Bank
since 1980. She has been the Bank's Treasurer since 1992 and First Ashland's
Treasurer since its incorporation in 1995. Mrs. Bugg has served as teller,
data coordinator and Treasurer during her career with the Bank and First
Ashland.
ROBERT D. EDMONDS. Mr. Edmonds, age 35, is Assistant Vice
President and Chief Financial Officer of First Ashland and the Bank, positions
he has held with the Bank since October 1994 and with First Ashland since its
incorporation in 1995. Mr. Edmonds has been an employee of the Bank since
April 1994. Prior to such time, he served as a certified public accountant
with the firm of Smith, Goolsby, Artis & Reams, P.S.C. located in Ashland,
Kentucky.
EXECUTIVE COMPENSATION
First Ashland's officers do not receive any compensation for services
performed in their capacity as such. The following table sets forth the
compensation paid by the Bank during fiscal 1995 for services rendered by the
President of the Bank. No other officer earned salary and bonus exceeding
$100,000 in fiscal 1995.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
- ---------------------------------------------------------------------------------------------------------------------------
RESTRICTED
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK LTIP OPTIONS/ ALL OTHER
POSITION YEAR(1) SALARY($) BONUS($) COMPENSATION($)(2) AWARD($)(3) PAYOUTS ($) SARS(#)(4) COMPENSATION($)
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul D. Leake 1995 $90,000 $31,920(5) $- $- $ - -/- $-
President, 1994 86,400 32,976(6) - - 25,406(7) -/- -
Chief Executive
Officer and
Director
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes on next page)
96
<PAGE> 107
(1) In accordance with the revised rules regarding directors and officers
compensation disclosure adopted by the Commission, compensation
information is excluded for First Ashland's 1993 fiscal year.
(2) Does not include any additional benefits or perquisites which, in the
aggregate, exceeded 10% of his salary and bonus or $50,000.
(3) On October 25, 1995, First Ashland awarded to Mr. Leake 14,087
shares of restricted stock under the RRP. Such restricted shares
are scheduled to vest in five equal annual installments, commencing
on October 25, 1996.
(4) On October 25, 1995, First Ashland awarded to Mr. Leake an option to
purchase 35,218 First Ashland Shares. Such options are scheduled to
vest in five equal installments commencing on October 25, 1996.
(5) This amount consists of $31,920 received pursuant to the Bank's
Incentive Plan for fiscal 1995.
(6) This amount consists of $7,200 received pursuant to the Bank's
Employee Bonus Plan and $25,776 received pursuant to the Bank's
Incentive Plan.
(7) The amount consists of a one-time only cash payment summarily based
on the Bank's favorable operating results for fiscal 1994 and prior
periods.
EMPLOYMENT AGREEMENT. The Bank entered into an employment agreement
with Mr. Leake upon the completion of the Bank's conversion to stock form, which
provides for an annual base salary in an amount not less than Mr. Leake's
then-current salary and initial term of three years. The agreement provides for
extensions subject to the performance of an annual formal evaluation by
disinterested members of the Board of Directors of the Bank. The agreement also
provides for termination upon the employee's death, for cause or in certain
events specified by OTS regulations. The employment agreement is terminable by
the employee upon 90 days notice to the Bank.
The employment agreement provides for payment to the employee (in lieu
of salary) of an amount equal to 299% of the employee's base compensation, in
the event there is a change in control of the Bank where employment terminates
in connection with such charge in control or within twelve months thereafter.
For the purposes of the employment agreement, a "change in control" is defined
as any event which would require the filing of an application for acquisition of
control or notice or change in control pursuant to OTS regulations. Based on his
current salary, if the employment of Mr. Leake were terminated as of October 1,
1995 under circumstances entitling him to severance pay as described above, he
would have been entitled to receive a lump sum cash payment of approximately
$272,688.
The contract also provides, among others things, for participation in
an equitable manner in employee benefits applicable to executive personnel. The
agreement further provides that, for a period of one year after termination of
employment for any reason, the employee will not manage, operate, or control any
financial institution having an office within ten miles of any office of the
Bank.
The Bank will enter into another employment agreement (the "New
Employment Agreement") with Mr. Leake to be effective upon the completion of the
acquisition of First Ashland by Camco. The New Employment Agreement provides for
an annual base salary in an amount not less than Mr. Leake's current salary and
an initial term of three years. This agreement provides for one year extensions
provided that i) the employee has not been given notice of the Bank's decision
not to extend the New Employment Agreement and ii) prior to the anniversary date
of the New Employment Agreement, the board of directors reviews and approves
such extension. This agreement also provides for termination upon the employee's
death, for cause or in certain events specified by OTS regulations. The New
Employment Agreement is terminable by the employee upon 90 days notice to the
Bank.
In the event Mr. Leake is involuntarily terminated other than in
connection with or within twelve (12) months after a change in control, as
defined in the New Employment Agreement, Mr. Leake would be compensated for the
remaining term of the New Employment Agreement at the rate of his salary in
effect immediately prior to the date of termination. In addition, Mr. Leake
would be entitled to continue to receive health benefits as previously
maintained for the remaining term of the New Employment Agreement.
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The New Employment Agreement also provides for payment to the employee
(in lieu of salary) of an amount equal to 299% of the employee's base
compensation, in the event there is a change in control of the Bank where
employment terminates in connection with such change in control or within twelve
months thereafter. For the purposes of the employment agreement, a change in
control is defined as any event which would require the filing of an application
for acquisition of control or notice of change in control pursuant to 12 C.F.R.
sec. 574.3 or sec. 574.4. Such events would generally trigger prior to the
acquisition or control of 10% of the Camco Shares.
The New Employment Agreement also provides, among other things, for
participation in an equitable manner in employee benefits applicable to
executive personnel. The agreement further provides that, for a period of one
year after voluntary termination of employment, the employee will not manage,
operate, or control any financial institution having an office within ten miles
of any office of the Bank. See "THE MERGER - Interests of Certain Persons."
SEVERANCE COMPENSATION. The Bank's Board of Directors has established the First
Federal Executive Severance Compensation Plan in order to provide certain
executive employees with severance pay benefits in the event of a change in
control of the Bank or First Ashland following the Bank's conversion to stock
form. Management personnel with employment agreements are not eligible to
participate in the Executive Severance Compensation Plan. The purpose of the
Executive Severance Compensation Plan is to recognize the valuable services and
contributions of the Bank's officers and the uncertainties relating to
continuing employment, reduced employee benefits, management changes and
relocations in the event of a change in control. The Bank believes that the
Executive Severance Compensation Plan assists it in attracting and retaining
highly qualified individuals and reduces the distractions and other adverse
effects on the executive's performance in the event of a change in control. The
Executive Severance Compensation Plan vests in each participant a contractual
right to the benefits such participant is entitled to thereunder. Under the
Executive Severance Compensation Plan, in the event of a change in control as
defined in the Executive Compensation Plan, eligible executives who are
terminated or who voluntarily terminate employment (for reasons specified under
the Executive Severance Compensation Plan), within one year of a change in
control will be entitled to receive a severance payment. Payments pursuant to
the Executive Severance Compensation Plan are equal to the executive's Annual
Compensation, as defined in the plan. Such payments may tend to discourage
takeover attempts by increasing costs to be incurred by the Bank in the event of
a takeover. As some or all of the Bank's executives may be retained in the event
of a change in control, any amount payable under the Executive Severance
Compensation Plan may be considerably less than the total amount that could
possibly be paid under the Executive Severance Compensation Plan. Accordingly,
management cannot estimate the potential effect of the Executive Severance
Compensation Plan. The Executive Severance Compensation Plan may be amended or
terminated by the Board of Directors by a majority vote at any time prior to a
change in control but may not be amended or terminated thereafter. The Executive
Severance Compensation Plan will be terminated at the time of the Merger, and,
in substitution therefor, the Bank will enter into individual severance
agreements (the "Severance Agreements") with each of executive officers Ratliff,
Conley, Smith, Bugg and Edmonds for terms to expire on the one year anniversary
of the Effective Date of the Severance Agreements. The Severance Agreements
provide benefits equal to, and are on substantially similar terms and conditions
as, the benefits provided under the Executive Severance Compensation Plan. See
"THE MERGER - Interests of Certain Persons."
INCENTIVE COMPENSATION. Prior to April 20, 1995, the directors and
officers of the Bank were eligible to participate in the Bank's Incentive Plan
which provided such individuals with compensation based on objective criteria
comparing the Bank's financial and operating performance to that of other
savings institutions located within the area covered by the FHLB of Cincinnati.
On July 19, 1995, First Ashland adopted the Incentive Plan which provides
certain officers of First Ashland with compensation based on objective criteria
related to the financial and operating performance of First Ashland and the
Bank. Pursuant to the Agreement, the Incentive Plan will be amended to provide
for bonuses if the Bank's net income is below $795,000 to compensate for changes
caused by the Merger and will terminate October 1, 1998.
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STOCK OPTIONSSTOCK OPTIONS
The following table provides information regarding stock options. No
stock appreciation rights ("SARs") were granted during fiscal 1995.
<TABLE>
<CAPTION>
Option/SAR Grants In Last Fiscal Year
-----------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#)(1) the Fiscal Year Price ($/Share) Date
- ---- -------------- --------------- ---------------- ----------
<S> <C> <C> <C> <C>
Paul D. Leake 35,218 27.2% $14.25 October 25, 2005
- -----------------------------
<FN>
(1) Information is provided as of October 25, 1995, the date that stockholders approved First Ashland's Stock Option Plan.
</TABLE>
The following table provides information as to the value of the options
held by First Ashland's Chief Executive Officer on March 31, 1996, none of which
have been exercised. No stock appreciation rights were granted as of such date.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 3/31/96 Option /SAR Values
----------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised In-The-Money
Shares Acquired Value Options/SARs at 3/31/96 (#) Options/SARs at 3/31/96($)
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ---------------- ------------ --------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Paul D. Leake - - -/35,218(1) -/132,067(2)
- -----------------------------
<FN>
(1) Represents an option to purchase First Ashland Shares awarded to First
Ashland's Chief Executive Officer. The option vests in five equal
annual installments. The first installment will vest on October 25,
1996, with the remaining installments to vest equally on October 25,
1997, 1998, 1999 and 2000.
(2) Represents the aggregate market value (market price of the First
Ashland Shares less the exercise price of the option granted) based
upon the average of the closing bid and the asked price of $18.00 per
share of the First Ashland Shares as reported on the NSCM on March 29,
1996.
</TABLE>
CERTAIN TRANSACTIONS
The Bank follows a policy of granting loans to eligible directors,
officers and employees with respect to their primary residence. The terms and
conditions of such loans are those prevailing at the time for similar
transactions to the general public; however, loans to employees who are not
officers include a 1% reduction in interest rate charged to the general public.
In addition, the Bank makes consumer and auto loans to its directors, officers
and employees. The Bank also offers a $5,000 restricted line of credit to all
full time employees who are not officers, at the federal discount rate plus 3%,
and to all full time employees who are officers at current market rates. Loans
to employees, officers and directors are made in the ordinary course of business
and on the same terms, including collateral and interest rates (except for the
employee discount referred to above), as those prevailing at the time for
comparable transactions and not to involve more than the normal risk of
collectibility at the time of origination. All loans to directors and officers
have been, and will continue to be, approved or ratified by a majority of the
Bank's disinterested directors. At March 31, 1996, the Bank's loans to
directors, officers and members of their immediate families totaled
approximately $616,000, which was 2.6% of the Bank's stockholders' equity on
such date. All of these loans were current at March 3l, 1996.
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<PAGE> 110
REGULATION OF FIRST ASHLAND
GENERAL
The Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad federal regulation
and oversight extending to all its operations. The Bank is a member of the FHLB
of Cincinnati and is subject to certain limited regulation by the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board"). As the
holding company of the Bank, First Ashland also is subject to federal regulation
and oversight. The purpose of the regulation of First Ashland and other holding
companies is to protect subsidiary savings associations. The Bank is a member of
the SAIF and the deposits of the Bank are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS has extensive authority over the operations of savings
associations. 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. The last regular OTS examination of the Bank was as of February 6, 1995.
Under agency scheduling guidelines, it is likely that another examination will
be initiated in the near future. When these examinations are conducted by the
OTS and the FDIC, the examiners may require the Bank to provide for higher loss
reserves. All savings associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the operations of the
OTS. The Bank's OTS assessment for the fiscal year ended September 30, 1995 was
$26,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and First Ashland.
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 regulations, and it is prohibited from
engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of regulatory capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Bank is in
compliance 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
March 31, 1996, the Bank's lending limit under this 15% restriction was $2.5
million. The Bank is in compliance with this 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, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Savings 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
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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 FDIC.
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 or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition. The FDIC recently changed the premium rates for BIF
insured institutions.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all SAIF insured depository institutions are placed into one
of nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, 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 will be made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, 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.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio, the FDIC revised
the premium schedule for BIF insured institutions to provide a range of
.04% to .31% of deposits. The revisions became effective in the third quarter
of 1995. In addition, the FDIC announced in November 1995 that the premium
schedule would be further revised, effective January 1996, to provide a range
of 0% to .27% with a minimum assessment of $2,000. As a result of these
adjustments, such institutions will generally pay lower premiums.
The SAIF is not expected to attain the designated reserve ratio until
the year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by FICO in order to finance the costs of resolving thrift failures in the
1980s. As a result, SAIF members will generally be subject to higher deposit
insurance premiums than BIF members until, all things being equal, the SAIF
attains the required reserve ratio.
The effect of this disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF insured
institutions to offer loan and deposit products on more attractive terms than
SAIF members due to the cost savings achieved through lower deposit premiums,
thereby placing SAIF members at a competitive disadvantage. In order to
eliminate this disparity a number of proposals to recapitalize the SAIF have
been recently considered by the United States Congress. The plan under
consideration provides for a one-time assessment, anticipated to range from
as high as .80% to .90%, to be imposed on all deposits assessed at the SAIF
rates as of March 31, 1995, including those held by commercial banks, and for
BIF deposit insurance premiums to be used to pay the FICO bond interest on a
pro rata basis together with SAIF premiums. The BIF and SAIF would be merged
into one fund as soon as practicable, but no later than January 1, 1998. There
can be no assurance that any particular proposal will be enacted or that
premiums for either BIF or SAIF members will not be adjusted in the future by
the FDIC or by legislative action.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings associations, such as the Bank, 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. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
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<PAGE> 112
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' 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. At March 31, 1996, the Bank had
no intangible assets which were required to 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 Bank's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The subsidiary of the Bank is an includable subsidiary.
At March 31, 1996, the Bank had tangible capital of $16.4 million,
or 20.2% of adjusted total assets, which is approximately $15.2 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. 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 March 31, 1996, the Bank had core capital of $16.4 million, or
20.2% of adjusted total assets, which is approximately $14.0 million above
the minimum leverage ratio requirement of 3% as 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. At
March 31, 1996, the Bank had $108,000 of loan valuation allowances, which was
less than 1.25% 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 (these
items are excluded on a sliding scale through June 30, 1994, after which they
must be excluded in their entirety) and reciprocal holdings of qualifying
capital instruments. The Bank had no such exclusions from capital and assets
at March 31, 1996.
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 FNMA or the FHLMC.
The OTS has adopted a final rule that requires 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 assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. 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 association 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.
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On March 31, 1996, the Bank had total capital of $16.5 million
(including $16.4 million in core capital and $108,000 in qualifying
supplementary capital) and risk-weighted assets of $40.4 million (including no
converted off-balance sheet assets); or total capital of 40.8% of risk-weighted
assets. This amount was $13.3 million above the 8% 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 Bank's operations and
profitability. First Ashland's shareholders do not have preemptive rights, and
therefore, if First Ashland is directed by the OTS or the FDIC to issue
additional First Ashland Shares, such issuance may result in the dilution in the
percentage of ownership of First Ashland.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result,
the regulatory capital of the Bank would be reduced below the amount required to
be maintained for the liquidation account established in connection with its
mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See " - Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the Bank's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
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Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of First Ashland, the Bank will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns. See "-Regulatory Capital Requirements."
LIQUIDITY
All savings associations, including the Bank, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "FIRST ASHLAND'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources." This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the Bank's average daily
balance of net withdrawable deposit accounts and current borrowings. Penalties
may be imposed upon associations for violations of either liquid asset ratio
requirement. At March 31, 1996, the Bank was in compliance with both
requirements, with an overall liquid assets ratio of 16.4% and a short-term
liquid assets ratio of 5.5%.
ACCOUNTING
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with generally
accepted accounting principles ("GAAP"). Under the policy statement, management
must support its classification of and accounting for loans and securities
(i.e., whether held for investment, sale or trading) with appropriate
documentation. The Bank is in compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent then GAAP, to require that transactions be reported
in a manner that best reflects their underlying economic substance and inherent
risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
All savings associations, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. Such assets
primarily consist of residential housing related loans and investments. At March
31, 1996, the Bank met the test and has always met the test since its
effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
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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.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in January 1995 and received a rating of satisfactory.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
Bank as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the Bank's capital. Affiliates of the Bank include First Ashland and any company
which is under common control with the Bank. In addition, a savings association
may not lend to any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of most affiliates. The Bank's
subsidiary is not deemed an affiliate, however; the OTS has the discretion to
treat subsidiaries of savings associations as affiliates on a case by case
basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
First Ashland is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, First Ashland is required to register
and file reports and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over First Ashland 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 holding company, First Ashland generally
is not subject to activity restrictions. If First Ashland acquires control of
another savings association as a separate subsidiary, it would become a multiple
savings and loan holding company, and the activities of First Ashland 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, First Ashland 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 First Ashland must register as, and will become subject
to the restrictions applicable to a bank holding company. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"-Qualified Thrift Lender Test."
First Ashland 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 holding 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.
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FEDERAL SECURITIES LAW
The stock of First Ashland is registered with the Commission under the
Exchange Act. First Ashland is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Commission under the
Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of First Ashland may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
First Ashland meets specified current public information requirements, each
affiliate of First Ashland is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
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 and NOW checking accounts). At March
31, 1996, the Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may 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
Board "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 Board.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Cincinnati, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the oversight of the Federal Housing Finance Board. All advances from the
FHLB are required to be fully secured by sufficient collateral as determined by
the FHLB. In addition, all long-term advances are required to provide funds for
residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati. At March 31, 1996, the Bank had $662,000 in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 5.6% and were 6.7% for fiscal 1995. For the
year ended September 30, 1995, dividends paid by the FHLB of Cincinnati to the
Bank totaled $40,875, which constitute a $10,000 increase over the amount of
dividends received in 1994.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the FHLB stock may result in a corresponding reduction in
the Bank's capital.
FEDERAL AND STATE TAXATION
Savings associations such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Code, are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
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Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower current federal income tax rate than
that applicable to corporations generally (approximately 32% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the Bank
may not deduct any addition to a bad debt reserve and generally must include
existing reserves in income over a four-year period. No representation can be
made as to whether the Bank will meet the 60% test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
March 31, 1996, the 6% and 12% limitations did restrict the percentage bad debt
deduction available to the Bank and it is expected that the 12% limitation may
be a limiting factor in future years unless the Bank increases deposits. The
Bank's inability to qualify for the percentage of income bad debt reduction does
not have a significant impact on the Bank's effective tax rate. See "FIRST
ASHLAND'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the Bank's supplemental reserves for
losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1996, the Bank's Excess for tax purposes totaled
approximately $2.2 million.
First Ashland and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings association members of
the consolidated group that are functionally related to the activities of the
savings association member.
First Ashland and its consolidated subsidiaries have not been audited
by the IRS with respect to consolidated federal income tax returns for the last
ten years and have consolidated federal income tax returns which are open and
subject to audit for the fiscal years 1995, 1994 and 1993. With respect to years
examined by the IRS, either all deficiencies have been satisfied or sufficient
reserves have been established to satisfy asserted deficiencies. In the opinion
of management, any examination of still open returns (including returns of
subsidiaries and predecessors of, or entities merged into, the Bank) would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Bank and its consolidated subsidiaries.
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KENTUCKY TAXATION. The Commonwealth of Kentucky imposes no income or
franchise taxes on savings institutions. The Bank is subject to an annual
Kentucky ad valorem tax. This tax is .1% of the Bank's deposit accounts, common
stock and retained income, with certain deductions for amounts borrowed by
depositors and securities guaranteed by the U.S. Government or certain of its
agencies. First Ashland is subject to Kentucky income tax computed on its
separately determined income at a rate of up to 8.25%.
DELAWARE TAXATION. As a Delaware holding company, First Ashland 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. First Ashland is
also subject to an annual franchise tax imposed by the State of Delaware.
DESCRIPTION OF CAMCO SHARES
The following summary of the material attributes of Camco Shares is
qualified in its entirety by reference to applicable provisions of Delaware law
and to the provisions of the Camco Certificate and Camco's By-laws:
AUTHORIZED STOCK
The Camco Certificate authorizes the issuance of up to 2,500,000 shares
of common stock, par value $1.00 per share, and 100,000 shares of preferred
stock, par value $1.00 per share. The Amendment would increase authorized shares
from 2,600,000 to 5,000,000, consisting of 4,900,000 shares of common stock,
$1.00 par value and 100,000 shares of preferred stock, $1.00 par value. The
Board of Directors of Camco is authorized to fix by resolution all powers,
designations, preferences and relative, participating, optional or other rights,
or the qualifications, limitations or restrictions of the preferred stock.
The Board of Directors is authorized to issue, without shareholder
approval, the preferred shares and to fix the designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof. The issuance of preferred shares and any conversion rights
which may be specified by the Board of Directors for the preferred shares could
adversely affect the voting power of holders of the common shares. In addition,
if the purchase price of the preferred shares is less than the book value of the
common shares, the book value of the common shares could be adversely affected.
No preferred shares will be issued in connection with this offering, and the
Board of Directors has no present intention to issue any of the preferred
shares.
SPECIAL MEETINGS
Special meetings of stockholders of Camco may be called only by the
president or by a majority of the Board of Directors of Camco.
PREEMPTIVE RIGHTS
The Camco Certificate does not grant preemptive rights to the holders
of Camco Shares. Under Delaware law, preemptive rights do not exist unless they
are specifically granted by the corporation's certificate of incorporation.
VOTING RIGHTS
The holders of Camco Shares are entitled to cast one vote per share on
all matters submitted to stockholders for their approval. Cumulative voting is
not provided for in the election of directors.
BOARD OF DIRECTORS
Camco's By-laws provided for a classified Board of Directors consisting
of nine directors, or such other number as determined by the Board, divided into
three classes and elected for three-year terms. Pursuant to the By-laws, the
number of directors is currently fixed at seven. After the Merger is effective,
the number of directors will be increased to eight, and Paul D. Leake, President
of First Ashland, will become a director of Camco. Therefore, it would take two
annual elections to replace a majority of the Board. The By-laws require that
any stockholder nomination for the election of directors must be submitted in
writing, containing specific information regarding the nominee, by the later of
the March 31st immediately
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preceding the annual meeting of stockholders or the sixtieth day before the
first anniversary of the most recent annual meeting.
Vacancies on Camco's Board may be filled by a majority of the directors
then in office. If a majority of the directors then in office constitutes less
than a majority of the Board, any stockholders holding at least 10% of Camco's
Shares may ask the Chancery Court to order an election to fill the vacancy and
replace directors selected by those directors in office.
The Camco Certificate authorizes the removal of a director for cause by
a vote of not less than 80% of Camco's Shares.
ANTITAKEOVER PROVISIONS IN THE CAMCO CERTIFICATE AND BY-LAWS OF CAMCO
The Camco Certificate and Camco's By-laws contain certain provisions
that could deter or prohibit non-negotiated changes in the control of Camco. The
Camco Certificate requires the approval of the holders of (i) at least 80% of
Camco's outstanding shares of voting stock, and (ii) at least a majority of
Camco's outstanding shares of voting stock, not including shares held by a
"Substantial Stockholder," to approve certain "Business Combinations" as defined
therein, and related transactions. Under Delaware law, absent this provision,
Business Combinations, including mergers, consolidations and sales of
substantially all of the assets of Camco must, subject to certain exceptions, be
approved by the vote of the holders of a majority of Camco's outstanding voting
shares. The increased voting requirements in the Camco Certificate apply in
connection with Business Combinations involving a "Substantial Stockholder,"
except in cases where the proposed transaction has been approved in advance by
three-fourths of the members of Camco's Board of Directors provided that a
majority of the members of the Board are continuing Directors (a continuing
Director being defined as a person who was (i) a member of the Board as of May
26, 1987, (ii) elected by the stockholders or appointed by the Board after May
26, 1987 and prior to the date as of which the Substantial Stockholder in
question became a Substantial Stockholder, or (iii) appointed as a Director by
three-fourths of the Board if and only if a majority of the Board at the time of
appointment consisted of continuing Directors). The term "Substantial
Stockholder" is defined to include any individual, corporation, partnership or
other entity, except for Camco or a subsidiary of Camco, which owns beneficially
or controls, directly or indirectly, 15% or more of the outstanding voting
shares of Camco. A "Business Combination" is defined to include (i) any merger
or consolidation of Camco or a subsidiary of Camco with or into any Substantial
Stockholder or with or into any or other corporation which, after such merger or
consolidation, would be an Affiliate of a Substantial Stockholder as defined in
a Camco Certificate; (ii) any sale, lease, exchange, mortgage, transfer,
pledge or other disposition of all or a substantial part of the assets of Camco
or of a subsidiary of Camco to any Substantial Stockholder (the terms
"substantial part" is defined to include more that 10% of Camco's total
assets); (iii) the adoption of any plan or proposal for the liquidation or
dissolution of Camco if, as of the record date for the determination of
stockholders entitled to notice thereof and to vote thereon, any person shall
be a Substantial Shareholder; (iv) the issuance or transfer of Camco Equity
Securities, as defined in the Camco Certificate, having an aggregate value
equaling or exceeding 60% of Camco's shareholders equity to a Substantial
Shareholder in exchange for cash, securities or other property; (v) any
reclassification of the securities of Camco, any recapitalization involving the
securities of Camco or any reorganization, merger, or consolidation of Camco
that has the effect of increasing, directly or indirectly, a Substantial
Stockholder's proportionate share of outstanding shares of any class of equity
securities of Camco or a subsidiary of Camco.
In view of the various provisions of the Camco Certificate, the
aggregate stock ownership by the directors and officers of Camco may have the
effect of facilitating the perpetuation of current management and discouraging
proxy contests and takeover attempts. Officers and directors will have a
significant influence over the vote on such a transaction and may be able to
defeat such a proposal. The Board of Directors of Camco believe that such
provisions are in the best interests of shareholders by encouraging prospective
acquirers to negotiate a proposed acquisition with the directors. Such
provisions could, however, adversely affect the market value of the Common
Shares or deprive shareholders of the opportunity to sell their shares for
premium prices.
COMPARISON OF RIGHTS OF HOLDERS OF CAMCO SHARES
AND HOLDERS OF FIRST ASHLAND SHARES
As a result of the Merger, all of the holders of First Ashland Shares
at the Effective Time will become stockholders of Camco, except holders of First
Ashland Shares who exercise dissenters' rights. There are certain differences
between the rights of holders of Camco Shares and the rights of holders of First
Ashland Shares arising from the distinctions between
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the Camco Certificate and Camco's By-laws and First Ashland's Certificate of
Incorporation and Bylaws. However, the rights of holders of Camco Shares and
those of holders of First Ashland Shares are similar in most material respects.
The differences are addressed below.
AUTHORIZED STOCK
The Camco Certificate, after the Merger, will authorize 4,900,000
common shares and 100,000 preferred shares. First Ashland's Certificate of
Incorporation authorizes 2,000,000 common shares and 100,000 preferred shares.
DIRECTOR NOMINATIONS
Camco stockholders generally must submit director nominations by the
March 31st preceding the annual meeting, which is scheduled for the fourth
Tuesday in May. First Ashland stockholders generally must submit director
nominations 30 days prior to the meeting or, if less than 40 days notice of the
meeting is provided, then within 10 days of the mailing of such notice.
ANTITAKEOVER PROVISIONS
Certain provisions of the Camco Certificate and the By-laws of Camco
could deter or prohibit changes in majority control of the Board of Directors or
non-negotiated acquisitions of Control of Camco. See "DESCRIPTION OF CAMCO
SHARES - Certain Antitakeover Provisions in the Camco Certificate and
By-laws of Camco." First Ashland's Certificate of Incorporation and By-laws
contain provisions that could have a similar impact.
The Certificate of Incorporation of First Ashland provides that in no
event shall any record owner of any outstanding First Ashland Shares which are
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of the then outstanding shares of Common Stock (the "Limit"), be
entitled or permitted to any vote in respect of the shares held in excess of the
Limit. This limitation would not inhibit any person from soliciting (or voting)
proxies from other beneficial owners for more than 10% of the First Ashland
Shares or from voting such proxies. Beneficial ownership is to be determined
pursuant to Rule 13d-3 of the General Rules and Regulations of the Exchange Act,
and in any event includes shares beneficially owned by any affiliate of such
person, shares which such person or his affiliates (as defined in the
Certificate of Incorporation) have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power but shall not include shares
beneficially owned by directors, officers or employees of the Bank or First
Ashland. This provision may be enforced by the Board of Directors of First
Ashland to limit the voting rights of persons beneficially owning more than 10%
of the stock and thus could be utilized in a proxy contest or other solicitation
to defeat a proposal that is desired by a majority of the stockholders.
First Ashland's Certificate of Incorporation requires that certain
business combinations (including transactions initiated by management) between
it (or any majority-owned subsidiary thereof) and a 10% or more stockholder
either (i) be approved by at least 80% of the total number of outstanding voting
shares, voting as a single class, of First Ashland, (ii) be approved by
two-thirds of the continuing Board of Directors (i.e., persons serving prior to
the 10% stockholder becoming such) or (iii) involve consideration per share
generally equal to that paid by such 10% stockholder when it acquired its block
of stock.
Amendments to First Ashland's Certificate of Incorporation must be
approved by First Ashland's Board of Directors and also by a majority of the
outstanding First Ashland Shares; provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
(i.e., provisions relating to number, classification, election and removal of
directors; amendment of by-laws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation). The By-laws may be amended
by a majority vote of the Board of Directors or the affirmative vote of at least
80% of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
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ANTITAKEOVER STATUTES APPLICABLE TO CAMCO AND FIRST ASHLAND
Certain federal and state laws can make a change in control more
difficult, even if desired by the holders of the majority of the Camco Shares
or First Ashland Shares. The statutes described below apply to both Camco and
First Ashland.
DELAWARE ANTI-TAKEOVER STATUTE. The Delaware General Corporation Law
(the "DGCL") imposes limits on the ability of persons who acquire more than 15%
of the outstanding stock of a Delaware corporation, such as Camco or First
Ashland, to effect a takeover of such corporation for three years after the
person's acquisition of stock of the corporation. Such a takeover may be
effected if (i) the buyer, while acquiring the 15% interest, acquires at least
85% of the corporation's outstanding stock (the 85% requirement excludes shares
held by directors who are also officers and certain shares held under employee
stock plans), or (ii) the takeover is approved by the target corporation's board
of directors and two-thirds of the shares of outstanding stock of the
corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting
stock listed on a national exchange or listed for quotation with a registered
national securities association. Camco and First Ashland each have less than
2,000 stockholders. Both entities are traded on a registered national
securities association and could otherwise exempt themselves from the
requirements of the statute by adopting an amendment to their respective
Certificate of Incorporation or Bylaws electing not to be governed by this
provision. At the present time, neither Camco nor First Ashland has adopted any
such amendment.
FEDERAL REGULATION. OTS regulations prohibit any person, without the
prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is,
or after consummation of such acquisition would be, the beneficial owner of
more than 10% of such stock. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% may not be counted as shares entitled to vote and may
not be voted by any person or counted as voting shares in connection with any
matter submitted to a vote of stockholders. Like the Certificate of
Incorporation provisions outlined above, these federal regulations can make a
change in control more difficult, even if desired by the holders of the
majority of the shares of the stock. The Board of Directors reserves the right
to ask the OTS or other federal regulators to enforce these restrictions
against persons seeking to obtain control of First Ashland, whether in a proxy
solicitation or otherwise. Camco and First Ashland have requested that OTS not
enforce these provisions in the Merger.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association or a savings and loan holding company at any time without the prior
approval of the OTS. In addition, federal regulations require that, prior to
obtaining control of a savings association a person, other than a company, must
give 60 days prior notice to the OTS and have received no OTS objection to such
acquisition of control. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation as a savings and loan holding company. Under federal law (as well as
the regulations referred to below) the term "savings association" includes
state and federally chartered savings and loan associations and federally
chartered savings banks whose accounts are insured by the SAIF or the BIF.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of
the savings association's or saving and loan holding company's directors, or
a determination by the OTS that the acquirer has the power to direct, or
directly or indirectly to exercise a controlling influence over, the management
or policies of the entity. Acquisition of more than 10% of any class of a
savings association's or saving and loan holding company's voting stock, if
the acquirer also is subject to any one of eight "control factors," constitutes
a rebuttable determination of control under the regulations. The determination
of control may be rebutted by submission to the OTS, prior to the acquisition
of stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing
certain undertakings. The regulations provide that persons or companies which
acquire beneficial ownership exceeding 10% or more of any class of a savings
association's or saving and loan holding company's stock must file with the
OTS a certification that the holder is not in control of such institution, is
not subject to a rebuttable determination of control and will take no action
which would result in a determination or rebuttable determination of control
without prior notice to or approval of the OTS, as applicable.
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DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
The By-laws of Camco provide that Camco shall indemnify its directors
or officers against expenses (including, without limitation, attorneys' fees,
filing fees, court reporters' fees and transcript costs), judgments, fines, and
amounts paid in settlement by reason of the fact that they are or were
directors, officers, employees or agents of Camco or, at the request of Camco,
were serving another organization in a similar capacity, if the directors or
officers acted in good faith and in a manner they reasonably believed to be in
the best interest of Camco. With regard to criminal matters, directors and
officers must be indemnified by Camco if the directors or officers had no
reasonable cause to believe their conduct was unlawful. Directors or officers
claiming indemnification shall be presumed to have acted in good faith and in a
manner they reasonably believed to be not opposed to the best interests of Camco
and, with respect to any criminal matter, to have had no reasonable cause to
believe their conduct was unlawful.
Camco shall not indemnify any officer or director of Camco who was a
party to any completed action or suit instituted by (or in the right of) Camco
for any matter asserted in such action as to which the officer or director shall
have been adjudged to be liable for acting with reckless disregard for the best
interests of Camco or misconduct (other than negligence) in the performance of
his duty to Camco. However, should the court in which such action was brought
determine that the officer or director is fairly and reasonably entitled to such
indemnity, Camco shall indemnify such officer or director to the extent
permitted by the court.
Any indemnification not precluded by judgment shall be made by Camco
only upon a determination that the director has met the applicable standard of
conduct. Such determination may be made only (a) by a majority vote of a quorum
of disinterested directors, (b) if such a quorum is not obtainable or if a
majority of a quorum of disinterested directors so directs, in a written opinion
by independent legal counsel, (c) by the stockholders or (d) by the court, if
any, in which such action was brought. Expenses incurred in defending any
action, suit or proceeding shall be paid by Camco in advance upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
the director or officer is not entitled to be indemnified by Camco.
In addition, Camco has agreed to indemnify each of its directors and
officers against expenses (including, without limitation, attorneys' fees,
filing fees, court reporters' fees and transcript costs), judgments, fines, and
amounts paid in settlement by reason of the fact that he is or was a director,
officer, employee or agent of Camco or, at the request of Camco, was serving
another organization in a similar capacity, if the director or officer acted in
good faith and in a manner he reasonably believed to be in the best interest of
Camco and if, with respect to any criminal action or proceeding, such director
or officer had no reason to believe that his conduct was unlawful. Such
indemnification shall be made, however, only upon a determination by the
directors or stockholders of Camco, the Court of Common Pleas of Franklin County
or written opinion of legal counsel appointed by Camco that the director or
officer has adhered to the appropriate standard of conduct.
First Ashland's Certificate of Incorporation provides that First
Ashland shall indemnify or agree to indemnify any current or former director,
officer, employee or agent against whom an action is threatened, pending, or
completed because of that person's position with First Ashland or because of
that person's performance of his or her duty, for expenses reasonably incurred
in such actions, to the fullest extent permitted by the DGCL.
LEGAL MATTERS
The federal income tax consequences of the Merger, and certain other
legal matters in connection with the Merger, will be passed upon for Camco by
Vorys, Sater, Seymour and Pease, Suite 2100, Atrium Two, 221 East Fourth Street,
P.O. Box 0236, Cincinnati, Ohio. Such counsel has not received nor will receive
a substantial interest, direct or indirect, in Camco, nor was such counsel
compensated on a contingency fee basis for the rendering of its services.
EXPERTS
The consolidated financial statements of Camco at December 31, 1995 and
1994, and for each of the two years ended December 31, 1995, included in this
Prospectus and Joint Proxy Statement, have been audited by Grant Thornton LLP,
independent certified public accountants, as stated in their report appearing
herein, and have been included in reliance upon such report and given upon the
authority of such firm as experts in accounting and auditing. The consolidated
financial statements of Camco for the year ended December 31, 1993, included in
this Prospectus and Joint Proxy Statement, have been audited by Deloitte &
Touche LLP, whose report, dated March 4, 1994, expressed an unqualified
112
<PAGE> 123
opinion on such financial statements. Representatives of Grant Thornton LLP
are expected to attend the Camco Special Meeting to respond to appropriate
questions and to make a statement if they so desire.
The consolidated financial statements of First Ashland at September 30,
1995 and 1994, and for each of the three years then ended September 30, 1995,
included in this Prospectus and Joint Proxy Statement, have been audited by
Smith, Goolsby, Artis & Reams, PSC, independent certified public accountants, as
stated in their report appearing herein, and have been included in reliance upon
such report and given upon the authority of such firm as experts in accounting
and auditing.
NCC has consented to the inclusion herein of the summary of and the
copy of its fairness opinions to Camco, as of March 25, 1996, and updated as of
August 8, 1996, setting forth its opinion as to the fairness of this Merger to
stockholders of Camco.
CRG has consented to the inclusion herein of the summary of and the
copy of its fairness opinions to Camco, as of March 22, 1996, and updated as of
August 5, 1996, setting forth its opinion as to the fairness of the Merger to
stockholders of First Ashland.
113
<PAGE> 124
CAMCO FINANCIAL CORPORATION
Cambridge, Ohio
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition (As of March 31, 1996 (unaudited)
and December 31, 1995)........................................................................................F-2
Consolidated Statements of Earnings (For the three months ended
March 31, 1996 and 1995) (unaudited)..........................................................................F-3
Consolidated Statements of Cash Flows (For the three months ended
March 31, 1996 and 1995) (unaudited)..........................................................................F-4
Notes to Consolidated Financial Statements
(For the three months ended March 31, 1996 and 1994) (unaudited)..............................................F-6
Report of Independent Certified Public Accountants............................................................F-8
Consolidated Statements of Financial Condition
(As of December 31, 1995 and 1994)............................................................................F-9
Consolidated Statements of Earnings
(For the years ended December 31, 1995, 1994 and 1993)........................................................F-11
Consolidated Statements of Stockholders' Equity
(For the years ended December 31, 1995, 1994 and 1993)........................................................F-12
Consolidated Statements of Cash Flows
(For the years ended December 31, 1995, 1994 and 1993)........................................................F-13
Notes to Consolidated Financial Statements
(For the years ended December 31, 1994 and 1993)..............................................................F-15
</TABLE>
F-1
<PAGE> 125
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 9,746 $ 11,325
Short-term interest bearing deposits in other financial institutions 4,175 2,122
-------- --------
Cash and cash equivalents 13,921 13,447
Interest-bearing deposits in other financial institutions 3,597 1,881
Investment securities available for sale - at market 3,141 3,131
Investment securities - at cost, approximate market value of $16,356
and $19,123 as of March 31, 1996 and December 31, 1995 16,498 19,283
Mortgage-backed securities available for sale - at market 857 985
Mortgage-backed securities - at cost, approximate market value of
$4,838 and $5,045 as of March 31, 1996 and December 31, 1995 4,847 5,002
Loans held for sale - at lower of cost or market 4,278 1,518
Loans receivable - net 286,438 291,233
Office premises and equipment - net 4,301 4,153
Real estate acquired through foreclosure 28 28
Federal Home Loan Bank stock - at cost 2,861 2,832
Accrued interest receivable 2,210 2,129
Prepaid expenses and other assets 734 699
Prepaid federal income taxes -- 148
-------- --------
TOTAL ASSETS $343,711 $346,469
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $290,301 $286,574
Advances from the Federal Home Loan Bank 20,069 26,078
Taxes and insurance prepaid by borrowers 1,510 2,964
Accounts payable and accrued liabilities 1,534 1,797
Dividends payable 217 207
Accrued federal income taxes 230 --
Deferred federal income taxes 1,225 1,156
-------- --------
Total liabilities 315,086 318,776
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares;
no shares outstanding -- --
Common stock - $1 par value; authorized, 2,500,000 shares;
issued 1,971,482 shares at March 31, 1996 and December 31, 1995 1,971 1,971
Additional paid-in capital 5,735 5,735
Retained earnings - substantially restricted 20,878 19,936
Unrealized gains on securities designated as available for sale 41 51
-------- --------
Total stockholders' equity 28,625 27,693
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $343,711 $346,469
======== ========
</TABLE>
F-2
<PAGE> 126
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31,
(in thousands, except share data)
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED)
<S> <C> <C>
Interest income
Loans $ 6,079 $ 5,236
Mortgage-backed securities 98 108
Investment securities 313 176
Interest-bearing deposits and other 153 402
---------- ----------
Total interest income 6,643 5,922
Interest expense
Deposits 3,237 2,836
Borrowings 365 455
---------- ----------
Total interest expense 3,602 3,291
---------- ----------
Net interest income 3,041 2,631
Provision for loan losses 21 35
---------- ----------
Net interest income after provision for loan losses 3,020 2,596
Other income
Late charges, rent and other 247 164
Loan servicing fees 186 187
Service charges and other fees on deposits 95 108
Gain on sale of loans 416 40
Gain on sale of real estate acquired through foreclosure -- 3
---------- ----------
Total other income 944 502
General, administrative and other expense
Employee compensation and benefits 1,014 1,024
Occupancy of premises 260 225
Federal deposit insurance premiums 163 152
Data processing 100 90
Advertising 86 107
State franchise taxes 106 90
Other 479 466
---------- ----------
Total general, administrative and other expense 2,208 2,154
Earnings before federal income taxes 1,756 944
Federal income taxes
Current 523 310
Deferred 74 11
---------- ----------
Total federal income taxes 597 321
---------- ----------
NET EARNINGS $ 1,159 $ 623
========== ==========
EARNINGS PER SHARE $ .59 $ .33
========== ==========
Weighted average number of common shares outstanding 1,971,477 1,875,414
========== ==========
</TABLE>
F-3
<PAGE> 127
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 1,159 $ 623
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 118 118
Provision for loan losses 21 35
Gain on sale of real estate acquired through foreclosure -- (3)
Federal Home Loan Bank stock dividends (29) (37)
Gain on sale of loans (112) (40)
Loans originated for sale in the secondary market (29,537) (3,751)
Proceeds from sale of loans in the secondary market 26,889 3,289
Current federal income taxes 378 503
Deferred federal income taxes 74 (12)
Other - net (379) (699)
-------- --------
Net cash provided by (used in) operating activities (1,418) 26
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities
and interest-bearing deposits 3,274 5,398
Purchases of investment securities and interest-bearing deposits (2,236) (275)
Loan principal repayments 15,734 15,508
Loan disbursements (10,960) (29,324)
Principal collected on mortgage-backed securities 277 137
Additions to office premises and equipment (254) (37)
Proceeds from sale of real estate acquired through foreclosure -- 23
Purchase of Federal Home Loan Bank stock -- (314)
-------- --------
Net cash provided by (used in) investing activities 5,835 (8,884)
Cash flows provided by (used in) financing activities:
Net increase in deposits 3,727 10,472
Advances from Federal Home Loan Bank and other borrowings 2,000 14,900
Repayment of Federal Home Loan Bank advances
and other borrowings (8,009) (14,808)
Dividends paid on common stock (207) (178)
Decrease in taxes and insurance prepaid by borrowers (1,454) (1,855)
-------- --------
Net cash provided by (used in) financing activities (3,943) 8,531
-------- --------
Increase (decrease) in cash and cash equivalents 474 (327)
Cash and cash equivalents at beginning of period 13,447 9,279
-------- --------
Cash and cash equivalents at end of period $ 13,921 $ 8,952
======== ========
</TABLE>
F-4
<PAGE> 128
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended March 31,
(In thousands)
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 3,621 $3,218
======= ======
Income taxes $ -- $ --
======= ======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (10) $ 46
======= ======
Recognition of gains on sale of loans in accordance with
SFAS No. 122 $ 310 $ --
======= ======
</TABLE>
F-5
<PAGE> 129
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. Accordingly, these
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto of Camco Financial Corporation
("Camco" or "the Company") included in Camco's Annual Report on Form
10-KSB for the year ended December 31, 1995. However, all adjustments
(consisting only of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the consolidated
financial statements have been included. The results of operations for the
three month periods ended March 31, 1996 and 1995 are not necessarily
indicative of the results which may be expected for the entire year.
2. Principles of Consolidation
Camco has four wholly-owned subsidiaries: Cambridge Savings Bank
("Cambridge Savings"), Marietta Savings Bank ("Marietta Savings"), First
Federal Savings Bank of Washington Court House ("First Federal")
(collectively hereinafter "the Banks") and East Ohio Land Title Agency,
Inc., as well as two second tier subsidiaries, Camco Mortgage Corporation
and WestMar Mortgage Company.
The Company's consolidated financial statements include the accounts of
Camco and its wholly-owned and second tier subsidiaries. All significant
intercompany balances and transactions have been eliminated.
3. Effects of Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123
entitled "Accounting for Stock-Based Compensation" establishing financial
accounting and reporting standards for stock-based employee compensation
plans. SFAS No. 123 encourages all entities to adopt a new method of
accounting to measure compensation cost of all employee stock compensation
plans based on the estimated fair value of the award at the date it is
granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the
existing accounting are required to disclose in a footnote to the
financial statements pro forma net earnings and, if presented, earnings
per share, as if this Statement had been adopted. The accounting
requirements of SFAS No. 123 are effective for transactions entered into
during fiscal years that begin after December 15, 1995; however, companies
are required to disclose information for awards granted in their first
fiscal year beginning after December 14, 1994. Management of Camco does
not believe the disclosure provision of SFAS No. 123 will have a material
adverse effect on its financial condition or results of operations.
4. Reclassifications
Certain reclassifications have been made to the March 31, 1995
consolidated financial statements to conform to the March 31, 1996
presentation.
5. Pending Legislative Changes
The deposit accounts of Cambridge Savings, Marietta Savings and First
Federal and of other savings associations are insured by the Federal
Deposit Insurance Corporation ("FDIC") in the Savings Association
Insurance Fund ("SAIF"). The reserves of the SAIF are below the level
required by law, because a significant portion of the assessments paid
into the fund are used to pay the cost of prior thrift failures. The
deposit accounts
F-6
<PAGE> 130
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
5. Pending Legislative Changes (continued)
of commercial banks are insured by the FDIC in the Bank Insurance Fund
("BIF"), except to the extent such banks have acquired SAIF deposits. The
reserves of the BIF met the level required by law in May 1995. As a result
of the respective reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations exceeded those paid by
healthy commercial banks by approximately $.19 per $100 in deposits in
late 1995, and are expected to exceed them by $.23 per $100 in deposits in
1996. This premium disparity could have a negative competitive impact on
Cambridge Savings, Marietta Savings and First Federal and other
institutions with SAIF deposits.
Congress is considering legislation to recapitalize the SAIF and eliminate
the significant premium disparity. Currently, that recapitalization plan
provides for a special assessment of approximately $.85 per $100 of SAIF
deposits held at March 31, 1995, in order to increase SAIF reserves to the
level required by law. Certain banks holding SAIF deposits would pay a
lower special assessment. In addition, the cost of prior thrift failures
would be shared by both the SAIF and the BIF. Such cost sharing might
increase BIF assessments. SAIF assessments for healthy institutions would
be reduced significantly below current levels, but could never be reduced
below the level for healthy BIF institutions.
A component of the recapitalization plan provides for the merger of the
SAIF and BIF on January 1, 1998. However, legislative proposals
contemplate an elimination of the Federal thrift charter and of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. Cambridge Savings and Marietta Savings are state savings
banks, which are not considered thrifts for these purposes. However, First
Federal is a federal thrift and would have to convert to a different
charter and would become subject to federal regulations as a bank. Such
regulation would subject First Federal to the more restrictive activity
limits imposed on national banks. If First Federal is required to convert
to a bank charter, it would have to recapture as taxable income
approximately $2.7 million of its bad debt reserve, unless Congress amends
these recapture provisions. Such a proposal is currently under
consideration. That proposal would eliminate the special thrift method of
tax accounting for bad debt reserves, which the Banks have relied on,
effective in 1996. In addition, Camco would become a bank holding company,
which would subject it to more restrictive activity limits and to capital
requirements similar to those imposed on First Federal.
The Banks had $277.3 million in deposits at March 31, 1995. If the special
assessment is $.85 per $100 in deposits, those three institutions will pay
an aggregate additional assessment of $2.4 million. This assessment should
be tax deductible, but it will reduce earnings and capital for the quarter
in which it is recorded. It is expected that quarterly SAIF assessments
would be reduced significantly after such special assessment is paid.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, Camco can
give no assurances that the disparity between BIF and SAIF assessments
will be eliminated and cannot be certain of the impact of the SAIF
recapitalization and related proposals until the appropriate legislation
has been enacted.
F-7
<PAGE> 131
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Camco Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Camco Financial Corporation and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of earnings, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The consolidated financial statements for the year ended December 31,
1993 were audited by other auditors whose report, dated March 4, 1994, expressed
an unqualified opinion on such financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 and 1994 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Camco
Financial Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
As more fully explained in Notes A and B, the Corporation changed its method of
accounting for certain securities as of January 1, 1994.
As more fully explained in Note C, the Corporation changed its method of
accounting for gains on sale of loans during the year ended December 31, 1995.
Grant Thornton LLP
Cincinnati, Ohio
February 1, 1996 (except for Note M as to which the date is March 26, 1996)
F-8
<PAGE> 132
<TABLE>
<CAPTION>
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 1995 1994
<S> <C> <C>
Cash and due from banks $ 11,325 $ 8,220
Short-term interest bearing deposits in other financial institutions 2,122 1,059
--------- ---------
Cash and cash equivalents 13,447 9,279
Interest-bearing deposits in other financial institutions 1,881 7,427
Investment securities available for sale - at market 3,131 2,978
Investment securities - at cost, approximate market value of $19,123
and $25,903 as of December 31, 1995 and 1994 19,283 27,333
Mortgage-backed securities available for sale - at market 985 1,464
Mortgage-backed securities - at cost, approximate market value of
$5,045 and $5,150 as of December 31, 1995 and 1994 5,002 5,452
Loans held for sale - at lower of cost or market 1,518 468
Loans receivable - net 291,233 260,991
Office premises and equipment - net 4,153 4,081
Real estate acquired through foreclosure 28 39
Federal Home Loan Bank stock - at cost 2,832 2,262
Accrued interest receivable on loans 1,736 1,318
Accrued interest receivable on mortgage-backed securities 58 86
Accrued interest receivable on investment securities and
interest-bearing deposits 335 460
Prepaid expenses and other assets 699 547
Prepaid federal income taxes 148 442
---------- ----------
TOTAL ASSETS $346,469 $324,627
======= =======
</TABLE>
F-9
<PAGE> 133
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
<S> <C> <C>
Deposits $286,574 $266,861
Advances from the Federal Home Loan Bank 26,078 26,511
Taxes and insurance prepaid by borrowers 2,964 3,190
Accounts payable and accrued liabilities 1,797 2,119
Dividends payable 207 296
Deferred federal income taxes 1,156 909
--------- --------
Total liabilities 318,776 299,886
Commitments - -
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares;
no shares outstanding - -
Common stock - $1 par value; authorized, 2,500,000 shares,
issued 1,971,482 shares at December 31, 1995 and 1,875,414
shares at December 31, 1994 1,971 1,875
Additional paid-in capital 5,735 4,416
Retained earnings - substantially restricted 19,936 18,466
Unrealized gains (losses) on securities designated as available for sale 51 (16)
-------- --------
Total stockholders' equity 27,693 24,741
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $346,469 $324,627
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-10
<PAGE> 134
<TABLE>
<CAPTION>
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended December 31,
(In thousands, except share data)
1995 1994 1993
<S> <C> <C> <C>
Interest income
Loans $22,939 $16,622 $15,359
Mortgage-backed securities 423 497 712
Investment securities 1,570 1,826 1,526
Interest-bearing deposits and other 508 814 1,393
------- -------- -------
Total interest income 25,440 19,759 18,990
Interest expense
Deposits 12,478 9,497 9,725
Borrowings 1,779 736 27
------ -------- ---------
Total interest expense 14,257 10,233 9,752
------ ------ -------
Net interest income 11,183 9,526 9,238
Provision for loan losses 143 97 310
-------- --------- --------
Net interest income after provision for loan losses 11,040 9,429 8,928
Other income
Late charges, rent and other 915 752 590
Loan servicing fees 796 769 621
Service charges and other fees on deposits 448 408 366
Gain on sale of loans 1,126 501 1,546
Gain (loss) on sale of real estate acquired through foreclosure 8 148 (17)
------- ------- -------
Total other income 3,293 2,578 3,106
------- ------- -------
General, administrative and other expense
Employee compensation and benefits 4,198 3,606 2,862
Occupancy of premises 902 930 774
Federal deposit insurance premiums 625 574 534
Data processing 397 405 408
Advertising 406 409 307
State franchise taxes 322 291 277
Other 1,925 1,939 1,801
------- ------- -------
Total general, administrative and other expense 8,775 8,154 6,963
------- ------- -------
Earnings before federal income taxes 5,558 3,853 5,071
Federal income taxes
Current 1,794 1,356 1,725
Deferred 116 (45) 22
------- ------- -------
Total federal income taxes 1,910 1,311 1,747
------- ------- -------
NET EARNINGS $ 3,648 $ 2,542 $ 3,324
======= ======= =======
EARNINGS PER SHARE $1.85 $1.47 $1.93
==== ==== ====
Weighted average number of common shares outstanding 1,970,349 1,727,835 1,724,140
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-11
<PAGE> 135
<TABLE>
<CAPTION>
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1995, 1994 and 1993
(In thousands, except share data)
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
ADDITIONAL DESIGNATED TOTAL
COMMON STOCK PAID-IN AS AVAILABLE RETAINED STOCKHOLDERS'
($1 PAR VALUE) CAPITAL FOR SALE EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 781 $1,510 $- $14,674 $16,965
Stock options exercised 2 13 - - 15
Cash dividends declared - $.2898 per share - - - (478) (478)
2 for 1 stock split, including cash in lieu of
fractional shares 782 (782) - - -
Net earnings - - - 3,324 3,324
-------- -------- ----- ------ -------
Balance, December 31, 1993 1,565 741 - 17,520 19,826
Stock options exercised 1 7 - - 8
Cash dividends declared - $.3510 per share - - - (578) (578)
Stock dividend (5%) including cash in lieu of
fractional shares 78 938 - (1,018) (2)
Proceeds from offering of common stock 231 2,730 - - 2,961
Designation of securities as available for sale
upon adoption of SFAS No. 115 - - 298 - 298
Net earnings - - - 2,542 2,542
Unrealized losses on securities designated as
available for sale - - (314) - (314)
-------- -------- --- ---------- --------
Balance, December 31, 1994 1,875 4,416 (16) 18,466 24,741
Stock options exercised 2 8 - - 10
Cash dividends declared - $.3903 per share - - - (770) (770)
Stock dividend (5%) including cash in lieu
of fractional shares 94 1,311 - (1,408) (3)
Net earnings - - - 3,648 3,648
Unrealized gain on securities designated as
available for sale - - 67 - 67
-------- -------- ---- ---------- ---------
Balance at December 31, 1995 $1,971 $5,735 $ 51 $19,936 $27,693
===== ===== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE> 136
<TABLE>
<CAPTION>
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
1995 1994 1993
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 3,648 $ 2,542 $ 3,324
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 758 641 375
Provision for loan losses 143 97 310
Loss (gain) on sale of real estate acquired through
foreclosure (8) (148) 29
Federal Home Loan Bank stock dividends (177) (109) (75)
Gain on sale of loans (471) (501) (1,042)
Gain on sale of equipment (5) - -
Loans originated for sale in the secondary market (39,941) (35,015) (114,488)
Proceeds from sale of mortgage loans in the
secondary market 39,362 41,777 113,483
Current federal income taxes 294 (381) (16)
Deferred federal income taxes 116 (45) 22
Other - net (742) 801 (134)
------- ------- ---------
Net cash provided by operating activities 2,977 9,659 1,788
------- ------- ---------
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities
and interest-bearing deposits 15,296 18,156 22,211
Proceeds from sale of investment securities - - 1,005
Purchases of investment securities and interest-
bearing deposits - (11,126) (23,155)
Loans purchased - (710) (1,287)
Loans originated, net of principal collected (30,694) (68,160) (10,674)
Purchase of mortgage-backed securities - (500) (1,832)
Principal collected on mortgage-backed securities 1,061 2,807 4,644
Additions to premises and equipment (565) (535) (721)
Proceeds from sale of premises and equipment 37 - -
Purchase of securities designated as held to maturity (1,775) - -
Proceeds from sale of real estate acquired through foreclosure 89 333 315
Proceeds from redemption of FHLB stock - 67 217
Purchase of FHLB stock (393) (551) -
Additions to real estate acquired through foreclosure (70) (92) -
Other - net - 1 (129)
------ ------ ---------
Net cash used in investing activities (17,014) (60,310) (9,406)
------ ------ ---------
Net cash used in operating and investing
activities (subtotal carried forward) (14,037) (50,651) (7,618)
------ ------ ---------
</TABLE>
F-13
<PAGE> 137
<TABLE>
<CAPTION>
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended December 31,
(In thousands)
1995 1994 1993
<S> <C> <C> <C>
Net cash used in operating and investing activities
(subtotal brought forward) $(14,037) $(50,651) $ (7,618)
Cash flows provided by (used in) financing activities:
Net increase in deposits 19,713 14,642 2,467
Advances from Federal Home Loan Bank and
other borrowings 70,400 63,241 10,000
Repayment of Federal Home Loan Bank advances
and other borrowings (70,833) (38,230) (8,614)
Dividends paid on common stock (859) (580) (399)
Proceeds from exercise of stock options 10 8 15
Proceeds from offering of common stock - 2,961 -
Increase (decrease) in taxes and insurance prepaid
by borrowers (226) 1,778 294
-------- ------- ------
Net cash provided by financing activities 18,205 43,820 3,763
-------- ------- ------
Increase (decrease) in cash and cash equivalents 4,168 (6,831) (3,855)
Cash and cash equivalents at beginning of year 9,279 16,110 19,965
-------- ------- -------
Cash and cash equivalents at end of year $ 13,447 $ 9,279 $16,110
======= ======== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $ 14,003 $ 10,143 $ 9,781
======= ======= ======
Income taxes $ 1,684 $ 1,329 $ 1,606
======= ======== ======
Supplemental disclosure of noncash investing activities:
Transfers of mortgage loans to real estate acquired
through foreclosure $ 70 $ 72 $ 764
======= ======== ======
Issuance of mortgage loans upon sale of real
estate acquired through foreclosure $ 42 $ 277 $ 638
======= ======== ======
Unrealized gain (loss) on securities designated as
available for sale, net of related taxes $ 51 $ (16) $ -
======= ======== ======
Recognition of gains on sale of loans in accordance
with SFAS No. 122 $ 655 $ - $ -
======= ======== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE> 138
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Camco Financial Corporation's (the Corporation) business activities have
been limited primarily to holding the common shares of its four wholly-owned
subsidiaries: Cambridge Savings Bank (Cambridge), Marietta Savings Bank
(Marietta), First Federal Savings Bank of Washington Court House (First
Federal) (collectively hereinafter the Banks) and East Ohio Land Title
Agency, Inc., and two second tier subsidiaries, Camco Mortgage Corporation
and WestMar Mortgage Company. Accordingly, the Company's results of
operations are economically dependent upon the results of the Banks'
operations. The Banks conduct a general commercial banking business in
southeastern and central Ohio which consists of attracting deposits from the
general public and applying those funds to the origination of loans for
residential, consumer and nonresidential purposes. The Banks' profitability
is significantly dependent on net interest income which is the difference
between interest income generated from interest-earning assets (i.e. loans
and investments) and the interest expense paid on interest-bearing
liabilities (i.e. customer deposits and borrowed funds). Net interest income
is affected by the relative amount of interest-earning assets and
interest-bearing liabilities and the interest received or paid on these
balances. The level of interest rates paid or received by the Banks can be
significantly influenced by a number of competitive factors, such as
governmental monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles (GAAP) and general
accounting practices within the financial services industry. In preparing
financial statements in accordance with GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which, with the exception of the policy described in Note A-3, have
been consistently applied in the preparation of the accompanying
consolidated financial statements.
1. Principles of Consolidation
The Corporation's consolidated financial statements include the accounts of
Camco and its wholly-owned and second tier subsidiaries. All significant
intercompany balances and transactions have been eliminated.
F-15
<PAGE> 139
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Interest Rate Risk
The earnings of the Banks are primarily dependent upon net interest income,
which is determined by 1) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities
(interest rate spread) and 2) the relative amounts of interest-earning
assets and interest-bearing liabilities outstanding. The Corporation's
interest rate spread is affected by regulatory, economic and competitive
factors that influence interest rates, loan demand and deposit flows. The
Corporation is vulnerable to an increase in interest rates to the extent
that interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets. At December 31, 1995, 1994 and 1993, the
Corporation had net interest-earning assets of $328.0 million, $309.4
million and $264.8 million with weighted average effective yields of 8.07%,
7.33% and 6.70%, and net interest-bearing liabilities of approximately
$312.7 million, $293.4 million and $253.7 million, with weighted average
effective interest rates of 4.82%, 4.29% and 3.66%. To minimize the effect
of adverse changes in interest rates on its results of operations, the
Corporation has implemented an asset and liability management plan that
emphasizes increasing the interest rate sensitivity and shortening the
maturities of its interest-earning assets and extending the maturities of
its interest-bearing liabilities. Although the Corporation has undertaken a
variety of strategies to minimize its exposure to interest rate risk, its
primary emphasis has been on the origination and purchase of adjustable rate
loans.
3. Investment Securities and Mortgage-Backed Securities
Prior to January 1, 1994, investment securities and mortgage-backed
securities were carried at cost, adjusted for amortization of premiums and
accretion of discounts. The investments and mortgage-backed securities were
carried at cost, as it was management's intent and the Corporation had the
ability to hold the securities until maturity. Investment securities and
mortgage-backed securities held for indefinite periods of time, or which
management utilized as part of its asset/liability management strategy, or
that would be sold in response to changes in interest rates, prepayment
risk, or the perceived need to increase regulatory capital were classified
as held for sale at the point of purchase and carried at the lower of cost
or market.
F-16
<PAGE> 140
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Investment Securities and Mortgage-Backed Securities (continued)
In May 1993, the Financial Accounting Standards Board issued SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS
No. 115). SFAS No. 115 requires that investments be categorized as
held-to-maturity, trading, or available for sale. Securities classified as
held-to-maturity are carried at cost only if the Corporation has the
positive intent and ability to hold these securities to maturity. Trading
securities and securities available for sale are carried at fair value with
resulting unrealized gains or losses recorded to operations or stockholders'
equity, respectively. The Corporation adopted SFAS No. 115 for the year
beginning January 1, 1994. The effect of adoption was to initially increase
stockholders' equity by approximately $298,000 on January 1, 1994,
representing the unrealized market value appreciation on investment and
mortgage-backed securities designated as available for sale, net of
applicable deferred federal income taxes. Subsequent to January 1, 1994, the
amount of unrealized gains on securities designated as available for sale
had declined and, at December 31, 1995 and 1994, the Corporation's equity
accounts reflected net unrealized gains and losses of $51,000 and $16,000,
respectively. Realized gains or losses on sales of securities are recognized
using the specific identification method.
4. Loans Held for Sale
Loans held for sale are carried at the lower of acquisition cost (less
principal payments received) or fair value (market value), calculated on an
aggregate basis. At December 31, 1994, such loans were carried at market,
with a corresponding $5,000 loss recognized through operations. At December
31, 1995, such loans were recorded at cost, which approximated fair value.
5. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for premiums and discounts on loans purchased and sold and the
allowance for loan losses. Premiums and discounts on loans purchased and
sold are amortized and accreted to operations using the interest method over
the average life of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is
returned to accrual status.
F-17
<PAGE> 141
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Loan Origination and Commitment Fees
The Corporation accounts for loan origination fees and costs in accordance
with Statement of Financial Accounting Standards No. 91 (SFAS No. 91)
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Cost of Leases". Pursuant to the
provisions of SFAS No. 91, all loan origination fees received, net of
certain direct origination costs, are deferred on a loan-by-loan basis and
amortized to interest income using the interest method, giving effect to
actual loan prepayments. Additionally, SFAS No. 91 generally limits the
definition of loan origination costs to the direct costs attributable to
originating a loan, i.e., principally actual personnel costs.
Fees received for loan commitments are deferred and amortized over the life
of the related loan using the interest method.
7. Allowance for Loan Losses
It is the Corporation's policy to provide valuation allowances for estimated
losses on loans based upon past loss experience, trends in the level of
delinquent and specific problem loans, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
market area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Corporation records a loan loss provision equal to the
difference between the fair value of the property securing the loan and the
loan's carrying value. Such provision is based on management's estimate of
the fair value of the underlying collateral, taking into consideration the
current and currently anticipated future operating or sales conditions. As a
result, such estimates are particularly susceptible to changes that could
result in a material adjustment to results of operations in the near term.
Recovery of the carrying value of such loans is dependent to a great extent
on economic, operating, and other conditions that may be beyond the
Corporation's control.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This Statement, which
was amended by SFAS No. 118 as to certain income recognition and financial
statement disclosure provisions, requires that impaired loans be measured
based upon the present value of expected future cash flows discounted at the
loan's effective interest rate or, as an alternative, at the loans
observable market price or fair value of the collateral. The Corporation
adopted the Statement effective January 1, 1995, without material effect on
consolidated financial condition or results of operations.
F-18
<PAGE> 142
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Allowance for Loan Losses (continued)
Under SFAS No. 114, a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Corporation
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Corporation's investment in impaired nonresidential loans, such loans are
collateral dependent and as a result are carried as a practical expedient at
the lower of cost or fair value.
It is the Corporation's policy to charge off unsecured credits that are more
than ninety days delinquent. Similarly, collateral dependent loans which are
more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No.
114 at that time.
At December 31, 1995, the Corporation had no loans that would be defined as
impaired under SFAS No. 114.
8. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of cost
(principal balance of the former mortgage loan plus costs of obtaining title
and possession), or fair value less estimated selling expense at date of
acquisition. Any excess of cost over fair value is charged to the allowance
for loan losses at acquisition. Costs relating to the development and
improvement of property are capitalized up to the fair value of the
property, whereas those relating to holding the property are charged to
expense.
9. Premises and Equipment
Depreciation of premises and equipment is computed using the straight-line
method over estimated useful lives of 10 to 50 years for buildings and
improvements and 3 to 25 years for furniture, fixtures and equipment.
F-19
<PAGE> 143
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Federal Income Taxes
The Corporation accounts for Federal income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
No. 109). Pursuant to the provisions of SFAS No. 109, a deferred tax
liability or deferred tax asset (benefit) is computed by applying the
current statutory tax rates to net taxable or deductible temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements that will result in taxable or deductible
amounts in future periods. Deferred tax benefits are recorded only to the
extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period earnings,
carried back against prior years' earnings, offset against taxable temporary
differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax benefits to the extent that the value of net
deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
11. Earnings Per Share and Dividends Per Share
Earnings per share is calculated based on the weighted average number of
common and common equivalent shares (which includes those stock options that
are dilutive) outstanding during the respective periods, adjusted to reflect
a 5% stock dividend effected during the years ended December 31, 1995 and
1994, and a 2-for-1 stock split effected in the form of a 100% stock
dividend in 1993. Dividends per share for the years ended December 31, 1995,
1994 and 1993, have also been adjusted to reflect the effect of such stock
dividends and stock split.
12. Fair Value of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
about Fair Value of Financial Instruments", requires disclosure of fair
value information about financial instruments, whether or not recognized in
the consolidated statement of financial condition, for which it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all non-financial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Corporation.
F-20
<PAGE> 144
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and Due from Banks: The carrying amount reported in the
consolidated statement of financial condition for cash and
due from banks is deemed to approximate fair value.
Interest-bearing Deposits in Other Financial Institutions:
For short-term interest-bearing deposits in other financial
institutions, the carrying amount reported in the
consolidated statement of financial condition is deemed to
approximate fair value. For other interest-bearing deposits
in other financial institutions, fair values are estimated
using discounted cash flow analyses, using interest rates
currently being offered for such deposits with similar
remaining maturities.
Investment Securities and Mortgage-backed Securities: Fair
values for investment securities and mortgage-backed
securities are based on quoted market prices and dealer
quotes.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four
family residential, multi-family residential real estate,
installment and other. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The
fair values for the resultant loan categories were computed
via discounted cash flow analysis, using current interest
rates offered for loans with similar terms to borrowers of
similar credit quality.
Federal Home Loan Bank stock: The carrying amount presented
in the consolidated statement of financial condition is
deemed to approximate fair value.
Accrued Interest Receivable and Accrued Interest Payable: The
carrying amount as reported in the consolidated statement of
financial condition is deemed a reasonable estimate of fair
value.
Deposits: The fair values of deposits with no stated
maturity, such as money market demand deposits, savings and
NOW accounts, are deemed equal to the amount payable on
demand as of December 31, 1995 and 1994. The fair value of
certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining
maturities.
F-21
<PAGE> 145
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
Advances from Federal Home Loan Bank: The fair value of these
advances is estimated using the rates currently offered for
similar advances of similar remaining maturities or, when
available, quoted market prices.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 11,325 $ 11,325 $ 8,220 $ 8,220
Interest-bearing deposits 4,003 4,003 8,486 8,486
Investment securities 22,414 22,254 30,311 28,881
Mortgage-backed securities 5,987 6,030 6,916 6,614
Loans receivable 292,751 291,671 261,459 255,662
Federal Home Loan Bank stock 2,832 2,832 2,262 2,262
--------- --------- --------- ---------
Total financial assets $339,312 $338,115 $317,654 $310,125
======= ======= ======= =======
Financial liabilities
Deposits $286,574 $300,632 $266,861 $265,592
Advances from the Federal
Home Loan Bank 26,078 26,139 26,511 26,866
-------- -------- -------- --------
Total financial liabilities $312,652 $326,771 $293,372 $292,458
======= ======= ======= =======
</TABLE>
13. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and amounts due from depository
institutions and short-term interest-bearing time deposits in other
financial institutions with original maturities of three months or less.
F-22
<PAGE> 146
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Advertising
Advertising costs are expensed when incurred.
15. Reclassification
Certain prior year amounts have been reclassified to conform to the 1995
consolidated financial statement presentation.
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities at December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government agency obligations $19,147 $17 $184 $18,980
Municipal bonds 136 7 - 143
------ -- --- ------
Total investment securities
held to maturity 19,283 24 184 19,123
AVAILABLE FOR SALE:
U.S. Government agency obligations 2,999 46 - 3,045
Corporate equity securities 82 4 - 86
------ -- --- ------
Total investments available
for sale 3,081 50 - 3,131
------ -- --- ------
Total investment securities $22,364 $74 $184 $22,254
====== == === ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government agency obligations $27,185 $ 1 $1,434 $25,752
Municipal bonds 148 5 2 151
------ --- ----- ------
Total investment securities
held to maturity 27,333 6 1,436 25,903
AVAILABLE FOR SALE:
U.S. Government agency obligations 2,998 5 25 2,978
------ --- ----- ------
Total investment securities $30,331 $11 $1,461 $28,881
====== == ===== ======
</TABLE>
F-23
<PAGE> 147
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
The amortized cost, gross unrealized gains and losses, and estimated fair
values of mortgage-backed securities at December 31, 1995 and 1994, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
FNMA $3,218 $33 $ 3 $3,248
FHLMC 1,784 21 8 1,797
----- -- ----- -----
Total mortgage-backed securities
held to maturity 5,002 54 11 5,045
AVAILABLE FOR SALE:
FHLMC 968 17 - 985
----- -- ----- -----
Total mortgage-backed securities $5,970 $71 $ 11 $6,030
===== == ==== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
FNMA $3,378 $- $195 $3,183
FHLMC 2,074 - 107 1,967
----- ----- --- -----
Total mortgage-backed securities
held to maturity 5,452 - 302 5,150
AVAILABLE FOR SALE:
FHLMC 1,487 13 36 1,464
----- ---- ---- -----
Total mortgage-backed securities $6,939 $ 13 $338 $6,614
===== ==== === =====
</TABLE>
F-24
<PAGE> 148
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
The amortized cost and estimated fair value of investment and
mortgage-backed securities at December 31, 1995 and 1994 (including
securities designated as available for sale) by contractual term to maturity
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 6,019 $ 6,030 $ 3,582 $ 3,432
Due after one year through five years 15,217 15,084 23,682 22,645
Due after five years through ten years 1,046 1,054 3,067 2,804
------- ------- ------- -------
Total investment securities 22,282 22,168 30,331 28,881
Corporate equity securities 82 86 - -
Mortgage-backed securities - not
due at a single maturity date 5,970 6,030 6,939 6,614
------- ------- ------- -------
Total $28,334 $28,284 $37,270 $35,495
====== ====== ====== ======
</TABLE>
During the year ended December 31, 1993, investment securities were sold at
amortized cost resulting in cash proceeds of $1.0 million. There were no
sales of investment securities during the years ended December 31, 1995 and
1994.
There were no sales of mortgage-backed securities during the years ended
December 31, 1995, 1994 and 1993.
F-25
<PAGE> 149
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE C - LOANS RECEIVABLE
Loans receivable at December 31 consist of the following:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Conventional real estate loans:
Existing residential properties $244,422 $212,886
Nonresidential real estate 11,486 14,845
Construction 19,944 21,947
Developed building lots 965 1,147
Education loans 2,728 2,799
Consumer and other loans 22,589 18,659
------- -------
Total 302,134 272,283
Less:
Undisbursed loans in process 8,717 9,483
Deferred loan origination fees and other
unearned income - net 1,152 866
Allowance for loan losses 1,032 943
------- -------
Total loans receivable - net $291,233 $260,991
======= =======
</TABLE>
As depicted above, the Corporation's lending efforts have historically
focused on loans secured by existing residential properties, which comprise
approximately $244.4 million, or 84%, of the total loan portfolio at
December 31, 1995 and approximately $212.9 million, or 82%, of the total
loan portfolio at December 31, 1994. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio, which
has historically provided the Corporation with adequate collateral coverage
in the event of default. Nevertheless, the Corporation, as with any lending
institution, is subject to the risk that residential real estate values
could deteriorate in its primary lending areas of Ohio and northern
West Virginia, thereby impairing collateral values. However, management is
of the belief that residential real estate values in the Corporation's
primary lending areas are presently stable.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights," which requires that the Corporation recognize as separate assets,
rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. An institution that acquires mortgage
servicing rights through either the purchase or origination of mortgage
loans and sells those loans with servicing rights retained is required to
allocate some of the cost of the loans to the mortgage servicing rights.
SFAS No. 122 requires that securitization of mortgage loans be accounted for
as sales of mortgage loans and acquisitions of mortgage-backed securities.
Additionally, SFAS No. 122 requires that capitalized mortgage servicing
rights and capitalized excess servicing receivables be assessed for
impairment. Impairment is measured based on fair value.
F-26
<PAGE> 150
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE C - LOANS RECEIVABLE (continued)
SFAS No. 122 was effective for years beginning after December 15, 1995,
(January 1, 1996, as to the Corporation) to transactions in which an entity
acquires mortgage servicing rights and to impairment evaluations of all
capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application was prohibited, and
earlier adoption is encouraged. Management elected early adoption of SFAS
No. 122 in the current year, which resulted in the recognition of $655,000
in pre-tax gains on sales of loans during the year ended December 31, 1995.
The mortgage servicing rights recorded by the Banks', calculated in
accordance with the provisions of SFAS No. 122, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees, interest
earned on float, net interest earned on escrows, miscellaneous income, and
costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net realizable present value to an
acquirer of the acquired servicing.
At December 31, 1995 and 1994, the Banks were servicing approximately $242.9
million and $240.5 million, respectively, of mortgage loans that have been
sold to the Federal Home Loan Mortgage Corporation and other investors.
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 943 $1,028 $ 889
Provision for losses 143 97 310
Charge-offs, net of immaterial recoveries (54) (182) (171)
------- ------ -----
Balance at end of year $1,032 $ 943 $1,028
===== ====== =====
</TABLE>
Nonaccrual and nonperforming loans totaled approximately $1.1 million, $1.2
million and $2.0 million at December 31, 1995, 1994 and 1993, respectively.
Interest income that would have been recognized had nonaccrual loans
performed pursuant to contractual terms totaled approximately $24,000,
$57,000 and $64,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The Banks, in the ordinary course of business, have granted loans to certain
of their directors, executive officers, and their associates. Such loans are
made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans (excluding loans
to any such individual which in the aggregate did not exceed $60,000) was
less than 5% of stockholders' equity at December 31, 1995 and 1994.
F-27
<PAGE> 151
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE C - LOANS RECEIVABLE (continued)
At December 31, 1995 and 1994, the Banks had outstanding commitments to
originate or purchase fixed rate loans of approximately $2.7 million and
$502,000, respectively, and adjustable rate loans of approximately $4.0
million and $3.5 million, respectively. In the opinion of management, such
commitments were at market rates on those dates and commitments were, or
will be, discharged from existing excess liquidity.
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Land $ 919 $ 791
Buildings and improvements 4,095 4,005
Furniture, fixtures and equipment 2,662 2,358
----- -----
7,676 7,154
Less accumulated depreciation and amortization (3,523) (3,073)
----- -----
Premises and Equipment, net $4,153 $4,081
===== ======
</TABLE>
NOTE E - DEPOSITS
Deposit balances (including accrued interest payable) by weighted-average
interest rate at December 31, 1995 and 1994, are summarized by savings type
as follows:
<TABLE>
<CAPTION>
1995 1994
AMOUNT RATE AMOUNT RATE
(In thousands)
<S> <C> <C> <C> <C>
NOW accounts $ 44,591 2.30% $ 41,658 2.22%
Money market demand accounts 15,047 3.29 20,756 2.98
Passbook and statement savings accounts 50,498 3.01 57,981 3.00
------- ---- ------- ----
Total withdrawable accounts 110,136 2.76 120,395 2.73
------- ---- ------- ----
Money market certificates:
Seven days to one year 19,332 4.73 19,994 3.95
One to two year 54,336 5.99 41,228 5.28
Two to eight year 70,198 6.13 67,621 5.68
Negotiated rate certificates 21,446 5.63 7,489 5.24
Individual retirement accounts 11,126 6.23 10,134 4.69
------- ---- ------- ----
Total certificate accounts 176,438 5.88 146,466 5.24
------- ---- ------- ----
Total deposits $286,574 4.68% $266,861 4.10%
======= ==== ======= ====
</TABLE>
F-28
<PAGE> 152
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE E - DEPOSITS (continued)
Interest expense on deposits is summarized as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Certificate accounts $ 9,592 $6,173 $6,326
NOW accounts and money
market demand accounts 1,450 1,447 1,520
Passbook and statement savings
accounts 1,436 1,877 1,879
------- ----- -----
Total interest expense on deposits $12,478 $9,497 $9,725
====== ===== =====
</TABLE>
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
YEAR ENDING DECEMBER 31: (In thousands)
<S> <C> <C> <C>
1995 $ - $ 71,357
1996 105,593 46,664
1997 48,826 11,513
1998 14,479 11,928
1999 3,713 3,594
After 1999 3,827 1,410
------- -------
Total certificate of deposit accounts $176,438 $146,466
======= =======
</TABLE>
At December 31, 1995 and 1994, public savings deposits were collateralized
by investment securities and interest-bearing deposits in other banks
totaling $20.0 million and $12.2 million, respectively.
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1995 and 1994, Federal Home Loan Bank advances consisted of
short-term cash management borrowings which matured within one year and 30
days of the respective dates. At such respective dates, the advances carried
weighted-average interest rates of 6.31% and 7.00%, and were collateralized
by certain first mortgage loans totaling $39.1 million and $39.8 million, as
well as Federal Home Loan Bank stock of the respective Bank subsidiaries
which are parties to the borrowings.
F-29
<PAGE> 153
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE G - FEDERAL INCOME TAXES
The Corporation and its subsidiaries file a consolidated Federal income tax
return. The Banks are permitted under the Internal Revenue Code to deduct
from otherwise taxable income either actual bad debts under the tax
experience method, or an annual addition to a reserve for bad debts based
upon a percentage of taxable income subject to certain limitations. The bad
debt deduction allowable under the percentage of taxable income method
equals 8% of taxable income determined without regard to that deduction and
with certain adjustments. The bad debt deductions allowable under the tax
methods differ from the allowance method used for financial accounting
purposes. Bad debt deductions under the percentage of taxable income method
are included in taxable income of later years only if the bad debt reserve
is used subsequently for purposes other than to absorb bad debt losses.
Because the Corporation does not intend to use the reserve for purposes
other than to absorb losses, no deferred income taxes have been provided on
additions made to the reserve prior to January 1, 1987. Retained earnings at
December 31, 1995 includes approximately $3.6 million representing such bad
debt deductions for which no deferred income taxes have been provided.
The components of the Corporation's net deferred tax liability as of
December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE AT 34% DIFFERENCE AT 34%
Deferred tax liabilities:
<S> <C> <C> <C> <C>
Deferred loan origination fees $ (639) $ (217) $(1,160) $ (394)
FHLB stock dividends (952) (324) (775) (264)
Percentage of earnings bad debt deduction (1,750) (595) (1,250) (425)
Retirement expense (156) (53) (144) (49)
Mortgage servicing rights (655) (223) - -
Other liabilities (285) (97) (232) (79)
------- -------- ------ -------
Total deferred tax liabilities (4,437) (1,509) (3,561) (1,211)
Deferred tax assets:
General loan loss allowance 949 323 833 283
Other assets 88 30 56 19
-------- -------- ------- -------
Total deferred tax assets 1,037 353 889 302
------ ------- ------ ------
Net deferred tax liability $(3,400) $(1,156) $(2,672) $ (909)
====== ====== ====== ======
</TABLE>
F-30
<PAGE> 154
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE G - FEDERAL INCOME TAXES (continued)
A reconciliation of the effective tax rate for the years ended December 31,
1995, 1994 and 1993, respectively, and the federal statutory rate in each of
these years of 34%, computed by applying the statutory federal corporate tax
rate to income before taxes, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Expected federal tax at statutory rate $1,890 $1,310 $1,724
Other 20 1 23
------ ------ ------
Tax provision per consolidated financial
statements $1,910 $1,311 $1,747
====== ====== ======
</TABLE>
NOTE H - REGULATORY CAPITAL REQUIREMENTS
On July 1, 1994, Marietta and Cambridge changed corporate charters to state
savings banks. As a result, effective July 1, Cambridge and Marietta became
subject to the regulatory capital requirements of the Federal Deposit
Insurance Corporation (FDIC).
The Federal Deposit Insurance Corporation (FDIC) has adopted risk-based
capital ratio guidelines to which Cambridge Savings Bank and Marietta
Savings Bank are subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk- based
capital ratios are determined by allocating assets and specified off-balance
sheet commitments to four risk-weighted categories, with higher levels of
capital being required for the categories perceived as representing greater
risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1
capital. The FDIC may, however, set higher capital requirements when
particular circumstances warrant. Savings banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.
F-31
<PAGE> 155
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE H - REGULATORY CAPITAL REQUIREMENTS (continued)
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for savings banks that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or
anticipating significant growth. All other savings banks are required to
maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points.
As of December 31, 1995, Cambridge and Marietta's regulatory capital
exceeded all minimum capital requirements as shown in the following table:
<TABLE>
<CAPTION>
CAMBRIDGE REGULATORY CAPITAL
TIER 1 TOTAL
TIER 1 CAPITAL TO CAPITAL TO
LEVERAGE PERCENT RISK-BASED PERCENT RISK-BASED PERCENT
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles $12,491 $12,491 $12,491
Additional capital items
General valuation
allowances - limited -- -- 330
------- ------- -------
Regulatory capital
computed 12,491 8.0 12,491 14.9 12,821 15.3
Maximum range of
capital requirement 7,813 5.0 6,724 8.0 6,724 8.0
------- --- ------- ---- ------- ----
Regulatory
capital - excess $ 4,678 3.0 $ 5,767 6.9 $ 6,097 7.3
======= === ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
MARIETTA REGULATORY CAPITAL
TIER 1 TOTAL
TIER 1 CAPITAL TO CAPITAL TO
LEVERAGE PERCENT RISK-BASED PERCENT RISK-BASED PERCENT
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles $7,911 $7,911 $7,911
Additional capital items
General valuation
allowances -- -- 326
------ ------ ------
Regulatory capital
computed 7,911 8.0 7,911 13.6 8,237 14.2
Maximum range of
capital requirement 4,956 5.0 4,646 8.0 4,646 8.0
------ --- ------ ---- ------ ----
Regulatory
capital - excess $2,955 3.0 $3,265 5.6 $3,591 6.2
====== === ====== ==== ====== ====
</TABLE>
F-32
<PAGE> 156
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE H - REGULATORY CAPITAL REQUIREMENTS (continued)
First Federal Savings Bank is subject to minimum regulatory capital
standards promulgated by the Office of Thrift Supervision (OTS). Such
minimum capital standards generally require the maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as
the tangible capital requirement, the core capital requirement and the
risk-based capital requirement. The tangible capital requirement provides
for minimum tangible capital (defined as shareholders' equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted
in present form, would increase the core capital requirement to a range of
4.0% - 5.0% of adjusted total assets for substantially all savings
associations. An additional proposal, which was approved in 1994 and
becomes effective for institutions with total assets of more than $300
million in 1996, imposes an addition to the risk- based requirement based
on an institution's sensitivity to interest-rate risk. Management
anticipates no material change to the Savings Bank's excess regulatory
capital position as a result of these changes in the regulatory capital
requirement. The risk-based capital requirement currently provides for the
maintenance of core capital plus general loss allowances equal to 8.0% of
risk-weighted assets. In computing risk-weighted assets, the Corporation
multiplies the value of each asset on its statement of financial condition
by a defined risk- weighting factor, e.g., one-to-four family residential
loans carry a risk-weighted factor of 50%.
As of December 31, 1995, the First Federal's regulatory capital exceeded all
minimum capital requirements as shown in the following table:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
FIRST FEDERAL CAPITAL CAPITAL CAPITAL
(In thousands)
<S> <C> <C> <C>
Equity capital under GAAP $ 6,677 $ 6,677 $ 6,677
General loan loss allowance -- -- 293
------- ------- -------
Bank's regulatory capital 6,677 6,677 6,970
Minimum regulatory capital requirement 1,378 2,756 3,920
------- ------- -------
Bank's regulatory capital in excess of
minimum requirements $ 5,299 $ 3,921 $ 3,050
======= ======= =======
Bank's regulatory capital as a percent
of assets 7.3% 7.3% 14.2%
======= ======= =======
Asset base used for regulatory capital purposes $91,880 $91,880 $49,001
======= ======= =======
</TABLE>
The Corporation's management believes that, under the current regulatory
capital regulations, the Banks will continue to meet their minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Corporation, such as increased interest rates or a downturn in the
economy in areas where the subsidiaries have most of their loans, could
adversely affect future earnings and, consequently, the ability to meet
future minimum regulatory capital requirements.
F-33
<PAGE> 157
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE H - REGULATORY CAPITAL REQUIREMENTS (continued)
The deposit accounts of Cambridge Savings, Marietta Savings and First
Federal and of other savings associations are insured by the SAIF
administered by the FDIC. The reserves of the SAIF are below the level
required by law, because a significant portion of the assessments paid into
the fund are used to pay the cost of prior thrift failures. The deposit
accounts of commercial banks are insured by the Bank Insurance Fund (the
"BIF") administered by the FDIC, except to the extent such banks have
acquired SAIF deposits. The reserves of the BIF met the level required by
law in May 1995. As a result of the respective reserve levels of the funds,
deposit insurance assessments paid by healthy savings associations exceeded
those paid by healthy commercial banks by approximately $.19 per $100 in
deposits in late 1995 and are expected to exceed them by $.23 per $100 in
deposits in 1996. This premium disparity could have a negative competitive
impact on the Banking Subsidiaries and other institutions with SAIF
deposits.
Congress is considering legislation to recapitalize the SAIF and to
eliminate the significant premium disparity. Currently, the recapitalization
plan provides for a special assessment of approximately $.85 per $100 of
SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. Certain banks holding SAIF deposits would pay a
lower special assessment. In addition, the cost of prior thrift failures
would be shared by both the SAIF and the BIF. Such cost sharing might
increase BIF assessments. SAIF assessments for healthy institutions would be
reduced significantly below current levels, but could never be reduced below
the level for healthy BIF institutions.
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 1998. However, legislative proposals contemplate an
elimination of the federal thrift charter and of the separate federal
regulation of thrifts prior to the merger of the deposit insurance funds.
Cambridge Savings and Marietta Savings are state savings banks, which are
not considered thrifts for these purposes. However, First Federal is a
thrift and would have to convert to a different charter and would become
subject to federal regulations as a bank. Such regulation would subject
First Federal to the more restrictive activity limits imposed on national
banks. If First Federal is required to convert to a bank charter, it would
have to recapture approximately $2.7 million of its bad debt reserve, unless
Congress amends these recapture provisions. A proposal is currently under
consideration that would eliminate the special thrift method of tax
accounting for bad debt reserves, which the Banking Subsidiaries have relied
on, effective in 1996. In addition, if required to become a bank holding
company, Camco would become subject to more restrictive activity limits and
to capital requirements similar to those imposed on First Federal.
The Banking Subsidiaries had $277.3 million in deposits at March 31, 1995.
If the special assessments is $.85 per $100 in deposits, the Banking
Subsidiaries will pay an aggregate additional assessment of $2.4 million.
This assessment should be tax deductible, but it will reduce earnings and
capital for the quarter in which it is recorded. It is expected that
quarterly SAIF assessments would be reduced significantly after such special
assessment is paid.
No assurances can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, Camco can
give no assurances that the disparity between BIF and SAIF assessments will
be eliminated and cannot be certain of the impact of the SAIF
recapitalization and related proposals until the appropriate legislation has
been enacted.
F-34
<PAGE> 158
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE I - PENSION PLAN
The Corporation has a non-contributory insured defined benefit pension plan
(the Plan) covering all eligible employees. The Plan's benefit formula is
the projected unit credit formula which encompasses future salary levels and
participants' years of service.
Net pension costs includes the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during year $ 185 $ 180 $ 139
Interest cost on projected benefit obligation 158 155 123
(Gain)loss on plan assets (139) (53) 9
Net amortization, deferral and other 65 27 62
----- ----- -----
Net pension cost $ 269 $ 309 $ 333
===== ===== =====
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized in the consolidated statement of financial condition at December
31:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation $ 1,819 $ 1,431
======= =======
Accumulated benefit obligation $ 1,955 $ 1,526
======= =======
Plan assets at fair value $ 1,918 $ 1,527
Actuarial present value of projected benefit
obligation for services rendered to date 3,033 2,425
------- -------
Plan assets less than projected benefit obligation (1,115) (898)
Unrecognized net loss 1,168 913
Unrecognized transition liability, net of amortization 2 2
Other 116 136
------- -------
Prepaid pension cost (included in prepaid expenses
and other assets) $ 171 $ 153
======= =======
</TABLE>
Assumptions for the plan valuations include:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
Weighted average discount rate 6.00% 6.50% 6.75%
Annual rate of increase in compensation levels 4.50% 4.50% 5.00%
Expected long-term rate of return on assets 8.00% 7.00% 5.50%
</TABLE>
The unrecognized transition liability is being amortized straight-line as a
component of pension cost over a 20 year period.
F-35
<PAGE> 159
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE I - PENSION PLAN (continued)
Plan assets at December 31, 1995 and 1994 were invested in certificates of
deposit at the Banks, money market funds, stock and bond mutual funds and in
10,923 and 10,404 shares of the Corporation's common stock at the respective
dates.
The Corporation also has a 401(k) Salary Savings Plan covering substantially
all employees. Total expense under this plan was $62,000, $63,000 and
$51,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
NOTE J - STOCK OPTION PLANS
Stockholders of the Corporation have approved three stock option plans.
Under the 1972 Plan, 161,416 common shares were reserved for issuance to
officers, directors, and key employees of the Corporation and its
subsidiaries. The 1982 Plan reserved 66,702 common shares for issuance to
employees of the Corporation and its subsidiaries. The foregoing number of
shares under option have been adjusted to reflect the 5% stock dividends
effected during the years ended December 31, 1995 and 1994, and the stock
split effected in the form of a 100% stock dividend in 1993. At December 31,
1995, all of the stock options had been granted and were subject to exercise
at the discretion of the grantees through 2002.
Under the 1995 Plan, 93,000 shares were reserved for issuance. As of
December 31, 1995, options to purchase 70,000 shares were awarded to
officers, directors, and key employees at the common stock's fair value on
the grant date, subject to stockholder approval in May 1996.
F-36
<PAGE> 160
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE J - STOCK OPTION PLANS (continued)
The following summarizes stock option transactions for the 1972 and 1982
Plans:
<TABLE>
<CAPTION>
1972 PLAN
OPTION
NUMBER PRICE
OF SHARES PER SHARE TOTAL
<S> <C> <C> <C>
Outstanding at December 31, 1992 and 1993 2,668 $1.58-$5.72 $ 12,629
Effect of 5% stock dividend in 1994 133 -- --
-------- ----------- --------
Outstanding at December 31, 1994 2,801 $1.50-$5.44 12,629
Exercised (1,382) $3.55 (avg.) (4,911)
Effect of 5% stock dividend in 1995 71 -- --
-------- ----------- --------
Outstanding at December 31, 1995 1,490 $5.18 $7,718
======== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1982 PLAN
OPTION
NUMBER PRICE
OF SHARES PER SHARE TOTAL
<S> <C> <C> <C>
Outstanding at December 31, 1992 8,894 $5.72 $ 50,820
Exercised (2,688) $5.72 (15,375)
-------- ----- --------
Outstanding at December 31, 1993 6,206 $5.72 35,445
Exercised (1,361) $5.44 (7,685)
Effect of 5% stock dividend in 1994 259 -- --
-------- ----- --------
Outstanding at December 31, 1994 5,104 $5.44 27,760
Exercised (1,058) $5.44 (5,755)
Effect of 5% stock dividend in 1995 202 -- --
-------- ----- --------
Outstanding at December 31, 1995 4,248 $5.18 $ 22,005
======== ===== ========
</TABLE>
F-37
<PAGE> 161
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE K - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION
The following condensed financial statements summarize the financial
position of Camco Financial Corporation as of December 31, 1995 and 1994
and the results of its operations and its cash flows for each of the years
ended December 31, 1995, 1994 and 1993:
CAMCO FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Cash in subsidiary Banks $ 685 $ 467
Investment securities available for sale 86 --
Investment in Bank subsidiaries utilizing
the equity method 27,079 21,731
Investment in title agency subsidiary 232 160
Notes receivable from Bank subsidiary -- 3,000
Other 46 46
-------- --------
Total assets $ 28,128 $ 25,404
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued liabilities $ 110 $ 112
Dividends payable 207 296
Current federal income taxes payable 118 255
-------- --------
Total liabilities 435 663
Stockholders' equity
Common stock 1,971 1,875
Additional paid-in capital 5,735 4,416
Retained earnings - substantially restricted 19,936 18,466
Unrealized gain (loss) on investment securities
designated as available for sale, net of
related tax effects 51 (16)
-------- --------
Total stockholders' equity 27,693 24,741
-------- --------
Total liabilities and stockholders' equity $ 28,128 $ 25,404
======== ========
</TABLE>
F-38
<PAGE> 162
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE K - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
CAMCO FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Income:
Dividends from Bank subsidiaries $ 1,123 $ 870 $ 991
Interest and other income 140 203 10
Equity in undistributed net income
of the Bank subsidiaries 2,781 1,845 2,556
Equity in undistributed net income
of title agency subsidiary 72 8 65
------- ------- -------
Total income 4,116 2,926 3,622
General, administrative and other
expense 607 496 398
------- ------- -------
Earnings before federal income tax
credits 3,511 2,430 3,224
Federal income tax credits (137) (112) (100)
------- ------- -------
Net earnings $ 3,648 $ 2,542 $ 3,324
======= ======= =======
</TABLE>
F-39
<PAGE> 163
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE K - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
CAMCO FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 3,648 $ 2,542 $ 3,324
Adjustments to reconcile net income to net
cash flows from operating activities:
Undistributed net income of the Bank
subsidiaries (2,781) (1,845) (2,556)
Undistributed net income of title
agency subsidiary (72) (8) (65)
Decrease (increase) in other assets (61) (16) 5
Increase (decrease) in accounts payable
and other liabilities (2) (72) 20
Increase (decrease) in federal income taxes payable (136) 35 --
------- ------- -------
Net cash provided by operating activities 596 636 728
------- ------- -------
Cash flows used in investing activities:
Issuance of note receivable to Bank subsidiary -- (3,000) --
Repayment of note receivable from Bank subsidiary 3,000 -- --
Contribution of capital to Bank subsidiaries (2,500) -- --
Purchase of investment securities (29) -- --
------- ------- -------
Net cash provided by (used in) investing activities 471 (3,000) --
Cash flows provided by (used in) financing activities:
Common stock options exercised 10 8 15
Dividends paid (859) (580) (399)
Proceeds from offering of common stock -- 2,961 --
------- ------- -------
Net cash provided by (used in) financing activities (849) 2,389 (384)
------- ------- -------
Net increase in cash and cash equivalents 218 25 344
Cash and cash equivalents - beginning of year 467 442 98
------- ------- -------
Cash and cash equivalents - end of year $ 685 $ 467 $ 442
======= ======= =======
</TABLE>
F-40
<PAGE> 164
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE K - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
During 1994, the Corporation undertook an offering of common stock which was
completed on December 28, 1994. The Corporation issued 231,000 shares of
common stock in the offering at $14.50 per share. After giving effect to
offering expenses of $379,000, the Corporation recognized a $3.0 million
increase in stockholders' equity.
NOTE L - SEGMENT INFORMATION
The following table sets forth the Corporation's revenues, income before
income taxes, and assets for each of its business segments for the years
ended December 31, 1995, 1994 and 1993. For purposes of the table, "revenue"
represents the sum of total interest income and total other income:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Revenue:
Banking $ 26,827 $ 20,429 $ 19,876
Mortgage banking 2,808 2,703 3,575
--------- --------- ---------
Total business segments 29,635 23,132 23,451
Intersegment eliminations (902) (795) (849)
--------- --------- ---------
Total $ 28,733 $ 22,337 $ 22,602
========= ========= =========
Earnings before income taxes:
Banking $ 4,092 $ 2,934 $ 3,675
Mortgage banking 1,698 1,099 1,825
--------- --------- ---------
Total business segments 5,790 4,033 5,500
Intersegment eliminations (232) (180) (429)
--------- --------- ---------
Total $ 5,558 $ 3,853 $ 5,071
========= ========= =========
Assets-year-end:
Banking $ 344,177 $ 323,355 $ 269,867
Mortgage banking 3,096 1,817 7,752
--------- --------- ---------
Total business segments 347,273 325,172 277,619
Intersegment eliminations (804) (545) (521)
--------- --------- ---------
Total $ 346,469 $ 324,627 $ 277,098
========= ========= =========
</TABLE>
F-41
<PAGE> 165
CAMCO FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995, 1994 and 1993
NOTE M - PENDING BUSINESS COMBINATION
On March 26, 1996, Camco Financial entered into a definitive merger
agreement (the agreement) with First Ashland Financial Corporation (First
Ashland). Pursuant to the agreement, Camco Financial has agreed to acquire
First Ashland for cash and common shares with an approximate fair value
totaling $28 million. Following the acquisition, First Ashland's banking
subsidiary, First Federal Bank for Savings, will continue operations as a
stand alone subsidiary of Camco Financial. At December 31, 1995, First
Ashland reported assets of approximately $90 million and stockholders'
equity of approximately $24 million.
F-42
<PAGE> 166
FIRST ASHLAND FINANCIAL CORPORATION
Ashland, Kentucky
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition at March 31, 1996
(unaudited) and September 30, 1995............................................................................F-44
Consolidated Statement of Operation for the six month periods ended
March 31, 1996 and 1995 (unaudited)..........................................................................F-45
Consolidated Statements of Changes in Stockholders' Equity for the six month
period ended March 31, 1996 and the year ended September 30, 1995.............................................F-46
Consolidated Statements of Cash Flows for the six month periods ended
March 31, 1996 and 1995 (unaudited)..........................................................................F-47
Notes to Consolidated Financial Statements for the six month periods ended
March 31, 1996 and 1995.......................................................................................F-48
Independent Auditors' Report..................................................................................F-51
Consolidated Statements of Financial Condition as of
September 30, 1995 and 1994...................................................................................F-52
Consolidated Statements of Operations for the years
ended September 30, 1995, 1994 and 1993.......................................................................F-53
Consolidated Statements of Changes in Stockholders' Equity for
the years ended September 30, 1995, 1994 and 1993.............................................................F-54
Consolidated Statements of Cash Flows for
the years ended September 30, 1995, 1994 and 1993.............................................................F-55
Notes to Consolidated Financial Statements....................................................................F-56
</TABLE>
F-43
<PAGE> 167
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
--------- -------------
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 2,712 $ 2,049
Certificates of deposit in other financial institutions 197 197
Investment securities - held to maturity 5,768 13,008
Investment securities - available for sale 5,207 1,487
Mortgage-backed securities - held to maturity 7,242 7,652
Loans receivable - net 62,536 61,641
Real estate acquired in settlement of loans - net 186 46
Federal Home Loan Bank Stock 662 640
Accrued interest receivable 676 651
Office properties and equipment - net 1,369 1,414
Other assets 305 103
-------- --------
Total assets $ 86,860 $ 88,888
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $ 60,646 $ 59,915
Advances from Federal Home Loan Bank 2,003 5,017
Advance payments by borrowers for taxes and insurance 60 88
Accrued income taxes 10 --
Deferred income taxes 47 52
Accrued interest on deposits 63 73
Accounts payable and accrued expenses 378 243
Other liabilities 22 16
-------- --------
Total liabilities 63,229 65,404
-------- --------
Capital stock 15 14
Paid in capital 14,347 13,539
Unearned employee stock ownership plan shares (938) (1,016)
Unearned recognition and retention plan shares (709) --
Retained earnings, substantially restricted 10,951 10,963
Minimum pension liability adjustment (7) --
Net unrealized gain (loss) on available for sale securities (28) (16)
-------- --------
Total stockholders' equity 23,631 23,484
-------- --------
Total liabilities and stockholders' equity $ 86,860 $ 88,888
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
F-44
<PAGE> 168
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION
<TABLE>
<CAPTION>
Six months ended March 31,
----------------------------
1996 1995
---------- ----------
(Unaudited) (Unaudited)
(In thousands except per share data)
<S> <C> <C>
INTEREST INCOME:
Loans $ 2,453 $ 2,173
Mortgage backed securities 267 287
Investment securities 375 150
Other interest earning assets 99 53
---------- ----------
Total interest income 3,194 2,663
---------- ----------
INTEREST EXPENSE:
Interest on deposits 1,548 1,367
Interest on FHLB advances 113 162
---------- ----------
Total interest expense 1,661 1,529
---------- ----------
NET INTEREST INCOME 1,533 1,134
Provision for loss on loans 20 7
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOSS ON LOANS 1,513 1,127
---------- ----------
NONINTEREST INCOME:
Service charge 14 10
Gain (loss) on sale of securities 7 --
Insurance commissions 6 6
Late charges and other fees on loans 21 15
Other 1 3
---------- ----------
Total noninterest income 49 34
---------- ----------
NONINTEREST EXPENSE:
Compensation and benefits 503 389
Occupancy and equipment 78 77
Deposit insurance premiums 82 81
Loss (gain) on foreclosed real estate 5 (12)
Other general and administrative expenses 303 206
---------- ----------
Total noninterest expenses 971 741
---------- ----------
INCOME BEFORE INCOME TAXES 591 420
INCOME TAX EXPENSE 181 142
---------- ----------
NET INCOME $ 410 $ 278
========== ==========
EARNINGS PER SHARE $ .31 $ --(1)
========== ==========
WEIGHTED AVERAGE SHARES 1,313,868 --(1)
========= ========== ==
</TABLE>
(1) Not meaningful due to fact that shares were not issued until April 7, 1995.
See notes to unaudited consolidated financial statments.
F-45
<PAGE> 169
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED
SEPTEMBER 30, 1995 (AUDITED) AND THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
MINIMUM
PENSION
PAID-IN ADJUSTMENT
CAPITAL STOCK CAPITAL RETAINED EARNINGS LIABILITY
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 $ -- $ -- $ 10,247 $ --
Net income for the year ended
September 30, 1995 -- -- 716 --
Common stock issued in conversion,
net of cost 14 13,501 -- --
Contribution for unearned ESOP
shares -- -- -- --
ESOP shares earned -- 38 -- --
Net change in unrealized gain (loss) -- -- -- --
on securities available for sale
BALANCE AT SEPTEMBER 30, 1995 14 13,539 10,963 --
Net income for the six months ended
March 31, 1996 -- -- 410 --
Dividends paid -- -- (423) --
ESOP shares earned -- 35 -- --
RRP shares issued 1 773 -- --
RRP shares earned -- -- -- --
Effect of recording minimum
pension liability for directors
retirement plan in excess
of unrecognized prior service cost -- -- -- (7)
Net change in unrealized gain (loss)
on securities available for sale -- -- -- --
---- ------- -------- ----
BALANCE AT MARCH 31, 1996 $ 15 $14,347 $ 10,950 $ (7)
==== ======= ======== ====
<CAPTION>
UNREALIZED LOSS
ON SECURITIES COMMON STOCK COMMON STOCK
AVAILABLE ACQUIRED BY ACQUIRED
FOR SALE ESOP BY RRP TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 $(41) $ -- $ -- $10,206
Net income for the year ended
September 30, 1995 -- -- -- 716
Common stock issued in conversion,
net of cost -- -- -- 13,515
Contribution for unearned ESOP
shares -- (1,127) -- (1,127)
ESOP shares earned -- 111 -- 149
Net change in unrealized gain (loss) 25 -- -- 25
on securities available for sale
BALANCE AT SEPTEMBER 30, 1995 (16) (1,016) -- 23,484
Net income for the six months ended
March 31, 1996 -- -- -- 410
Dividends paid -- -- -- (423)
ESOP shares earned -- 79 -- 114
RRP shares issued -- --
RRP shares earned -- -- 65 65
Effect of recording minimum
pension liability for directors
retirement plan in excess
of unrecognized prior service cost -- -- -- (7)
Net change in unrealized gain (loss)
on securities available for sale (12) -- -- (12)
---- ------- ----- -------
BALANCE AT MARCH 31, 1996 $(28) $ (937) $(709) $23,631
==== ======= ===== =======
</TABLE>
See notes to unaudited consolidated financial statements.
F-46
<PAGE> 170
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended March 31,
--------------------------
1996 1995
-------- --------
(Unaudited) (Unaudited)
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 410 $ 278
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loss on loans and other real estate 20 7
Provision for depreciation and amortization 45 45
Amortization (accretion) of investment and mortgage related securities
premiums (discounts), net (8) (13)
Stock dividends received (23) (20)
Loss (gain) on sale of foreclosed real estate 5 (12)
Gain on sale of securities (51) --
Loss on sale of securities 44 --
ESOP and RRP shares earned 171 --
Decrease (increase) in:
Interest receivable (25) (18)
Prepaid expenses and other assets (202) 710
Increase (decrease) in:
Accounts payable and accrued expenses 136 28
Accrued interest payable (10) --
Accrued income taxes 10 18
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 517 1,028
-------- --------
INVESTING ACTIVITIES
Investment securities:
Held to maturity or for investment:
Proceeds from maturing investment securities 1,750 --
Available for sale:
Proceeds from sale of investment securities 1,786 --
Purchased (19) (15)
Mortgage-backed and related securities:
Principal payments on mortgage-backed securities 415 325
Loan:
Originations and principal payment, net (1,141) (1,631)
Proceeds from sale of foreclosed real estate 105 65
Purchased of investment property -- (52)
Improvements to real estate owned (16) --
Purchase of office properties and equipment -- (11)
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 2,880 (1,319)
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, now accounts, passbook
savings accounts and certificates of deposit 730 (2,199)
Proceeds from FHLB advances -- 1,250
Federal Home Loan Bank - principal payments on advances (3,013) (13)
Increase (decrease) in advance payments from borrowers for taxes and
insurance (28) (6)
Dividends paid (423) --
Deposits received for stock subscriptions -- 13,487
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,734) 2,519
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 663 12,228
Cash and cash equivalents at beginning of period 2,049 1,295
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,712 $ 13,523
======== ========
Cash paid during the period for:
Interest on deposits and advances $ 1,671 $ 1,533
Income taxes $ 156 $ 124
Non-cash investing activities:
Real estate acquired in settlement of loans $ 229 $ --
Unrealized gain (loss) on securities available for sale $ (12) $ 2
</TABLE>
See notes to unaudited consolidated financial statements.
F-47
<PAGE> 171
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended March 31,
1996 and 1995 (Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly they do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
In the opinion of management the unaudited consolidated financial
statements of First Ashland Financial Corporation and its subsidiary,
included herein reflect all adjustments (consisting only of normal
recurring adjustments), necessary to present fairly the consolidated
financial condition of First Ashland Financial Corporation as of March
31, 1996, and the consolidated results of operations for all interim
periods presented.
The consolidated results of operations for the six months ended March
31, 1996, are not necessarily indicative of the results which may be
expected for the entire fiscal year ending September 30, 1996.
2. REGULATORY CAPITAL REQUIREMENT
Pursuant to Financial Institution Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), as implemented by rules promulgated by the Office
of Thrift Supervision, savings institutions must meet three separate
minimum capital-to-asset requirements. The following table summarizes,
as of March 31, 1996, the capital requirements of First Federal Bank
for Savings (the "Bank") and its actual capital ratio's. As of March
31, 1996, the Bank exceeded all current regulatory capital standards.
<TABLE>
<CAPTION>
Regulatory Capital Requirement Bank Only - Actual Capital
-------------------------------- --------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Tangible capital $1,220 1.50% $16,408 20.15%
Core capital 2,441 3.00 16,408 20.15
Risk-based capital 3,234 8.00 16,517 40.85
</TABLE>
3. CHANGE IN ACCOUNTING PRINCIPLE
On October 1, 1994, the Bank adopted SFAS No. 115, "Accounting For
Certain Investments in Debt and Equity Securities". The Bank classified
all securities, except marketable equity securities, as
"held-to-maturity" and as a result, there was no initial effect.
Management deems it prudent to review each security purchased on a case
by case basis and classifies each security based on management's intent
to hold the security to maturity or available for sale to allow for
greater flexibility to manage future interest rate risk and liquidity.
In accordance with the revised provisions of SFAS No. 115 which were in
effect for part of the six month period ended March 31, 1996, the
Company and Bank reclassified certain investment securities to be held
to maturity to the
F-48
<PAGE> 172
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
available for sale category. The effect of this reclassification
resulted in a net unrealized gain on available for sale securities
totaling $83,205 net of deferred income taxes of $42,863. For the six
month period ended March 31, 1996, net unrealized losses on available
for sale securities totaled $11,543 net of deferred income taxes of
$4,822.
Effective October 1, 1995, the Bank adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." Under SFAS No. 114, loans individually
and specifically evaluated for impairment, uncollateralized as well as
collateralized, except loans that are measured at fair value or at the
lower of cost or fair value, are measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate or, at the loan's observable market price or fair value of the
collateral. The Bank considers a loan to be impaired when, based on
current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of
the loan agreement on a timely basis. Groups of similar small balance
loans, such as residential and consumer loans, are excluded from the
provisions of SFAS No. 114 and 118. The adoption of SFAS No. 114 and
118 did not have any material effect on the Bank's financial position
or results of operations.
4. HOLDING COMPANY
On April 7, 1995, First Federal Savings and Loan Association of Ashland
converted from a federal mutual savings and loan association to a
federal stock savings bank with a concurrent name change to First
Federal Bank For Savings. First Ashland Financial Corporation (the
"Holding Company") acquired all of the outstanding stock of the Bank.
At that date, 1,408,750 shares of the Holding Company stock were issued
at a price of $10 per share of which 112,700 shares were issued to an
Employee Stock Ownership Plan. The net proceeds from the offering after
deducting related conversion costs were approximately $12,387,000.
5. BENEFIT PLANS
In conjunction with the Bank's conversion, the company formed an ESOP
which covers substantially all employees with more than one year of
employment and who have attained the age of 21. The ESOP borrowed
$1,127,000 from the company and purchased 112,700 common shares, equal
to 8% of the total number of shares issued in the conversion. The Bank
will make scheduled discretionary contributions to the ESOP sufficient
to service the debt. In accordance with generally accepted accounting
principles, the unpaid balance of the ESOP loan on the Bank's books and
the related receivable on the company's books has been eliminated in
the consolidated statements statement of financial condition. The cost
of unearned shares, which is comparable to unearned compensation, is
reported as a reduction of stockholders equity. Likewise the
calculation of earnings per share (EPS) for the six months ended March
31, 1996, was made using the weighted average shares outstanding of
1,313,868, after the elimination of unearned ESOP shares. As of March
31, 1996 the Bank considered 7,798 shares committed to be released and
93,764 as unearned ESOP shares.
Total ESOP expense was $106,756 for the six month period ended March
31, 1996, and $0.00 for the same period ended March 31, 1995, under the
shares allocated method of calculating ESOP expense.
F-49
<PAGE> 173
FIRST ASHLAND FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
Subsequent to the conversion, the Board of Directors approved a
Stock Option Plan and a Recognition and Retention Plan (RRP). The plans
were approved by the Company's stockholders on October 25, 1995. Under
the Stock Option Plan, stock options and stock appreciation rights
covering shares representing an aggregate of up to 10% of the common
stock sold in the conversion may be granted to directors, officers and
employees of the Company or Bank. Restricted stock awards covering up
to 4% of the common stock sold in the conversion may be awarded to the
Company's or Bank's directors, directors emeritus, advisory directors,
executive officers or employees under the RRP. On March 22, 1996, the
Company issued 54,289 shares of common stock from authorized but
unissued shares to fund the RRP. The market value of the Company's
common stock on October 25, 1995, the RRP approval date, was $14.25 per
share and was the per share amount used to record the total unearned
RRP shares of $773,618. The market value of the Company's common stock
on March 22, 1996, was $16.00 per share. The unearned RRP shares
represents deferred compensation and is being amortized over the
vesting period of five years. Compensation expense charged to
operations applicable to the RRP was $64,468 for the six months ended
March 31, 1996.
On October 25, 1995, shareholders approved the implementation of the
Company's Stock Option and Incentive Plan. Pursuant to such plan,
129,598 options were granted to directors, advisory directors and
officers at a purchase price of $14.25. These options will vest over a
five-year period, with the first installment vesting on October 25,
1996.
F-50
<PAGE> 174
SMITH, GOOLSBY
ARTIS & REAMS, P.S.C.
R. MILTON GOOSLBY, C.P.A.
JOHN W. ARTIS, C.P.A.
C. ALAN REAMS, C.P.A.
LARRY J. WITHERS, C.P.A.
STEPHEN W. KANOUSE, C.P.A.
DELMAR H. FRALEY, C.P.A.
RODNEY H. ROBINETTE, C.P.A.
-------
G. DALE SWENTZEL, C.P.A.
CERTIFIED PUBLIC ACCOUNTANTS STUART T. BLEVINS, C.P.A.
P.O. BOX 551 1330 CARTER AVE. DAVID K. WHALEY, C.P.A.
ASHLAND, KENTUCKY 41105-0551 SHARON K. KRETZER, C.P.A.
(606) 329-1171 FAX (616) 325-0590 THERESA C. LYONS, C.P.A.
Board of Directors
First Ashland Financial Corporation and Subsidiary
Ashland, Kentucky
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated statements of financial condition
of First Ashland Financial Corporation and subsidiary as of September 30, 1995
and 1994, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Ashland
Financial Corporation and subsidiary as of September 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
As discussed in notes to the consolidated financial statements, the Bank changed
its method of accounting for income taxes effective October 1, 1993, and debt
securities October 1, 1994.
Smith, Goolsby, Artis & Reams, P.S.C.
Ashland, Kentucky
November 8, 1995
F-51
<PAGE> 175
FIRST ASHLAND FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- ------ ---- ----
<S> <C> <C>
Cash (including interest bearing deposits of $1,410,226
in 1995 and $981,111 in 1994) $2,048,743 $1,295,106
Certificates of deposits in other financial institutions 197,000 396,000
Marketable equity securities, at market, cost $1,469,122 -- 1,427,224
Investment securities available for sale at estimated
fair value, cost $1,503,226 1,486,638 --
Investment securities, held to maturity or for investment,
estimated fair value $13,061,205 in 1995 and
$3,598,119 in 1994 13,008,050 3,621,613
Mortgage-backed and related securities, held to maturity or
for investment, estimated fair value $7,718,870 in 1995
and $7,990,047 in 1994 7,652,207 8,247,418
Loans receivable, net of allowance for loan losses of $87,895
in 1995 and $137,882 in 1994 61,641,321 56,587,270
Foreclosed real estate 45,916 52,575
Federal Home Loan Bank stock 639,700 599,000
Accrued interest receivable 651,323 393,366
Office properties and equipment, at cost less accumulated
depreciation of $910,331 (1995) and $820,499 (1994) 1,414,382 1,489,845
Other assets 102,492 1,025,899
---------- ----------
TOTAL ASSETS $88,887,772 $75,135,316
========== ==========
LIABILITIES
Deposits $59,915,117 $59,807,835
Advances from Federal Home Loan Bank 5,016,667 4,793,333
Advance payments by borrowers for taxes and insurance 88,252 52,293
Deferred income taxes 51,872 16,260
Accrued interest on deposits and advances 72,854 59,419
Accounts payable and accrued expenses 242,526 193,509
Other liabilities 16,327 7,033
----------- -------------
TOTAL LIABILITIES 65,403,615 64,929,682
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value Authorized and unissued -
100,000 shares -- --
Common stock $.01 par value Authorized - 2,000,000
shares; issued and outstanding - 1,408,750 shares 14,088 --
Paid-in capital 13,539,134
Retained earnings - substantially restricted 10,963,143 10,247,532
Unearned ESOP shares (1,015,620)
Net unrealized loss on securities available for sale ( 16,588) ( 41,898)
---------- ------------
TOTAL STOCKHOLDERS' EQUITY 23,484,157 10,205,634
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,887,772 $75,135,316
========== ==========
</TABLE>
NOTE: The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-52
<PAGE> 176
FIRST ASHLAND FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
INTEREST INCOME
<S> <C> <C> <C>
Loans $4,463,803 $4,217,395 $4,272,126
Mortgage-backed securities 568,769 634,335 725,431
Investment securities 628,297 423,629 336,472
Other interest earning assets 140,954 56,424 90,317
---------- ------------ ------------
TOTAL INTEREST INCOME 5,801,823 5,331,783 5,424,346
--------------------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 2,915,933 2,572,590 2,795,084
Interest on FHLB advances 305,368 155,263 43,803
---------- ---------- ------------
TOTAL INTEREST EXPENSE 3,221,301 2,727,853 2,838,887
---------------------- ---------- --------- ---------
NET INTEREST INCOME 2,580,522 2,603,930 2,585,459
-------------------
Provision for loss on loans 0 40,594 22,351
---------- ------------ -----------
Net interest income after
provision for loss on loans 2,580,522 2,563,336 2,563,108
--------- --------- ---------
NONINTEREST INCOME
Service charge 23,600 22,935 14,977
Loss on sale of securities 0 (175,421) (3,988)
Gain on sale of other assets 0 0 7,294
Insurance commissions 15,346 12,951 17,272
Late charges and other fees on loans 30,543 25,583 24,911
Other 16,550 7,104 9,496
---------- ----------- ------------
TOTAL NONINTEREST INCOME 86,039 (106,848) 69,962
------------------------ ---------- ------- -----------
NONINTEREST EXPENSE
Compensation and benefits 900,033 772,404 567,665
Occupancy and equipment expense 172,791 174,256 143,859
Deposit insurance premiums 141,611 138,721 123,355
Loss (gain) on foreclosed real estate (14,092) 5,439 (14,818)
Other general and administrative expenses 437,414 496,019 370,642
---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 1,637,757 1,586,839 1,190,703
-------------------------- ---------- --------- ---------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,028,804 869,649 1,442,367
- --------------------
INCOME TAX EXPENSE 313,193 299,215 463,491
- ------------------ ---------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE 715,611 570,434 978,876
---------
CUMULATIVE EFFECT OF CHANGE IN
METHOD OF ACCOUNTING FOR
INCOME TAXES 0 14,905 0
------------ ---------- --------- -----------
NET INCOME $ 715,611 $ 585,339 $ 978,876
========== =========== ========== ==========
</TABLE>
NOTE: The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-53
<PAGE> 177
FIRST ASHLAND FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED LOSS
UNEARNED ON SECURITIES
COMMON STOCK PAID-IN RETAINED ESOP AVAILABLE
SHARES AMOUNT CAPITAL EARNINGS SHARES FOR SALE TOTAL
------ ------ ------- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1992 $ $ $ 8,683,317 $ ($94,697) $ 8,588,620
Net income for the year
ended September 30, 1993 978,876 978,876
Changes in net unrealized
loss in certain marketable
equity securities 21,925 21,925
--------- ------ ---------- ---------- ---------- ------- ----------
BALANCES, SEPTEMBER 30, 1993 9,662,193 ( 72,772) 9,589,421
Net income for the year
ended September 30, 1994 585,339 585,339
Change in net unrealized
loss on certain marketable
equity securities 30,874 30,874
--------- ------ ---------- ---------- ---------- ------- ----------
BALANCES, SEPTEMBER 30, 1994 10,247,532 ( 41,898) 10,205,634
Net income for the year
ended September 30, 1995 715,611 715,611
Common stock issued in
conversion, net of costs 1,408,750 14,088 13,500,850 13,514,938
Contribution for unearned
ESOP shares ( 1,127,000) (1,127,000)
ESOP shares earned 38,284 111,380 149,664
Net change in unrealized
loss on available for
sale securities 25,310 25,310
--------- ------ ---------- ---------- ---------- ------- ----------
BALANCES, SEPTEMBER 30, 1995 1,408,750 $14,088 $13,539,134 $10,963,143 ($1,015,620) ($16,588) $23,484,157
========= ====== ========== ========== ========= ======= ==========
</TABLE>
NOTE: The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-54
<PAGE> 178
FIRST ASHLAND FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $715,611 $585,339 $978,876
Adjustment to reconcile net income
to net cash provided by operating activities:
Cumulative effect adjustment -- (14,905) --
Provision for loss on loans -- 40,594 22,351
Provision for depreciation 89,833 86,957 84,681
Amortization (accretion) of investment
securities premiums (discounts), net (13,646) 3,351 4,305
Deferred income taxes 35,612 85,228 (8,920)
Stock dividends received (40,700) (30,100) (23,700)
Gain on sale of foreclosed real estate (28,008) (2) (21,037)
Loss on sale of securities -- 175,421 3,988
Loss (gain) on sale of other assets -- 11,380 (7,294)
ESOP shares earned 149,664
Decrease (increase) in:
Accrued interest receivable (257,957) (23,575) (178,539)
Other assets 923,407 (930,170) 19,841
Increase (decrease) in:
Accounts payable and accrued expenses 49,017 102,360 (24,582)
Accrued interest payable 13,435
Accrued income taxes -- (46,111) 19,563
Other liabilities 9,294 (2,501) (13,848)
---------- ---------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,645,562 43,266 855,685
---------- --------- -------
INVESTING ACTIVITIES
Investment securities:
Held to maturity or for investment:
Proceeds from sale -- -- 298,114
Proceeds from calls or maturities 1,250,000 550,000 --
Purchased (10,622,791) (311,813) (1,511,612)
Available for sale:
Proceeds from sale -- 756,771
Purchased (34,104) (23,561) (523,030)
Mortgage-backed and related securities:
Held to maturity or for investments:
Principal payments 595,211 3,744,384 3,404,936
Purchased -- ( 1,000,000) (5,475,156)
Loans:
Originations and principal payments, net (5,348,338) (4,741,530) (6,247,079)
Purchased -- (500,000)
Proceeds from sale of participating interest -- -- 102,715
Certificates of deposit with other financial
institutions
Proceeds from maturities 199,000 98,000 384,000
Purchased -- ( 296,000) --
Proceeds from sale of foreclosed real estate 328,954 86,401 111,788
Proceeds from sale of other assets -- 28,290 107,294
Purchases of office properties and equipment (14,370) ( 127,997) (252,599)
------ ---------- --------
NET CASH USED BY INVESTING ACTIVITIES (13,646,438) (1,737,055) (9,600,629)
---------- ---------- ---------
FINANCING ACTIVITIES
Net change in NOW, savings and certificates of deposit 107,282 (1,749,040) 6,592,064
Proceeds from FHLB advances 3,500,000 2,500,000 2,000,000
Repayment of FHLB advances (3,276,666) (26,667) (26,667)
Net change in advances from borrowers for taxes
and insurance 35,959 24,835 25,971
Sale of common stock, net of costs 12,387,938
----------
-- --
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,754,513 749,128 8,591,368
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 753,637 (944,661) (153,576)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,295,106 2,239,767 2,393,343
----------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,048,743 $1,295,106 $2,239,767
========== ========= =========
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
Cash paid during the year for:
Interest paid on deposits and advances $ 1,117,000 $1,088,000 $1,133,000
Income taxes $ 249,929 $ 386,111 $ 452,848
Real estate acquired in foreclosure of loans $ 294,287 $ 138,974 $ 87,250
Common stock issued to ESOP leveraged with an employer loan $ 1,127,000 -- --
</TABLE>
NOTE: The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-55
<PAGE> 179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant
accounting policies which First Ashland Financial Corporation
("Company") and its wholly owned subsidiary First Federal Bank
for Savings ("Bank") follows in preparing and presenting its
consolidated financial statements.
A. Basis of Presentation
The consolidated financial statements include the accounts
of the Company, the Bank and the Bank's wholly owned
inactive subsidiary, First S&L Corporation. All
significant intercompany balances and transactions have
been eliminated in consolidation.
B. Organization
The Bank is a federally chartered stock savings Bank and a
member of the Federal Home Loan Bank System. As a member
of this system, the Bank is required to maintain an
investment in capital stock of the Federal Home Loan Bank
of Cincinnati in an amount equal to at least the greater
of 1.0% of its outstanding loans and mortgage-backed
securities or 0.03% of total assets as of December 31 of
each year.
Savings deposits of the Bank are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000. The
Bank pays a premium to the FDIC for the insurance of such
savings deposits.
C. Investment Securities and Mortgage-Backed and Related
Securities Effective October 1, 1994, management adopted
the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No.
115, investments in securities and mortgage-backed and
related securities are classified in three categories and
accounted for as follows:
HELD TO MATURITY. Debt securities for which the Bank
has the positive intent and ability to hold to
maturity are reported at cost, adjusted for
amortization of premiums and accretion of discounts
which are recognized in interest income over the
period to maturity, using the level yield method.
TRADING SECURITIES. Debt securities and equity
securities that have readily determinable fair values
that are bought and held principally for the purpose
of selling them in the near term are classified as
trading securities. The Bank does not hold any
securities which would be classified as trading
securities pursuant to SFAS No. 115.
AVAILABLE FOR SALE. Securities available for sale
consist of debt securities and equity securities that
have readily determinable fair values not classified
as securities to be held to maturity or trading
securities. Unrealized holding gains and losses, net
of tax, on securities available for sale are reported
as a net amount in a separate component of equity
until realized. Gains and losses on the sale of
securities available for sale are determined using the
specific identification method.
The initial adoption of SFAS No. 115 at October 1, 1994
had no effect on the Bank's financial position or results
of operations.
Prior to the adoption of SFAS No. 115, investment
securities were carried at cost, adjusted for amortization
of premiums and discounts, and marketable equity
securities were carried at the lower of aggregate cost or
market. Realized gains and losses on sales were included
in income. Unrealized losses on marketable equity
securities were included as a separate component of equity
until realized. Gains and losses on sales were determined
using the specific identification method.
Substantially all mortgage derivatives owned by the Bank
are classified as "low-risk" under regulatory guidelines
and are subject to normal effects of changes in interest
rates. At September 30, 1995, the Bank held "high-risk"
mortgage derivatives with a carrying value of $91,242 and
a market value of $114,660. The market value and repayment
period are subject to significant volatility due to
changes in interest rates. The Bank does not purchase
mortgage derivatives at a premium in order to minimize
prepayment risk, and generally purchases mortgage
derivatives issued by government agencies to minimize
credit risk. At September 30, 1995, the Bank owned
structured notes with a carrying value of $1,000,000 and
an approximate market value of $830,000. Such notes are
subject to significant price volatility in certain
circumstances, such as an increase in short term interest
rates. Management has the intent and ability to hold such
investments to maturity.
In November, 1994, the OTS adopted a regulation which
affects the computation of regulatory capital. Unrealized
gains or losses on debt and equity securities classified
as "available for sale" under SFAS No. 115 are not
included in the Bank's regulatory capital.
Federal Home Loan Bank stock is carried at cost which
represents redemption value. The marketability of the
Federal Home Loan Bank stock is limited to redemption by
the Federal Home Loan Bank or the sale to other financial
institutions.
Regulations require the Bank to maintain an amount of cash
and U.S. government and other approved securities equal to
a prescribed percentage of deposit accounts (net of loans
on deposits) plus short-term borrowings. At September 30,
1995 and 1994, the Bank met these requirements.
F-56
<PAGE> 180
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
D. Depreciation
Depreciation of office property and equipment is
calculated by the straightline method over the estimated
useful lives of such property. The gain or loss on the
sale of office property and equipment is recorded in the
year of disposition. The estimated useful lives are 20 to
40 years for buildings and improvements and 5 to 10 years
for equipment.
E. Interest Income
Interest on loans receivable is recorded in the period
earned. Interest on delinquent loans is accrued to the
extent considered collectible. Interest on non-accrual
loans is recognized to the extent cash is received.
F. Loan Fees
Loan fees are accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 91. SFAS
No. 91 requires loan origination fees and certain related
direct loan origination costs be offset and the resulting
net amount be deferred and amortized over the contractual
life of the related loans as an adjustment to the yield of
such loans, using the level yield method.
G. Loans Receivable, Net
Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, net deferred loan
origination fees, unearned discounts, the undisbursed
portion of loans in process and dealer reserves.
The Bank has established an allowance for loan losses for
the purpose of absorbing losses associated with the Bank's
loan portfolio. All actual loan losses are charged to the
related allowance and all recoveries are credited to it.
Additions to the allowance for loan losses are provided by
charges to operations based on various factors, including
the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the
allowance for loan losses to outstanding loans, historical
loss experience, delinquency trends and prevailing and
projected economic conditions. Management evaluates the
carrying value of loans periodically in order to evaluate
the adequacy of the allowance. While management uses the
best information available to make these evaluations,
future adjustments to the allowance may be necessary if
the assumptions used in making the evaluations require
material revision.
H. Income Taxes
Deferred income tax assets and liabilities are computed
for differences between the financial statement and tax
bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on
enacted tax laws, and rates applicable to the periods in
which the differences are expected to affect taxable
income.
I. Cash and Cash Equivalents
For purposes of reporting consolidated cash flows,
Management considers cash, balances with banks, federal
funds sold and interest-bearing cash deposits in other
depository institutions with maturities of three months or
less to be cash equivalents.
J. Effect of Implementing New Accounting Standards
In December 1990, the Financial Accounting Standards Board
("FASB") issued SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". This
statement is effective for annual financial statements for
fiscal years beginning after December 15, 1994. This
statement establishes standards of financial accounting
and reporting for an employer that offers postretirement
benefits other than pensions to its employees. At the
present time it is anticipated the statement will not have
a material adverse impact on the Company's consolidated
financial statements.
In December 1991, FASB issued SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments". This statement
is effective for financial statements for fiscal years
ending after December 15, 1992, except for entities with
less than $150 million in total assets, for which it is
effective for financial statements for fiscal years ending
after December 15, 1995. This statement requires
disclosures about fair value of all financial instruments,
both assets and liabilities recognized and those not
recognized in the statement of financial position. At the
present time, it is anticipated the statement will not
have a material adverse impact on the Company's
consolidated financial statements.
In May 1993, the FASB issued SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan". Certain provisions of
SFAS No. 114 were amended in October, 1994 by the issuance
of SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." SFAS No.
114 requires that loans individually and specifically
evaluated for impairment, uncollateralized as well as
collateralized, except loans that are measured at fair
value or at the lower of cost or fair value, should be
measured based on the present value of expected future
cash flows discounted at the loan's effective interest
rate or, at the loan's
F-57
<PAGE> 181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
J. Effect of Implementing New Accounting Standards
(Continued)
observable market price or fair value of the collateral if
the loan is dependent on the collateral. SFAS No. 114 and
SFAS No. 118 amended SFAS No. 5, "Accounting for
Contingencies," to clarify that a creditor should evaluate
the collectibility of both contractual interest and
contractual principal of a receivable when assessing the
need to accrue a loss. SFAS No. 114 and SFAS No. 118 also
amend SFAS No. 15, "Accounting by Debtors and Creditors
for Troubled Debt Restructurings," to require a creditor
to account for a troubled debt restructuring involving a
modification of terms with the provisions of this
statement. SFAS No. 114 and SFAS No. 118 are effective for
fiscal years beginning after December 15, 1994. The
implementation of SFAS No. 114 and SFAS No. 118 is not
expected to have a material effect on the Company's
consolidated financial position or results of operations.
In October 1994, FASB issued SFAS 119, "Disclosure about
Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS 119 requires disclosures
about derivative financial instruments, such as futures,
forward, swap and option contracts, as well as other
financial instruments with similar characteristics. It
also amends existing requirements of SFAS 105, "Disclosure
of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and SFAS 107 (described
above). SFAS 119 will not change any requirements for
recognition, measurement or classification of financial
instruments in the Consolidated Financial Statements of
the Company. SFAS 119 is effective for entities with less
than $150 million in assets for fiscal years ending after
December 15, 1995.
Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of," is effective for
fiscal years beginning after December 15, 1995. The
statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable. An impairment loss is
recognized if the sum of the expected future cash flows is
less than the carrying amount of the asset. Management
does not expect the implementation of SFAS 121 to have a
material impact on the Company's consolidated financial
position or results of operations.
In May 1995, the FASB issued Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), "Accounting for
Mortgage Servicing Rights." This statement amends
Statement of Financial Accounting Standards No. 65 ("SFAS
65"), Accounting for Certain Mortgage Banking Activities,"
to require that a mortgage banking enterprise recognize as
separate assets rights to service mortgage loans for
others, however those servicing rights are acquired.
Institutions that sell loans and retain the servicing
rights will be required to allocate the total cost of the
loans to servicing rights and loans based on their
relative fair value if that value can be estimated. SFAS
122 requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based
on the fair value of those rights. SFAS 122 is effective
for fiscal years beginning after December 15, 1995.
Management does not believe the adoption of SFAS 122 will
have a material effect on the Company's consolidated
financial position or results of operations.
In April 1995, the AICPA issued SOP 94-6, "Disclosure of
Certain Significant Risks and Uncertainties." This SOP
applies to financial statements prepared in conformity
with generally accepted accounting principles by all
nongovernmental entities. The disclosure requirements in
SOP 94-6 focus primarily on risks and uncertainties that
could significantly affect the amounts reported in the
financial statements in the near-term functioning of the
reporting entity. The risks and uncertainties discussed in
SOP 94-6 stem from the nature of the entity's operations,
from the necessary use of estimates in the preparation of
the entity's financial statements, and from significant
concentrations in certain aspects of the entity's
operations. SOP 94-6 is effective for financial statements
issued for fiscal years ending after December 15, 1995 and
is not expected to have any impact on the Company's
operations.
K. Foreclosed Real Estate
Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at the lower of
cost or fair value less estimated selling costs at the
date of foreclosure. Costs relating to improvement of
property are capitalized, whereas costs relating to
holding property are expensed.
After foreclosure valuations are periodically performed by
management, and an allowance for loss is established by a
charge to operations if the carrying value of a property
exceeds the lower of cost or fair value, less estimated
selling costs.
L. Earnings Per Share
Earnings per share will be computed based upon the average
common and common equivalent shares outstanding during the
period subsequent to the Bank's conversion to a stock
savings bank on April 7, 1995. Earnings per share for the
year ended September 30, 1995 is not meaningful.
M. Advertising Costs
Advertising costs are expensed when incurred.
F-58
<PAGE> 182
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
N. Reclassifications
Certain presentations of accounts previously reported have
been reclassified in these consolidated financial
statements. Such reclassification had no effect on net
income or retained income as previously reported.
NOTE 2: CONVERSION
The Bank converted from a federally chartered mutual savings and
loan association to a federally chartered stock savings bank on
April 7, 1995, and issued all of its common stock to the
Company. Concurrently with the conversion, the Company issued
1,408,750 shares of Company common stock par value $.01, at
$10.00 per share. Net proceeds of the Company's stock issuance,
after costs, were approximately $13,500,000.
NOTE 3: CHANGE IN ACCOUNTING PRINCIPLES
The Bank adopted Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting For Certain Investments in Debt and
Equity Securities," on October 1, 1994. The initial adoption of
SFAS No. 115 had no effect on the Company's consolidated
financial position or results of operations.
Effective October 1, 1993, Management adopted the provisions of
SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
requires a change from the deferred method previously used in
the consolidated financial statements to the asset and liability
method of computing deferred income taxes. Under the asset and
liability method, deferred income taxes are recognized for the
tax consequences of temporary differences by applying statutory
tax rates to differences between the financial statements
carrying amounts and the tax bases of existing assets and
liabilities. The cumulative effect of adopting SFAS No. 109 was
to increase net income for the year ended September 30, 1994 by
$14,905 and is separately disclosed in the consolidated
statements of income. Financial statements for prior periods
have not been restated.
NOTE 4: INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1995:
TO BE HELD TO MATURITY:
Debt Securities:
U.S. Treasury
securities $ 4,202,970 $ 58,410 $ -- $ 4,261,380
Obligations of U.S.
Government Agencies
and corporations 7,294,517 68,910 ( 170,672) 7,192,755
Obligations of state
and political
subdivisions 1,510,563 102,377 ( 5,870) 1,607,070
---------- ------- ------- ----------
$13,008,050 $229,697 ($176,542) $13,061,205
========== ======= ======= ==========
AVAILABLE FOR SALE:
Equity Securities:
Federated Short -
Intermediate
Government Trust $ 400,000 $ -- ($ 2,478) $ 397,522
Federated Intermediate
Government Trust 500,000 -- ( 10,708) 489,292
AMF adjustable rate
mortgage portfolio 603,226 -- ( 3,402) 599,824
---------- ----------- ------- ----------
$ 1,503,226 $ -- ($ 16,588) $ 1,486,638
========== ============ ======= ==========
SEPTEMBER 30, 1994:
HELD FOR INVESTMENT:
Debt Securities:
Obligations of U.S.
government agencies
and corporations $2,251,500 $ 1,057 ($ 67,813) $2,184,744
Obligations of State
and political
subdivisions 1,370,113 61,348 ( 18,086) 1,413,375
--------- ------ ------- ---------
$3,621,613 $62,405 ($ 85,899) $3,598,119
========= ====== ======= =========
</TABLE>
F-59
<PAGE> 183
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 4: INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C>
SEPTEMBER 30, 1994
HELD FOR INVESTMENT:
Equity Securities:
Federated Short-
Intermediate
Government Trust $ 400,000 $ -- ($ 5,554) $ 394,446
Federated Intermediate
Government Trust 500,000 -- ( 24,674) 475,326
AMF adjustable rate
mortgage portfolio 569,122 -- ( 11,670) 557,452
--------- ------ ------- ---------
$1,469,122 $ -- ($ 41,898) $1,427,224
========= ====== ======= =========
</TABLE>
The amortized cost and estimated fair value of debt securities at September 30,
1995, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
Due in one year or less $ 2,744,982 $ 2,749,310
Due after one year through five years 8,292,504 8,348,035
Due after five years through ten years 695,000 609,650
Due after ten years 1,275,564 1,354,210
---------- ----------
$13,008,050 $13,061,205
========== ==========
</TABLE>
Investment securities with a carrying value of approximately $4,350,000 at
September 30, 1995, were pledged to secure deposits of public funds and for
other purposes required or permitted by law.
Proceeds from the sale of investment securities held for investment and the loss
realized on the sales for 1994 and 1993 are shown below. There were no sales of
investment securities in 1995.
<TABLE>
<CAPTION>
PROCEEDS LOSS
-------- ----
<S> <C> <C> <C>
1994 - 92,177 shares, Putnam American Income Trust $756,771 $175,421
======= =======
1993 - 1,100 shares, U.S. League Financial Institution
Insurance Group, Ltd. $ 23,512 $ 3,388
======= =======
</TABLE>
Accrued interest receivable includes $268,243 and $68,930 for the years ended
September 30, 1995, and 1994, respectively, relating to investment securities.
NOTE 5: MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1995:
TO BE HELD TO MATURITY:
FHLMC $2,442,210 $ 60,654 ($ 24,644) $2,478,220
FNMA 1,414,106 7,846 ( 35,022) 1,386,930
GNMA 234,436 20,684 -- 255,120
Collateralized mortgage
obligations -
FHLMC, FNMA
and GNMA 3,539,356 48,864 ( 12,400) 3,575,820
Others 22,099 681 -- 22,780
----------- ---------- ----------- -----------
$7,652,207 $138,729 ($ 72,066) $7,718,870
========= ======= ======= =========
SEPTEMBER 30, 1994:
HELD FOR INVESTMENT:
FHLMC $2,860,054 $ 41,541 ($ 75,397) $2,826,198
FNMA 1,494,201 2,716 ( 117,798) 1,379,119
GNMA 272,146 15,590 287,736
Collateralized mortgage
obligations -
FHLMC, FNMA and GNMA 3,566,257 37,369 ( 160,950) 3,442,676
Others 54,760 ( 442) 54,318
--------- ------- ---------- ---------
$8,247,418 $ 97,216 ($354,587) $7,990,047
========= ======= ======= =========
</TABLE>
F-60
<PAGE> 184
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 5: MORTGAGE-BACKED AND RELATED SECURITIES (Continued)
Expected maturities will differ from contractual maturities because borrowers
may prepay obligations without prepayment penalties.
Accrued interest receivable includes $52,351 and $57,054 at September 30, 1995
and 1994, respectively, related to mortgage-backed securities.
The amortized cost of mortgage-backed securities includes unamortized premiums
of $32,143 and $38,213 and unearned discounts of $79,320 and $97,008 at
September 30, 1995 and 1994, respectively.
NOTE 6: LOANS RECEIVABLE, NET
The Bank's loan portfolio consists principally of long-term conventional loans
collateralized by first mortgages on single-family residences. Loans receivable,
net at September 30, 1995 and 1994, consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Real estate mortgage secured by
one-to-four family residential property $57,151,667 $53,129,110
Real estate mortgage secured
by multi-family residential property 1,187,081 992,993
Real estate mortgage secured by other properties 1,876,876 1,323,380
Consumer loans:
Loans to depositors, secured by savings 694,478 626,502
Loans secured by automobiles 315,505 345,458
Loans secured by mobile homes 189,576 225,748
Loans secured by other collateral 118,382 185,933
Unsecured consumer loans 714,930 670,101
---------- ----------
62,248,495 57,499,225
LESS:
Unearned loan origination fees 189,329 195,544
Undisbursed portion of mortgage loans 273,352 506,236
Unearned discounts on consumer loans 43,580 59,555
Dealer reserves 13,018 12,738
Allowance for loan losses 87,895 137,882
---------- ----------
$61,641,321 $56,587,270
========== ==========
</TABLE>
Loans serviced for others at September 30, 1995, 1994 and 1993 totaled $173,728,
$183,951 and $538,621, respectively.
Accrued interest receivable includes $329,068 and $265,692 at September 30, 1995
and 1994, respectively, related to loans receivable.
The following is a reconciliation of the allowance for loan losses:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $137,882 $174,125 $162,172
Provision charged to operations -- 40,594 22,351
Loans charged off ( 50,050) ( 76,837) ( 10,398)
Recoveries 63 -- --
--------- -------- ---------
Balance at end of year $ 87,895 $137,882 $174,125
--------- -------- ---------
The following is a summary of non-performing loans:
<CAPTION>
AMOUNTS
------------------------------------------------
(IN THOUSANDS)
1995 1994 1993
---- ---- ----
Loans past due 90 days or more $105 $323 $175
Nonaccrual loans 272 229 457
--- --- ---
Total non-performing loan
balances at year end $377 $552 $632
=== === ===
Non-performing loans as a
percentage of loans .61% .98% 1.23%
==- ==- ====
</TABLE>
If interest on non-accrual loans had been accrued, such income would have
approximated $21,099, $17,793 and $44,823 for the years ended September 30,
1995, 1994 and 1993, respectively. Interest income which is reflected in the
accompanying statements of operations amounted to $11,939, $4,823 and $26,334
for the years ended September 30, 1995, 1994 and 1993, respectively. The Bank is
not committed to lend additional funds on non-performing loans.
F-61
<PAGE> 185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 6: LOANS RECEIVABLE, NET (Continued)
In the normal course of business and subject to normal credit policies, the Bank
makes loans to officers, directors, their immediate family and business
interests of such persons. At September 30, 1995 and 1994, the balances of loans
to such parties were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Aggregate amount of indebtedness at beginning of year $523,525 $584,003
New loans 244,328 551,184
Repayments (293,324) (611,662)
------- -------
Aggregate amount of indebtedness at end of year $474,529 $523,525
======= =======
</TABLE>
The terms and conditions of these loans are consistent with similar loans to
unrelated parties and in management's opinion do not involve more than a normal
risk of collectibility.
NOTE 7: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30, by major
classifications are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 273,020 $ 273,020
Buildings and improvements 1,155,823 1,155,823
Furniture and equipment 863,880 849,511
Automobile 31,990 31,990
--------- ---------
TOTAL 2,324,713 2,310,344
-----
Less: Accumulated depreciation 910,331 820,499
--------- ---------
$1,414,382 $1,489,845
========== ==========
</TABLE>
Depreciation expense charged to operations for the years 1995, 1994 and 1993
totaled $89,833, $86,957 and $84,681, respectively.
NOTE 8: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments are primarily commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statement of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of these instruments. The Bank uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
<TABLE>
<CAPTION>
CONTRACT AMOUNT
---------------------
1995 1994
---- ----
<S> <C> <C>
Financial instruments the contract
amounts of which represents credit risk:
Loan Commitments:
Adjustable rate $ 901,050 $392,900
Fixed rate 209,000 13,000
Unused lines of credit - fixed interest rates 63,000 13,000
--------- -------
$1,173,050 $418,900
========= =======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since, in some instances, the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained by the Bank upon extension of credit is based on established credit
policies and primarily includes a first mortgage on residential real estate. The
Bank, in almost all instances, limits the amount they will loan on real estate
to 89% of the appraised value. They further require that borrowers have, at a
minimum, 10% personal equity in any real estate financed.
NOTE 9: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's lending activity is with customers located within Boyd and
Greenup Counties of Kentucky. These loans are secured by a first mortgage on
residential real estate on which the Bank primarily limits the amount of its
loan to 89% of appraised value. Upon default by a borrower the mortgaged
property is subject to foreclosure action by the Bank.
In addition to the regional concentration of credit risk, the Bank had deposits
with two financial institutions which exceeded the federally insured limits at
September 30, 1995, by $1,013,786 and at September 30, 1994 by $1,314,236. The
Bank does not have a policy for requiring collateral on such deposits.
F-62
<PAGE> 186
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 10: DEPOSITS
An analysis of deposits at September 30, is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
AMOUNT % AMOUNT %
------ - ------- -
<S> <C> <C> <C> <C>
Passbook 3.25% and 3.25%,
respectively $ 3,914,324 6.5 $5,452,306 9.1
NOW accounts 2.56% and
2.78%, respectively 3,574,568 6.0 2,843,166 4.8
Investment plus accounts
3.30% and 3.40%, respectively 9,333,191 15.6 12,327,168 20.6
---------- ----- ---------- -----
Savings deposits 16,822,083 28.1 20,622,640 34.5
---------- ----- ---------- -----
Certificate accounts
3.26% to 4.25% 3,526,048 5.9 11,619,189 19.4
4.26% to 5.25% 8,343,263 13.9 19,616,195 32.8
5.26% to 6.25% 12,216,285 20.4 5,727,341 9.6
6.26% to 7.25% 17,414,429 29.1 296,747 .5
7.26% to 8.25% 1,593,009 2.6 796,647 1.3
8.26% to 9.25% 0 .0 1,129,076 1.9
----------- ----- ---------- -----
Certificates of deposit 43,093,034 71.9 39,185,195 65.5
---------- ----- ----------- -----
$59,915,117 100.0% $59,807,835 100.0%
========== ===== ========== =====
</TABLE>
The weighted average interest rate on deposits at September 30, 1995 and 1994
was for savings deposits 3.12% and 3.27%, respectively, and for certificates of
deposit, 5.93% and 4.77%, respectively. The weighted average interest rate on
total deposits at September 30, 1995 and 1994 was 5.14% and 4.25%, respectively.
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $10,395,139 and $10,332,154 at
September 30, 1995 and 1994, respectively. Scheduled maturities of jumbo
certificates of deposit at September 30, 1995 were; 0-3 months, $1,355,095; 3-6
months, $1,140,102; 6-12 months, $2,226,920; after 12 months, $5,673,022.
At September 30, 1995, scheduled maturities of certificates of deposit, by
contract interest rates, are as follows:
YEARS ENDING SEPTEMBER 30
-------------------------
(In Thousands)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 TOTAL
---- ---- ---- ---- ---- -----
<C> <C> <C> <C> <C> <C> <C>
3.25% - 4.25% $ 3,513 $ 13 $ -- $ -- $ -- $ 3,526
4.26% - 5.25% 6,850 854 87 552 -- 8,343
5.26% - 6.25% 4,150 1,963 5,785 312 6 12,216
6.26% - 7.25% 6,737 8,176 1,585 756 161 17,415
7.26% - 8.25% 961 8 106 518 -- 1,593
------- ---------- ----- ----- ----- -------
$22,211 $11,014 $7,563 $2,138 $167 $43,093
====== ====== ===== ===== === ======
</TABLE>
Interest expense on deposits for the years ended September 30, 1995, 1994 and
1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Certificates of deposit $2,344,936 $1,887,817 $2,093,295
Money Market Checking 341,382 388,414 352,161
Passbook Savings 153,017 217,946 261,906
NOW 76,598 78,413 87,722
----------- ----------- -----------
$2,915,933 $2,572,590 $2,795,084
========= ========= =========
</TABLE>
NOTE 11: ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Cincinnati at September 30,
consisted of a fixed rate loan requiring quarterly principal reductions and
adjustable rate loans with the principal balance due at maturity. These loans
are summarized as follows:
F-63
<PAGE> 187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 11: ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
<TABLE>
<CAPTION>
09/30/95 INTEREST
DATE OF MATURITY INTEREST RATE AMOUNT
- ------- -------- -------- ---- ------
ADVANCE DATE RATE INDEX 1995 1994
- ------- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
08/11/94 11/17/95 5.8750% Libor $ 500,000 $ 500,000
04/30/93 04/30/96 5.7375% Libor 500,000 500,000
07/01/93 07/01/96 5.8500% Libor 500,000 500,000
04/19/95 04/19/00 5.8625% Libor 1,000,000 --
09/19/95 09/19/00 5.8125% Libor 500,000 --
09/21/95 09/21/00 5.8125% Libor 750,000 --
08/03/90 08/01/05 6.7083% Fixed 266,667 293,333
11/18/93 11/18/13 5.8750% Libor 1,000,000 1,000,000
04/19/94 04/19/95 -- 1,000,000
04/30/93 04/30/03 -- 500,000
07/01/93 07/01/03 -- 500,000
--------- ---------
$5,016,667 $4,793,333
</TABLE>
Interest on advances is payable monthly, computed on the unpaid balance. The
interest rate on libor indexed loans is adjusted monthly or quarterly. Required
principal reduction on the fixed rate loan totals $6,667 per quarter.
Pursuant to collateral agreements with the Federal Home Loan Bank, advances are
secured by the Bank's Federal Home Loan Bank stock and a blanket pledge of first
mortgage loans equal to 150 percent of the current outstanding advances.
NOTE 12: RETAINED EARNINGS
In connection with the insurance of savings accounts, $2,221,363 of the Bank's
retained income at September 30, 1995 is restricted and may be used only for the
absorption of losses. The restriction does not represent a valuation allowance
and was not created by charges against earnings.
The Office of Thrift Supervision ("OTS") imposes regulations which provide that
Thrifts must maintain certain levels of capital. The regulations include a
leverage limit, a tangible capital requirement and a risk-based capital
requirement. Specifically, the regulations provide that Thrifts must maintain
tangible capital equal to 1.5% of adjusted total assets, core capital equal to
3% of adjusted total assets and a combination of core and supplementary capital
equal to 8% of risk weighted assets.
In November, 1994, the OTS adopted a regulation which affects the computation of
regulatory capital. Unrealized gains or losses on debt securities classified as
"available for sale" under SFAS No. 115, and unrealized gains on equity
securities, are not included in the Bank's regulatory capital.
The following is a reconciliation of the Bank's generally accepted accounting
principles ("GAAP") capital to regulatory capital at September 30, 1995:
<TABLE>
<CAPTION>
REGULATORY
---------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
GAAP capital $16,661 $16,661 $16,661
Regulatory adjustments:
Net unrealized loss on available for
sale securities -- -- 17
General loan valuation allowance -- -- 88
-------- --------- ---------
Regulatory capital 16,661 16,661 16,766
Required amounts 1,245 2,490 3,123
------ ------ ------
Regulatory capital excess $15,416 $14,171 $13,643
====== ====== ======
Regulatory capital as a percentage of assets,
as defined 20.1% 20.1% 42.9%
Required percentage of total assets, as defined 1.5% 3.0% 8.0%
---- ---- ----
Regulatory capital as a percentage in excess of
requirement 18.6% 17.1% 34.9%
==== ==== ====
</TABLE>
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders. The Office of Thrift Supervision ("OTS")
regulations provide that a savings institution which meets fully phased-in
capital requirements and is subject only to "normal supervision" may pay out, as
a dividend, 100 percent of net income to date over the calendar year and 50
percent of surplus capital existing at the beginning of the calendar year
without supervisory approval, but with 30 days prior notice to the OTS. Any
additional amount of capital distributions would require prior regulatory
approval. A savings institution failing to meet current capital standards may
only pay dividends with supervisory approval.
F-64
<PAGE> 188
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 12: RETAINED EARNINGS (Continued)
At the time of conversion, a liquidation account was established in an amount
equal to the Bank's net worth as reflected in the latest statement of condition
used in its final conversion offering circular. The liquidation account is
maintained for the benefit of eligible deposit account holders who maintain
their deposit account in the Bank after conversion. In the event of a complete
liquidation (and only in such event), each eligible deposit account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current adjusted subaccount balance for deposit
accounts then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of dividends, the
existence of the liquidation account will not restrict the use or application of
net worth. The initial balance of the liquidation account was $10,344,000.
NOTE 13: INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Currently payable - Federal $276,346 $213,987 $472,411
- State 1,235
Deferred - Federal 36,468 85,228 ( 8,920)
- State ( 856)
---------- ------- -------
$313,193 $299,215 $463,491
======== ======== ========
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
income and expenses for tax and financial statement purposes. The source of
these temporary differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
FHLB stock dividends $13,838 $10,234 $ 8,058
Capital loss - other securities -- 50,914 --
Loan loss allowance 16,954 10,903 ( 7,600)
Depreciation 12,352 20,833 8,934
Deferred loan fees 2,113 ( 4,460) ( 17,002)
Deferred compensation ( 6,301) ( 4,760) ( 1,700)
Accrued officers compensation ( 10,853) -- --
Accretion 7,625 -- --
Other ( 116) 1,564 390
--------- ------- -------
$35,612 $85,228 ($ 8,920)
======= ======= ========
</TABLE>
The following tabulation reconciles the federal statutory tax rate to the
effective rate of taxes provided for income taxes:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Nontaxable income ( 3.9) ( 3.3) ( 2.1)
Nondeductible expenses .3 3.5 .2
Other -- .2 --
-------- -------- ---------
30.4% 34.4% 32.1%
==== ==== ====
</TABLE>
The tax effect of temporary differences giving rise to the Company's
consolidated deferred income tax asset (liability) at September 30, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Deferred tax assets:
<S> <C> <C>
Deferred loan fees $ 64,372 $ 66,485
Loan loss allowance 22,772 39,726
Deferred compensation 22,961 16,660
Capital loss carryover 26,615 26,615
Unrealized loss on available for sale securities 5,640 --
Accrued officer compensation 10,853 --
State income tax 856 --
------- -------
154,069 149,486
Less valuation allowance related to:
Capital loss carryover ( 26,615) ( 26,615)
Unrealized loss on available for sale securities ( 5,640) --
--------- -------
121,814 122,871
------- -------
Deferred tax liabilities:
FHLB stock dividends ( 102,540) ( 88,702)
Depreciation ( 58,078) ( 45,726)
Accretion on securities ( 12,328) ( 4,703)
State income tax ( 291) --
ESOP deduction ( 449) --
--------- ---------
( 173,686) ( 139,131)
------- -------
NET DEFERRED TAX LIABILITY ($ 51,872) ($ 16,260)
======= =======
</TABLE>
F-65
<PAGE> 189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 13: INCOME TAXES (Continued)
The Bank has an unused capital loss carryover of $78,279 which may be
used to offset capital gains generated within the five tax years ending
after September 30, 1994.
In computing federal income taxes, Thrift institutions are allowed a
statutory bad debt deduction of otherwise taxable income of 8%, subject
to limitations based on aggregate loans and savings balances. Due to
the limitation based on the level of deposits outstanding and retained
earnings, the Bank did not receive a bad debt deduction for the year
1993 and was limited to net charge-off under the experience method for
the years 1995 and 1994. As of September 30, 1995, appropriations of
retained earnings representing bad debt deductions were approximately
$2,221,363. If these tax bad debt deductions are used for other than
loan losses, the amount used will be subject to Federal income taxes at
the prevailing corporate rates.
NOTE 14: BENEFIT PLANS
First Federal Bank for Savings participates in the Pentegra
multi-employer pension plan. This non-contributory defined benefit plan
covers all eligible employees meeting certain service and age
requirements. The plan operates on a fiscal year ending on June 30, and
it is the policy of the Bank to fund the normal cost of the plan.
Contributions for plan years ending June 30, 1995, 1994 and 1993 were
$39,900, $31,768, and $32,072, respectively. The data available from
the plan administrators is not sufficient to determine the Bank's share
of the pension plan's accumulated benefit obligation, or the net assets
attributable to the Bank.
Directors are eligible to participate in a retirement plan (Director
Retirement Plan) which provides for retirement benefits equal to
approximately two-thirds of the monthly compensation paid to active
directors for a period not to exceed the earlier of the number of
months a participant served as director, or the participant's death.
Directors must have a minimum of ten years of continuous service and
service until age 70 to participate in the Director Retirement Plan. In
the event a director eligible for benefits dies while serving on the
Board of Directors or during the period of retirement, the Bank shall
pay monthly benefits equal to 50% of the amount which would have been
payable to the director to the surviving spouse until the surviving
spouse dies or remarries, or the date on which the director would have
received the maximum benefit. The director, and surviving spouse, may
be entitled to similar benefits in the event of total and permanent
disability. The disclosures required under SFAS No. 87 for the Director
Retirement Plan are not available at September 30, 1995. Directors'
retirement expense for the years ended September 30, 1995, 1994 and
1993 amounted to $30,000, $22,133 and $11,133, respectively. The
unfunded liability for the plan is not expected to have a material
effect on the Bank's financial position or results of operations.
In conjunction with the Bank's conversion on April 7,1995, the Company
established an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees. The ESOP borrowed $1,127,000 from the
Company and purchased 112,700 common shares, equal to 8% of the total
number of shares issued in the conversion. The Bank makes scheduled
discretionary contributions to the ESOP sufficient to service the debt.
Shares are allocated to participants' accounts under the shares
allocated method. The cost of shares not committed to be released and
unallocated shares is reported as a reduction of stockholders' equity.
Compensation expense is recorded based on the average fair market value
of the ESOP shares when committed to be released. The expense under the
ESOP for the year ended September 30, 1995 was $149,664. The fair value
of ESOP shares at September 30, 1995 was $1,549,625.
Subsequent to the conversion, the Board of Directors approved a Stock
Option Plan and a Recognition and Retention Plan (RRP). The plans were
approved by the Company's stockholders subsequent to September 30,
1995. Under the Stock Option Plan, stock options and stock appreciation
rights covering shares representing an aggregate of up to 10% of the
common stock sold in the conversion may be granted to directors,
officers and employees of the Company or Bank. Restricted stock awards
covering up to 4% of the common stock sold in the conversion may be
awarded to the Company's or Bank's directors, directors emeritus,
advisory directors, executive officers or employees under the RRP.
Subject to OTS approval, shares of common stock required to fund the
Stock Option Plan and the Recognition and Retention Plan will be
purchased by the plans trustees in the open market.
NOTE 15: OTHER NONINTEREST EXPENSE
Other noninterest expense amounts for the years ended September 30, are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Data processing service $ 80,547 $ 77,553 $ 65,897
State tax on stock and reserves 66,700 66,869 61,939
Advertising 18,399 59,048 53,687
All other 271,768 292,549 189,119
------- ------- -------
$437,414 $496,019 $370,642
======= ======= =======
</TABLE>
NOTE 16: OTHER ASSETS
The composition of other assets at September 30, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Settlements due from brokers $ -- $ 756,771
Prepaid and refundable income taxes 14,419 126,013
Other prepaid expenses 66,699 115,575
Other receivables 6,374 12,540
Other assets 15,000 15,000
------- ---------
$102,492 $1,025,899
======== ==========
</TABLE>
F-66
<PAGE> 190
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 17: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY -------
-----------------------------------------------------
The following condensed statement of financial condition as of
September 30, 1995 and the related condensed statements of operations
and cash flows for the period from April 7, 1995 to September 30, 1995
for First Ashland Financial Corporation should be read in conjunction
with the consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION SEPTEMBER 30, 1995
-------------------------------- ------------------
<S> <C>
ASSETS
Cash $ 424,847
Securities, held to maturity 5,359,343
Note receivable - ESOP 1,014,300
Equity in net assets of bank 6,429,801
Interest receivable on securities 137,771
Deferred income taxes 11,709
Other assets 3,781
----------
TOTAL ASSETS $13,381,552
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 118,950
Accrued income taxes 9,389
----------
TOTAL LIABILITIES 128,339
Common stock 14,088
Additional paid-in capital 13,539,134
Retained earnings 715,611
Unearned ESOP shares ( 1,015,620)
----------
TOTAL STOCKHOLDERS' EQUITY 13,253,213
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,381,552
==========
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM APRIL 7, 1995
TO SEPTEMBER 30, 1995
-------------------------
STATEMENT OF OPERATIONS
<S> <C>
INCOME
Equity in earnings of bank $649,668
Interest income 224,447
-------
TOTAL INCOME 874,115
EXPENSES
Officers' incentive compensation 89,565
Corporation management fees 18,000
Legal and accounting fees 19,699
Other expenses 9,236
-------
TOTAL EXPENSES 136,500
-------
INCOME BEFORE INCOME TAXES 737,615
Federal and State Income Taxes 22,004
-------
NET INCOME $715,611
=======
</TABLE>
F-67
<PAGE> 191
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 17: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
------- -----------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM APRIL 7, 1995
TO SEPTEMBER 30, 1995
STATEMENT OF CASH FLOWS
<S> <C>
OPERATING ACTIVITIES
Net income $ 715,611
Adjustment to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of bank ( 649,668)
Deferred income tax benefit ( 11,709)
Net accretion of investment securities discounts ( 13,041)
Increase in accrued interest receivable ( 137,771)
Increase in other assets ( 3,781)
Increase in accounts payable and accrued expenses 118,950
Increase in accrued income taxes 9,389
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 27,980
------------
INVESTING ACTIVITIES
Purchased securities to be held to maturity ( 5,346,302)
ESOP loan origination ( 1,127,000)
ESOP loan repayments 112,700
Purchased capital stock in Bank ( 5,630,469)
----------
NET CASH USED BY INVESTING ACTIVITIES ( 11,991,071)
----------
FINANCING ACTIVITIES
Net proceeds from sale of common stock 12,387,938
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,387,938
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 424,847
Cash and cash equivalents at beginning of year --
----------
Cash and Cash Equivalents at End of Year $ 424,847
===========
</TABLE>
F-68
<PAGE> 192
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this
"Agreement"), dated March 25, 1996, is by and among Camco Financial Corporation,
a Delaware corporation ("Acquiror"), First Ashland Financial Corporation, a
Delaware corporation ("FAFC"), and First Federal Bank for Savings, a federal
savings bank, a wholly-owned subsidiary of FAFC ("Target Bank").
A. Acquiror, FAFC and Target Bank wish to provide for the terms
and conditions of the following described business transaction in which FAFC
will be merged with and into Acquiror and the separate existence of FAFC shall
cease (the "Merger").
B. For federal income tax purposes, it is intended that the
Merger shall qualify as a tax-free reorganization within the meaning of
Section 368(a) (I) (A) of the Internal Revenue Code of 1986, as amended (the
"Code").
C. For accounting purposes, it is intended that the Merger
shall be accounted for as a purchase.
D. The parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and to
prescribe various conditions to the Merger.
E. Concurrently with the execution and delivery of this
Agreement, and as a condition and material inducement to Acquiror's willingness
to enter into this Agreement, each of the directors of FAFC has entered into a
shareholder agreement (a "Shareholder Agreement") in the form attached hereto as
Exhibit A.
Accordingly, and in consideration of the representations, warranties,
covenants, agreements and conditions herein contained, the parties hereto agree
as follows:
ARTICLE ONE
-----------
TERMS OF THE MERGER AND CLOSING
-------------------------------
SECTION 1.01. MERGER; SURVIVING CORPORATION. Subject to the terms and
conditions of this Agreement, and pursuant to the provisions of the Delaware
General Corporation Law ("DGCL"), the Home Owners' Loan Act ("HOLA") and the
rules and regulations promulgated thereunder (the "Thrift Regulations"), the
following shall occur:
At the Effective Time (as hereinafter defined), FAFC will be
merged with and into Acquiror in accordance with the DGCL pursuant to the terms
of this Agreement. Upon completion of the Merger, the separate existence of FAFC
shall cease and Acquiror shall continue as the surviving corporation. The name
of Acquiror, as the surviving corporation, shall remain "Camco Financial
Corporation." From and after the Merger, Acquiror, as the surviving corporation,
shall possess all assets and property of every description, and every interest
in the assets and property, wherever located, and the rights, privileges,
immunities, powers, franchises and authority, of a public as well as a private
nature, of Acquiror and FAFC, and all obligations belonging or due to each of
them.
SECTION 1.02. EFFECTIVE TIME OF THE MERGER. As soon as practicable
after each of the conditions set forth in Article Six hereof has been satisfied
or waived, Acquiror and FAFC will file or cause to be filed a Certificate of
Merger with the Secretary of State of Delaware for the Merger, which Certificate
of Merger shall be in the form required by and executed in accordance with the
applicable provisions of the DGCL; provided, however, if a record date for a
dividend on Acquiror Common (as hereinafter defined) would otherwise fall after
the date on which each of the conditions set forth in Article Six hereof has
been satisfied or waived but before such Effective Time, the parties shall use
their reasonable best efforts (without any requirement that any party waive any
condition set forth in Article Six) to cause the Effective Time to occur on or
before such record date. The Merger shall become effective at the time specified
in the Certificate of Merger as filed with the Secretary of State of Delaware
(the "Effective Time").
SECTION 1.03. MERGER.
(a) (i) Each common share of FAFC, $.01 par value per share
(the "FAFC Common"), issued and outstanding immediately prior to the Effective
Time (except for Dissenting Shares, as defined in Section 1.03(b) below)
A-1
<PAGE> 193
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be converted into a right to receive $9.00 in cash and 0.64278 of a
share of the common stock of Acquiror, $1.00 par value per share (the "Acquiror
Common") (subject to possible adjustment as set forth in Section 1.03(a)(iii),
Section 1.03(a)(iv) and Section 1.03(a)(v) below) (the "Per Share Merger
Consideration") from Acquiror, without any interest thereon from the Effective
Time until the time of payment. No fractional shares will be issued, and cash
will be paid in lieu of fractional shares based on the Market Value (as
hereinafter defined).
The holders of certificates representing shares of
FAFC Common shall cease to have any rights as stockholders of FAFC as of the
Effective Time, except such rights, if any, as they may have pursuant to the
DGCL and except as set forth in Section 1.03(c)(iv). Except as provided below
with respect to Dissenting Shares, until certificates representing shares of
FAFC Common are surrendered for exchange, each such certificate shall, after the
Effective Time, represent for all purposes only the right to receive the Per
Share Merger Consideration for the number of shares represented by such
certificate.
(ii) In the event that prior to the Effective Time the
outstanding shares of Acquiror Common shall have been increased, decreased
or changed into or exchanged for a different number or kind of shares or
securities by reorganization, recapitalization, reclassification, stock
dividend, stock split or other like changes in Acquiror's capitalization, all
without Acquiror receiving consideration therefor, then an appropriate
proportional adjustment shall be made in the number and kind of shares of
Acquiror Common to be thereafter delivered pursuant to this Agreement.
(iii) In the event that the Market Value of Acquiror Common
on the Closing Date (as hereinafter defined) would cause the cash portion of
the total merger consideration to exceed the stock portion as determined by
Acquiror based on the Market Value after giving effect to Dissenting Shares, the
cash portion of the Per Share Merger Consideration shall be reduced and the
Acquiror Common portion shall be increased in such amounts as to ensure that the
stock portion exceeds the cash portion. The Market Value shall be the average of
the bid and asked price quotes of Acquiror Common on the last day of trading of
Acquiror Common prior to the Closing Date. In the event a change in the
allocation of cash and Acquiror Common is required hereby, the proportion of
stock shall be 52% and cash 48% after taking into account the cash necessary for
Dissenting Shares.
(iv) The Per Share Merger Consideration shall be adjusted
at closing in the event that the actual (if completed by the Closing Date) or
estimated cost of clean-up and remediation (the "Remediation Cost"), if any, of
properties owned by FAFC or Target Bank in Ashland, Kentucky and Russell,
Kentucky on which are located the main office and a branch office of Target Bank
exceed or exceeded $25,000. In such event, the cash portion of the Per Share
Merger Consideration shall be reduced by an amount equal to 130% of the quotient
of (x) the Remediation Cost divided by (y) the number of outstanding shares of
FAFC Common. For purposes of this Section 1.03(a)(iv), the Remediation Cost
shall be either (A) the actual or estimated cost of clean-up and remediation if,
in the opinion of Acquiror's independent auditors, the Remediation Cost is
deductible for state and federal tax purposes, or (B) the after-tax cost of
actual or estimated cost clean-up and remediation, if in the opinion of
Acquiror's independent auditors, the Remediation Cost is deductible for state
and federal tax purposes.
Acquiror and FAFC shall, upon execution hereof,
jointly retain an expert or experts to examine and study the properties in
question and to conduct such tests as said expert or experts deem appropriate to
determine what remediation and clean-up, if any, is indicated, including cost
estimates thereof. Acquiror and FAFC shall each pay 50% of the fees and costs of
such expert or experts. In the event that such expert shall provide alternative
remediation methods and estimated costs, the amount of Remediation Cost that
shall be deducted from the Per Share Merger Consideration shall be based upon
the cost of the least costly remediation method required to achieve applicable
regulatory standards and consistent with the highest and best use of the
property. If the amount of the adjustment to the Per Share Merger Consideration
pursuant to this Section 1.03(a)(iv) exceeds $.2734, FAFC and Target Bank shall
have the option to terminate this Agreement pursuant to 7.03(ii) without
penalty, if Target Bank gives written notice of its intent to terminate the
Agreement within thirty (30) days of receipt of the Remediation Cost estimates.
(v) (A) In the event that the Market Average Price (as
hereinafter defined) of Acquiror Common on the Closing Date (or the last date
by which the Closing must occur under Section 1.04 of this Agreement) is less
than $16.00 per share or more than $20.00 per share, the Per Share Merger
Consideration shall be adjusted by adjusting the amount of the Acquiror Common
to be received as part of the Per Share Merger Consideration as provided in (B)
hereof; provided, however, that if the Market Average Price of Acquiror Common
on the Closing Date (or the last date by which the Closing must occur under
Section 1.04 of this Agreement), is less than $14.00 per share, FAFC shall have
the
A-2
<PAGE> 194
option to terminate this Agreement without obligation to Acquiror by notice
to Acquiror on the Closing Date (or the last date by which the Closing must
occur under Section 1.04 of this Agreement), and if the Market Average Price of
Acquiror Common on the Closing Date (or the last date by which the Closing must
occur under Section 1.04 of this Agreement), is more than $22.00 per share,
Acquiror shall have the option to terminate this Agreement without obligation to
FAFC or Target Bank by notice to FAFC on the Closing Date (or the last date by
which the Closing must occur under Section 1.04 of this Agreement). If the
Market Average Price on the Closing Date (or the last date by which the Closing
must occur under Section 1.04 of this Agreement), is greater than $22.00 or less
than $14.00 and the appropriate party does not elect to terminate this
Agreement, the amount of Acquiror Common to be received as part of the Per Share
Merger Consideration shall be computed as herein provided based upon $14.00 or
$22.00, as applicable, irrespective of the Market Average Price.
(B) (I) If the Market Average Price is less than
$16.00, the amount of Acquiror Common to be received as part of the Per Share
Merger Consideration shall be the quotient, carried to five decimal places, of
(x) 11.57 divided by (y) 18 minus the difference between 16 and the Market
Average Price.
(II) If the Market Average Price is greater than
$20.00, the amount of Acquiror Common to be received as part of the Per Share
Merger Consideration shall be the quotient, carried to five decimal places,
of (x) 11.57 divided by (y) 18 plus the difference between 20 and the Market
Average Price.
(C) The Market Average Price shall be the average of the
bid and asked price quotes of Acquiror Common on the Nasdaq National
Market ("Nasdaq") for the 20 consecutive full trading days ending on the day
prior to the Closing Date.
(b) DISSENTING SHARES. Any shares of FAFC Common held by a holder
who dissents from the Merger in accordance with Section 262 of the DGCL shall be
herein called "Dissenting Shares." Notwithstanding any other provision of this
Agreement, any Dissenting Shares shall not, after the Effective Time of the
Merger, be entitled to vote for any purpose or receive any dividends or other
distributions and shall be entitled only to such rights as are afforded in
respect of Dissenting Shares pursuant to the DGCL.
(c) EXCHANGE OF FAFC COMMON.
(i) As soon as practicable after the Effective Time of the
Merger, holders of record of certificates formerly representing shares of
FAFC Common (the "Certificates") shall be instructed to tender such Certificates
to Acquiror or, at the election of the Acquiror, to an exchange agent designated
by Acquiror (the "Exchange Agent"), pursuant to a letter of transmittal that
Acquiror shall deliver or cause to be delivered to such holders. Such letters of
transmittal shall specify that risk of loss and title to Certificates shall pass
only upon delivery of such Certificates as specified in the letter of
transmittal.
(ii) After the Effective Time of the Merger, each holder of
a Certificate that surrenders such Certificate to Acquiror or, at the election
of Acquiror, to the Exchange Agent, will, upon acceptance thereof by Acquiror
or the Exchange Agent, be entitled to the Per Share Merger Consideration for
the number of shares represented by such Certificate, which shall be paid
promptly (but in no event later than five business days) after acceptance of
such Certificate.
(iii) Acquiror or, at the election of Acquiror, the Exchange
Agent shall accept Certificates upon compliance with such reasonable terms
and conditions as Acquiror or the Exchange Agent may impose to effect an orderly
exchange thereof in accordance with customary exchange practices. Certificates
shall be appropriately endorsed or accompanied by such instruments of transfer
as Acquiror or the Exchange Agent may require.
(iv) Each outstanding Certificate shall, until duly
surrendered to Acquiror or the Exchange Agent, be deemed to evidence the right
to receive the Per Share Merger Consideration for the number of shares
represented by such Certificate. No dividends or other distributions declared on
or after the Effective Time with respect to Acquiror Common payable to the
holders of record thereof on or after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to Acquiror Common
represented thereby until the holder of record shall surrender such Certificate.
Subject to the effect, if any, of applicable law, after the subsequent surrender
and exchange of a Certificate, the holder thereof shall be entitled to receive
any such dividends or distributions, without interest thereon, which theretofore
became payable with respect to Acquiror Common represented by such Certificate.
All dividends or other distributions declared on or after the Effective Time
with respect to Acquiror Common and payable to the holders of record thereof on
or after the Effective Time which are payable to the holder of a Certificate not
theretofore surrendered and
A-3
<PAGE> 195
exchanged for Acquiror Common pursuant to this Section 1.03 shall be paid or
delivered by Acquiror to the Exchange Agent, in trust, for the benefit of such
holders. All such dividends and distributions held by the Exchange Agent for
payment or delivery to the holders of unsurrendered Certificates unclaimed at
the end of one year from the Effective Time shall be repaid or redelivered by
the Exchange Agent to the Acquiror after which time any holder of Certificates
who has not theretofore surrendered such Certificates to the Exchange Agent,
subject to applicable law, shall look as a general creditor only to Acquiror for
payment or delivery of such dividends or distributions, as the case may be,
subject to applicable escheat or unclaimed property laws. Any shares of Acquiror
Common delivered or made available to the Exchange Agent pursuant to this
Section 1.03 and not exchanged for Certificates within one year after the
Effective Time pursuant to this Section 1.03 shall be returned by the Exchange
Agent to Acquiror which shall thereafter act as Exchange Agent subject to the
rights of holders of unsurrendered Certificates under this Article One.
(v) After the Effective Time of the Merger, holders
of Certificates shall cease to have rights with respect to the FAFC Common
previously represented by such Certificates, and their sole rights shall be to
exchange such Certificates for the Per Share Merger Consideration for the
number of shares represented by such Certificate. After the Effective Time of
the Merger, there shall be no further transfer on the records of FAFC of
Certificates, and if any Certificates are presented to FAFC for transfer, they
shall be canceled in exchange for the Per Share Merger Consideration for the
number of shares represented by such Certificates. Acquiror shall not be
obligated to deliver the Per Share Merger Consideration to any former holder of
FAFC Common until such holder surrenders the Certificates as provided herein.
Neither the Exchange Agent nor any party to this Agreement nor any affiliate
thereof shall be liable to any holder of FAFC Common represented by any
Certificate for any consideration paid to a public official pursuant to
applicable abandoned property, escheat or similar laws. FAFC and the Exchange
Agent shall be entitled to rely upon the stock transfer books of FAFC to
establish the identity of those persons entitled to receive the consideration
specified in this Agreement, which books shall be conclusive with respect
thereto. In the event of a dispute with respect to ownership of stock
represented by any Certificate, Acquiror and the Exchange Agent shall be
entitled to deposit any consideration in respect thereof in escrow with an
independent third party and thereafter be relieved with respect to any claims
thereto.
(vi) If the Per Share Merger Consideration is to be
issued to a person other than a person in whose name a surrendered Certificate
is registered, it shall be a condition of issuance that the surrendered
Certificate shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such issuance shall pay to Acquiror or the
Exchange Agent any required transfer or other taxes or establish to the
satisfaction of the Acquiror or the Exchange Agent that such tax has been paid
or is not applicable.
(vii) In the event any Certificate shall have been
lost, stolen or destroyed, the owner of such lost, stolen or destroyed
Certificate shall deliver to Acquiror or the Exchange Agent an affidavit
stating such fact, in form satisfactory to Acquiror, and, at Acquiror's
discretion, a bond in such reasonable sum as Acquiror or the Exchange Agent may
direct as indemnity against any claim that may be made against Acquiror or
Target Bank or its successor or any other party with respect to the Certificate
alleged to have been lost, stolen or destroyed. Upon such delivery, the owner
shall have the right to receive the Per Share Merger Consideration with respect
to the shares represented by the lost, stolen or destroyed Certificate.
(d) Certificate of Incorporation and By-laws of Acquiror as
the Surviving Corporation. The Certificate of Incorporation and By-laws of
Acquiror, as in effect immediately prior to the Effective Time of the Merger,
shall be the Certificate of Incorporation and By-laws of the surviving
corporation of the Merger, until either is thereafter amended in accordance
with applicable law.
(e) Shares Held by Acquiror or FAFC. All treasury shares
held by FAFC and all FAFC shares owned by Acquiror for its own account shall be
cancelled and retired at the Effective Time and no consideration shall be issued
in exchange therefor.
SECTION 1.04. CLOSING. Subject to the provisions of this Agreement, the
closing of the Merger (the "Closing") shall take place on or before the
thirtieth day after the satisfaction of the last to be satisfied of the
conditions set forth in Section 6.01(d), (o) and (p). The date, time and
location of the Closing shall be as designated in writing by Acquiror to FAFC;
provided, however, that (i) the Closing shall not occur prior to October 1,
1996; and (ii) if a record date for a dividend on Acquiror Common would
otherwise fall after the date on which each of the conditions set forth in
Article Six hereof has been satisfied or waived but before such Closing occurs,
the parties shall use their reasonable best efforts (without any requirement
that any party waive any condition set forth in Article Six) to cause the
Closing to occur on or before such
A-4
<PAGE> 196
record date. The date on which the Closing actually occurs is herein referred to
as the "Closing Date". Time is of the essence for Closing.
SECTION 1.05. ACTIONS AT CLOSING.
(a) At the Closing, FAFC and Target Bank shall deliver
to Acquiror:
(i) A certificate signed by an appropriate
officer of FAFC and Target Bank stating that all of the conditions set forth in
Sections 6.01(a), (b), (c), as it relates to FAFC and Target Bank approvals,
(d), (f), (g), (h), (i), (m), (n), (r) and (s) of this Agreement (but, as to
Section 6.01(d), relating only to approvals which FAFC or Target Bank is
required by law to obtain and as to Section 6.01(g) relating only to FAFC) have
been satisfied or waived as provided therein;
(ii) A certified copy of the resolutions of
FAFC's Board of Directors and stockholders, as required for valid approval of
the execution of this Agreement;
(iii) Certificates of the Delaware Secretary of
State and the Office of Thrift Supervision (the "OTS"), each dated a recent
date, as to the good standing of FAFC and the valid corporate existence of
Target Bank, respectively, and a certificate of the Federal Deposit Insurance
Corporation ("FDIC"), dated a recent date, as to the existence of deposit
insurance of Target Bank;
(iv) A legal opinion from counsel for FAFC and
Target Bank, in form reasonably acceptable to Acquiror's counsel, opining
with respect to the matters listed on Exhibit B hereto; and
(v) A Certificate of Merger for the Merger,
executed by FAFC and in proper form for filing with the Delaware Secretary of
State.
(b) At the Closing, Acquiror shall deliver to FAFC:
(i) A certificate signed by an appropriate
officer of Acquiror stating that all of the conditions set forth in Sections
6.02(a), (b), (c), (d), (f), (g) and (l) of this Agreement (but, as to Section
6.02(d), excluding the approval of FAFC's Board of Directors and stockholders)
have been satisfied;
(ii) A certified copy of the resolutions of
Acquiror's Board of Directors and stockholders authorizing the execution of
this Agreement and the consummation of the transactions contemplated hereby;
and
(iii) A legal opinion from counsel for Acquiror,
in form reasonably acceptable to FAFC's counsel, opining with respect to
the matters listed on Exhibit C hereto.
(iv) A Certificate of Merger for the Merger,
executed by Acquiror and in proper form for filing with the Delaware Secretary
of State.
(v) A certificate signed by an appropriate
officer of Acquiror with respect to the adjustment to the Per Share Merger
Consideration pursuant to Section 1.03(a)(iv) of this Agreement.
ARTICLE TWO
-----------
REPRESENTATIONS AND WARRANTIES OF FAFC AND TARGET BANK
------------------------------------------------------
FAFC and Target Bank hereby make the following representations and
warranties:
SECTION 2.01. ORGANIZATION AND CAPITAL STOCK.
(a) FAFC is a corporation organized under the DGCL and
Target Bank is a federal stock savings bank, organized under the HOLA, and each
is duly organized and validly existing (and, in the case of FAFC, in good
standing) under the laws of the State of Delaware and the United States,
respectively, with full corporate power and all necessary governmental
authorizations to own all of its properties and assets, to incur all of its
liabilities and to carry on its business as presently conducted. The minute
books of each contain complete and accurate records of all meetings and other
corporate actions of their respective Boards of Directors and stockholders,
including committees of Boards of Directors.
A-5
<PAGE> 197
Attached as Section 2.01(a) of that certain confidential writing delivered by
FAFC to Acquiror concurrently with the delivery and execution of this Agreement
(the "Disclosure Schedule") are copies of the Certificate of Incorporation of
FAFC and Charter of Target Bank certified by the Secretary of State of the
State of Delaware and the OTS, respectively, a copy of the By-laws of FAFC
certified by the Secretary of FAFC and a copy of the By-laws of Target Bank
certified by the Secretary of Target Bank.
(b) The authorized capital stock of FAFC consists of
2,000,000 shares of FAFC Common, par value $.01, of which, as of the date
hereof, 1,463,039 shares are issued and outstanding, including 54,289 shares
held by the RRP (as hereinafter defined), and 100,000 preferred shares, par
value $.01, none of which is issued and outstanding. In addition, 129,598
shares of FAFC Common are reserved for issuance upon exercise of outstanding
stock options. The weighted average exercise price of such options is $14.25
per share. All of the issued and outstanding shares of FAFC Common are duly and
validly issued and outstanding and are fully paid and non-assessable. None of
the outstanding shares of FAFC Common has been issued in violation of any
preemptive or other rights of the current or past stockholders of FAFC. Each
Certificate representing shares of FAFC Common issued by FAFC in replacement of
any Certificate theretofore issued by it which was claimed by the record holder
thereof to have been lost, stolen or destroyed, if any, was issued by FAFC only
upon receipt of an affidavit of lost stock Certificate and a bond sufficient to
indemnify FAFC against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such Certificate or the issuance of
such replacement Certificate.
The authorized capital stock of Target Bank consists
of 2,000,000 shares of Target Bank common stock, par value $.01 per share (the
"Target Bank Common"), of which 1,408,750 shares are issued and outstanding and
held by FAFC and 100,000 preferred shares, none of which is issued and
outstanding. Such shares are held by FAFC free and clear of all liens,
encumbrances, rights of first refusal, options or other restrictions of any
nature whatsoever.
The deposits of Target Bank are insured by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC"). Target Bank is a member of the Federal Home Loan
Bank of Cincinnati ("FHLB Cincinnati"). Target Bank is a "domestic building
and loan association" as defined in Section 7701(a) (19) of the Code and a
"qualified thrift lender" as defined in 12 U.S.C. ss. 1467a(m) and the Thrift
Regulations.
(c) Except as set forth in Section 2.01(b) of this
Agreement, there are no shares of capital stock or other equity securities of
FAFC or Target Bank outstanding and no outstanding options, warrants, rights to
subscribe for, calls, or commitments of any character whatsoever relating to,
or securities or rights convertible in or exchangeable for, shares of the
capital stock of FAFC or Target Bank, or contracts, commitments, understandings
or arrangements by which FAFC or Target Bank is or may be obligated to issue
additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock.
SECTION 2.02. AUTHORIZATION; NO DEFAULTS.
(a) The Board of Directors of FAFC and the Board of
Directors of Target Bank each has, by all appropriate action, approved this
Agreement and authorized the execution and delivery hereof on its behalf by its
duly authorized officers and the performance by FAFC and Target Bank of its
respective obligations hereunder.
(b) This Agreement has been duly and validly executed and
delivered by FAFC and Target Bank and constitutes a legal, valid and binding
obligation of FAFC and Target Bank, enforceable against each in accordance with
its terms, except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, receivership, conservatorship, moratorium or other laws
affecting creditors' rights generally or the rights of creditors of savings
institutions the accounts of which are insured by the FDIC or laws relating to
the safety and soundness of insured financial institutions and by judicial
discretion in applying principles of equity. Neither FAFC nor Target Bank is in
default under or in violation of any provision of its respective Certificate of
Incorporation, Charter or By-laws, or any promissory note, indenture or any
evidence of indebtedness or security therefor, lease, contract, purchase or
other commitment or any other agreement of FAFC or Target Bank, except for
defaults and violations which will not have a material adverse effect on the
operations, business or financial condition of FAFC and Target Bank, taken as a
whole. No other corporate proceeding of FAFC or Target Bank is required for
approval of this Agreement and the Merger or the performance of FAFC's or Target
Bank's obligations under this Agreement other than approval of this Agreement by
the holders of at least the minimum portion of the outstanding shares of FAFC
required under the DGCL and FAFC's Certificate of Incorporation for approval of
the Merger (the "Minimum Portion"). Except for the requisite approvals of the
OTS ("Regulatory Approvals"), and filings with
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the OTS and the Secretary of State of Delaware, no notice to, filing with,
authorization by, or consent or approval of, any federal or state regulatory
authority or other third party is necessary for the execution and delivery of
this Agreement by FAFC or Target Bank or consummation of the Merger by FAFC or
Target Bank.
(c) Neither the execution and delivery of this Agreement nor
the consummation of the Merger, nor compliance by FAFC and Target Bank with the
provisions of this Agreement will (i) conflict with or result in a breach of the
Certificate of Incorporation, Charter or By-laws of FAFC or Target Bank; (ii)
except as set forth in Section 2.02(c) of the Disclosure Schedule, result in a
breach or termination of, or accelerate the performance required by, any note,
bond, mortgage, lease, agreement or other instrument to which FAFC or Target
Bank is a party or may be bound if such note, bond, mortgage, lease, agreement
or other instrument is material to the operations, business or financial
condition of FAFC or Target Bank or if the breach, termination or acceleration
of any note, bond, mortgage, lease, agreement or other instrument would result
in a Material Adverse Change to FAFC or Target Bank; or (iii) violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to FAFC or Target Bank.
SECTION 2.03. SUBSIDIARIES; EQUITY INTERESTS. The term "subsidiary"
means an organization or entity which is consolidated or is eligible to be
consolidated with a party to this Agreement for financial reporting purposes.
Except for Target Bank and First S & L Corporation, FAFC has no subsidiaries.
The only subsidiary of Target Bank is First S & L Corporation. Except for shares
of Target Bank Common owned by FAFC and shares of stock of First S & L
Corporation and stock of the FHLB Cincinnati owned by Target Bank, or as set
forth in Section 2.03 of the Disclosure Schedule, neither FAFC nor Target Bank
owns, beneficially or otherwise, any shares of Equity Securities (as defined
below) or similar interests of any corporation, bank, business trusts,
association or similar organization. "Equity Securities" of an issuer means
capital stock or other equity securities of such issuer, options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, shares of any capital
stock or other equity securities of such issuer, or contracts, commitments,
understandings or arrangements by which such issuer is or may become bound to
issue additional shares of its capital stock or other equity securities of such
issuer, or options, warrants, scrip or rights to purchase, acquire, subscribe
to, calls on or commitments for any shares of its capital stock or other equity
securities. Neither FAFC nor Target Bank is a party to any partnership or joint
venture.
SECTION 2.04. FINANCIAL INFORMATION. The consolidated statements of
financial condition of FAFC and Target Bank as of September 30, 1995 and 1994
and related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three fiscal years then ended, together
with the notes thereto, and the unaudited consolidated statements of financial
condition of FAFC as of December 31, 1995 and the related unaudited consolidated
statements of operations, statements of changes in stockholders' equity and
statements of cash flows for the three (3) months then ended, all of which are
included in Section 2.04 of the Disclosure Schedule (together, the "FAFC
Financial Statements"), have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis except as disclosed
therein and fairly present in all material respects the consolidated financial
position and the consolidated results of operations, changes in stockholders'
equity and cash flows of FAFC as of the dates and for the periods indicated
(subject, in the case of interim financial statements, to normal recurring
year-end adjustments, none of which are material, and the absence of footnotes).
The books and records of FAFC and Target Bank have been and are being maintained
in accordance with applicable legal and accounting requirements. Neither FAFC
nor Target Bank is aware of any event or circumstances, or series of events or
circumstances, which is reasonably likely to result in a Material Adverse Change
(as defined in Section 2.05 of this Agreement) to FAFC or Target Bank.
SECTION 2.05. ABSENCE OF CHANGES.
(a) The term "Material Adverse Change" shall mean a material
adverse change in the consolidated financial condition, results of operations,
assets, deposit liabilities or business (including its future prospects) of an
entity, other than changes resulting from or attributable to reasonable expenses
incurred in connection with the transactions contemplated by this Agreement and
the Merger; provided that the term "Material Adverse Change" shall exclude a
change with respect to, or effect on, such entity and its subsidiaries, taken as
a whole, resulting from any matter affecting depository institutions generally
(including, without limitation, financial institutions and their holding
companies) including, without limitation, changes in general economic conditions
and changes in prevailing interest and deposit rates, and any reduction in the
net income or stockholders' equity attributable to (i) any special assessment of
up to .95% of deposits levied against financial institutions which are insured
by the SAIF or (ii) any recapture of bad debt reserves attributable to any
federal legislation eliminating or altering the exclusion from taxable federal
income of bad debt reserves of thrift institutions. Since December 31, 1995 to
the date hereof, FAFC on a consolidated basis has not experienced or suffered a
Material Adverse Change.
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(b) Since September 30, 1995, neither FAFC nor Target Bank
has, except as set forth in Section 2.05 of the Disclosure Schedule, (i) issued
or sold any corporate debt securities; (ii) declared or set aside or paid any
dividend (other than the cash dividend to be paid on February 28, 1996 and
disclosed at Section 4.01(a) hereof) or other distribution in respect of its
capital stock (or other ownership interests); (iii) incurred any material
obligation or liability (absolute or contingent), except obligations or
liabilities incurred in the ordinary course of business; (iv) mortgaged, pledged
or subjected to lien or encumbrance (other than statutory liens for taxes not
yet delinquent and landlord liens) any of its assets or properties except
pledges to secure government deposits, FHLB advances and in connection with
repurchase or reverse repurchase agreements; (v) discharged or satisfied any
lien or encumbrance or paid any obligation or liability (absolute or
contingent), other than current liabilities included in FAFC's balance sheet as
of September 30, 1995, and current liabilities incurred since the date thereof
in the ordinary course of business; (vi) sold, exchanged or otherwise disposed
of any of its assets other than in the ordinary course of business; (vii) made
or modified any general wage or salary increase other than in the ordinary
course of business consistent with past practices, entered into or modified any
employment contract with any officer or salaried employee or instituted,
modified or changed the contribution level to any employee welfare, bonus, stock
option, profit sharing, retirement or similar plan or arrangement; (viii)
suffered any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting its business, property or assets or waived
any rights of value that are material in the aggregate, considering its business
taken as a whole; (ix) entered, or agreed to enter, into any agreement or
arrangement granting any preferential right to purchase any of its assets,
properties or rights or requiring the consent of any party to the transfer and
assignment of any such assets, properties or rights; (x) entered into any
transaction outside the ordinary course of business; or (xi) sold or otherwise
disposed of any of its securities except in the ordinary course or business.
SECTION 2.06. REGULATORY ENFORCEMENT MATTERS. Neither FAFC nor Target
Bank is subject to, or has received any notice or advice that it is not
in substantial compliance with any statute or regulation, or that it is or may
become subject to any order, agreement or memorandum of understanding with any
federal or state agency charged with the supervision or regulation of savings
banks or savings associations or engaged in the insurance of deposits or any
other governmental agency having supervisory or regulatory authority with
respect to FAFC or Target Bank, and FAFC and Target Bank have received no
notice from any governmental authority threatening to revoke any license,
franchise, permit or governmental authorization.
SECTION 2.07. TAX MATTERS.
(a) FAFC and Target Bank have filed all federal, state and
local tax returns and reports due with respect to any of their employees,
depositors, borrowers, operations, businesses or properties in a timely fashion
and have paid or made provision for all amounts due or claimed to be due. All
such returns and reports fairly reflect the information required to be presented
therein. All provisions for accrued but unpaid taxes contained in the FAFC
Financial Statements were made in accordance with GAAP and provide for
anticipated tax liabilities including interest and penalties. There are no
federal, state or local tax returns or reports not filed which would be due but
for an extension of time for filing having been granted, except as disclosed in
Section 2.07(a) of the Disclosure Schedule.
(b) Neither FAFC nor Target Bank has executed or filed with
the Internal Revenue Service ("IRS") or any state or local tax authority any
agreement extending the period for assessment and collection of any tax, nor is
FAFC or Target Bank a party to any action or proceeding by any governmental
authority for assessment or collection of taxes, except tax liens or levies
against customers of Target Bank. There is no outstanding assessment or claim
for collection of taxes against FAFC or Target Bank. Neither FAFC nor Target
Bank has received any notice of deficiency, proposed deficiency or assessment
from the IRS or any other governmental agency with respect to any federal, state
or local taxes. No tax return of FAFC or Target Bank is currently the subject of
any audit by the IRS or any other governmental agency. No material deficiencies
have been asserted in connection with the tax returns of FAFC or Target Bank,
and FAFC and Target Bank have no reason to believe that any deficiency would be
asserted relating thereto. Except as disclosed in Section 2.07(b) of the
Disclosure Schedule, (i) neither FAFC nor Target Bank has ever been a member of
an "affiliated group of corporations" (within the meaning of Section 1504(a) of
the Code) filing consolidated returns, other than the affiliated group of which
FAFC is the parent; and (ii) neither FAFC nor Target Bank is a party to any
tax-sharing agreement.
SECTION 2.08. LITIGATION. Except as disclosed in Section 2.08 of the
Disclosure Schedule, there is no litigation, claim or other proceeding pending
or, to the knowledge of FAFC or Target Bank, threatened, against FAFC or Target
Bank, or any of their respective directors or officers, or to which the property
of FAFC or Target Bank is or would be subject, involving a claim in excess of
$10,000 per claim or $50,000 in the aggregate. Each of FAFC and Target Bank has
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taken all requisite action (including without limitation the making of claims
and the giving of notices) pursuant to its directors and officers' liability
insurance policy or policies in order to preserve all rights thereunder with
respect to all matters (other than matters arising in connection with this
Agreement and the transactions contemplated hereby) occurring prior to the
Effective Time of the Merger that are known to either. Each matter as to which
FAFC or Target Bank has given notice to the insurer under a directors and
officers liability policy is described in Section 2.08 of the Disclosure
Schedule.
SECTION 2.09. EMPLOYMENT AND SEVERANCE AGREEMENTS. Except as disclosed
in Section 2.09 of the Disclosure Schedule, neither FAFC nor Target Bank is a
party to or bound by any agreement or policy for the employment, retention or
engagement of any officer, employee, agent, consultant or other person or
entity, any employment or severance agreement or policy, or agreement, policy or
arrangement to provide post-retirement, post-termination or change-of-control
benefits, by acceleration or otherwise, to any current or former officer,
employee or director. A true, accurate and complete copy of each such agreement,
policy and arrangement is included in Section 2.09 of the Disclosure Schedule.
SECTION 2.10. REPORTS. FAFC and Target Bank each has filed all reports
and statements, together with any amendments required to be made with respect
thereto, that it was required to file with (i) the OTS, (ii) the FDIC, (iii) any
applicable state securities or banking or savings and loan authorities, and (iv)
any other governmental authority with jurisdiction over FAFC or Target Bank,
except as may be disclosed in Section 2.10 of the Disclosure Schedule or, to the
extent that any report or statement has not been filed, such failure will not
have a material adverse effect on FAFC's or Target Bank's regulatory compliance
status. As of their respective dates, each of such reports and documents,
including the financial statements, exhibits and schedules thereto, complied in
all material respects with the relevant statutes, rules and regulations enforced
or promulgated by the regulatory authority with which they were filed, and did
not contain any untrue statement of a material fact or omit to state any
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.
SECTION 2.11. LOAN PORTFOLIO. Except as may be disclosed in Section
2.11 of the Disclosure Schedule, (i) all loans shown on the FAFC Financial
Statements at September 30, 1995, or which were entered into after September 30,
1995, but before the Effective Time of the Merger, were and will be made for
good, valuable and adequate consideration in the ordinary course of the business
of Target Bank and its subsidiary, in accordance with sound banking practices,
and are not subject to any known defenses, set-offs or counterclaims, including
without limitation any such as are afforded by usury or truth in lending laws,
except as may be provided by bankruptcy, insolvency or similar laws or by
general principles of equity; (ii) to the knowledge of FAFC and Target Bank, the
notes or other evidences of indebtedness evidencing such loans and all forms of
pledges, mortgages and other collateral documents and security agreements are
and will be what they purport to be and enforceable in all material respects in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and (iii) FAFC and Target
Bank have complied and will prior to the Effective Time comply with all laws and
regulations relating to such loans, or to the extent there has not been such
compliance, such failure to comply will not materially interfere with the
collection of any such loan.
SECTION 2.12. EMPLOYEE MATTERS AND ERISA.
(a) Neither FAFC nor Target Bank has entered into any
collective bargaining agreement with any labor organization with respect to any
group of employees of FAFC or Target Bank, and to the knowledge of FAFC and
Target Bank there is no present effort nor existing proposal to attempt to
unionize any group of employees of FAFC or Target Bank.
(b) Except as may be disclosed in Section 2.12(b) of the
Disclosure Schedule, (i) FAFC and Target Bank are and have been in material
compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, including,
without limitation, any such laws respecting employment discrimination and
occupational safety and health requirements, and neither FAFC nor Target Bank is
engaged in any unfair labor practice; (ii) there are no unfair labor practice
charges or other complaints by any employee or former employee of either FAFC or
Target Bank pending before any governmental agency and there are no
administrative charges or court complaints against FAFC or Target Bank
concerning alleged employment discrimination or other employment related matters
pending or threatened before the U.S. Equal Employment Opportunity Commission or
any state or federal court or agency; (iii) there is no labor dispute, strike,
slowdown or stoppage actually pending or, to the knowledge of FAFC and Target
Bank, threatened against or directly affecting FAFC or Target Bank; and (iv)
neither FAFC nor Target Bank has experienced any work stoppage or other labor
difficulty.
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(c) Except as may be disclosed in Section 2.12(c) of the
Disclosure Schedule, neither FAFC nor Target Bank maintains, contributes to or
participates in or has any liability under any employee benefit plans, as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or any nonqualified employee benefit plans or deferred
compensation, bonus, stock or incentive plans, or other employee benefit or
fringe benefit programs for the benefit of former or current directors or
employees of FAFC or Target Bank (the "Employee Plans"). No present or former
director, employee or fiduciary of FAFC or Target Bank has been charged with
breaching or has breached a fiduciary duty under any of the Employee Plans.
Except as may be disclosed in Section 2.12(c) of the Disclosure Schedule,
neither Target Bank nor any of its subsidiaries participates in, nor has it
participated in, nor has it any present or future obligation or liability under,
any multi-employer plan (as defined at Section 3(37) of ERISA). Except as may be
disclosed in Section 2.12(c) of the Disclosure Schedule, neither Target Bank nor
any of its subsidiaries maintains, contributes to, or participates in, any plan
that provides health, major medical, disability or life insurance benefits to
former employees of FAFC or Target Bank except as provided in Section 4980B of
the Code.
(d) Except as set forth in Section 2.12(d) of the Disclosure
Schedule, neither FAFC nor Target Bank maintains, or has maintained during the
past ten (10) years, any Employee Plans subject to Title IV of ERISA or Section
412 of the Code. No reportable event (as defined in Section 4043 of ERISA) has
occurred with respect to any Employee Plans as to which a notice would be
required to be filed with the Pension Benefit Guaranty Corporation. No claim is
pending, and FAFC and Target Bank have not received notice of any threatened or
imminent claim, with respect to any Employee Plan (other than a routine claim
for benefits for which plan administrative review procedures have not been
exhausted) for which FAFC or Target Bank or its subsidiary would be liable after
September 30, 1995, except as set forth in Section 2.12(d) of the Disclosure
Schedule. FAFC and Target Bank do not have any liabilities for excise taxes
under Sections 4971, 4975, 4976, 4977, 4979, or 4980B of the Code or for a fine
under Section 502 of ERISA with respect to any Employee Plan. All Employee Plans
have been operated, administered and maintained in accordance with the terms
thereof and in material compliance with the requirements of all applicable laws,
including, without limitation, ERISA and the Code to the extent applicable.
SECTION 2.13. TITLE TO PROPERTIES; INSURANCE; PERSONAL PROPERTY.
(a) FAFC and Target Bank have marketable title, insurable at
standard rates, free and clear of all liens, charges and encumbrances (except
taxes which are a lien but not yet payable, liens, charges or encumbrances
explicitly reflected in the FAFC Financial Statements and easements,
rights-of-way, and other restrictions which are not material to the current use,
value or marketability of the property and further excepting in the case of Real
Estate Owned ("REO"), as such real estate is internally classified on the books
of Target Bank, rights of redemption under applicable law) to all real
properties reflected on the FAFC Financial Statements or acquired subsequent to
the date thereof. All leasehold interests held by FAFC or Target Bank in real
estate are held pursuant to lease agreements which are valid and enforceable in
accordance with their terms subject to bankruptcy, insolvency, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles. All such owned real
properties comply in all material respects with all applicable private
agreements, zoning requirements and other governmental laws and regulations
relating thereto, and there are no condemnation proceedings pending or, to the
knowledge of either FAFC or Target Bank, threatened with respect to such
properties. FAFC and Target Bank each have valid title or other rights under
licenses to all material intangible personal or intellectual property used in
their respective businesses, free and clear of any claim, defense or right of
any other person or entity which is material to such property, subject only to
rights of the licensors pursuant to applicable license agreements, which rights
do not materially adversely interfere with the use of such property.
(b) All material insurable properties owned or held by
FAFC or Target Bank are insured by financially sound and reputable insurers in
amounts deemed adequate by the senior management of Target Bank and against
fire and other risks insured against by extended coverage and public liability
insurance, as is customary with thrift institutions of similar size. FAFC and
Target Bank have delivered to Acquiror as part of Section 2.13(b) of the
Disclosure Schedule true, accurate and complete copies of all insurance
policies and fidelity bonds of FAFC and Target Bank. There are no outstanding
claims alone or in the aggregate in excess of Ten Thousand Dollars ($10,000)
with respect to FAFC or Target Bank under such bonds and insurance policies,
and neither FAFC nor Target Bank is aware of any acts of dishonesty or losses
which would form the basis of a material claim under such bonds or insurance
coverage. Each such policy is in full force and effect, with all premiums due
thereon on or prior to the Closing Date having been paid as and when due.
Neither FAFC nor Target Bank has been notified that its fidelity or insurance
coverage will not be renewed by the carrier on substantially the same terms as
the existing coverage.
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(c) All of the personal property reflected in the FAFC
Financial Statements as being owned by FAFC or Target Bank is owned free and
clear of any lien, encumbrance, right of first refusal, options or other
restrictions, and all such personal property is in good condition and repair
(ordinary wear and tear excepted) and is sufficient to carry on the business of
FAFC or Target Bank as it is presently conducted.
SECTION 2.14. ENVIRONMENTAL MATTERS.
(a) As used in this Agreement, "Environmental Laws" means
all local, state and federal environmental, health and safety laws and
regulations as in effect from time to time in all jurisdictions in which FAFC
and Target Bank have done business or owned or leased property, including,
without limitation, the Federal Resource Conservation and Recovery Act, the
Federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), the Federal Clean Water Act, the Federal Clean Air Act, and the
Federal Occupational Safety and Health Act.
For purposes of this Agreement, "Hazardous Substances"
means (i) any "hazardous substance" as defined in Section 101(14) of CERCLA
or regulations promulgated thereunder; (ii) any "solid waste," "hazardous
waste," or "infectious waste," as such terms are defined in any Environmental
Law; (iii) asbestos, urea formaldehyde, polychlorinated biphenyls ("PCBs"),
nuclear fuel or material, chemical waste, radioactive material, explosives,
known carcinogens, petroleum products and by-products, and other dangerous,
toxic or hazardous pollutants, contaminants, chemicals, materials or substances
listed or identified in, or regulated by, any Environmental Law; and (iv) any
additional substances or materials which are classified or considered to be
hazardous or toxic under any Environmental Law.
(b) To the actual knowledge of the current senior executive
officers of FAFC and Target Bank, without any duty to make inquiry into books
and records, (i) neither the conduct nor operation of FAFC or Target Bank, nor
any condition of any property currently leased, ever owned (including, without
limitation, REO), or ever operated by either of them ("Real Property")
materially violates or materially violated any Environmental Laws and (ii) no
condition or event has occurred with respect to any of them or any such property
that, with notice or the passage of time, or both, would constitute a material
violation of Environmental Laws or obligate (or potentially obligate) FAFC or
Target Bank to remedy, stabilize, neutralize or otherwise alter the
environmental condition of any such property. Except as disclosed in Section
2.14(b) of the Disclosure Schedule, to the actual knowledge of the current
senior executive officers of FAFC and Target Bank, neither FAFC nor Target Bank
has received any notice from any person or entity that FAFC or Target Bank or
the operation of any facilities or any property ever owned (including, without
limitation, REO), leased or operated by either of them are or were in violation
of any Environmental Laws or that any of them are responsible (or potentially
responsible) for the cleanup of any pollutants, contaminants, or hazardous or
toxic wastes, substances or materials at, on or beneath any such property.
(c) Except as disclosed in Section 2.14(c) of the Disclosure
Schedule, neither FAFC nor Target Bank has received notice or has knowledge that
any property in which FAFC or Target Bank has a security interest, lien or other
encumbrance violates or violated Environmental Laws in any material respect.
(d) To the actual knowledge of the current senior executive
officers of FAFC and Target Bank, without any duty to make inquiry into books
and records, neither FAFC nor Target Bank has caused any Hazardous Substances to
be integrated into the Real Properties or any component thereof in such manner
or quantity as may reasonably be expected to or in fact would pose an unlawful
threat to human health or materially and adversely affect the value of any such
Real Properties. To the actual knowledge of the current senior executive
officers of FAFC and Target Bank, none of the Real Properties has been used by
FAFC or Target Bank for the storage or disposal of Hazardous Substances, except
as disclosed in Section 2.14(d) of the Disclosure Schedule or as permitted under
Environmental Laws. To the knowledge of FAFC and Target Bank, neither FAFC nor
Target Bank has any interest, direct or indirect, in property owned by a third
party which is or has been contaminated by Hazardous Substances, except as
permitted under Environmental Laws. To the knowledge of FAFC and Target Bank, no
property which is subject to such a security interest is or has been so
contaminated except for the properties listed in Section 2.14(d) of the
Disclosure Schedule, except as permitted under Environmental Laws. To the actual
knowledge of the current senior executive officers of FAFC and Target Bank, no
Real Property contains or formerly contained underground storage tanks, except
as disclosed in Section 2.14(d) of the Disclosure Schedule.
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(e) Except as disclosed in Section 2.14(e) of the
Disclosure Schedule, with respect to each of the nonresidential Real Properties
in which FAFC or Target Bank has held within the past 14 years or currently
holds indicia of ownership to protect a security interest in the facility (as
such terms are defined in 42 U.S.C. sec. 9601 et seq.), FAFC and Target Bank
have not, to the actual knowledge of the current senior executive officers of
FAFC and Target Bank, without any duty to make inquiry into books and records,
"participated in the management of the facility" or otherwise acted in a manner
such that Target Bank would lose its statutory exemption from liability under
Section 101(20) (A) of CERCLA and as further defined in the currently vacated
Environmental Protection Agency's Final Rule on Lender Liability, 40 C.F.R.
Part 300 Subpart L, sec. 300.1100, 57 FR 18343, April 29, 1992.
SECTION 2.15. COMPLIANCE WITH LAWS. FAFC and Target Bank each have all
licenses, franchises, permits and other governmental authorizations that are
legally required to enable them to conduct their respective businesses in all
material respects, and such businesses have been and are being conducted in
compliance in all material respects with all applicable laws and regulations.
SECTION 2.16. BROKERAGE. Except for amounts payable to Capital
Resources Group, Inc., as disclosed in Section 2.16 of the Disclosure Schedule,
there are no claims or agreements for brokerage commissions, finders' fees, or
similar compensation in connection with the transactions contemplated by this
Agreement payable by FAFC or Target Bank.
SECTION 2.17. UNDISCLOSED LIABILITIES. Except for (i) liabilities and
obligations fully reflected, disclosed or provided for in the FAFC Financial
Statements as of September 30, 1995 (including related notes), and (ii)
liabilities and obligations incurred since September 30, 1995 in the ordinary
course of business or related to the transaction contemplated by this Agreement,
and (iii) liabilities and obligations fully disclosed in Section 2.17 of the
Disclosure Schedule, neither FAFC nor Target Bank has any material liabilities
or obligations, whether absolute, known or unknown, accrued or unaccrued,
contingent or otherwise (and there is no asserted or unasserted claim against
FAFC or Target Bank giving rise to any such material liabilities or
obligations). For purposes of this Section 2.17, the term "liabilities" includes
without limitation liabilities as a guarantor and liabilities for taxes, in each
case material to the condition of either FAFC or Target Bank.
SECTION 2.18. STATEMENTS TRUE AND CORRECT. None of the information
supplied or to be supplied by FAFC or Target Bank for inclusion in (i) the Joint
Proxy Statement (as hereinafter defined), (ii) the Registration Statement (as
hereinafter defined) or (iii) any other document to be filed with any regulatory
authority in connection with the transactions contemplated hereby, will, at the
respective times such documents are filed and, with respect to the Registration
Statement when it becomes effective, and, with respect to the Joint Proxy
Statement when first mailed to the stockholders of FAFC or Acquiror, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements therein not misleading, or, in the
case of the Joint Proxy Statement or any amendment thereof or supplement
thereto, at the time of the FAFC Stockholders' Meeting or the Acquirors'
Stockholders' Meeting, be false or misleading with respect to any material fact,
or omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of any proxy for the FAFC
Stockholders' Meeting. All documents that FAFC or Target Bank is responsible for
filing with any regulatory authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable law and the applicable rules and regulations
thereunder.
SECTION 2.19. MATERIAL CONTRACTS.
(a) Section 2.19 of the Disclosure Schedule contains a
complete and correct list of all written or oral agreements, leases, and other
obligations and commitments of the following types, to which either FAFC or
Target Bank is a party, or by which any of their respective property is bound,
or which has been authorized by FAFC or Target Bank:
(i) Promissory note, guaranty, mortgage, security
agreement or other evidence of indebtedness (other than deposit accounts) owed
by FAFC or Target Bank in an amount in excess of Twenty Five Thousand Dollars
($25,000);
(ii) Partnership or joint venture agreements;
(iii) Employee Plans;
(iv) Insurance contracts or policies;
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(v) Agreement or commitment for sale or purchase
(otherwise than in the ordinary course of business) of any asset for more than
Twenty Five Thousand Dollars ($25,000);
(vi) Agreements or commitments for any single
capital expenditure in excess of Five Thousand Dollars ($5,000) or capital
expenditures in excess of Ten Thousand Dollars ($10,000) in the aggregate;
(vii) Agreement or other document creating a
monetary lien or security interest in excess of Twenty Five Thousand Dollars
($25,000) or other encumbrance relating to any real or personal property owned,
rented, or leased by FAFC or Target Bank;
(viii) Lease of, commitment to lease and any other
agreements relating to the lease or rental of, real or personal property by
FAFC or the Target Bank involving an annual payment in excess of Ten Thousand
Dollars ($10,000);
(ix) Any direct or indirect loan or guaranty of
a loan to any director, officer, or 5% stockholder of FAFC or Target Bank
or any director or officer of its subsidiary or a spouse or child of such
person, or any partnership, corporation, or other entity in which any such
director, officer, or stockholder or a spouse or child of such person holds
(directly or indirectly) an interest of ten percent (10%) or more; and
(x) All other material contracts and commitments
not made in the ordinary course of business;
(b) Concurrently with its delivery of the Disclosure
Schedule, FAFC and Target Bank will deliver complete and correct copies of all
written agreements, leases, policies and commitments listed in the Disclosure
Schedule, together with all amendments thereto, and a complete and correct
written description of all oral agreements listed in Section 2.19 of the
Disclosure Schedule.
SECTION 2.20. LIQUIDATION ACCOUNT. Records have been maintained as
required by Thrift Regulations with respect to the Liquidation Account and
are current and complete.
ARTICLE THREE
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REPRESENTATIONS AND WARRANTIES OF ACQUIROR
------------------------------------------
Acquiror hereby makes the following representations and warranties:
SECTION 3.01. ORGANIZATION AND CAPITAL STOCK.
(a) Acquiror is a corporation organized under the DGCL and is
duly organized and validly existing and in good standing under the laws of the
State of Delaware, with full corporate power and all necessary governmental
authorizations to own all of its properties and assets, to incur all of its
liabilities and to carry on its business as presently conducted. The minute
books of Acquiror contain complete and accurate records of all meetings and
other corporate actions of its Board of Directors and stockholders, including
committees of its Board of Directors. Acquiror has heretofore delivered copies
of its Certificate of Incorporation certified by the Secretary of State of the
State of Delaware and a copy of the By-laws of Acquiror certified by the
Secretary of Acquiror.
(b) The authorized capital stock of Acquiror consists of (i)
2,500,000 shares of Acquiror Common, par value One Dollar ($1.00) per share, of
which, as of the date of this Agreement, 1,971,477.1 shares were issued and
outstanding, and (ii) 100,000 shares of preferred stock, par value One Dollar
($1.00) per share, none of which have been issued or are outstanding. All of the
issued and outstanding shares of Acquiror Common are duly and validly issued and
outstanding and are fully paid and non-assessable. In addition, 78,738 shares of
Acquiror Common are reserved for issuance upon exercise of outstanding stock
options, including 73,000 shares which have been awarded under the Camco
Financial Corporation 1995 Stock Option and Incentive Plan which will be
submitted to the stockholders of Acquiror for approval at Acquiror's 1996 annual
meeting of stockholders. The weighted average exercise price of such options is
$16.14 per share. None of the outstanding shares of Acquiror Common has been
issued in violation of any preemptive or other rights of the current or past
stockholders of Acquiror.
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(c) Except as set forth in Section 3.01(b) of this Agreement,
there are no shares of capital stock or other equity securities of Acquiror
outstanding and no outstanding options, warrants, rights to subscribe for,
calls, or commitments of any character whatsoever relating to, or securities or
rights convertible in or exchangeable for, shares of the capital stock of
Acquiror, or contracts, commitments, understandings or arrangements by which
Acquiror is or may be obligated to issue additional shares of its capital stock
or options, warrants or rights to purchase or acquire any additional shares of
its capital stock.
SECTION 3.02. AUTHORIZATION.
(a) The Board of Directors of Acquiror has, by all appropriate
action, approved this Agreement and the Merger and authorized the execution and
delivery hereof on its behalf by its duly authorized officers and the
performance of its obligations hereunder. Except for approval of the Merger by
the stockholders of Acquiror and the approval of the authorization of additional
common shares as required hereby by the Board of Directors and stockholders of
Acquiror in accordance with the DGCL and Acquiror's Certificate of
Incorporation, no other corporate proceeding is required for the approval by
Acquiror of this Agreement or the Merger or the performance by Acquiror of its
obligations under this Agreement.
(b) This Agreement has been duly and validly executed and
delivered by Acquiror and constitutes a legal, valid and binding obligation of
Acquiror, enforceable against Acquiror in accordance with its terms, except as
such enforcement may be limited by bankruptcy, insolvency, reorganization,
receivership, conservatorship, moratorium or other laws affecting creditors'
rights generally or the rights of creditors of savings institutions, the
accounts of which savings institutions are insured by the SAIF or laws relating
to the safety and soundness of insured financial institutions and by judicial
discretion in applying principles of equity. Neither Acquiror nor any of its
significant subsidiaries (as defined in Section 3.03 of this Agreement) is in
default under or in violation of any provision of its respective certificate or
articles of incorporation, charter, by-laws, or any promissory note, indenture
or any evidence of indebtedness or security therefor, lease, contract, purchase
or other commitment or any other agreement of any of them which is material to
Acquiror, except for defaults and violations which will not have a material
adverse effect on the operations, business or financial condition of Acquiror
and its significant subsidiaries taken as a whole or on the ability of Acquiror
to consummate the transaction contemplated by this Agreement. Except for the
Regulatory Approvals and related filings, no notice to, filing with,
authorization by, or consent or approval of, any federal or state regulatory
authority or other third party is necessary for the execution and delivery of
this Agreement by Acquiror or consummation of the Merger by Acquiror.
(c) Neither the execution and delivery of this Agreement nor
the consummation of the Merger, nor compliance by Acquiror with the provisions
of this Agreement, will (i) conflict with or result in a breach of The
Certificate of Incorporation or By-laws of Acquiror; (ii) result in a breach of
termination of, or accelerate the performance required by, any note, bond,
mortgage, lease, agreement or other instrument to which Acquiror is a party or
may be bound; or (iii) violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation applicable to Acquiror.
SECTION 3.03. SUBSIDIARIES. Each of Acquiror's significant subsidiaries
(as such term is defined under regulations promulgated by the Securities and
Exchange Commission ("SEC")) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power and all material licenses, permits and governmental
authorizations to own its respective properties and assets, to incur its
respective liabilities and to carry on its business as now being conducted. All
of the outstanding shares of capital stock of each significant subsidiary of
Acquiror are owned by Acquiror, directly or indirectly, free and clear of any
material liens, encumbrances, or security interests of third parties. All of the
issued and outstanding shares of each significant subsidiary are duly and
validly issued and outstanding and are fully paid and non-assessable.
SECTION 3.04. FINANCIAL INFORMATION. The consolidated statements of
financial condition of Acquiror and its subsidiaries as of December 31, 1994 and
1993 and the related consolidated statements of income, statements of
stockholders' equity and statements of cash flows for each of the three fiscal
years ended December 31, 1994, together with the notes thereto, and the
unaudited consolidated statements of financial condition of Acquiror as of
September 30, 1995 and related consolidated statements of income, statements of
stockholders' equity and statements of cash flows for the nine (9) months then
ended included in Acquiror's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1995, as currently on file with the SEC (together, the
"Acquiror Financial Statements"), have been prepared in accordance with GAAP
applied on a consistent basis except as disclosed therein and fairly present in
all material respects the consolidated financial position and the consolidated
results of operations, changes in stockholders' equity and cash flows of
Acquiror and its consolidated subsidiaries as of the dates and for the periods
indicated (subject, in the case of interim financial statements,
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to normal, recurring year-end adjustments, none of which are material, and the
absence of footnotes). The books and records of Acquiror have been and are
being maintained in accordance with applicable legal and accounting
requirements. Acquiror is not aware of any event or circumstances, or series of
events or circumstances, which is reasonably likely to result in a Material
Adverse Change (as defined in Section 2.05 of this Agreement) to Acquiror.
SECTION 3.05. ABSENCE OF CHANGES. Since September 30, 1995, Acquiror,
on a consolidated basis, has not experienced or suffered a Material Adverse
Change or entered into any contract agreement or understanding which would
adversely affect its ability to perform its obligations under this Agreement;
provided, however, that the term "Material Adverse Change" as applied to
Acquiror shall also exclude any borrowings incurred by Acquiror in connection
with the performance of its obligations under this Agreement.
SECTION 3.06. LITIGATION. Except for routine litigation regarding the
collection of loans or foreclosure of liens in the ordinary course of business
of Acquiror, there is no litigation, claim or other proceeding pending or, to
the knowledge of Acquiror, threatened, against Acquiror or any of its
significant subsidiaries, or any of their respective directors or officers, or
to which the property of Acquiror or any of its significant subsidiaries is or
would be subject involving a claim in excess of $10,000 per claim or $50,000 in
the aggregate. Acquiror has taken all requisite action (including without
limitation the making of claims and the giving of notices) pursuant to its
directors and officers' liability insurance policy or policies in order to
preserve all rights thereunder with respect to all matters (other than matters
arising in connection with this Agreement and the transactions contemplated
hereby) occurring prior to the Effective Time of the Merger that are known to
it.
SECTION 3.07. COMPLIANCE WITH LAWS. Acquiror and its significant
subsidiaries have all licenses, franchises, permits and other government
authorizations that are legally required to enable them to conduct their
respective businesses in all material respects and are in compliance in all
material respects with all applicable laws and regulations.
SECTION 3.08. BROKERAGE FEES. Except for amounts payable to National
Capital Companies, Inc., there are no claims or agreements for brokerage
commissions, finders' fees, or similar compensation in connection with the
transactions contemplated by this Agreement payable by Acquiror.
SECTION 3.09. STATEMENTS TRUE AND CORRECT. None of the information
relating to Acquiror or its significant subsidiaries included in (i) the Joint
Proxy Statement, (ii) the Registration Statement or (iii) any other document to
be filed with any regulatory authority in connection with the transaction
contemplated hereby, will, at the respective times such documents are filed and,
with respect to the Registration Statement, when it becomes effective and, with
respect to the Joint Proxy Statement, when first mailed to the stockholders of
FAFC or Acquiror, be false or misleading with respect to any material fact, or
omit to state any material fact necessary in order to make the statements
therein not false or misleading, or, in the case of the Joint Proxy Statement or
any amendment thereof or supplement thereto, at the time of the FAFC
Stockholders' Meeting or the Acquirors' Stockholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material
fact, necessary to correct any statement in any earlier communication with
respect to the solicitation of any proxy for the FAFC Stockholders' Meeting. All
documents that Acquiror is responsible for filing with the OTS or any other
regulatory authority in connection with the transactions contemplated hereby
will comply as to form in all material respects with the provisions of
applicable law and any rules and regulations thereunder.
SECTION 3.10. UNDISCLOSED LIABILITIES. Except for (i) liabilities and
obligations fully reflected, disclosed or provided for in the Acquiror Financial
Statements as of December 31, 1994 (including related notes), and (ii)
liabilities and obligations incurred since December 31, 1994 in the ordinary
course of business or related to the transaction contemplated by this Agreement,
Acquiror has no material liabilities or obligations, whether absolute, known or
unknown, accrued or unaccrued, contingent or otherwise (and there is no asserted
or unasserted claim against Acquiror giving rise to any such material
liabilities or obligations). For purposes of the Section 3.10, the term
"liabilities" includes without limitation liabilities as a guarantor and
liabilities for taxes, in each case material to the condition of Acquiror.
SECTION 3.11. REGULATORY ENFORCEMENT MATTERS. Acquiror and its
significant subsidiaries are not subject to, nor have they received any notice
or advice that any of them is not in substantial compliance with any statute or
regulation, or that any of them is or may become subject to any order, agreement
or memorandum of understanding with any federal or state agency charged with the
supervision or regulation of savings banks, savings associations or holding
companies of savings banks or savings associations or engaged in the insurance
of deposits or any other governmental agency having supervisory or regulatory
authority with respect to Acquiror or any of its significant subsidiaries, and
Acquiror and its
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significant subsidiaries have received no notice from any governmental
authority threatening to revoke any license, franchise, permit or governmental
authorization.
Section 3.12. Tax Matters.
(a) Acquiror and its significant subsidiaries have filed all
federal, state and local tax returns and reports due with respect to any of
their employees, depositors, borrowers, operations, businesses or properties in
a timely fashion and have paid or made provision for all amounts due or claimed
to be due. All such returns and reports fairly reflect the information required
to be presented therein. All provisions for accrued but unpaid taxes contained
in Acquiror's Financial Statements were made in accordance with GAAP and provide
for anticipated tax liabilities including interest and penalties. There are no
federal, state or local tax returns or reports not filed which would be due but
for an extension of time for filing having been granted.
(b) Neither Acquiror nor any of its significant subsidiaries
has executed nor filed with the IRS or any state or local tax authority any
agreement extending the period for assessment and collection of any tax, nor is
Acquiror or any of its significant subsidiaries a party to any action or
proceeding by any governmental authority for assessment or collection of taxes,
except tax liens or levies against customers of Acquiror or any of its
significant subsidiaries. There is no outstanding assessment or claim for
collection of taxes against Acquiror or any of its significant subsidiaries.
Neither Acquiror nor any of its significant subsidiaries has received any notice
of deficiency, proposed deficiency or assessment from the IRS or any other
governmental agency, with respect to any federal, state or local taxes. No tax
return of Acquiror or any of its significant subsidiaries is currently the
subject of any audit by the IRS or any other governmental agency. No material
deficiencies have been asserted in connection with the tax returns of the
Acquiror or any of its significant subsidiaries, and Acquiror has no reason to
believe that any deficiency would be asserted relating thereto.
ARTICLE FOUR
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AGREEMENTS OF FAFC AND TARGET BANK
----------------------------------
SECTION 4.01. BUSINESS IN ORDINARY COURSE.
(a) FAFC and Target Bank shall not declare or pay any dividend
or make any other distribution with respect to their capital stock or ownership
interests whether in cash, stock or other property, after the date of this
Agreement except payment by FAFC of a cash dividend on February 28, 1996, in the
amount of $.30 per share of FAFC Common.
(b) FAFC and Target Bank shall continue to carry on, after the
date hereof, their respective businesses and the discharge or incurrence of
obligations and liabilities, only in the usual, regular and ordinary course of
business, as heretofore conducted. By way of amplification and not limitation,
FAFC and Target Bank will not, without the prior written consent of Acquiror
acting through its Chief Executive Officer or such other officer as Acquiror may
specify in a written notice to Target Bank, provided in the case of subsections
(iv), (vi), (vii), (viii), (ix), (xi) and (xiii) below such consent shall not be
unreasonably withheld or delayed:
(i) issue any FAFC Common or Target Bank
Common or other capital stock or any options, warrants, or other rights to
subscribe for or purchase FAFC Common or Target Bank Common or any other
capital stock or any securities convertible into or exchangeable for any
capital stock, except pursuant to options outstanding on the date hereof under
the FAFC Stock Option Plan;
(ii) directly or indirectly redeem, purchase
or otherwise acquire any FAFC Common or Target Bank Common or any other
capital stock or ownership interests of FAFC or Target Bank;
(iii) effect a reclassification, recapitalization,
split-up, exchange of shares, readjustment or other similar change in or to any
capital stock or otherwise reorganize or recapitalize;
(iv) change their Certificate of Incorporation
or Charter or By-laws;
(v) except as provided in Section 4.09, enter
into or modify any employment agreement or severance agreement or plan;
grant any increase in the compensation payable or to become payable to any
director, officer or employee, except for increases in salaries consistent
with FAFC's and Target Bank's past practices; grant any stock options; or,
except as required by law, pay or agree to pay any bonus, adopt or make any
change in any bonus, insurance,
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pension, or other Employee Plan, payment or arrangement made to, for or with
any director, officer or employee, except for payments of and changes in
salaries and bonuses consistent with FAFC's and Target Bank's past practices,
or promote any persons employed as of the date hereof or hire any new
employees;
(vi) except for FHLB of Cincinnati advances,
the aggregate amount of which at any time shall not exceed Six Million Dollars
($6,000,000) plus such additional amount as may be obtained with the right of
prepayment at any time without penalty or premium, and deposit-taking in the
ordinary course of its business, borrow or agree to borrow any funds, including
but not limited to repurchase transactions, or indirectly guarantee or agree to
guarantee any obligations of others;
(vii) make or commit to make any new loan or
letter of credit or any new or additional discretionary advance under any
existing line of credit, in a principal amount in excess of One Hundred
Thousand Dollars ($100,000) or that would increase the aggregate credit
outstanding to any one borrower (or group of affiliated borrowers) to more than
One Hundred Thousand Dollars ($100,000) (excluding for this purpose any accrued
interest or overdrafts); provided, however, that Target Bank may make
one-to-four family residential mortgage loans that conform to Target Bank's
mortgage lending policies as of the date hereof in principal amounts of up to
Two Hundred Fifty Thousand Dollars ($250,000);
(viii) establish any new lending programs or make
any changes in its policies concerning which persons may approve loans;
(ix) enter into any securities transaction for
its own account or purchase or otherwise acquire any investment security for
its own account other than U.S. Treasury obligations and deposits in an
overnight account at the FHLB of Cincinnati or participation certificates
issued or guaranteed by the Government National Mortgage Association, the
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation;
(x) increase or decrease the rate of interest
paid on time deposits or on certificates of deposit, except in a manner and
pursuant to policies consistent with past practices in relation to rates
prevailing in Target Bank's market;
(xi) enter into any agreement, contract or
commitment out of the ordinary course of business or having a term in excess
of three (3) months and involving an expenditure in excess of Five Thousand
Dollars ($5,000) other than letters of credit, loan agreements, deposit
agreements, and other lending, credit and deposit agreements and documents made
in the ordinary course of business;
(xii) except in the ordinary course of business,
place on any of its assets or properties any mortgage, pledge, lien, charge,
or other encumbrance;
(xiii) cancel or accelerate any material
indebtedness owing to FAFC or Target Bank or any claims which FAFC or Target
Bank may possess or waive any rights of material value;
(xiv) sell or otherwise dispose of any real
property or any material amount of any tangible or intangible personal property
other than, (a) properties acquired in foreclosure or otherwise in the ordinary
collection of indebtedness owed to Target Bank, (b) student loans, or (c) fixed
rate loans which are held for sale upon origination and sold within sixty (60)
days thereafter;
(xv) foreclose upon or otherwise take title
to or possession or control of any real property without first obtaining
a Phase One environmental report thereon which indicates that the property is
free of pollutants, contaminants or hazardous or toxic waste materials;
provided, however, that Target Bank shall not be required to obtain such a
report with respect to single family, non-agricultural residential property of
one acre or less to be foreclosed upon unless it has reason to believe that
such property might contain any such pollutants, contamination, or waste
materials;
(xvi) voluntarily commit any act or omission
which will knowingly cause a breach of any material agreement, contract or
commitment;
(xvii) violate any law, statute, rule, governmental
regulation, or order, which violation is reasonably likely to result in a
Material Adverse Change to FAFC and Target Bank, taken as a whole; or
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(xviii) purchase any real or personal property or
make any other capital expenditure where the amount paid or committed therefor
is in excess of Five Thousand Dollars ($5,000).
(c) FAFC and Target Bank shall promptly notify Acquiror in
writing of the occurrence of any matter or event known to and directly involving
FAFC or Target Bank that is reasonably likely to result in a Material Adverse
Change in FAFC and Target Bank, taken as a whole, or impair the ability of FAFC
or Target Bank to consummate the transactions contemplated herein.
(d) Unless and until this Agreement shall have been properly
terminated by a party pursuant to Article Seven hereof and except as provided
below in this Section 4.01(d), each of FAFC and Target Bank shall (i) not,
directly or indirectly, through any of their respective officers, directors,
agents, stockholders or affiliates, solicit, encourage or initiate any
negotiations or discussions with respect to inquiries, offers or proposals
relating to the possible sale or other disposition of shares of its capital
stock by its stockholders or the possible sale or other disposition (except in
the ordinary course of business) of a substantial portion of its assets to, or
merger or consolidation with, any other person, (ii) not disclose to any person
any information not customarily disclosed publicly or provide access to its
properties, books or records or otherwise assist or encourage any person in
connection with any of the foregoing, and (iii) give Acquiror prompt notice of
any such inquiries, offers or proposals. The foregoing shall not apply, however,
to the consideration and facilitation of an inquiry, offer or proposal not
solicited by FAFC or Target Bank or any of their respective officers, directors,
stockholders, agents or affiliates which relates to the possible sale or other
disposition of FAFC Common or Target Bank Common by stockholders or the possible
sale or other disposition of all or substantially all of FAFC's or Target Bank's
assets to, or merger or consolidation with, another corporation or association
(an "Unsolicited Acquisition Proposal") if and to the extent that the Board of
Directors of FAFC reasonably determines in good faith after consultation with
its financial advisor and counsel to FAFC that failure to consider such
Unsolicited Acquisition Proposal could reasonably be expected to constitute a
breach of its fiduciary duties to the stockholders of FAFC; provided, however,
that FAFC shall give Acquiror prompt notice of such Unsolicited Acquisition
Proposal and keep Acquiror promptly informed regarding the substance thereof and
the response of the Board of Directors of FAFC thereto.
(e) FAFC and Target Bank shall permit representatives of
Acquiror to attend each meeting of its respective board of directors and
executive committee, and shall give reasonable prior notice of all such meetings
to Acquiror; provided, however, the representatives of Acquiror may be excluded
from portions of such meetings where sensitive matters (including but not
limited to an Unsolicited Acquisition Proposal) are being discussed or voted
upon.
(f) FAFC shall provide to Acquiror such reports on litigation
involving FAFC or Target Bank as Acquiror shall reasonably request, provided
that FAFC shall not be required to divulge information to the extent that, in
the good faith opinion of its counsel, by doing so, it would waive the
attorney-client privilege.
(g) Target Bank will use its best efforts to prevent the
decline in its level of deposits and in its mortgage loan portfolio in a manner
consistent with the safe and sound operations of the Target Bank and the terms
of this Agreement.
SECTION 4.02. BREACHES. In the event that FAFC or Target Bank has
knowledge of the occurrence, or impending or threatened occurrence, of any event
or condition which would cause or constitute a breach by either of any
representations or agreements contained or referred to herein, it shall give
prompt written notice thereof to Acquiror and use its best efforts to prevent or
promptly remedy the same.
SECTION 4.03. SUBMISSION TO STOCKHOLDERS. FAFC shall cause to be duly
called and held, as soon as practicable, a special meeting of its stockholders
for submission of this Agreement for adoption by such stockholders as required
by applicable law (the "FAFC Stockholders' Meeting"). FAFC and Acquiror shall
prepare a joint proxy statement (the "Joint Proxy Statement") for use in
connection with the FAFC Stockholders' Meeting and the Acquiror's Stockholders'
Meeting. The Board of Directors of FAFC shall unanimously recommend to its
stockholders the adoption of this Agreement and use its best efforts to obtain
such stockholder approval; provided, however, that if the Board of Directors of
FAFC shall have reasonably determined in good faith (after consultation with its
counsel) that such recommendation is reasonably likely to constitute a breach of
its fiduciary duties to the stockholders of FAFC, then the Board of Directors of
FAFC shall not be obligated to recommend to its stockholders adoption of this
Agreement, or to present this Agreement to the stockholders of FAFC for their
adoption at the FAFC Stockholders' Meeting or to hold the FAFC Stockholders'
Meeting for such purpose, but FAFC shall be subject to Section 7.08 below.
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SECTION 4.04. CONSENTS TO CONTRACTS AND LEASES. FAFC and Target Bank
shall use their best efforts to obtain all necessary consents with respect to
all interests of FAFC and Target Bank in any material leases, licenses,
contracts, instruments and rights which require the consent of another person
for their transfer or assumption pursuant to the Merger, if any.
SECTION 4.05. CONFORMING ACCOUNTING AND RESERVE POLICIES AND MERGER
EXPENSES. After the receipt of all approvals set forth in Section 6.01(d) of
this Agreement, and provided that at such time all of the conditions to closing
set forth in Sections 6.01(a), (b), (c), (d), (f), (g), (h), (i), (j), (k), (l),
(m), (n), (o), (p) and (r) of this Agreement have been satisfied, to the extent
they are capable of being satisfied as of such time, and further provided that
no basis for termination of this Agreement by either party pursuant to Article
Seven of this Agreement is then extant, at the request of Acquiror, Target Bank
shall, on or before or effective as of the date specified by Acquiror, establish
and take such reserves and accruals and make such other accounting adjustments
and entries as Acquiror shall request in order to give effect to the expenses
arising from or incurred in connection with the transactions contemplated by
this Agreement and to conform Target Bank's reserve, accrual and other
accounting policies to the policies of an Acquiror significant subsidiary;
provided, however, such requested adjustments and entries shall not be taken
into account in determining whether FAFC and Target Bank, taken as a whole, have
experienced a Material Adverse Change.
SECTION 4.06. CONSUMMATION OF AGREEMENT. FAFC and Target Bank shall use
their best efforts to perform and fulfill all conditions and obligations to be
performed or fulfilled under this Agreement by them and to effect the Merger in
accordance with the terms and provisions hereof. Target Bank shall furnish to
Acquiror in a timely manner all information, data and documents in the
possession of FAFC or Target Bank requested by Acquiror as may be required to
obtain the Regulatory Approvals or other necessary approvals of the Merger and
shall otherwise cooperate fully with Acquiror to carry out the purpose and
intent of this Agreement.
SECTION 4.07. ACCESS TO INFORMATION. FAFC and Target Bank shall permit
Acquiror reasonable access to their properties in a manner which will avoid
undue disruption or interference with normal operations and shall disclose and
make available to Acquiror all books, documents, papers and records relating to
assets, stock, ownership, properties, operations, obligations and liabilities,
including but not limited to all books of account (including the general
ledger), tax records, minute books of directors' and stockholders' meetings,
organizational documents, material contracts and agreements, loan files, filings
with any regulatory authority, accountants' workpapers, litigation files, plans
affecting employees, and any other business activities or prospects in which
Acquiror may have a reasonable and legitimate interest in furtherance of the
transactions contemplated by this Agreement. Acquiror will hold any such
information which is nonpublic in confidence in accordance with the provisions
of Section 8.01 hereof.
SECTION 4.08. SUBSEQUENT DISCLOSURE SCHEDULE. If subsequent to the date
of this Agreement and prior to the Effective Time, an event occurs which renders
untrue any representation or warranty of FAFC or Target Bank made at the date of
this Agreement (a "Trigger Event"), FAFC or Target Bank shall promptly deliver
to Acquiror a supplement to the Disclosure Schedule (a "Subsequent Disclosure
Schedule"), which shall contain a detailed description of any and all such
matters. A Subsequent Disclosure Schedule shall be delivered by FAFC or Target
Bank to Acquiror within five (5) business days after FAFC or Target Bank learns
of the Trigger Event but in no event later than before the Closing. The
submission of a Subsequent Disclosure Schedule and the matters therein contained
shall not constitute a default or breach by FAFC or Target Bank of any of its
representations and warranties under this Agreement; provided, however, that all
matters therein disclosed together with all other events, circumstances and
occurrences may be taken into account by Acquiror in determining whether FAFC or
Target Bank has experienced a Material Adverse Change; provided, further,
however, that this Section 4.08 is not intended to permit FAFC or Target Bank to
alter or amend its representations and warranties as made herein (including the
Disclosure Schedule) as of the date of this Agreement, and any Subsequent
Disclosure Schedule shall not cure the inaccuracy thereof as of the date of this
Agreement for any purpose under this Agreement.
SECTION 4.09. CERTAIN CONTRACTS, POLICIES, AGREEMENTS, AND PLANS. FAFC
and Target shall, as appropriate, amend the following specified contracts,
policies, agreements, and plans in the manner described in this Section 4.09 and
shall obtain in each case the written agreement of all the parties affected by
such amendment or a separate writing if the affected party is not now a
signatory to a written agreement.
(a) The Employment Agreement with Paul D. Leake dated
March 24, 1994 shall be replaced by a new employment contract, to be
effective as of the Effective Time, in the form set forth in Section 4.09(a)
of the Disclosure Schedule.
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(b) The Management Incentive Compensation Plan dated July 19,
1995 (the "Incentive Plan") shall be amended to provide (i) that the bonuses
payable to eligible employees under the Incentive Plan with respect to the
twelve months ended September 30, 1996 and 1997 shall be not less than 10% of
the employee's base salary, notwithstanding net income of Target Bank of less
than $795,000 for such periods; (ii) that the bonuses payable to eligible
employees under the Incentive Plan with respect to the twelve months ended
September 30, 1998 shall be not less than 8% of the employee's base salary,
notwithstanding net income of Target Bank of less than $795,000 for such
periods; (iii) that the Incentive Plan shall terminate effective October 1,
1998; and (iv) that the schedule set forth in section 5 of the Incentive Plan
under the heading "Recurring Earnings Per Share (fully diluted)" shall be
replaced with a schedule providing for the payment of bonuses based on the
levels of net income after taxes, without giving effect to net income
attributable to assets acquired by Target Bank as a result of mergers or
acquisitions, if any, consummated after the date of this Agreement, as follows:
Net Income % of Base Salary
---------- ----------------
(Dollars in thousands)
Less than $795 0%
$795 to 954 15
$955 to 1,034 20
$1,035 to $1,113 25
$1,114 to $1,193 30
Over $1,193 35
(c) Upon the termination of the Incentive Plan, eligible
employees of Target Bank shall be eligible to participate in any bonus plan
maintained by Acquiror, if any, with credit for prior years of service to Target
Bank, if applicable.
(d) The FAFC Executive Severance Compensation Plan adopted by
the Board of Directors of Target Bank on March 24, 1995 and amended by the Board
of Directors of Target Bank on February 22, 1996 (the "Executive Plan") shall be
terminated, and FAFC shall enter into a severance agreement in the form set
forth in Section 4.09(d) of the Disclosure Schedule with each employee who is a
participant in the Executive Plan on the date of this Agreement.
(e) The FAFC Employee Bonus Plan shall be amended to
specifically provide that the officers of FAFC and Target Bank are not
eligible to participate in such plan.
SECTION 4.10. AFFILIATES.
(a) Within 45 days after the date of this Agreement, FAFC
shall identify to Acquiror all persons whom FAFC reasonably believes to be
"affiliates" as defined in Rule 145 promulgated pursuant to the Securities Act
of 1933, as amended. Thereafter and until the Effective Time, FAFC shall
identify to Acquiror each additional person whom it reasonably believes to have
thereafter become its affiliate as so defined.
(b) FAFC shall cause each person who is identified as an
affiliate to deliver to Acquiror before the Effective Time a written agreement
providing that such person will not transfer or dispose of any Acquiror Common
received in the Merger except in compliance with the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
SECTION 4.11 TAX TREATMENT. Neither FAFC nor Target Bank shall take any
action which would prevent the Merger and the other transactions contemplated
hereby from qualifying as a reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code.
ARTICLE FIVE
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FURTHER AGREEMENTS
------------------
SECTION 5.01. REGULATORY APPROVALS, REGISTRATION AND PROXY STATEMENT.
(a) REGULATORY APPROVALS. Acquiror shall use its best efforts
to file within sixty (60) days after the date hereof all applications for the
Regulatory Approvals required in order to consummate the Merger. Acquiror shall
keep
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FAFC reasonably informed as to the status of such applications and make
available to FAFC copies of such applications as filed and any supplementally
filed materials.
(b) REGISTRATION STATEMENT. Acquiror shall, as soon as
reasonably practicable, prepare in accordance with the Securities Act of 1933,
as amended, and file with the Securities and Exchange Commission (the "SEC") a
registration statement in respect of the Acquiror's Common Shares to be issued
to holders of FAFC Common Shares in accordance with Article One of this
Agreement (the "Registration Statement") and shall use all reasonable efforts to
have the Registration Statement, as amended, declared effective by the SEC as
promptly as practicable.
(c) PROXY STATEMENT AND SUBMISSION TO STOCKHOLDERS. Acquiror
shall cause to be duly called and held as soon as practicable a meeting of its
stockholders for submission of this Agreement for adoption by such stockholders
as required by applicable law (the "Acquiror's Stockholders' Meeting"). Also to
be submitted will be a proposal to approve an increase in the number of
authorized common shares of Acquiror in such amount as to have available
sufficient shares to carry out this Agreement. Acquiror shall deliver the Joint
Proxy Statement to its stockholders. The Board of Directors of Acquiror shall
unanimously recommend to its stockholders the adoption of the Agreement and the
increase in the number of authorized shares of Acquiror Common and use its best
efforts to obtain such stockholder approvals.
(d) INFORMATION. Acquiror shall fully cooperate with FAFC in
the preparation of the Joint Proxy Statement, and FAFC and Target Bank shall
timely provide all information requested by Acquiror for inclusion in the Joint
Proxy Statement and shall fully cooperate with Acquiror in the preparation of
the Joint Proxy Statement.
SECTION 5.02. BREACH. In the event that Acquiror has knowledge of the
occurrence, or impending or threatened occurrence, of any event or condition
which would cause or constitute a breach of any of its representations or
agreements contained or referred to herein, it shall give prompt written notice
thereof to FAFC and use its best efforts to prevent or promptly remedy the same.
SECTION 5.03. CONSUMMATION OF AGREEMENT. Acquiror shall use its best
efforts to perform and fulfill all conditions and obligations to be performed or
fulfilled by it under this Agreement and to effect the Merger in accordance with
the terms and conditions of this Agreement.
SECTION 5.04. DIRECTORS AND OFFICERS' LIABILITY INSURANCE AND
INDEMNIFICATION.
(a) From the Effective Time of the Merger and continuing for a
period of three years thereafter, the current and former officers and directors
of FAFC shall be indemnified by Acquiror from their acts and omissions occurring
prior to the Effective Time to the maximum extent permitted by the Certificate
of Incorporation and By-laws of Acquiror but subject to any applicable
limitations of Delaware law. From the Effective Time and continuing for a period
of three years thereafter, the current and former officers and directors of
Target Bank shall be indemnified by Target Bank for their acts and omissions
occurring prior to the Effective Time to the extent permitted by the Thrift
Regulations. As a condition to receiving such indemnification, the party
claiming indemnification shall assign to Acquiror, by separate writing, all
right, title and interest in and to the proceeds of the claiming party's
applicable insurance coverage, if any, including insurance maintained or
provided by Acquiror or FAFC or Target Bank, to the extent of such indemnity. No
person shall be entitled to such indemnification with respect to a claim (i) if
such person fails to cooperate in the defense and investigation of such claim as
to which indemnification may be made, (ii) made by such person against Acquiror,
its subsidiaries, FAFC or Target Bank arising out of or in connection with this
Agreement, the transactions contemplated hereby or the conduct of the business
of Acquiror, its subsidiaries, FAFC or Target Bank, or (iii) if such person
fails to deliver such notices as may be required under any applicable directors
and officers liability insurance policy to preserve any possible claims of which
the claiming party is aware, to the extent such failure results in a denial of
payment under such policy.
(b) Subject to FAFC and Target Bank providing all requested
information and representations to Acquiror's directors' and officers' liability
insurance carrier, Acquiror shall use its best efforts to add a rider, at rates
not to exceed $10,000 per year, to its existing directors' and officers'
liability insurance policy providing coverage of up to $1 million for the acts
and omissions of the current and former officers and directors of FAFC and
Target Bank occurring prior to the Effective Time of the Merger and to continue
such rider for a period of three years. In the event that the Acquiror is unable
to obtain such rider to its existing directors' and officers' liability
insurance policy, the current and former officers and directors shall have the
right to obtain, at Acquiror's expense, comparable coverage for a period of
three (3) years, or such lesser period for which such coverage may be available,
beginning as of the Effective Time.
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SECTION 5.05 EMPLOYEES. (a) All employees of Target Bank immediately
prior to the Effective Time shall continue as employees of Target Bank at the
Effective Time and, with respect to employees who are not currently covered by a
written employment agreement with the Target Bank, shall be employed as at-will
employees at the same base compensation they are receiving from Target Bank. Any
employee who is currently covered by a written employment agreement or policy
will continue his or her employment in accordance with the terms of such written
agreement or policy except as provided in this Agreement. Except as specifically
provided herein, no employee of Target Bank shall be entitled to be eligible for
or participate in any qualified or non-qualified employee benefit program or
plan maintained by Acquiror or its subsidiaries. The Defined Benefit Plan of
FAFC and/or Target Bank may be terminated.
(b) Except as otherwise provided in this Agreement, the
employee benefit plans sponsored by Target Bank on the date of this Agreement
will not be affected by the Merger, subject to the following terms and
conditions:
(i) The health insurance plan sponsored by
Target Bank for the benefit of its employees will be subject to a contribution
by the Target Bank employees toward a portion of the per-employee cost of the
plan to be phased in as follows: 8% in the first full calendar year following
the Effective Time; 14% in the second full calendar year following the
Effective Time; and 20% in the third full calendar year following the Effective
Time;
(ii) The ESOP shall be terminated and the ESOP
assets shall be distributed as set forth in Section 5.06 of this Agreement;
(iii) Commencing in the first plan year
following the final distribution under the ESOP pursuant to Section 5.06 of
this Agreement, or such earlier date as may be required under the Code or
ERISA, employees of Target Bank shall become participants in the Camco 401(k)
plan in accordance with the terms and conditions of such plan as then in
effect, with past service credit given for their years of employment by Target
Bank for eligibility and vesting purposes; and
(iv) The defined benefit plan of Target Bank
may be terminated by Target Bank prior to the Effective Time or may be
terminated by Acquiror after the Effective Time.
SECTION 5.06. TARGET BANK'S EMPLOYEE STOCK OWNERSHIP PLAN. Prior to
the Closing, no employer contributions shall be made to the ESOP by either
Acquiror, FAFC or Target Bank except as necessary to make the minimum required
payments under the current exempt loan (the "Loan") between FAFC and the ESOP;
provided, however, that all such contributions shall be deductible by FAFC or
Target Bank under Section 404 of the Code and the allocation of such
contributions shall otherwise be in compliance with Section 415 of the Code.
All shares of FAFC Common held by the Trustee of the ESOP at the
Effective Time shall be exchanged by the Trustee for the Per Share Merger
Consideration in accordance with this Agreement, and the cash proceeds paid by
Acquiror to the ESOP with respect to the unallocated shares owned by the ESOP
shall be applied against the loan. To the extent that such cash proceeds are
insufficient to retire the Loan, the Trustee of the ESOP shall dispose of such
number of the shares held in the suspense account (which is a part of the ESOP)
for the purpose of retiring the Loan. Any shares remaining in the suspense
account following repayment of the Loan in full will be available for allocation
to Participants (as defined in the ESOP) in accordance with the provisions of
the ESOP.
As soon as practicable after the Closing Date, Acquiror shall take all
appropriate steps to terminate the ESOP, but shall retain in existence the trust
which is part of the ESOP for the time period described in the following
sentence. The remaining ESOP assets following termination of the ESOP shall be
held for the exclusive benefit of employees and former employees of FAFC and
Target Bank until the earlier of (1) the date on which all amounts held in any
suspense account upon retirement of the Loan have been allocated to Participants
in the ESOP or (2) the date on which, pursuant to the applicable provisions of
Sections 401(a)(26) and 410(b) of the Code, the ESOP trust may no longer be
maintained for the exclusive benefit of employees and former employees of FAFC
and Target Bank and remain qualified under the applicable provisions of Section
401(a) of the Code. During this time period, the assets held in the suspense
account shall be allocated to the accounts of each eligible ESOP Participant in
accordance with the applicable provisions of the ESOP to the maximum extent
permitted under Section 415 of the Code. In the event that all amounts held in
the suspense account upon retirement of the Loan are allocated to Participants
in the ESOP prior to the date specified in (2) above, the ESOP trust shall be
terminated and the ESOP account balances shall be distributed to Participants in
the ESOP following such termination. To the extent that all amounts held in the
suspense account of the ESOP have not been allocated to ESOP Participants as of
the date specified in (2) above, the ESOP trust shall be terminated, the ESOP
account balances shall be distributed to
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Participants in the ESOP and any remaining balance in the suspense account
shall be transferred to another plan maintained by Acquiror which is qualified
under Section 401(a) of the Code.
In the event that, following the Effective Time, the employment of any
Participant who was employed by Target Bank or its subsidiary immediately prior
the Effective Time is terminated involuntarily without cause by Target Bank or
its subsidiary, such Participant (or his beneficiary or beneficiaries) shall
receive a cash bonus from Target Bank as soon as practicable after the date on
which the final allocation of earnings from the suspense account is made, equal
to the amount such Participant would have received if he or she had continued as
a Participant in the ESOP, at his or her then-current annualized compensation as
such term is defined in the ESOP, through the earlier of such dates; provided,
however, that neither Acquiror nor Target Bank shall be obligated to make any
such cash payment under any circumstances in which such payments are not or will
not be deductible because of Section 280G of the Code.
Acquiror, at its expense, may in its discretion file one or more
Applications for Determination with the appropriate district office of the
Internal Revenue Service (the "Key District Office") relating to the proposed
termination of the ESOP as of the Effective Time and providing for the cash
portion of the Merger Consideration to be applied against the ESOP loan, for the
conversion to cash of a sufficient number of shares of Acquiror Common received
in the Merger with respect to unallocated employer securities to fully retire
the ESOP loan and the distribution of the assets of the ESOP to Participants,
former Participants and their beneficiaries. Upon receipt of a favorable
Determination Letter from the Key District Office in response to the Application
for Determination, Acquiror shall cause the ESOP to make distribution of
benefits from the ESOP at the earliest practicable time in a manner consistent
with the favorable Determination Letter. In this regard Participants, former
Participants, and their beneficiaries will be offered the ability to transfer to
or to make a tax-free rollover, to the extent permitted by law, to an individual
retirement account at their election.
SECTION 5.07. STOCK OPTIONS.
(a) At the Effective Time, FAFC's Stock Option Plan (not to
exceed 129,598 shares of FAFC Common) shall be assumed by Acquiror. No
option granted on or after January 16, 1996 shall be valid in any respect.
The number of shares of Acquiror Common subject to such FAFC
options shall be equal to the number of shares of FAFC Common subject to such
FAFC options immediately prior to the Effective Time multiplied by the option
exchange ratio (as hereinafter defined) (with the product rounded down to the
next whole share) and the per share exercise price shall be adjusted by dividing
the per share exercise price under each such FAFC option by the option exchange
ratio (with the quotient rounded up to the next whole cent). The Acquiror and
its Compensation Committee shall be substituted for FAFC and the Committee of
the FAFC Board of Directors administering the FAFC Stock Option Plan. The Option
Exchange Ratio is the value of the Per Share Merger Consideration determined in
accordance with Section 1.03(a)(iii), Section 1.03(a)(iv) and Section 1.03(a)(v)
of this Agreement on the last day of trading prior to Closing Date, divided by
the Market Value of the Acquiror Common; provided, however, that the terms of
each FAFC option shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction subsequent to the Effective Time.
(b) The shares of Acquiror Common covered by the FAFC options
to be issued pursuant to Section 5.07(a) shall be covered by an effective
registration statement filed on Form S-8 with the SEC and shall be duly
authorized, validly issued, fully paid and non-assessable and not subject to or
in violation of any preemptive rights. Acquiror shall at and after the Effective
Time have reserved sufficient shares of Acquiror Common for issuance with
respect to such options. Acquiror shall also take any reasonable action required
to be taken under any applicable state blue sky or securities laws in connection
with the issuance of such shares.
(c) Except as provided in this Section 5.07, all other terms
and conditions of the FAFC Stock Option Plan and Award Grants shall remain as
now existing. The list of Award Grants by type, name, expiration date, number
and exercise price is set forth in Section 5.07 of the Disclosure Schedule.
(d) In respect of any stock option which is an "Incentive
Stock Option" within the meaning of Section 422 of the Code, the conversion
hereby provided for shall comply with the requirements of Section 424(a) of the
Code, including the requirement that such converted options shall not give to
the holder thereof any benefits additional to those which such holder had prior
to such conversion under the option as originally granted. It is intended that
the foregoing assumption shall be undertaken in a manner that will not
constitute a "modification" as defined in Section 424(h) of the Code as to any
stock option which is an "Incentive Stock Option".
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SECTION 5.08. RECOGNITION AND RETENTION PLAN. The existing FAFC 1995
Recognition and Retention Plan ("RRP") and grants of awards made on or prior to
January 16, 1996 as listed in Section 5.08 of the Disclosure Schedule in an
amount not to exceed 54,289 shares of FAFC Common will be honored by Acquiror in
accordance with the terms of said plan and grants of award and Thrift
Regulations. No awards subsequent to January 16, 1996 shall be valid in any
respect. To the extent such awards have not vested prior to the Effective Time,
the cash portion of the Per Share Merger Consideration for each RRP award shall
be deposited by Acquiror in an account at Cambridge Savings Bank bearing
interest at market rates. The cash and a pro rata portion of the interest earned
on such cash shall be distributed to grantees in a manner consistent with the
vesting of each RRP award.
SECTION 5.09. DIRECTORS RETIREMENT PLAN. The obligations of Target Bank
under its Directors Retirement Plan shall be administered by Acquiror in
accordance with the terms and conditions of the Directors Retirement Plan in
effect on the date of this Agreement and only with respect to the persons who
are directors of FAFC or who are receiving benefits under the Directors
Retirement Plan on the date of this Agreement. The amount of benefits payable
under the Directors Retirement Plan shall not increase notwithstanding any
increase in directors fees.
SECTION 5.10. BOARD OF DIRECTORS. Acquiror will add Paul D. Leake
to its Board of Directors. Target Bank will add such persons to its Board of
Directors as required by Acquiror.
SECTION 5.11. CONDUCT OF BUSINESSES. From the date of this Agreement
until the Effective Time, Acquiror covenants that it:
(a) Will use all reasonable efforts to obtain any consent,
authorization or approval of, or waiver or exemption by, any governmental entity
or other third party required to be obtained or made by it in connection with
the Merger or the taking of any action in connection with the consummation and
its performance relating thereto;
(b) Will use all reasonable efforts to preserve intact its
business organization and assets and maintain its rights, franchises and
existing relationships with customers, suppliers, employees and business
associates;
(c) Will notify FAFC in writing within five business days of
(i) the existence of any adverse business conditions threatening the normal
business operations of Acquiror, (ii) the occurrence of any event or the failure
of any event to occur which might result in a breach of or a failure to comply
with any representation, warranty, covenant, condition or agreement by or
pertaining to Acquiror contained in this Agreement, (iii) the commencement of
any material action, suit, proceeding, or investigation against Acquiror and/or
(iv) the tender of any offer to acquire Acquiror by merger or otherwise; and
(d) Will take no action which would adversely affect the
ability of Acquiror to obtain any necessary approvals of governmental
authorities required for the transactions contemplated hereby without the
imposition of a burdensome restriction or condition, or (ii) adversely affect
the ability of Acquiror to perform its covenants and agreements under this
Agreement.
SECTION 5.12. NASDAQ LISTING. Acquiror agrees to use all reasonable
efforts to cause to be listed on Nasdaq, subject to official notice of issuance,
the shares of Acquiror Common to be issued in the Merger.
SECTION 5.13. TAX TREATMENT. Acquiror shall not take any action which
would prevent the Merger and the other transactions contemplated hereby from
qualifying as a reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code.
SECTION 5.14. ACCESS TO INFORMATION. Acquiror shall permit FAFC
reasonable access to its properties in a manner which will avoid undue
disruption or interference with normal operations and shall disclose and make
available to FAFC books, documents, papers and records relating to assets,
stock, ownership, properties, operations, obligations and liabilities, including
but not limited to all books of account (including the general ledger, tax
records, minute books of directors' and stockholders' meetings, organizational
documents, material contracts and agreements, loan files, filings with any
regulatory authority, accountants' work papers, litigation files, plans
affecting employees, and any other business activities or prospects in which
FAFC may have a reasonable and legitimate interest in furtherance of the
transactions contemplated by this Agreement. FAFC will hold any such information
which is non-public in confidence in accordance with the provisions of Section
8.01 hereof.
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SECTION 5.15. SUBSEQUENT DISCLOSURE SCHEDULE. If subsequent to the date
of this Agreement and prior to the Effective Time, an event occurs which renders
untrue any representation or warranty of Acquiror made at the date of this
Agreement (a "Trigger Event"), Acquiror shall promptly deliver to FAFC a
disclosure schedule (the "Acquiror Disclosure Schedule"), which shall contain a
detailed description of any and all such matters. The Acquiror Disclosure
Schedule shall be delivered by Acquiror to FAFC within five (5) business days
after Acquiror learns of the Trigger Event but in no event later than before the
Closing. The submission of the Acquiror Disclosure Schedule and the matters
therein contained shall not constitute a default or breach by Acquiror of any of
its representations and warranties under this Agreement; provided, however, that
all matters therein disclosed together with all other events, circumstances and
occurrences may be taken into account by FAFC in determining whether Acquiror
has experienced a Material Adverse Change; provided, further, however, that this
Section 5.15 is not intended to permit Acquiror to alter or amend its
representations and warranties as made herein as of the date of this Agreement,
and any Acquiror Disclosure Schedule shall not cure the inaccuracy thereof as of
the date of this Agreement for any purpose under this Agreement.
SECTION 5.16. DISSENTING STOCKHOLDERS' APPRAISAL RIGHTS. Acquiror
will comply with all applicable notification and other provisions of
regulations or statutes relating to Dissenting Shares.
SECTION 5.17. ADVISORY DIRECTORS. At the Effective Time, Acquiror will
form an Ashland, Kentucky Advisory Board which will be maintained, subject to
Thrift Regulations and OTS directives, by Acquiror at least through December 31,
2000. Each person who is a director of Target Bank on the date of this Agreement
who does not retain such position through December 31, 2000, shall, at the time
he or she no longer is a director of Target Bank, be entitled to immediately
become a member of the Ashland, Kentucky Advisory Board for a term extending
through December 31, 2000. In addition, each person named in Section 5.17 of the
Disclosure Schedule whose employment is involuntarily terminated by Target Bank
or the Acquiror after the Effective Time without cause, shall be entitled on the
date of such termination to become a member of the Ashland, Kentucky Advisory
Board for a term extending through December 31, 2000. The Ashland, Kentucky
Advisory Board shall meet at least once every six months at such time selected
and designated by the Acquiror and each member of the Ashland, Kentucky Advisory
Board shall receive compensation of $100.00 per meeting attended.
ARTICLE SIX
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CONDITIONS PRECEDENT TO THE MERGER
----------------------------------
SECTION 6.01. CONDITIONS TO ACQUIROR'S OBLIGATIONS. Acquiror's
obligations under this Agreement are conditioned upon Acquiror receiving,
concurrently with the execution and delivery of this Agreement by FAFC and
Target Bank, a Stockholder Agreement in the form attached as Exhibit A executed
by each of the directors of FAFC who is a stockholder of FAFC. Each such
agreement shall be dated as of the date of this Agreement. Failure of FAFC to
deliver any of such agreements shall be a material breach of this Agreement.
Acquiror's obligations to effect the Merger shall be subject to the satisfaction
(or waiver by Acquiror) prior to or on the Closing Date of the following
conditions:
(a) The representations and warranties made by FAFC and Target
Bank in this Agreement shall be true in all material respects on and as of the
Closing Date (but as updated by any Subsequent Disclosure Schedule) with the
same effect as though such representations and warranties had been made or given
on and as of the Closing Date;
(b) FAFC and Target Bank shall have performed and complied in
all material respects with all obligations and agreements required to be
performed by them prior to the Closing Date under this Agreement;
(c) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal restraint or prohibition (an "Injunction") preventing the consummation of
the Merger shall be in effect, nor shall there be pending any proceeding by any
governmental agency or other person seeking any of the foregoing; and there
shall not be any action taken, or any statute, rule, regulation or order
enacted, promulgated, entered, enforced or deemed applicable to the Merger which
makes the consummation of the Merger illegal;
(d) All Regulatory Approvals and other necessary consents,
authorizations and other approvals required by law for consummation of the
Merger shall have been obtained without the imposition of any conditions that
Acquiror reasonably determines to be unduly burdensome, and all waiting periods
required by law shall have expired;
(e) Acquiror shall have received all documents required to
be received from FAFC and Target Bank on or prior to the Closing Date, all in
form and substance reasonably satisfactory to Acquiror;
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(f) FAFC and Target Bank shall not have experienced a Material
Adverse Change, as defined in Section 2.05(a) of this Agreement, including but
not limited to items contained in any Subsequent Disclosure Schedule except
changes resulting from action taken by FAFC and Target Bank pursuant to Section
4.05 of this Agreement;
(g) Immediately prior to the Effective Time, no more than
five percent (5%) of the outstanding FAFC Common shall qualify as Dissenting
Shares;
(h) Immediately prior to the Effective Time, the amount of the
total equity capital of Target Bank shall not be less than the total equity
capital of Target Bank as reported in its Thrift Financial Report at December
31, 1995 and the stockholders' equity of FAFC shall not be less than its
stockholders' equity at December 31, 1995, but for purposes of such
calculations, any special exclusions contemplated by the definition of Material
Adverse Change and reserves, accruals, adjustments and entries contemplated by
Section 4.05 shall not be taken into account;
(i) FAFC shall have received a written opinion of Capital
Resources Group, Inc. dated the date of this Agreement and updated to a date
reasonably proximate to the date of the FAFC Proxy Statement to the effect that
the Per Share Merger Consideration to be received by the holders of FAFC Common
in the Merger is fair from a financial point of view;
(j) Acquiror shall have received a written opinion of National
Capital Companies dated the date of this Agreement and reasonably proximate to
the date of the Acquiror's Proxy Statement to the effect that the Merger is fair
to the holders of Acquiror Common from a financial point of view;
(k) Acquiror shall have received from Smith, Goolsby, Artis
and Reams letters dated not more than five days prior to (i) the effective date
of the Registration Statement and (ii) the Closing Date, with respect to certain
financial information regarding FAFC and Target Bank including audited and
unaudited financial and statistical information set forth in the Registration
Statement, each in form and substance customary in transactions of the nature
contemplated by this Agreement and satisfactory to Acquiror;
(l) The Registration Statement (including any post-effective
amendments thereto) shall be effective under the Securities Act of 1933, as
amended, and no proceeding shall be pending or, to the knowledge of Acquiror,
threatened by the SEC to suspend the effectiveness of the Registration
Statement;
(m) The changes and amendments required to be made by
Section 4.09 with respect to contracts, policies, agreements, and plans
shall have occurred;
(n) Acquiror shall have received the affiliate letters
required by Section 4.10 of this Agreement;
(o) This Agreement shall have been validly adopted by the
affirmative vote of the holders of at least the number of outstanding FAFC
Common Shares required under Delaware law and the FAFC Certificate of
Incorporation and By-laws;
(p) This Agreement and the authorization of sufficient
additional shares as is necessary to effect the Merger shall have been validly
adopted by the affirmative vote of the holders of at least the number of
outstanding Acquiror Common required under Delaware law and the Acquiror's
Certificate of Incorporation and By-laws;
(q) Acquiror shall have received an opinion of its counsel
(which opinion shall not have been withdrawn at or prior to the Effective Time)
to the effect that the Merger, when consummated in accordance with the terms
hereof, will constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Code and that no gain or loss will be recognized by the
stockholders of FAFC to the extent they receive Acquiror Common in exchange for
shares of FAFC Common;
(r) Neither FAFC nor Target Bank shall have incurred any
damage, destruction or similar loss, not covered by insurance, materially
affecting their business or properties; and
(s) FAFC and Target Bank shall have complied with Section
4.05 hereof to the reasonable satisfaction of Acquiror.
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SECTION 6.02. CONDITIONS TO FAFC'S OBLIGATIONS. FAFC'S obligations
under this Agreement are conditioned upon its receipt, concurrently with the
execution and delivery of this Agreement by FAFC and Target Bank, of a written
opinion from Capital Resources Group, Inc. that the Per Share Merger
Consideration to be received by the holders of FAFC Common in the Merger is fair
from a financial point of view. FAFC's obligation to effect the Merger shall be
subject to the satisfaction (or waiver by FAFC) prior to or on the Closing Date
of the following conditions:
(a) The representations and warranties made by Acquiror in
this Agreement shall be true in all material respects on and as of the Closing
Date (but as updated by any Subsequent Disclosure Schedule) with the same effect
as though such representations and warranties had been made or given on and as
of the Closing Date;
(b) Acquiror shall have performed and complied in all material
respects with all of its obligations and agreements hereunder required to be
performed prior to the Closing Date under this Agreement;
(c) No Injunction preventing the consummation of the Merger
shall be in effect, nor shall there be pending any proceeding by any thrift
regulatory authority or other governmental agency or other person seeking an
Injunction or to prevent or delay the Merger; and there shall not be any action
taken, or any statute, rule, regulation or order enacted, promulgated, entered,
enforced or deemed applicable to the Merger which makes the consummation of the
Merger illegal;
(d) All Regulatory Approvals and other necessary consents,
authorizations and other approvals, including the requisite approval of this
Agreement by the stockholders of FAFC, required by law for consummation of the
Merger shall have been obtained and all waiting periods required by law shall
have expired;
(e) FAFC shall have received all documents required to be
received from Acquiror on or prior to the Closing Date, all in form and
substance reasonably satisfactory to FAFC;
(f) Acquiror shall not have experienced a Material Adverse
Change as defined in Section 3.05 of this Agreement;
(g) The Registration Statement (including any post-effective
amendments thereto) shall be effective under the Securities Act of 1933, as
amended, and no proceedings shall be pending or, to the knowledge of Acquiror,
or threatened by the SEC to suspend the effectiveness of the Registration
Statement;
(h) This Agreement shall have been validly adopted by the
affirmative vote of the holders of at least the number of outstanding FAFC
Common Shares required under Delaware law and the FAFC Certificate of
Incorporation and By-laws;
(i) This Agreement and the authorization of sufficient
additional shares of Acquiror Common as is necessary to effect the Merger shall
have been validly adopted by the affirmative vote of the holders of at least the
number of outstanding Acquiror Common required under Delaware law and the
Acquiror's Certificate of Incorporation and By-laws;
(j) FAFC shall have received a written opinion of Capital
Resources Group, Inc., dated as of a date reasonably proximate to the date of
the FAFC proxy statement, to the affect that the Per Share Merger Consideration
to be received by the holders of FAFC Common in the Merger is fair from a
financial point of view, and such opinion shall not have been withdrawn or
materially modified prior to the vote of the holders of FAFC Common;
(k) FAFC shall have received an opinion of Acquiror's counsel
(which opinion shall not have been withdrawn at or prior to the Effective Time)
to the effect that the Merger, when consummated in accordance with the terms
hereof, will constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Code and that no gain or loss will be recognized by the
stockholders of FAFC to the extent they receive Acquiror Common in exchange for
shares of FAFC Common;
(l) The Acquiror Common to be issued to holders of FAFC
Common shall have been approved for listing on Nasdaq, subject to official
notice of issuance; and
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(m) The amount by which the Per Share Merger Consideration
is to be reduced pursuant to Section 103(a)(iv) of this Agreement shall be
no more than $.2734.
ARTICLE SEVEN
-------------
TERMINATION OR ABANDONMENT
--------------------------
SECTION 7.01. MUTUAL AGREEMENT. This Agreement may be terminated by the
mutual written agreement of the parties at any time prior to the Closing Date,
regardless of whether approval of this Agreement and the Plan of Merger by the
stockholders of FAFC and Acquiror shall have been previously obtained.
SECTION 7.02. BREACH OF AGREEMENT. In the event that there is a
material breach of any of the representations and warranties or agreements of
Acquiror or FAFC or Target Bank, and such breach is not cured within ten (10)
days after notice to cure such breach is given by the non-breaching party or, if
such breach is not capable of being cured within ten (10) days, steps are not
initiated within ten (10) days to effect a cure, then the nonbreaching party,
regardless of whether stockholder approval of this Agreement shall have been
previously obtained by FAFC and Acquiror, may terminate and cancel this
Agreement by providing written notice of such action to the other party hereto.
SECTION 7.03. FAILURE OF CONDITIONS. In the event any of the conditions
to the obligations of (i) Acquiror set forth in Sections 6.01 or (ii) FAFC set
forth in Section 6.02 are not satisfied or waived on or prior to the Closing
Date, and if any applicable cure period provided in Section 7.02 has lapsed,
then Acquiror (in the case of conditions to its obligations) or FAFC (in the
case of conditions to its obligations) may, regardless of whether approval of
this Agreement and the Plan of Merger by the stockholders of FAFC and Acquiror
shall have been previously obtained, terminate and cancel this Agreement by
delivery of written notice of such action to the other party on such date.
SECTION 7. 04. DENIAL OF REGULATORY APPROVAL. If any regulatory
application filed pursuant to Section 5.01 should be finally denied or
disapproved by the respective regulatory authority, then this Agreement may be
terminated by any party to this Agreement. It is understood, however, that a
reasonable request for additional information from or undertaking by Acquiror,
as a condition for approval, shall not be deemed to be a denial or disapproval
so long as Acquiror diligently provides the requested information or
undertaking. Notwithstanding the foregoing, Acquiror agrees to promptly and
diligently pursue any appeals available with respect to any such denial if FAFC
shall request the pursuit of such appeals based on advice of counsel to FAFC
that such appeal has a reasonable chance of success.
SECTION 7.05. FAILURE OF STOCKHOLDERS TO ADOPT.
(a) If FAFC's Board of Directors is excused, pursuant to
Section 4.03 of this Agreement, from its obligation to recommend that FAFC's
stockholders adopt this Agreement, to present this Agreement to them for
adoption or to hold the Stockholders' Meeting for such purpose, Acquiror or FAFC
may terminate this Agreement.
(b) In the event that at the FAFC Stockholders' Meeting, the
holders of at least the Minimum Portion of the outstanding shares of FAFC Common
do not adopt this Agreement, Acquiror may terminate this Agreement.
(c) In the event that at the FAFC Stockholders' Meeting, the
holders of at least the Minimum Portion of the outstanding shares of FAFC Common
do not adopt this Agreement and FAFC's Board of Directors has recommended that
FAFC's stockholders adopt this Agreement, Acquiror or FAFC may terminate this
Agreement.
(d) In the event at the Acquiror's Stockholders' Meeting, the
holders of at least the Minimum Portion of the outstanding shares of Acquiror
Common do not adopt this Agreement or do not provide for sufficient additional
shares of Acquiror Common to effect the Merger, Acquiror or FAFC may terminate
this Agreement.
(e) In the event that at the Acquiror's Stockholders' Meeting,
the holders of at least the Minimum Portion of the outstanding shares of
Acquiror Common do not adopt this Agreement or do not provide for sufficient
additional shares of Acquiror Common to effect the Merger, and Acquiror's Board
of Directors has recommended that Acquiror's stockholders adopt this Agreement
and the proposal to provide for sufficient additional shares of Acquiror Common
to effect the Merger, Acquiror or FAFC may terminate this Agreement.
SECTION 7.06. REGULATORY ENFORCEMENT MATTERS. In the event that any
party to this Agreement shall become a party or subject to any written
agreement, memorandum of understanding, cease and desist order, imposition of
civil money
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penalties or other regulatory enforcement action or proceeding with
or by any federal or state agency charged with the supervision or regulation of
financial institutions after the date of this Agreement, which is reasonably
determined by any of the non-affected parties to be significant to the affected
party's business, operations or financial condition, then any of the
non-affected parties may terminate this Agreement.
SECTION 7.07. TERMINATION. If the Closing Date does not occur on or
prior to February 28, 1997, then this Agreement may be terminated by FAFC or
Acquiror by giving written notice to the other; provided, however, that a party
who is then in breach of any of its representations, warranties, covenants or
agreements under this Agreement in any material respect may not exercise such
right of termination.
SECTION 7.08. TERMINATION FEE.
(a) In the event of termination of this Agreement pursuant to
Section 7.05(a), (b) or (c), in consideration of Acquiror's costs and expenses
in connection with this Agreement and the transactions contemplated hereby, its
agreements hereunder, its expenditure of significant management time and staff
resources, its forbearance from consideration and pursuit of other business
alternatives, its loss of a unique and valuable business opportunity, and the
added value to any person acquiring assets or securities of FAFC or combining
with FAFC or Target Bank resulting from FAFC's dealings with Acquiror and
Acquiror's agreement to proceed with the Merger on the terms and conditions set
forth herein (and to the extent Acquiror is not then in breach of any of its
representations, warranties, covenants, or agreements under this Agreement),
FAFC shall pay Two Hundred Thousand Dollars ($200,000) to Acquiror as an
agreed-upon termination fee, in immediately available funds within two (2)
business days after the occurrence of such event, provided that no termination
fee shall be payable if an Unsolicited Acquisition Proposal is accepted by FAFC
and a definitive agreement is entered into within 30 days of the execution of
this Agreement. If FAFC timely satisfies its obligations under this Section
7.08, it shall not be liable for specific performance or injunctive relief under
Section 8.15 of this Agreement.
(b) In the event of termination of this Agreement pursuant to
Section 7.05(d) or (e), in consideration of FAFC's costs and expenses in
connection with this Agreement and the transactions contemplated hereby, its
agreements hereunder, its expenditure of significant management time and staff
resources, its forbearance from consideration and pursuit of other business
alternatives and its loss of a unique and valuable business opportunity and
FAFC's agreement to proceed with the Merger on the terms and conditions set
forth herein, Acquiror shall pay Two Hundred Thousand Dollars ($200,000) to FAFC
as an agreed upon termination fee, in immediately available funds within two (2)
business days after the occurrence of such event. If Acquiror timely satisfies
its obligations under this Section 7.08, it shall not be liable for specific
performance or injunctive relief under Section 8.15 of this Agreement.
ARTICLE EIGHT
-------------
GENERAL
-------
SECTION 8.01. CONFIDENTIAL INFORMATION. The parties acknowledge the
confidential and proprietary nature of the information as hereinafter described
which has heretofore been exchanged and which will be received from each other
hereunder ("Information") and agree to hold and keep the same confidential. Such
Information will include any and all financial, technical, commercial,
marketing, customer or other information concerning the business, operations and
affairs of a party that may be provided to the other, irrespective of the form
of the communications, by such party's employees or agents. Such Information
shall not include information which is or becomes generally available to the
public other than as a result of a disclosure by a party or its representatives
in violation of this Agreement. The parties agree that the Information will be
used solely for the purposes contemplated by this Agreement and that such
Information will not be disclosed to any person other than employees and agents
of a party who are directly involved in evaluating the transaction. The
Information shall not be used in any way detrimental to a party, including use
directly or indirectly in the conduct of the other party's business or any
business or enterprise in which such party may have an interest, now or in the
future, and whether or not now in competition with such other party.
SECTION 8.02. PUBLICITY. Acquiror and FAFC shall cooperate with each
other in the development and distribution of all news releases and other public
disclosures concerning this Agreement and the Merger and shall not issue any
news release or make any other public disclosure without prior review by the
other, unless such may be required by law or upon the written advice of counsel.
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SECTION 8.03. RETURN OF DOCUMENTS. Upon termination of this Agreement
prior to the Effective Time, each party shall deliver to the other originals and
all copies of all Information made available to such party and will not retain
any copies, extracts or other reproductions in whole or in part of such
Information.
SECTION 8.04. NOTICE. Any notice or other communication shall be in
writing and shall be deemed to have been given or made on the date of delivery,
in the case of hand delivery, or three (3) business days after deposit in the
United States Registered Mail, postage prepaid, or upon receipt if transmitted
by facsimile telecopy or any other means, addressed (in any case) as follows:
(a) If to Acquiror:
Larry A. Caldwell, President, Chief Executive Officer
and Chairman of the Board
Camco Financial Corporation
814 Wheeling Avenue
Box 708
Cambridge, Ohio 43725-0708
With a copy to:
Roger A. Yurchuck, Esq.
or
Terri Reyering Abare, Esq.
Vorys, Sater, Seymour and Pease
221 East Fourth Street
Suite 2100, Atrium Two
Cincinnati, Ohio 45202
and
(b) If to FAFC or Target Bank:
Paul D. Leake, President and Chief Executive Officer
First Ashland Financial Corporation
1640 Carter Avenue
Ashland, Kentucky 41105-2349
With a copy to:
Kip A. Weissman, P.C.
or
Martin L. Meyrowitz, P.C.
Silver, Freedman & Taff, L.L.P.
1100 New York Ave., N.W.
Washington, D.C. 20005
or to such other address as any party may from time
to time designate by notice to the others.
SECTION 8.05. LIABILITIES. In the event that this Agreement is
terminated pursuant to the provisions of Article Seven hereof, no party hereto
shall have any liability to any other party for costs, expenses, damages or
otherwise, except as provided in Section 7.08 and as hereinafter set forth in
this Section 8.05. In the event that this Agreement is terminated pursuant to
Section 7.02 on account of an intentional breach of any of the representations
and warranties or of any of the covenants or agreements set forth herein, then
FAFC and Target Bank, in the case of a breach by either, shall pay to Acquiror,
or Acquiror, in the case of a breach by Acquiror, shall pay to FAFC, in
immediately available funds, the sum of Five Hundred Thousand Dollars ($500,000)
as agreed-upon liquidated damages, within two (2) business days after receipt of
a demand there for from the party entitled to such damages. For purposes of the
foregoing, in no event shall a breach of
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a representation and warranty be deemed "intentional" if no member of the board
of directors and no senior officer of FAFC or Target Bank, or Acquiror, as
the case may be, knew or should have known that such representation and
warranty was not true and correct. The termination fee provided for in Section
7.08 shall be the exclusive fee and remedy for a proper termination of this
Agreement pursuant to Section 7.05. FAFC shall have no obligation to Acquiror
under this Section 8.05 with respect to a proper termination pursuant to
Section 7.05.
SECTION 8.06. EXPENSES. Each of the parties shall bear its own costs,
fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby. Nothing herein shall limit the right of the
non-breaching party to seek and receive all relief and damages to which it may
be entitled on account of a non-intentional breach, including without limitation
reasonable expenses incurred to obtain such relief or damages.
SECTION 8.07. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as
provided in this Section 8.07, no representation, warranty, covenant or
agreement contained in this Agreement shall survive the Effective Time or the
earlier termination of this Agreement. No representation, warranty, covenant or
agreement shall be deemed to be terminated or extinguished so as to deprive
Acquiror (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 stockholder or former stockholder of
either Acquiror or FAFC. The agreements set forth in Sections 5.04, 5.05, 5.06,
5.07, 5.08, 5.09, 5.10, 5.16 and 5.17 shall survive the Effective Time and the
agreements set forth in Sections 7.08, 8.01, 8.03, 8.05 and 8.06 hereof shall
survive the earlier termination of this Agreement.
SECTION 8.08. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties and supersedes and cancels any and all prior
discussions, negotiations, undertakings and agreement between the parties
relating to the subject matter hereof.
SECTION 8.09. HEADINGS AND CAPTIONS. The captions of Articles and
Sections hereof are for convenience only and shall not control or affect the
meaning or construction of any of the provisions of this Agreement.
SECTION 8.10. WAIVER, AMENDMENT OR MODIFICATION. The conditions of this
Agreement which may be waived may be waived only by written notice by the party
waiving such condition to the other party or parties. The failure of any party
at any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. This Agreement may
be amended or modified by a written document duly approved by the boards of
directors of the parties, whether before or after approval of this Agreement by
the stockholders of FAFC and Acquiror, provided that except as provided in this
Agreement any amendment or modification after such stockholder approval shall
not decrease the Per Share Merger Consideration without the approval thereof by
the stockholders of FAFC by at least the Minimum Portion.
SECTION 8.11. RULES OF CONSTRUCTION. Unless the context otherwise
requires: (a) a term has the meaning assigned to it; (b) an accounting term not
otherwise defined has the meaning assigned to it in accordance with GAAP; (c)
"or" is not exclusive; and (d) words in the singular may include the plural and
in the plural include the singular.
SECTION 8.12. COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original and all of
which shall be deemed one and the same instrument.
SECTION 8.13. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
SECTION 8.14. GOVERNING LAW: ASSIGNMENT. This Agreement shall be
governed by the laws of the State of Delaware and applicable federal laws and
regulations. This Agreement may not be assigned by either of the parties
hereto.
SECTION 8.15. SPECIFIC PERFORMANCE AND INJUNCTIVE RELIEF. Each party to
this Agreement recognizes that, if it fails to perform, observe or discharge any
of its obligations under this Agreement, remedies at law may not provide
adequate relief to the other party or parties. Therefore, each party is hereby
authorized to demand specific performance of this Agreement, and is entitled to
temporary and permanent injunctive relief, in a court of competent jurisdiction
at any time when any other party fails to comply with any of the provisions of
this Agreement applicable to it, in addition to any other remedy which may be
available in law or equity, except that a party that collects liquidated damages
pursuant to Section 7.08 or Section 8.05 hereof shall not be entitled to demand
specific performance. To the extent permitted by applicable law, each party
hereby irrevocably waives any defense that it might have based on the adequacy
of a remedy at law which might
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be asserted as a bar to such remedy of specific performance or injunctive
relief. For purposes of this Section 8.15, FAFC and Target Bank shall
constitute a single party and either may bind both as a party.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
CAMCO FINANCIAL CORPORATION
Attest:
/s/ Anthony J. Popp By /s/ Larry A. Caldwell
- ------------------------ ----------------------------------
Secretary Larry A. Caldwell
President, Chief Executive Officer
and Chairman of the Board
Attest: FIRST ASHLAND FINANCIAL CORPORATION
/s/ Sandra A. Smith By /s/ Paul D. Leake
- ------------------------ ----------------------------------
Secretary Paul D. Leake
President and Chief Executive Officer
Attest: FIRST FEDERAL BANK FOR SAVINGS
/s/ Sandra A. Smith By /s/ Paul D. Leake
- ------------------------ ----------------------------------
Secretary Paul D. Leake, President
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APPENDIX B
NATIONAL Stephen Clinton, President
CAPITAL
COMPANIES, LLC March 25, 1996
Board of Directors
Camco Financial Corporation
814 Wheeling Avenue
Cambridge, OH 43725
Attention: Mr. Larry A. Caldwell, President
To the members of the Board of Directors:
You have requested our opinion (the "Opinion"), from a financial point of view,
to Camco Financial Corporation ("Camco") and its shareholders regarding the
fairness of the proposed acquisition of First Ashland Financial Corporation
("First Ashland") by Camco as set forth in the Agreement and Plan of Merger and
Reorganization (the "Agreement") among Camco, First Ashland and First Federal
Bank for Savings ("First Federal") dated March 25, 1996. The Agreement, in
addition to providing the terms of the merger is subject to the receipt of
approvals from the shareholders of First Ashland and Camco and from various
regulatory agencies, and is further subject to the satisfaction of certain other
conditions.
Pursuant to the Agreement, among other matters, and subject to the terms and
conditions of the Agreement, on the effective date: First Ashland will be merged
with and into Camco and Camco shall continue as the surviving corporation (the
"Merger"). First Federal will remain as a separate surviving federally chartered
savings institution and will become a wholly owned subsidiary of Camco. The
separate existence of First Ashland shall cease, and Camco shall be the
surviving corporation in the Merger and as the surviving corporation, shall
possess all assets and property of every description, and every interest in the
assets and property, wherever located, and the rights, privileges, immunities,
powers, franchises and authority, of a public as well as a private nature, of
Camco and First Ashland, and all obligations belonging or due to each of them.
Subject to the provisions of the Agreement, each share of First Ashland common
stock issued and outstanding immediately prior to the effective date of the
Agreement shall by virtue of the merger and without any action on the part of
the holder thereof, be converted into a right to receive $9.00 in cash and
.64278 of a share of Camco common stock (subject to a possible adjustment as
provided in the Agreement).
National Capital Companies, LLC ("National Capital") is a financial advisory
services company that specializes in financial valuations and analyses of
operations. National Capital advises financial services companies on mergers,
acquisitions and capital strategies. Our experience in these transactions has
been applied in the rendering of this Opinion including our expertise in the
application of current regulations and legislative matters affecting the
financial services industry. National Capital is familiar with Camco, having
acted as its financial advisor in connection with, and having participated in,
the negotiations leading to the Agreement.
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<PAGE> 225
In connection with the rendering of our Opinion, we reviewed, among other
matters with respect to First Ashland and First Federal unless otherwise noted:
(1) the Agreement (2) Board of Director and Executive Committee meeting minutes
and excerpts thereof for a twenty-four month period available as of February 6,
1996, the date our field work was completed: (3) unaudited financial statements
as of December 31, 1995 and audited financial statements as of September 30,
1995 and September 30, 1994 and the years then ended, and financial reports
filed with the appropriate regulatory agencies through December 31, 1995; (4)
regulatory examinations performed during the preceding two years by the Office
of Thrift Supervision (5) inquiries of members of Camco's and First Ashland's
management, representatives of the accounting firm Grant Thornton LLP and
Camco's special regulatory legal counsel, the firm of Vorys, Sater, Seymour and
Pease; (6) economic conditions in the market area; (7) the financial performance
of the respective companies as compared to selected comparable publicly held
companies; (8) conditions in the securities market in general and the market for
thrift and banking institutions specifically: (9) merger and acquisition
transactions with similar terms and conditions; and (10) analyses and such other
documents and matters as we deemed appropriate. In addition, we used information
from publicly available published sources that we believe is reliable. However,
we have not examined and otherwise tested this information and therefore cannot
and do not express an opinion as to its accuracy.
Our Opinion is based upon the representations contained in the Agreement and
other evidential matter and documents provided to us by First Ashland and Camco
and their representations that such information is accurate and complete. We did
not examine or otherwise test this information provided to us and therefore
cannot and do not express an opinion as to the accuracy of this information nor
did we independently value the assets or liabilities of First Ashland or Camco.
We have relied upon the respective managements' of First Ashland and Camco as to
the reasonableness and achievability of the respective financial and operating
forecasts and projections (and the assumptions and basis therefore) provided to
us, and we have assumed that such forecasts and projections reflect the best
currently available estimates and judgments of the respective managements' of
First Ashland and Camco. We also did not independently verify and have relied on
and assumed that the allowance for loan losses set forth in the balance sheet of
First Ashland at December 31, 1995, was adequate and complied fully with
applicable law, regulatory policy and sound banking practice as of the date of
such financial statements. We also assumed that the merger in all respects is,
and will be in compliance with all laws and regulations applicable to First
Ashland and Camco and that in the course of obtaining necessary regulatory
approvals for the merger, no conditions will be imposed that will have a
material adverse effect on the contemplated benefits of the merger to Camco or
its shareholders.
On the basis of and subject to the foregoing, it is our Opinion that as of March
25, 1996, that the terms of the merger as provided and described in the
Agreement are fair to Camco and its shareholders from a financial point of view.
Yours truly,
NATIONAL CAPITAL COMPANIES, LLC
Stephen Clinton
President
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<PAGE> 226
[NATIONAL
CAPITAL
COMPANIES, LLC LOGO]
Stephen Clinton
President
August 8, 1996
Board of Directors
Camco Financial Corporation
814 Wheeling Avenue
Cambridge, OH 43725
Attention: Mr. Larry A. Caldwell, President
To the members of the Board of Directors:
You have requested our opinion (the "Opinion"), from a financial point of view,
to Camco Financial Corporation ("Camco") and its shareholders regarding the
fairness of the proposed acquisition of First Ashland Financial Corporation
("First Ashland") by Camco as set forth in the Agreement and Plan of Merger and
Reorganization (the "Agreement") among Camco, First Ashland and First Federal
Bank for Savings ("First Federal") dated August 8, 1996. The Agreement, in
addition to providing the terms of the merger is subject to the receipt of
approvals from the shareholders of First Ashland and Camco and from various
regulatory agencies, and is further subject to the satisfaction of certain other
conditions.
Pursuant to the Agreement, among other matters, and subject to the terms and
conditions of the Agreement, on the effective date: First Ashland will be merged
with and into Camco and Camco shall continue as the surviving corporation (the
"Merger"). First Federal will remain as a separate surviving federally chartered
savings institution and will become a wholly owned subsidiary of Camco. The
separate existence of First Ashland shall cease, and Camco shall be the
surviving corporation in the Merger and as the surviving corporation, shall
possess all assets and property of every description, and every interest in the
assets and property, wherever located, and the rights, privileges, immunities,
powers, franchises and authority, of a public as well as a private nature, of
Camco and First Ashland, and all obligations belonging or due to each of them.
Subject to the provisions of the Agreement, each share of First Ashland common
stock issued and outstanding immediately prior to the effective date of the
Agreement shall by virtue of the merger and without any action on the part of
the holder thereof, be converted into a right to receive $9.00 in cash and
.67492 (adjusted to reflect the 5% stock dividend paid by Camco on July 10,
1996) of a share of Camco common stock (subject to a possible adjustment as
provided in the Agreement).
THE PARK AVENUE CENTRE
4600 N. PARK AVENUE, SUITE 100, CHEVY CHASE, MD 20815
(301) 657-0850 FAX (301) 657-0856
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<PAGE> 227
August 8, 1996
Page 2
National Capital Companies, LLC ("National Capital") is a financial advisory
services company that specializes in financial valuations and analyses of
operations. National Capital advises financial services companies on mergers,
acquisitions and capital strategies. Our experience in these transactions has
been applied in the rendering of this Opinion including our expertise in the
application of current regulations and legislative matters affecting the
financial services industry. National Capital is familiar with Camco, having
acted as its financial advisor in connection with, and having participated in,
the negotiations leading to the Agreement.
In connection with the rendering of our Opinion, we reviewed, among other
matters with respect to First Ashland and First Federal unless otherwise noted:
(1) the Agreement, Form S-4 Registration Statement filed by Camco with the
Securities and Exchange Commission June 20, 1996 and the July 26, 1996 draft of
Camco's and First Ashland's Joint Proxy Statement; (2) Board of Director and
Executive Committee meeting minutes and excerpts thereof for a twenty-four month
period available as of February 6, 1996, the date our field work was completed;
(3) unaudited financial statements as of May 31, 1996 and audited financial
statements as of September 30, 1995 and September 30, 1994 and the years then
ended, and financial reports filed with the appropriate regulatory agencies
through December 31, 1995; (4) regulatory examinations performed during the
preceding two years by the Office of Thrift Supervision; (5) inquiries of
members of Camco's and First Ashland's management, representatives of the
accounting firm Grant Thornton LLP and Camco's special regulatory legal counsel,
the firm of Vorys, Sater, Seymour and Pease; (6) economic conditions in the
market area; (7) the financial performance of the respective companies as
compared to selected comparable publicly held companies; (8) conditions in the
securities market in general and the market for thrift and banking institutions
specifically; (9) merger and acquisition transactions with similar terms and
conditions; and (10) analyses and such other documents and matters as we deemed
appropriate. In addition, we used information from publicly available published
sources that we believe is reliable. However, we have not examined and otherwise
tested this information and therefore cannot and do not express an opinion as to
its accuracy.
Our Opinion is based upon the representations contained in the Agreement and
other evidential matter and documents provided to us by First Ashland and Camco
and their representations that such information is accurate and complete. We did
not examine or otherwise test this information provided to us and therefore
cannot and do not express an opinion as to the accuracy of this information nor
did we independently value the assets or liabilities of First Ashland or Camco.
We have relied upon the respective managements' of First Ashland and Camco as to
the reasonableness and achievability of the respective financial and operating
forecasts and projections (and the assumptions and basis therefore) provided to
us, and we have assumed that such forecasts and projections reflect the best
currently available estimates and judgments of the respective managements' of
First Ashland and Camco. We also did not independently verify and have relied on
and assumed that the allowance for loan losses set forth in the balance sheet of
First Ashland at May 31, 1996, was adequate and complied fully with applicable
law, regulatory policy and sound banking practice as of the date of such
financial statements. We also assumed that the merger in all respects is, and
will be in compliance with all laws and regulations applicable to First Ashland
and Camco and that in the course of obtaining necessary regulatory approvals for
the merger, no conditions will be imposed that will have a material adverse
effect on the contemplated benefits of the merger to Camco or its shareholders.
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<PAGE> 228
August 8, 1996
Page 3
On the basis of and subject to the foregoing, it is our Opinion that as of
August 8, 1996, that the terms of the merger as provided and described in the
Agreement are fair to Camco and its shareholders from a financial point of view.
Yours truly,
NATIONAL CAPITAL COMPANIES, LLC
Stephen Clinton
President
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<PAGE> 229
APPENDIX C
FIRST ASHLAND
FINANCIAL CORPORATION
Ashland, Kentucky
FAIRNESS OPINION
AS OF:
MARCH 22, 1996
PREPARED BY:
CAPITAL RESOURCES GROUP, INC.
1211 CONNECTICUT AVENUE, NW
SUITE 200
WASHINGTON, D.C. 20036
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<PAGE> 230
CAPITAL RESOURCES GROUP
1211 Connecticut Ave., N.W. Suite 200 Washington. DC 20036
Tel (202) 466-5685 Fax (202)466-5695
March 22, 1996
Board of Directors
First Ashland Financial Corporation
1640 Carter Avenue
Ashland, Kentucky 41101
Dear Board Members:
You have requested our opinion as to the fairness from a financial
point of view to the holders of shares of common stock of First Ashland
Financial Corporation (the "Company") of the proposed consideration to be paid
to the shareholders of the Company by Camco Financial Corporation ("Camco").
Capital Resources Group, Inc. ("Capital Resources") is a financial
consulting and an investment banking firm that, as part of our specialization in
financial institutions, is regularly engaged in the financial valuations and
analyses of business enterprises and securities in connection with mergers and
acquisitions, valuations for mutual-to-stock conversions of thrifts, initial and
secondary offerings, divestiture and other corporate purposes. Senior members of
Capital Resources have extensive experience in such matters. We believe that,
except for the fee we will receive for our opinion and other fees to be received
in connection with the transaction discussed below, we are independent of the
Company.
FINANCIAL TERMS OF THE OFFER
We understand that, pursuant to an Agreement and Plan of Merger and
Reorganization ("Agreement"), among Camco, the Company and First Federal Bank
for Savings ("First Federal"), a wholly owned subsidiary of the Company, Camco
has agreed to acquire all of the issued and outstanding common stock of the
Company pursuant to which each share of common stock of the Company will be
converted into a right to receive $9.00 in cash and 0.64278 of a share
("exchange ratio") of the common stock of Camco, subject to possible adjustment
as specified in the Agreement ("Per Share Merger Consideration"). Based on the
current average of the bid and asked price quotes of Camco's common stock on the
NASDAQ, of $17.88 per share, this translates into an acquisition price of $20.49
per share for the Company's common stock. Each outstanding option for the
purchase of Company common stock will be converted into an option for the
purchase of Camco common stock, with the option exchange ratio based on the Per
Share Merger Consideration. If Camco effects a stock dividend, stock split,
reclassification or similar transaction prior to the effective time of the
merger transaction, then the appropriate adjustment will be made in the exchange
ratio and option exchange ratio.
<PAGE> 231
In the event that the Market Average Price (defined in the Agreement as
the average of the bid and asked price quotes of Camco common stock on the
NASDAQ for the 20 consecutive full trading days prior to the closing date of the
merger transaction) of Camco's common stock is less than $16.00 per share, the
exchange ratio will be adjusted upward, and if the Market Average Price of
Camco's common stock is more than $20.00 per share, the exchange ratio will be
adjusted downward; provided, however, that if the Market Average Price of
Camco's common stock is less than $14.00 per share, the Company shall have the
option to terminate the Agreement, and if the Market Average Price is greater
than $22.00 per share, Camco shall have the option to terminate the Agreement.
Pursuant to the merger transaction, the Company will be merged into
Camco and the separate existence of the Company will cease. First Federal
will operate as a separately held subsidiary of Camco.
MATERIALS REVIEWED
In the course of rendering our opinion we have, among other things:
(1) Reviewed the terms of the Agreement and discussed the
Agreement with management and the Board of Directors of the
Company, and the Company's legal counsel, Silver, Freedman
& Taff, L.L.P.;
(2) Reviewed the following financial data of the Company:
- the audited financial statements of the Company for
the fiscal years ended September 30, 1991 through
September 30, 1995 and the unaudited financial
statements for the three months ended December 31,
1995 as reported in its Report on Form 1 0-QSB,
- the Office of Thrift Supervision ("OTS") quarterly
Thrift Financial Reports covering the period through
December 31, 1995, the latest available period,
- the Company's latest available asset/liability
reports,
- other miscellaneous internally-generated management
information reports for recent periods, as well as
other publicly available information,
- the Company's most recent business plan and budget
report;
(3) Reviewed the Company's Annual Report to shareholders and
Form 10-KSB Report for fiscal 1995 which provides a
discussion of the Company's business and operations and
reviews various financial data and trends;
(4) Discussed with executive management of the Company, the
business, operations, recent financial condition and
operating results and future prospects of the Company;
(5) Compared the Company s financial condition and operating
results to those of similarly-sized thrift companies
operating in Kentucky and the U.S.;
<PAGE> 232
(6) Compared the Company's financial condition and operating
performance to the published financial statements and
market price data of publicly-traded thrifts in general, and
publicly-traded thrift in the Company's region of the U.S.
specifically;
(7) Reviewed the relevant market information regarding the
shares of common stock of the Company including trading
activity and volume and information on options to purchase
shares of common stock;
(8) Performed such other financial and pricing analyses and
investigations as we deemed necessary, including a comparative
financial analysis and review of the financial terms of other
pending and completed acquisitions of companies we consider to
be generally similar to the Company;
(9) Examined the Company's economic operating environment and
the competitive environment of the Company's market area;
(10) Reviewed available financial reports and financial data for
Camco, including Annual Reports to shareholders and Form 10-K
Reports covering the fiscal years ended 1992 through 1995,
quarterly reports, Form 10-Q reports, other published
financial data and other internal and regulatory financial
reports provided by management of Camco; reviewed Camco's
banking office network; and reviewed the pricing trends of
Camco's common stock and dividend payment history;
(11) Visited Camco's administrative and executive offices and
conducted interviews with management.
In arriving at our opinion, we have relied upon the accuracy and
completeness of the information provided to us by the various parties mentioned
above, upon public information and upon representations and warranties in the
Agreement, and have not conducted any independent investigations to verify any
such information or performed any independent appraisal of the Company's or
Camco's assets.
This fairness opinion is supported by the detailed information and
analysis contained in the Evaluation and Analysis Report dated March 22, 1996
("Report"), which has been produced by Capital Resources and will be delivered
to the Company. We have relied on the Report for purposes of rendering this
current fairness opinion. The Report contains a business description and
financial analysis of the Company, an analysis of current economic conditions in
the Company's primary market area, and a financial and market pricing comparison
with a selected group of thrift institutions which completed merger and
acquisition transactions or are currently subject to pending transactions. In
addition, the Report contains a discounted dividend stream and terminal value
analysis.
OPINION
Based on the foregoing and on our general knowledge of and experience
in the valuation of businesses and securities, we are of the opinion that, as of
March 22, 1996, the consideration proposed by
<PAGE> 233
Camco for shares of common stock of the Company is fair to the shareholders of
the Company from a financial point of view.
Respectfully submitted,
CAPITAL RESOURCES GROUP, INC.
<PAGE> 234
FIRST ASHLAND
FINANCIAL CORPORATION
Ashland, Kentucky
FAIRNESS OPINION
UPDATED AS OF:
AUGUST 5, 1996
PREPARED BY:
CAPITAL RESOURCES GROUP, INC.
1211 CONNECTICUT AVENUE, NW
SUITE 200
WASHINGTON, D.C. 20036
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<PAGE> 235
CAPITAL RESOURCES GROUP, INC.
1211 Conneticut Ave., N.W. Suite 200 Washington, DC 20036
Tel (202) 466-5685 Fax (202) 466-5695
August 5, 1996
Board of Directors
First Ashland Financial Corporation
1640 Carter Avenue
Ashland, Kentucky 41101
Dear Board Members:
You have requested our opinion as to the fairness from a financial point
of view to the holders of shares of common stock of First Ashland Financial
Corporation (the "Company") of the proposed consideration to be paid to the
shareholders of the Company by Camco Financial Corporation ("Camco"). This
current opinion serves as an update of our original Fairness Opinion dated March
22, 1996.
Capital Resources Group, Inc. ("Capital Resources") is a financial
consulting and an investment banking firm that, as part of our specialization in
financial institutions, is regularly engaged in the financial valuations and
analyses of business enterprises and securities in connection with mergers and
acquisitions, valuations for mutual-to-stock conversions of thrifts, initial and
secondary offerings, divestiture and other corporate purposes. Senior members of
Capital Resources have extensive experience in such matters. We believe that,
except for the fee we will receive for our opinion and other fees to be received
in connection with the transaction discussed below, we are independent of the
Company.
FINANCIAL TERMS OF THE OFFER
- ----------------------------
We understand that, pursuant to an Agreement and Plan of Merger and
Reorganization ("Agreement"), among Camco, the Company and First Federal Bank
for Savings ("First Federal"), a wholly owned subsidiary of the Company, Camco
has agreed to acquire all of the issued and outstanding common stock of the
Company pursuant to which each share of common stock of the Company will be
converted into a right to receive $9.00 in cash and 0.67492 of a share
("exchange ratio") of the common stock of Camco, subject to possible adjustment
as specified in the Agreement ("Per Share Merger Consideration"). Based on the
current average of the bid and asked price quotes of Camco's common stock on the
NASDAQ, of $18.50 per share, this translates into an acquisition price of $21.49
per share for the Company's common stock. Each outstanding option for the
purchase of Company common stock will be converted into an
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<PAGE> 236
CAPITAL RESOURCES GROUP, INC.
Board of Directors
August 5, 1996
Page 2
option for the purchase of Camco common stock, with the option exchange ratio
based on the Per Share Merger Consideration. The Agreement provides that, if
Camco effects a stock dividend, stock split, reclassification or similar
transaction prior to the effective time of the merger transaction, then the
appropriate adjustment will be made in the exchange ratio and option exchange
ratio. As a result of a 5% stock dividend paid by Camco in July 1996, the
exchange ratio noted above reflects a change from the exchange ratio reflected
in our original Fairness Opinion.
In the event that the Market Average Price (defined in the Agreement as
the average of the bid and asked price quotes of Camco common stock on the
NASDAQ for the 20 consecutive full trading days prior to the closing date of the
merger transaction) of Camco's common stock is less than $15.24 per share, the
exchange ratio will be adjusted upward, and if the Market Average Price of
Camco's common stock is more than $19.05 per share, the exchange ratio will be
adjusted downward; provided, however, that if the Market Average Price of
Camco's common stock is less than $13.33 per share, the Company shall have the
option to terminate the Agreement, and if the Market Average Price is greater
than $20.95 per share, Camco shall have the option to terminate the Agreement.
Pursuant to the merger transaction, the Company will be merged into Camco
and the separate existence of the Company will cease. First Federal will operate
as a separately held subsidiary of Camco.
MATERIALS REVIEWED
- ------------------
In the course of rendering our opinion we have, among other things:
(1) Reviewed the terms of the Agreement and discussed the Agreement with
management and the Board of Directors of the Company, and the
Company's legal counsel, Silver, Freedman & Taff, L.L.P.;
(2) Reviewed the following financial data of the Company:
- the audited financial statements of the Company for the fiscal
years ended September 30, 1991 through September 30, 1995 and
the unaudited financial statements for the three months ended
December 31, 1995 and three months ended March 31, 1996 as
reported in its Report on Form 10-QSB,
- the Office of Thrift Supervision ("OTS") quarterly Thrift
Financial Reports covering the period through March 31, 1996,
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<PAGE> 237
CAPITAL RESOURCES GROUP, INC.
Board of Directors
August 5, 1996
Page 3
- the Company's latest available asset/liability reports,
- other miscellaneous internally-generated management information
reports for recent periods, as well as other publicly available
information,
- the Company's most recent business plan and budget report;
(3) Reviewed the Company's Annual Report to shareholders and Form 10-KSB
Report for fiscal 1995 which provides a discussion of the Company's
business and operations and reviews various financial data and
trends;
(4) Discussed with executive management of the Company, the business,
operations, recent financial condition and operating results and
future prospects of the Company;
(5) Compared the Company's financial condition and operating results to
those of similarly-sized thrift companies operating in Kentucky and
the U.S.;
(6) Compared the Company's financial condition and operating performance
to the published financial statements and market price data of
publicly-traded thrifts in general, and publicly-traded thrift in
the Company's region of the U.S. specifically;
(7) Reviewed the relevant market information regarding the shares of
common stock of the Company including trading activity and volume
and information on options to purchase shares of common stock;
(8) Performed such other financial and pricing analyses and
investigations as we deemed necessary, including a comparative
financial analysis and review of the financial terms of other
pending and completed acquisitions of companies we consider to be
generally similar to the Company;
(9) Examined the Company's economic operating environment and the
competitive environment of the Company's market area;
(10) Reviewed available financial reports and financial data for Camco,
including Annual Reports to shareholders and Form 10-KSB Reports
covering the fiscal years ended 1992 through 1995, quarterly
reports, Form 10-QSB reports, other published financial data and
other internal and regulatory financial reports provided by
management of Camco; reviewed Camco's banking office network; and
reviewed the pricing trends of Camco's common stock and dividend
payment history;
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<PAGE> 238
CAPITAL RESOURCES GROUP, INC.
Board of Directors
August 5, 1996
Page 4
(11) Visited Camco's administrative and executive offices and conducted
interviews with management.
In addition, in the course of rendering our opinion, we reviewed the
information and data contained in the Prospectus/Joint Proxy Statement of Camco
and the Company that was not available as of the date of our original Fairness
Opinion.
In arriving at our opinion, we have relied upon the accuracy and
completeness of the information provided to us by the various parties mentioned
above, upon public information and upon representations and warranties in the
Agreement, and have not conducted any independent investigations to verify any
such information or performed any independent appraisal of the Company's or
Camco's assets.
This fairness opinion is supported by the detailed information and
analysis contained in the Evaluation and Analysis Reports dated March 22, 1996
and August 5, 1996 ("Reports"), which have been produced by Capital Resources
and have or will be delivered to the Company. We have relied on the Reports for
purposes of rendering this current fairness opinion. The Reports contain a
business description and financial analysis of the Company, an analysis of
current economic conditions in the Company's primary market area (economic
analysis is provided in the March 22 Report only), and a financial and market
pricing comparison with a selected group of thrift institutions which completed
merger and acquisition transactions or are currently subject to pending
transactions. In addition, the March 22 Report contains a discounted dividend
stream and terminal value analysis.
OPINION
- -------
Based on the foregoing and on our general knowledge of and experience in
the valuation of businesses and securities, we continue to be of the opinion
that, as of August 5, 1996, the consideration proposed by Camco for shares of
common stock of the Company is fair to the shareholders of the Company from a
financial point of view.
Respectfully submitted,
CAPITAL RESOURCES GROUP, INC.
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<PAGE> 239
APPENDIX D
SECTION 262. 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 the provisions of
subsection (d) of this section with respect to such shares, who continuously
hold such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of 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 Chapter shall be entitled to
an appraisal by the Court of Chancery of the fair value of his 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 non-stock
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 non-stock 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 Sections 251, 252, 254, 257, 258, 263 or 264 of this
Chapter;
(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 Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this
Section, 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 Chapter to
accept for such stock anything except (i) shares of stock of the corporation
surviving or resulting from such merger or consolidation, or depository receipts
in respect thereof; (ii) shares of stock of any other corporation or depository
receipts in respect thereof, which shares of stock 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 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; (iii) cash in lieu of
fractional shares or fractional depository receipts described in the foregoing
clauses (i) and (ii); or (iv) any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares, or fractional depository
receipts described in the foregoing clauses (i), (ii) and (iii) of this
subsection.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this Chapter 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) 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), 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
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<PAGE> 240
are available pursuant to subsections (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 his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his 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 his shares. A
proxy or vote against the merger of 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
the provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation of the date and 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 Chapter, the surviving or resulting corporation, either
before the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal rights
of the effective date of the merger or consolidation and that appraisal rights
are available for any or all of the shares of the constituent corporation, and
shall include in such notice a copy of this Section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(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 the provisions of subsections (a) and (d) hereof and who is
otherwise 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 his 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 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
his 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 THERE OF shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Registrar 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 as 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 one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publications
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 the provisions of 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
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<PAGE> 241
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 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 his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he 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 INN 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 other state.
(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 of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his 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 his 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 and 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 into 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.
(As amended by Ch. 186, Laws of 1967, Ch. 148, Laws of 1969, Ch. 106,
Laws of 1973, Ch. 371, Laws of 1976, Chs. 25 and 152, Laws of 1981, Ch. 112,
Laws of 1983, Ch. 136, Laws of 1987, Ch. 352, Laws of 1988, Ch. 376, Laws of
1990, Ch. 337, Laws of 1992, and Ch. 61, Laws of 1993 and Ch. 262, Laws of
1994.)
A-46
<PAGE> 242
APPENDIX E
CERTIFICATE OF AMENDMENT
OF
THIRD RESTATED
CERTIFICATE OF INCORPORATION
Camco Financial Corporation, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Camco
Financial Corporation, resolutions were duly adopted setting forth a proposed
amendment to the Third Restated Certificate of Incorporation of said
corporation, declaring said amendment to be advisable and directing that the
amendment be considered at the next annual meeting of the stockholders. The
resolution setting forth the proposed amendment is as follows:
RESOLVED, that Article Fourth of the Corporation's Third
Restated Certificate of Incorporation be amended to read as follows:
FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is Five Million
(5,000,000), of which stock Four Million Nine Hundred Thousand
(4,900,000) shares shall be common shares of the par value of
One Dollar ($1) each, amounting in the aggregate to Four
Million Nine Hundred Thousand Dollars ($4,900,000), and one
hundred thousand (100,000) shares shall be preferred shares of
the par value of One Dollar ($1) each, amounting in the
aggregate to One Hundred Thousand Dollars ($100,000). There is
hereby granted to the Board of Directors of the corporation
the authority to fix by resolution or resolutions any and all
powers, designations, preferences and relative, participating,
optional or other rights, or the qualifications, limitations
or restrictions thereof, of shares of the preferred stock, or
of any series of the preferred stock, of the corporation that
are permitted by the General Corporation Law of Delaware to be
fixed by the Board of Directors, and such grant of authority
shall include the power to specify the number of shares to any
series of the preferred stock of the corporation.
SECOND: That thereafter, pursuant to resolution of its Board
of Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, Camco Financial Corporation has caused
this certificate to be signed by Larry A. Caldwell, its President, and attested
by Anthony J. Popp, its Secretary, this ____ day of September, 1996.
By: Larry A. Caldwell
-----------------------------
Larry A. Caldwell, President
ATTEST:
By: Anthony J. Popp
--------------------------
Anthony J. Popp, Secretary
