<PAGE> 1
RULE 424(b)(3)
REGISTRATION NO. 33-64871
KENTUCKY ENTERPRISE BANCORP, INC.
800 Monmouth Street
Newport, Kentucky 41071
January 16, 1996
Dear Shareholder:
On behalf of the Board of Directors, we cordially invite you to attend the
Annual Meeting of Shareholders (the "Annual Meeting") of Kentucky Enterprise
Bancorp, Inc. ("Kentucky Enterprise"), which will be held at 10:00 a.m.,
Eastern Standard Time, on February 14, 1996, at Kentucky Enterprise Bank,
F.S.B., located at Highland and Newman Avenues, Ft. Thomas, Kentucky.
At the Annual Meeting, shareholders will be asked to: (i) approve an
Affiliation Agreement and related Agreement of Merger, as amended and restated,
both dated as of August 28, 1995 between Fifth Third Bancorp ("Fifth Third") and
Kentucky Enterprise (the "Affiliation Agreement" and the "Merger Agreement",
respectively); and (ii) elect three Class II directors for a class term of three
years. Pursuant to the Affiliation Agreement and the Merger Agreement, Kentucky
Enterprise will merge into Fifth Third (the "Merger"). At the time the Merger
becomes effective (the "Effective Time"), each share of common stock, $0.01 par
value per share, of Kentucky Enterprise (the "Kentucky Enterprise Common Stock")
shall be converted by virtue of the Merger into .5735 of a share of common
stock, without par value, of Fifth Third ("Fifth Third Common Stock") (the
"Exchange Ratio"). Based on the closing price per share of Fifth Third Common
Stock on the Nasdaq National Market on December 28, 1995, the value of .5735 of
a share of Fifth Third Common Stock was $27.53. The Exchange Ratio and such
share price have been adjusted to reflect the three-for-two stock split of Fifth
Third Common Stock effected in the form of a stock dividend declared December
19, 1995 and payable January 12, 1996. The Exchange Ratio shall be adjusted so
as to give Kentucky Enterprise shareholders the economic benefit of any further
stock dividends, reclassifications, recapitalizations, split-ups, exchanges of
shares, distributions or combinations or subdivisions of Fifth Third Common
Stock effected before the Effective Time. Only whole shares of Fifth Third
Common Stock will be issued. Any shareholder otherwise entitled to receive a
fractional share will receive cash in lieu of such fractional share based on the
Applicable Market Value Per Share of Fifth Third Common Stock, as defined in the
Merger Agreement. The proposed Merger is discussed in detail in the
accompanying Proxy Statement and Prospectus, as well as the Affiliation
Agreement and the Merger Agreement which are appended thereto as Annex A and
Annex B, respectively. We urge you to read the entire Proxy Statement and
Prospectus.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE SLATE OF DIRECTORS AND THE
MERGER AND RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSALS. THE AFFILIATION
AGREEMENT AND THE MERGER AGREEMENT MUST BE APPROVED BY THE AFFIRMATIVE VOTE OF
AT LEAST TWO-THIRDS OF THE ISSUED AND OUTSTANDING SHARES OF KENTUCKY ENTERPRISE
COMMON STOCK ENTITLED TO VOTE. THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF
THE VOTES CAST BY SHAREHOLDERS AT THE MEETING IS REQUIRED TO ELECT THE PROPOSED
DIRECTORS. AN ABSTENTION OR FAILURE TO VOTE HAS THE SAME EFFECT AS A VOTE
AGAINST THE PROPOSALS. IT IS, THEREFORE, IMPORTANT THAT YOU VOTE.
Your vote is very important, regardless of the number of shares you own.
Please sign and return the proxy card in the postage-paid return envelope
provided for your convenience. This will not prevent you from voting in
person, but will assure that your vote is counted if you are unable to attend
the Annual Meeting.
Please vote and return your proxy today.
Sincerely,
James T. White
President and
Chief Executive Officer
IMPORTANT: If your Kentucky Enterprise shares are held in the name of a
brokerage firm or nominee, only they can execute a proxy on your behalf. To
assure that your shares are voted, we urge you to telephone today the
individual responsible for your account at your brokerage firm and obtain
instructions on how to direct him or her to execute a proxy.
If you have any questions or need any help in voting your shares, please
telephone Jerry J. Egan, Secretary, at Kentucky Enterprise, (606) 261 - 3050,
extension 34.
<PAGE> 2
KENTUCKY ENTERPRISE BANCORP, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On February 14, 1996
NOTICE IS HEREBY GIVEN that an Annual Meeting of Shareholders ("Annual
Meeting") of Kentucky Enterprise Bancorp, Inc. ("Kentucky Enterprise") will be
held on February 14, 1996, at 10:00 a.m., Eastern Standard Time, at Kentucky
Enterprise Bank, F.S.B., located at Highland and Newman Avenues, Ft. Thomas,
Kentucky.
A Proxy Statement and Prospectus and Proxy Card for the Annual Meeting are
enclosed herewith. The Annual Meeting is for the purpose of considering and
voting upon the following matters:
1. A proposal to approve an Affiliation Agreement and related Agreement
of Merger, as amended and restated, both dated as of August 28, 1995 between
Fifth Third Bancorp ("Fifth Third") and Kentucky Enterprise (the "Affiliation
Agreement" and the "Merger Agreement", respectively). Pursuant to the
Affiliation Agreement and the Merger Agreement, Kentucky Enterprise will merge
into Fifth Third (the "Merger"). At the time the Merger becomes effective (the
"Effective Time"), each share of common stock, $0.01 par value per share, of
Kentucky Enterprise (the "Kentucky Enterprise Common Stock") shall be converted
by virtue of the Merger into .5735 of a share of common stock, without par
value, of Fifth Third ("Fifth Third Common Stock") (the "Exchange Ratio"). The
Exchange Ratio reflects the three-for-two stock split of Fifth Third Common
Stock effected in the form of a stock dividend declared December 19, 1995 and
payable January 12, 1996. The Exchange Ratio shall be adjusted so as to give
Kentucky Enterprise shareholders the economic benefit of any further stock
dividends, reclassifications, recapitalizations, split-ups, exchanges of
shares, distributions or combinations or subdivisions of Fifth Third Common
Stock effected before the Effective Time.
2. The election of John D. Coldiron, Robert C. Egan and Andrew W.
Loschiavo, to serve as Class II directors on the Kentucky Enterprise Board of
Directors until the consummation of the Merger if the Merger is approved, or
until their class term of three years expires if the Merger is not consummated.
3. Such other business as may properly come before the Annual Meeting or
any adjournments thereof. The Board of Directors is not aware of any other
business to come before the Annual Meeting.
Pursuant to the Code of Regulations of Kentucky Enterprise, the Board of
Directors has fixed January 8, 1996 as the record date for the determination
of shareholders entitled to receive notice of, and to vote at, the Annual
Meeting and any adjournments thereof. Only holders of record of Kentucky
Enterprise Common Stock at the close of business on such date will be entitled
to vote at the Annual Meeting or any adjournments thereof.
THE AFFIRMATIVE VOTE OF AT LEAST TWO-THIRDS OF THE ISSUED AND OUTSTANDING
SHARES OF KENTUCKY ENTERPRISE COMMON STOCK ENTITLED TO VOTE IS REQUIRED TO
APPROVE THE AFFILIATION AGREEMENT AND THE MERGER AGREEMENT. THE AFFIRMATIVE
VOTE OF AT LEAST A MAJORITY OF THE VOTES CAST BY SHAREHOLDERS AT THE MEETING IS
REQUIRED TO ELECT THE PROPOSED DIRECTORS. YOUR VOTE IS IMPORTANT REGARDLESS OF
THE NUMBER OF SHARES WHICH YOU OWN.
EACH SHAREHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE ANNUAL MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN BY A SHAREHOLDER MAY BE
REVOKED BEFORE IT IS EXERCISED BY SUBMITTING A LATER DATED PROXY, BY ATTENDING
THE ANNUAL MEETING AND VOTING IN PERSON OR BY GIVING NOTICE OF REVOCATION TO
KENTUCKY ENTERPRISE IN A WRITING ADDRESSED TO AND RECEIVED BY THE SECRETARY OF
KENTUCKY ENTERPRISE BEFORE THE ANNUAL MEETING.
By Order of the Board of Directors
James T. White, President and
Chief Executive Officer
Newport, Kentucky
January 16, 1996
<PAGE> 3
KENTUCKY ENTERPRISE 1,732,500 SHARES FIFTH THIRD BANCORP
BANCORP, INC. FIFTH THIRD BANCORP Fifth Third Center
800 Monmouth Street COMMON STOCK, NO PAR VALUE Cincinnati, Ohio 45263
Newport, Kentucky 41071 (513) 579-5300
(606) 261-3050
PROXY STATEMENT AND PROSPECTUS
This Proxy Statement and Prospectus ("Proxy Statement and Prospectus")
is being furnished to the shareholders of Kentucky Enterprise Bancorp, Inc. of
Newport, Kentucky ("Kentucky Enterprise"), a registered unitary savings and
loan holding company under the Home Owners' Loan Act in connection with the
solicitation of proxies by the Board of Directors of Kentucky Enterprise for
use at an Annual Meeting of Shareholders to be held on February 14, 1996 (the
"Annual Meeting").
At the Annual Meeting, holders of shares of Kentucky Enterprise's
common stock, $0.01 par value per share ("Kentucky Enterprise Common Stock"),
will be asked to: (i) approve an Affiliation Agreement and related Agreement
of Merger, as amended and restated, both dated as of August 28, 1995 between
Fifth Third Bancorp ("Fifth Third") and Kentucky Enterprise (the "Affiliation
Agreement" and the "Merger Agreement", respectively); and (ii) elect three
Class II directors for a class term of three years. Pursuant to the
Affiliation Agreement and the Merger Agreement, Kentucky Enterprise shall merge
into Fifth Third (the "Merger"). At the time the Merger becomes effective (the
"Effective Time"), each share of Kentucky Enterprise Common Stock shall be
converted by virtue of the Merger into .5735 of a share of Fifth Third common
stock, no par value per share ("Fifth Third Common Stock") (the "Exchange
Ratio"). The Exchange Ratio reflects the three-for-two stock split of Fifth
Third Common Stock effected in the form of a stock dividend declared December
19, 1995 and payable January 12, 1996. The Exchange Ratio shall be adjusted
so as to give the Kentucky Enterprise shareholders the economic benefit of
any further stock dividends, reclassifications, recapitalizations, split-ups,
exchanges of shares, distributions or combinations or subdivisions of Fifth
Third Common Stock effected before the Effective Time. No fractional shares
will be issued. Any shareholder otherwise entitled to receive a fractional
share will receive cash in lieu thereof based upon the Applicable Market
Value Per Share of Fifth Third Common Stock, as defined in the Merger
Agreement attached hereto as Annex B.
Under the rules and regulations of the Securities and Exchange
Commission (the "Commission"), the solicitation of Kentucky Enterprise's
shareholders to approve the Merger constitutes an offering of Fifth Third
Common Stock to be issued in connection with the Merger. Accordingly, Fifth
Third has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to such
offering, and this Proxy Statement and Prospectus does not contain all of the
information set forth in such Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
This Proxy Statement and Prospectus shall not constitute a prospectus
for public reoffering of the Fifth Third Common Stock issuable pursuant to the
Merger.
THE SECURITIES OF FIFTH THIRD TO BE ISSUED IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT AND
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF FIFTH THIRD COMMON STOCK OFFERED HEREBY 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
GOVERNMENTAL AGENCY.
The date of this Proxy Statement and Prospectus is January 16, 1996.
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AVAILABLE INFORMATION
THIS PROXY STATEMENT AND PROSPECTUS INCORPORATES DOCUMENTS BY
REFERENCE WHICH, WITH THE EXCEPTION OF THE 1994 ANNUAL REPORT TO SHAREHOLDERS
FOR FIFTH THIRD, ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SEE
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." THESE DOCUMENTS (EXCLUDING
EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN) ARE AVAILABLE WITHOUT CHARGE
UPON WRITTEN OR ORAL REQUEST FROM PAUL L. REYNOLDS, ASSISTANT SECRETARY, FIFTH
THIRD BANCORP, FIFTH THIRD CENTER, CINCINNATI, OHIO 45263 (TELEPHONE NUMBER:
(513) 579-5300). THE KENTUCKY ENTERPRISE ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED JUNE 30, 1995 AND THE QUARTERLY REPORT ON FORM 10-Q FOR THE
PERIOD ENDED SEPTEMBER 30, 1995 ARE AVAILABLE WITHOUT CHARGE FROM MICHAEL P.
BALLINGER, TREASURER, KENTUCKY ENTERPRISE BANCORP, INC., 800 MONMOUTH STREET,
NEWPORT, KENTUCKY 41071 (TELEPHONE NUMBER: (606) 261-3050). IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY FEBRUARY 7,
1996.
No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Proxy Statement and Prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized by Fifth Third
or Kentucky Enterprise. This Proxy Statement and Prospectus shall not
constitute an offer to sell or a solicitation of an offer to buy any securities
in any jurisdiction in which it would be unlawful to make such offer or
solicitation. Neither the delivery of this Proxy Statement and Prospectus at
any time, nor any offer or solicitation made hereunder, shall under any
circumstances imply that the information set forth herein or incorporated
herein is correct as of any time subsequent to its date.
Fifth Third and Kentucky Enterprise are each subject to the
information requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith, file reports, proxy
statements and other information with the Commission. Reports, proxy
statements and other information filed by Fifth Third and Kentucky Enterprise
can be inspected and copied at Room 1024 of the Offices of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices in New York (7 World Trade Center, 13th Floor, New York, New
York 10048) and Chicago (Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511), and copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
Fifth Third Common Stock and Kentucky Enterprise Common Stock are
traded in the over-the-counter market and quoted on the Nasdaq National Market
under the symbols "FITB" and "KEBI", respectively. Documents filed by Fifth
Third and Kentucky Enterprise with the Commission also can be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
All information contained in this Proxy Statement and Prospectus with
respect to Kentucky Enterprise was supplied by Kentucky Enterprise and all
information contained or incorporated in this Proxy Statement and Prospectus
with respect to Fifth Third was supplied by Fifth Third.
Although neither Kentucky Enterprise nor Fifth Third has any knowledge
that would indicate that any statements or information relating to the other
party contained herein is inaccurate or incomplete, neither Kentucky Enterprise
nor Fifth Third can warrant the accuracy or completeness of such statements or
information as they relate to the other party.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are hereby incorporated into this Proxy
Statement and Prospectus by reference.
(a) Fifth Third's Annual Report on Form 10-K for the year ended December
31, 1994;
(b) Pages 1 and 13-36 of Fifth Third's 1994 Annual Report to Shareholders
(enclosed with this Proxy Statement and Prospectus);
(c) Fifth Third's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1995, June 30, 1995 and September 30, 1995; and
(d) Fifth Third's Proxy Statement dated February 10, 1995.
In addition, all subsequent documents filed with the Commission by
Fifth Third pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
prior to the Effective Time are incorporated herein by reference. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement and Prospectus to the extent that a statement contained
herein (or in any other subsequently filed document which also is deemed to be
incorporated by reference herein) modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement and Prospectus.
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
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TABLE OF CONTENTS
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . .
SUMMARY OF THE PROXY STATEMENT AND PROSPECTUS . . . . . . . . . . . . . . . .
SELECTED HISTORICAL FINANCIAL DATA OF FIFTH THIRD . . . . . . . . . . . . . .
SELECTED HISTORICAL FINANCIAL DATA OF KENTUCKY ENTERPRISE . . . . . . . . . .
COMPARATIVE MARKET PRICE AND DIVIDEND DATA . . . . . . . . . . . . . . . . . .
COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . . . . .
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PURPOSES OF THE ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . .
MEETING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares Entitled to Vote; Voting and Revocation of Proxies . . . . . . . . . .
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL 1 - MERGER OF KENTUCKY ENTERPRISE INTO FIFTH THIRD . . . . . . . . .
Terms and Conditions of the Proposed Merger . . . . . . . . . . . . . . . . .
Background of, and Reasons for, the Merger . . . . . . . . . . . . . . . . . .
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Opinion of Trident Financial Corporation . . . . . . . . . . . . . . . . . . .
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion of Shares of Kentucky Enterprise Common Stock . . . . . . . . . . .
Exchange Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . .
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rights of Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . .
Conduct Pending Merger; Representations and Warranties . . . . . . . . . . . .
Conditions to Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amendment; Waiver; Termination . . . . . . . . . . . . . . . . . . . . . . . .
Effect on Kentucky Enterprise Employees . . . . . . . . . . . . . . . . . . .
Employee Stock Ownership Plan . . . . . . . . . . . . . . . . . . . . . . . .
Interests of Management . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effects of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PROPOSAL 2 - ELECTION OF DIRECTORS
Meetings and Committees of the Board of Directors . . . . . . . . . . . . . .
Executive Officers of Kentucky Enterprise . . . . . . . . . . . . . . . . . .
Compensation Committee Report on Executive Compensation . . . . . . . . . . .
Compensation of the Chief Executive Officer . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors' Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RESALE OF FIFTH THIRD COMMON STOCK BY AFFILIATES . . . . . . . . . . . . . . .
FIFTH THIRD BANCORP . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Requirements for Fifth Third . . . . . . . . . . . . . . . . . . . . .
Bank Holding Companies in General . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of Savings Associations by Holding Companies . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KENTUCKY ENTERPRISE BANCORP, INC. . . . . . . . . . . . . . . . . . . . . . .
Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lending Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Analysis of Loan and Mortgage-Backed Securities Portfolio . . . . . . . . . .
Loan and Mortgage-Backed Securities Maturity Schedule . . . . . . . . . . . .
Loan Originations and Purchases of Mortgaged-Backed Securities . . . . . . . .
Investment Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Activity and Other Sources of Funds . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Voting Securities and Principal Holders Thereof . . . . . . . . . . . . . . .
Stock Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KENTUCKY ENTERPRISE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . .
Asset/Liability Management . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate Sensitivity Analysis and Net Portfolio Value . . . . . . . . . .
Prepayment Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Decay Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average Balance, Interest and Average Yields and Rates . . . . . . . . . . . .
Rate/Volume Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994 . .
Comparison of Operating Results for the Years Ended June 30, 1994 and 1993 . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . .
Impact of Inflation and Changing Prices . . . . . . . . . . . . . . . . . . .
Impact of New Accounting Standards . . . . . . . . . . . . . . . . . . . . . .
Comparison of Periods Ended September 30, 1995 and 1994 . . . . . . . . . . .
EFFECT OF GOVERNMENTAL POLICIES . . . . . . . . . . . . . . . . . . . . . . .
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<PAGE> 8
DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE RIGHTS OF SHAREHOLDERS . . .
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rights Upon Liquidation . . . . . . . . . . . . . . . . . . . . . . . . .
Indemnification and Personal Liability of Directors and Officers . . . . .
Shareholders' Meetings; Quorum . . . . . . . . . . . . . . . . . . . . . .
Subscription, Conversion, Redemption Rights; Stock Nonassessable . . . . .
Change of Control Provisions . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN BENEFICIAL OWNERS OF FIFTH THIRD COMMON STOCK . . . . . . . . . .
FIFTH THIRD MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . .
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDERS' PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . .
RELATIONSHIP WITH INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . .
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDEX TO KENTUCKY ENTERPRISE FINANCIAL STATEMENTS . . . . . . . . . . . . F-1
ANNEXES:
Annex A: Affiliation Agreement dated as of August 28, 1995 between Fifth
Third Bancorp and Kentucky Enterprise Bancorp, Inc. (excluding
exhibits) . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Annex B: Agreement of Merger, as amended and restated, dated as of August
28, 1995 between Fifth Third Bancorp and Kentucky Enterprise
Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . . . B-1
Annex C: Fairness Opinion of Trident Financial Corporation . . . . . . C-1
Annex D: Sections 1701.84 and 1701.85 of the General Corporation
Law of Ohio . . . . . . . . . . . . . . . . . . . . . . . . . D-1
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SUMMARY OF THE PROXY STATEMENT AND PROSPECTUS
The following is a summary of certain information contained elsewhere in this
Proxy Statement and Prospectus and the documents incorporated herein by
reference and/or enclosed herewith. This summary is not intended to be a
summary of all information relating to the Merger and is qualified in its
entirety by reference to the more detailed information contained elsewhere in
this Proxy Statement and Prospectus, including the Annexes hereto, and the
documents incorporated by reference in, and/or enclosed with, this Proxy
Statement and Prospectus.
PARTIES TO THE TRANSACTION:
FIFTH THIRD: Fifth Third is a registered multi-bank holding
company, incorporated under Ohio law, which conducts
its principal activities through its banking and
non-banking subsidiaries. Fifth Third's 10
subsidiary banks operate a general banking
business from 382 offices located throughout Ohio,
Indiana, Kentucky and Florida. Fifth Third is also
a registered multi-savings and loan holding
company and operates two federally chartered
savings banks. At September 30, 1995, on a
consolidated basis, Fifth Third had consolidated
assets, deposits and stockholders' equity of
approximately $17.2 billion, $11.7 billion and
$1.6 billion, respectively. Fifth Third Common Stock
is traded over-the-counter and is listed on the
NASDAQ National Market under the symbol "FITB".
Fifth Third's principal executive offices are
located at Fifth Third Center, Cincinnati, Ohio
45263, and its telephone number is (513) 579-5300.
KENTUCKY ENTERPRISE: Kentucky Enterprise is a registered unitary
savings and loan holding company incorporated
under Ohio law. Kentucky Enterprise owns all of
the stock of Kentucky Enterprise Bank, F.S.B.
("Kentucky Enterprise Bank") which is
headquartered in Newport, Kentucky. Kentucky
Enterprise Savings Bank operates its main office, 10
branch offices and one loan production office
located in Boone, Kenton, Campbell and Pendleton
Counties, Kentucky. At September 30, 1995,
Kentucky Enterprise, on a consolidated basis, had
total assets, total deposits and shareholders'
equity of approximately $281.4 million, $227.4
million and $49.5 million, respectively. Kentucky
Enterprise Common Stock is traded over-the-
counter and is listed on the NASDAQ National
Market under the symbol "KEBI". Kentucky
Enterprise's principal executive offices are
located at 800 Monmouth Street, Newport, Kentucky
41071, and its telephone number is (606) 261-3050.
ANNUAL MEETING OF KENTUCKY ENTERPRISE SHAREHOLDERS:
TIME AND DATE: 10:00 a.m., Eastern Standard Time, on February 14,
1996
PLACE: Kentucky Enterprise Bank, F.S.B., located at Highland
and Newman Avenues, Ft. Thomas, Kentucky
-vii-
<PAGE> 10
PURPOSE: 1. To consider and vote upon the Affiliation
Agreement and the Merger Agreement which provide
for the Merger of Kentucky Enterprise with and
into Fifth Third. Pursuant to the Affiliation
Agreement and the Merger Agreement, Kentucky
Enterprise's shareholders will receive shares of
Fifth Third Common Stock in exchange for shares of
Kentucky Enterprise Common Stock and cash in lieu
of any fractional shares of Fifth Third Common
Stock. Copies of the Affiliation Agreement and
the Merger Agreement are attached hereto as Annex
A and Annex B, respectively, and are incorporated
herein by reference. See "PURPOSES OF THE ANNUAL
MEETING" and "PROPOSAL 1 - MERGER OF KENTUCKY
ENTERPRISE INTO FIFTH THIRD."
2. The election of John D. Coldiron, Robert C.
Egan and Andrew W. Loschiavo, to serve as Class II
directors on the Kentucky Enterprise Board of
Directors until the consummation of the Merger
if the Merger is approved, or until their class
term of three years expires if the Merger is not
consummated. See "PURPOSES OF THE ANNUAL MEETING"
and "PROPOSAL 2 - ELECTION OF DIRECTORS."
REQUIRED VOTE; Approval of the Affiliation Agreement and the
RECORD DATE: Merger Agreement requires the affirmative
vote of holders of at least two-thirds of the
approximately 2,801,024 shares of Kentucky Enterprise
Common Stock outstanding as of the close of business
on January 8, 1996 (the "Record Date"). The election
of directors requires the affirmative vote of holders
of at least a majority of the votes cast by the
shareholders at the meeting. An abstention or failure
to vote has the same effect as voting against the
proposals. Accordingly, shareholders are urged to
sign and return their proxies. See "MEETING
INFORMATION - Shares Entitled to Vote," " - Voting and
Revocation of Proxies," "PROPOSAL 1 - MERGER OF
KENTUCKY ENTERPRISE INTO FIFTH THIRD - Vote Required"
and "PROPOSAL 2 - ELECTION OF DIRECTORS - Vote
Required."
BENEFICIAL OWNERSHIP BY As of the close of business on September 30, 1995,
OFFICERS AND DIRECTORS: the executive officers and directors of Kentucky
Enterprise and their affiliates (including directors
of Kentucky Enterprise Bank) beneficially owned
758,019 shares, or approximately 27.56%, of
currently outstanding Kentucky Enterprise Common
Stock. These figures include options for shares of
stock which were exercisable on that date or which
will become exercisable. See "KENTUCKY ENTERPRISE
BANCORP, INC. - Voting Securities and Principal
Holders Thereof."
RIGHTS OF DISSENTING Pursuant to Sections 1701.84 and 1701.85 of the
SHAREHOLDERS: General Corporation Law of Ohio ("Section
1701.85"), shareholders who make a written demand for
appraisal prior to the vote on the Merger and who
do not vote in favor of the Merger may, upon
complying with certain other provisions of such
section, exercise appraisal rights. Failure to
comply with the procedures set forth in such
Sections will result in the loss of appraisal
rights. See "PROPOSAL 1 - MERGER OF KENTUCKY
ENTERPRISE INTO FIFTH THIRD - Rights of Dissenting
Shareholders" and Annex D.
-viii-
<PAGE> 11
TERMS OF THE MERGER; Upon consummation of the Merger, each shareholder
CONVERSION OF KENTUCKY of Kentucky Enterprise will receive, for each share
ENTERPRISE COMMON STOCK; of Kentucky Enterprise Common Stock which he or
STOCK CONSIDERATION: she holds at the Effective Time, .5735 of a share
of Fifth Third Common Stock (the "Exchange Ratio").
Based on the closing price per share of Fifth Third
Common Stock on the NASDAQ National Market on December
28, 1995, the value of .5735 of a share of Fifth Third
Common Stock was $27.53. The Exchange Ratio and such
share price have been adjusted to reflect the
three-for-two stock split of Fifth Third Common Stock
effected in the form of a stock dividend declared
December 19, 1995 and payable January 12, 1996. The
Exchange Ratio shall be adjusted so as to give the
Kentucky Enterprise shareholders the economic benefit
of any further stock dividends, reclassifications,
recapitalizations, split-ups, exchanges of shares,
distributions or combinations or subdivisions of Fifth
Third Common Stock effected before the Effective Time.
See "PROPOSAL 1 - MERGER OF KENTUCKY ENTERPRISE INTO
FIFTH THIRD - Conversion of Shares of Kentucky
Enterprise Common Stock" and "-Exchange Ratio."
NO FRACTIONAL SHARES: No fractional shares will be issued in connection
with the Merger. Kentucky Enterprise shareholders
will receive cash in lieu of any fractional
shares which they otherwise would be entitled to
receive based on the Applicable Market Value Per
Share of Fifth Third Common Stock, as defined in
the Merger Agreement. See "PROPOSAL 1 - MERGER OF
KENTUCKY ENTERPRISE INTO FIFTH THIRD - No
Fractional Shares."
CONDITIONS OF CLOSING: The Merger is subject to several significant
conditions, including but not limited to, Kentucky
Enterprise shareholder approval, and approval by
the Board of Governors of the Federal Reserve
System, the Office of Thrift Supervision and the
Kentucky Department of Financial Institutions,
applications for which have been filed. See
"PROPOSAL 1 - MERGER OF KENTUCKY ENTERPRISE INTO
FIFTH THIRD - Conditions to Closing."
MERGER: Upon consummation of the Merger, Kentucky
Enterprise will merge with and into Fifth Third
and Kentucky Enterprise will cease to exist as a
separate entity. Fifth Third plans to,
simultaneously with the Merger: (i) have its wholly
owned subsidiary, Fifth Third Bank of Northern
Kentucky, Inc., purchase substantially all of the
assets and assume substantially all of the
liabilities of Kentucky Enterprise Bank, F.S.B.
(except certain assets and certain liabilities
which will be maintained as Kentucky Enterprise
Bank, F.S.B. ("Kentucky Enterprise Bank")); (ii)
move Kentucky Enterprise Bank's main office to the
current location of its Limaburg Road branch in
Hebron, Kentucky; and (iii) change the name of
Kentucky Enterprise Bank to Fifth Third Savings Bank
of Northern Kentucky, F.S.B. See "PROPOSAL 1 -
MERGER OF KENTUCKY ENTERPRISE INTO FIFTH THIRD -
Effects of Merger."
EFFECTIVE TIME; RIGHT The Effective Time will, unless the parties agree
TO TERMINATE: otherwise, occur on a Friday which is as soon as
is reasonably possible following the date that all
of the conditions precedent to the closing,
including receipt of all regulatory approvals and
the expiration of any applicable waiting periods,
have been fully met or effectively waived. The
parties anticipate that the Merger will be
consummated in the spring of 1996. Kentucky
Enterprise and Fifth Third each will have the right
to terminate the Affiliation Agreement, among other
reasons, if the Effective Time does not occur on or
before June 30, 1996, subject to certain
conditions. See "PROPOSAL 1 - MERGER OF KENTUCKY
ENTERPRISE INTO FIFTH THIRD - Effective Time" and
"-Termination."
-ix-
<PAGE> 12
PROCEDURE FOR EXCHANGE Promptly after the Effective Time, Fifth Third will
OF SHARES: mail to each shareholder of Kentucky Enterprise a
form of transmittal letter and instructions for the
surrender of Kentucky Enterprise Common Stock
certificates for certificates representing the
shares of Fifth Third Common Stock to which such
shareholder is entitled. Certificates for shares of
Fifth Third Common Stock will be issued to
shareholders of Kentucky Enterprise only after
their certificates for Kentucky Enterprise Common
Stock have been surrendered in accordance with
such instructions. See "PROPOSAL 1 - MERGER OF
KENTUCKY ENTERPRISE INTO FIFTH THIRD - Exchange of
Certificates."
FEDERAL INCOME TAX The Merger is conditioned, in part, upon receipt of
CONSEQUENCES: an opinion of Fifth Third's counsel with respect
to certain tax matters, including an opinion that no
gain or loss (other than with respect to cash
received in lieu of fractional shares or cash
received upon the exercise of dissenters' rights)
will be recognized by Kentucky Enterprise's
shareholders upon the exchange of their Kentucky
Enterprise Common Stock for Fifth Third Common
Stock. See "PROPOSAL 1 - MERGER OF KENTUCKY
ENTERPRISE INTO FIFTH THIRD - Federal Income Tax
Consequences." SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
CONSEQUENCES TO THEM OF THE MERGER UNDER FEDERAL,
STATE, LOCAL AND ANY OTHER APPLICABLE TAX LAWS.
ACCOUNTING: Consummation of the Merger is conditioned upon
receipt by Fifth Third of a letter from Fifth
Third's independent public accountants to the
effect that the Merger will qualify for pooling of
interests accounting treatment. See "PROPOSAL 1 -
MERGER OF KENTUCKY ENTERPRISE INTO FIFTH THIRD -
Accounting Treatment."
-x-
<PAGE> 13
INTERESTS OF CERTAIN Fifth Third shall use its best efforts to employ at
PERSONS IN THE MERGER: Fifth Third or other Fifth Third subsidiaries or
affiliates as many of the employees of Kentucky
Enterprise and Kentucky Enterprise Bank who desire
such employment within the Fifth Third holding
company system as possible, to the extent of
available positions and consistent with Fifth
Third's standard staffing levels and personnel
policies. Each employee of Kentucky Enterprise Bank
who becomes an employee of Fifth Third or its
subsidiaries subsequent to the Merger will be
entitled to participate in all employee benefit
plans sponsored by Fifth Third or its subsidiaries
on the same terms and to the same extent as
similarly situated employees of Fifth Third. Such
employees shall receive credit for their period of
service to Kentucky Enterprise Bank for purposes of
determining participation and vesting in all Fifth
Third employee benefit plans, but not for purposes
of determining the benefits accrued under the Fifth
Third Master Retirement Plan.
It is not anticipated that Fifth Third will enter
into employment agreements with any officers of
Kentucky Enterprise or Kentucky Enterprise Bank in
connection with the transactions contemplated by the
Affiliation Agreement. In connection with the
Merger, the four officers of Kentucky Enterprise
who have employment agreements with Kentucky
Enterprise or Kentucky Enterprise Bank (each a
"Contract Officer") will, receive as of the
Effective Time, the severance or termination
payments provided in his respective agreement
("Contract Payments"), and such executive officers
will, as a result of the Merger, become immediately
vested in 17,634, 7,054, 7,054 and 3,526 currently
restricted shares of Kentucky Enterprise Common
Stock, respectively, under Kentucky Enterprise's
management recognition plan. The Merger will also
have the effect of accelerating the vesting of
certain retirement benefits under a supplemental
executive retirement agreement entered into with
the President and Chief Executive Officer of
Kentucky Enterprise and Kentucky Enterprise Bank.
The officers and directors of Kentucky Enterprise
will be provided certain directors' and officers'
liability insurance protection for five years
following the Effective Time, as long as such
insurance may be purchased on the terms specified in
the Affiliation Agreement. Also, Fifth Third has
affirmatively assumed the obligation to indemnify
officers and directors of Kentucky Enterprise,
Kentucky Enterprise Bank and their subsidiaries
for certain claims under specified circumstances
for five years after the Effective Time. See
"PROPOSAL 1 - MERGER OF KENTUCKY ENTERPRISE INTO
FIFTH THIRD - Effect on Kentucky Enterprise
Employees" and "-Interests of Management."
BOARD RECOMMENDATION: The Board of Directors of Kentucky Enterprise
believes that the terms of the Merger are fair to,
and in the best interests of, Kentucky Enterprise
shareholders and unanimously recommends approval of
the Merger and the election of the proposed
directors. See "PROPOSAL 1 - MERGER OF KENTUCKY
ENTERPRISE INTO FIFTH THIRD - Recommendation" and
"-Background of, and Reasons for, the Merger."
SECURITIES INVOLVED: For a comparative analysis of Kentucky Enterprise
Common Stock and Fifth Third Common Stock, see
"DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE
RIGHTS OF SHAREHOLDERS."
COMPARATIVE MARKET Fifth Third Common Stock and Kentucky Enterprise
PRICES: Common Stock are traded on the Nasdaq National
Market under the symbols "FITB" and "KEBI",
respectively. On August 25, 1995, the business day
immediately preceding the public announcement of the
execution of the Affiliation Agreement and the
Merger Agreement setting forth the terms of the
Merger, and on December 28, 1995, comparative
market prices of Kentucky Enterprise Common Stock
and Fifth Third Common Stock were as follows:
-xi-
<PAGE> 14
<TABLE>
<CAPTION>
August 25, 1995 December 28, 1995
--------------- ----------------
<S> <C> <C>
Kentucky Enterprise Common Stock $22.25 $27.00
(Closing sales price)
Fifth Third Common Stock* $37.33 $48.00
(Closing sales price)
</TABLE>
* Closing sales prices of Fifth Third Common Stock have been adjusted to
reflect the three-for-two stock split effected in the form of a stock
dividend declared December 19, 1995 and payable January 12, 1996.
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
-xii-
<PAGE> 15
SELECTED HISTORICAL FINANCIAL DATA OF FIFTH THIRD
The following table sets forth certain historical financial data
concerning Fifth Third. This information is based on information contained in
Fifth Third's 1994 Annual Report to Shareholders for the period ended December
31, 1994 and the Quarterly Reports to Shareholders for the periods ended
September 30, 1995 and September 30, 1994, respectively. The Annual Report
accompanies this Proxy Statement and Prospectus, and all such documents are
incorporated herein by reference and should be read in conjunction therewith.
See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
Summary of Operations: ($000's except per share amounts)
---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $412,244 $386,317 $516,753 $473,515 $427,870 $363,247 $317,643
Provision for credit losses 28,479 26,401 35,780 48,037 66,100 62,464 43,479
------ ------ ------ ------ ------ ------ ------
Net interest income after 383,765 359,916 480,973 425,478 361,770 300,783 274,164
provision for credit losses
Other operating income 223,169 190,022 255,908 231,150 206,308 189,002 141,490
Operating expenses 291,930 281,107 371,545 352,720 316,315 282,844 246,588
------- ------- ------- ------- ------- ------- -------
Income before income taxes 315,004 268,831 365,336 303,908 251,763 206,941 169,066
Applicable income taxes 105,183 89,025 120,877 97,673 79,742 63,987 48,040
------- ------ ------- ------ ------ ------ ------
Net income $209,821 $179,806 $244,459 $206,235 $172,021 $142,954 $121,026
======== ======== ======== ======== ======== ======== ========
Common Share Data:
------------------
Primary net income per share $2.09 $1.83 $2.48 $2.15 $1.83 $1.53 $1.31
Fully diluted net income per share 2.09 1.83 2.48 2.15 1.82 1.53 1.31
Cash dividends declared per share .70 .59 .80 .68 .60 .52 .45
Book value at period end 16.39 14.05 14.41 13.29 11.48 10.15 9.12
Average shares outstanding
(000's):
Primary 102,024 100,298 100,388 98,007 94,623 93,455 92,547
Fully Diluted 102,162 100,308 100,386 98,007 94,782 93,791 92,624
Financial Condition at Period End:
---------------------------------
Securities Available for Sale (1) $2,069,427 $1,091,937 $1,129,492 $898,074 --- --- ---
Securities Held to Maturity 2,561,074 2,253,727 2,507,543 1,776,394 $2,419,421 $2,625,968 $2,002,083
Loans and Leases 11,592,354 9,981,275 10,286,457 9,566,898 8,115,590 6,325,918 6,165,808
Assets 17,152,869 14,270,553 14,957,009 13,128,544 11,390,289 9,981,383 9,344,994
Deposits 11,721,852 10,626,555 10,630,878 9,477,306 8,447,812 7,633,362 7,354,767
Short-Term Borrowings 2,924,916 1,785,454 2,452,218 1,691,744 1,348,105 1,127,768 832,457
Long-Term Debt and Convertible 430,614 183,575 178,713 407,864 309,730 52,436 125,798
Subordinated Notes
Stockholders' Equity 1,645,378 1,360,531 1,398,774 1,277,660 1,076,854 944,691 845,325
Ratios:
------
Profitability Ratios:
--------------------
Return on average assets 1.77% 1.77% 1.77% 1.71% 1.63% 1.50% 1.38%
Return on average stockholders' 18.1 18.9 18.6 17.8 16.9 15.9 15.0
equity
Net interest margin 3.90 4.21 4.16 4.39 4.54 4.30 4.17
Overhead ratio (2) 44.3 47.3 46.6 48.7 48.6 49.5 51.5
Other operating income to total 34.7 32.9 33.1 32.2 31.6 33.2 30.8
income (3)
Capital Ratios:
--------------
Average stockholders' equity to 9.78 9.37 9.50 9.61 9.62 9.42 9.21
average assets
Tier 1 Capital to risk - adjusted 11.0 11.6 11.3 11.5 11.2 12.3 11.5
assets (4)
Total Capital to risk - adjusted 14.4 13.7 13.2 13.9 14.1 13.6 12.7
assets (4)
Leverage (5) 9.5 9.6 9.6 9.6 9.2 9.3 8.9
</TABLE>
-xiii-
<PAGE> 16
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Credit Quality Ratios:
---------------------
Reserve for credit losses to 622.5 510.1 570.5 362.8 155.5 68.0 64.0
nonperforming assets
Reserve for credit losses to loans 1.50 1.60 1.52 1.51 1.50 1.54 1.46
and leases outstanding
Net charge-offs to average loans .24 .17 .18 .31 .64 .89 .66
and leases outstanding
Nonperforming assets to loans, .24 .31 .27 .42 .96 2.24 2.27
leases and other real estate owned
====================================================================================================================
<FN>
NOTE: Per share amounts and shares outstanding reflect the three-for-two stock
split effected in the form of a stock dividend declared December 19,
1995 and payable January 12, 1996.
(1) At market. Amortized cost: September 30, 1995 - $2,086,838,000, September
30, 1994 - $1,149,863,000, December 31, 1994 - $1,203,677,000 and December
31, 1993 - $878,963,000. Prior to 1993, all securities were classified in
a single portfolio accounted for at amortized cost.
(2) Operating expenses divided by the sum of taxable equivalent net interest
income and other operating income.
(3) Other operating income excluding securities gains and losses as a percent
of net interest income and other operating income excluding securities
gains and losses.
(4) Under final year-end 1992 guidelines.
(5) Tier 1 capital (under final year-end 1992 rules) divided by average
quarterly assets.
</TABLE>
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
-xiv-
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA OF KENTUCKY ENTERPRISE
The following table sets forth certain historical financial data
concerning Kentucky Enterprise. This information is based on information
contained in Kentucky Enterprise's 1995 Annual Report to Shareholders for the
fiscal year ended June 30, 1995, and Quarterly Reports on Form 10-Q for the
periods ended September 30, 1995 and September 30, 1994, respectively, all of
which are available on request and are included in this Proxy Statement and
Prospectus under the heading "INDEX TO KENTUCKY ENTERPRISE FINANCIAL STATEMENTS"
and should be read in conjunction therewith.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30,
----------------- ------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
Total Amount of: (Dollars in thousands)
---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets $281,404 $285,069 $280,365 $284,209 $273,672 $285,256 $279,936
Loans receivable, net 154,699 134,733 151,740 128,537 130,227 142,231 153,862
Cash, securities held to maturity 56,467 71,475 55,488 77,166 53,451 63,678 73,083
and available for sale (including
Federal Home Loan Bank stock)
Mortgage-backed securities 66,057 74,382 68,934 74,232 85,701 74,428 48,119
Savings deposits 227,414 233,824 227,269 233,755 248,556 261,764 257,972
Advances from Federal Home Loan 297 324 324 351 378 405 --
Bank of Cincinnati
Stockholders' equity (Retained 49,512 47,133 49,028 46,751 21,810 20,433 19,214
earnings prior to 1994)
Number of:
----------
Real estate loans outstanding 3,381 3,298 3,389 3,303 3,696 4,177 4,701
Savings accounts 27,727 28,353 27,925 28,405 30,204 32,115 33,841
Full service offices 11 11 11 11 11 12 12
====================================================================================================================
</TABLE>
The following table summarizes Kentucky Enterprise's results of operations for
each of the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, JUNE 30,
----------------- ------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
Operating Data: (Dollars in thousands)
--------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $4,892 $4,388 $ 18,104 $ 16,345 $ 19,075 $ 22,199 $ 23,909
Interest Expense 2,639 2,332 9,769 9,561 11,268 15,570 17,715
Net interest income before 2,253 2,056 8,335 6,784 7,807 6,629 6,194
provision for loan losses
Other income 103 115 433 414 516 510 475
Noninterest expense 1,776 1,698 6,828 5,938 5,749 5,215 5,132
Income before income tax expense 570 473 1,905 1,194 2,314 1,811 1,523
and cumulative effect of change in
accounting principle
Income tax expense 202 161 605 310 765 592 503
Cumulative effect of change in -- -- -- -- 172 -- --
accounting for income taxes ------- ------- ------- ------- ------- ------- -------
Net income $ 368 $ 312 $ 1,300 $ 884 $ 1,377 $ 1,219 $ 1,020
======= ======= ======== ======== ======== ======== ========
Net income per common share fully $ .14 $ .12 $ .48 $ .14(1) $ N/A $ N/A $ N/A
diluted ======== ======== ========= ========= ======== ======== ========
====================================================================================================================
<FN>
(1) Computed based upon net income for the period from January 1, 1994 to June
30, 1994. The effect of net income per share for the post-conversion
period from December 16, 1993 to December 31, 1993 is not meaningful.
</TABLE>
-xv-
<PAGE> 18
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
----------------- ------------------------------------------------
1995 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
Performance Ratios:
------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Return on assets (net income .52% .44% .46% .31% .49% .43% .37%
divided by average total assets)
Return on equity (net income 2.98% 2.66% 2.72% 2.43% 6.52% 6.16% 5.44%
divided by average equity)
Equity-to-assets ratio (average 17.57% 16.56% 17.03% 12.86% 7.55% 6.97% 6.83%
equity divided by average total
assets)
Interest rate spread for the 2.48% 2.33% 2.34% 1.99% 2.59% 2.08% 1.96%
period
Net interest margin for the period 3.29% 2.96% 3.04% 2.46% 2.86% 2.40% 2.32%
Ratio of noninterest expense to 2.53% 2.39% 2.43% 2.10% 2.05% 1.84% 1.87%
average total assets
Liquidity ratio 18.97% 26.90% 19.56% 30.42% 22.18% 23.53% 27.46%
Quality Ratios:
---------------
Nonperforming assets to total .09% .12% .09% .10% .16% .29% .43%
assets at end of period
Allowance for loan losses to 199.20% 129.26% 184.91% 147.25% 102.44% 19.36% 3.78%
nonperforming loans
Provision for loan losses to total .01% -- .02% .05% .20% .08% .01%
loans receivable, net
Capital Ratios:
--------------
Total equity to total assets at 17.59% 16.53% 17.49% 16.45% 7.97% 7.16% 6.86%
end of period
Ratio of average interest-earning 120.80% 118.70% 119.66% 113.47% 106.72% 105.71% 105.58%
assets to average interest-bearing
liabilities
====================================================================================================================
</TABLE>
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
-xvi-
<PAGE> 19
COMPARATIVE MARKET PRICE AND DIVIDEND DATA
Fifth Third Common Stock and Kentucky Enterprise Common Stock are traded in
the over-the-counter market and quoted on the Nasdaq National Market. The
following table sets forth (in per share amounts), for the quarterly periods
indicated, the high and low closing sales prices and the dividends declared
during each quarterly period.
<TABLE>
<CAPTION>
FIFTH THIRD COMMON STOCK(3) KENTUCKY ENTERPRISE COMMON STOCK
--------------------------- --------------------------------
DIVIDENDS DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1992:
First Calendar Quarter $33.59 $28.67 $0.147 N/A (1) N/A (1) N/A (1)
Second Calendar Quarter $31.17 $26.75 $0.147 N/A (1) N/A (1) N/A (1)
Third Calendar Quarter $35.17 $27.17 $0.147 N/A (1) N/A (1) N/A (1)
Fourth Calendar Quarter $36.00 $31.17 $0.160 N/A (1) N/A (1) N/A (1)
Year Ended December 31, 1993:
First Calendar Quarter $36.75 $33.25 $0.160 N/A (1) N/A (1) N/A (1)
Second Calendar Quarter $39.00 $33.50 $0.160 N/A (1) N/A (1) N/A (1)
Third Calendar Quarter $36.42 $34.17 $0.180 N/A (1) N/A (1) N/A (1)
Fourth Calendar Quarter $36.00 $33.17 $0.180 $17.25 $14.75 -----
Year Ended December 31, 1994:
First Calendar Quarter $34.09 $30.09 $0.180 $24.00 $15.25 -----
Second Calendar Quarter $36.67 $31.17 $0.207 $22.25 $18.75 -----
Third Calendar Quarter $35.50 $33.25 $0.207 $23.25 $20.25 $ 0.05
Fourth Calendar Quarter $35.00 $31.00 $0.207 $24.75 $20.50 $ 0.05
Year Ended December 31, 1995:
First Calendar Quarter $35.17 $31.37 $0.233 $22.50 $20.75 $ 0.05
Second Calendar Quarter $38.25 $32.09 $0.233 $22.00 $19.00 $ 0.05
Third Calendar Quarter $38.83 $36.33 $0.233 $24.00 $20.00 $ 0.05
Fourth Calendar Quarter (2) $50.42 $37.75 $0.260 $28.00 $20.25 $ 0.05
____________________________
<FN>
(1) Kentucky Enterprise completed its initial public offering in connection
with Kentucky Enterprise Bank's conversion from mutual to stock form on
December 16, 1993.
(2) Through December 28, 1995
(3) Per share amounts of Fifth Third Common Stock reflect the three-for-two
stock split effected in the form of a stock dividend declared December 19,
1995 and payable January 12, 1996.
</TABLE>
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
-xvii-
<PAGE> 20
COMPARATIVE PER SHARE DATA
The following table sets forth certain per-share information for both Fifth
Third and Kentucky Enterprise at the dates indicated and for the periods then
ended. The equivalent values of such information are based on the Exchange
Ratio of .5735 shares of Fifth Third Common Stock for each share of Kentucky
Enterprise Common Stock. The Exchange Ratio reflects the three-for-two stock
split of Fifth Third Common Stock effected in the form of a stock dividend
declared December 19, 1995 and payable January 12, 1996. Neither Kentucky
Enterprise nor Fifth Third can give any assurances that the following table
will accurately reflect figures and values applicable at the date of
consummation of the Merger.
<TABLE>
<CAPTION>
Equivalent Share Basis -
Kentucky .5735 Shares of Fifth
Fifth Third(3) Enterprise Third Common Stock
- -------------------------------------------------------------------------------------------------------------------
Fully Fully
Primary Diluted Actual Primary Diluted
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
NET INCOME PER SHARE
December 31, 1992 $ 1.83 $ 1.82 N/A(1) $ 1.05 $ 1.04
December 31, 1993 2.15 2.15 N/A(1) 1.23 1.23
December 31, 1994 2.48 2.48 $ .40 1.42 1.42
September 30, 1994 1.83 1.83 .27 1.05 1.05
September 30, 1995 2.09 2.09 .37 1.20 1.20
DIVIDENDS DECLARED PER SHARE
December 31, 1992 $ .60 N/A(1) $ .34
December 31, 1993 .68 N/A(1) .39
December 31, 1994 .80 $ .10 .46
September 30, 1994 .59 .05 .34
September 30, 1995 .70 .15 .40
BOOK VALUE PER SHARE
December 31, 1994 $14.41 $17.35 $ 8.27
September 30, 1995 16.39 18.00 9.40
MARKET VALUE PER SHARE
ON AUGUST 25, 1995(2) $37.33 $22.25
<FN>
1 Kentucky Enterprise completed its initial public offering in connection with
Kentucky Enterprise Bank's conversion from mutual to stock form on December 16,
1993. Per share information is not applicable for periods prior to the
completion of Kentucky Enterprise's stock conversion and not meaningful for the
period December 16, 1993 through December 31, 1993.
2 August 25, 1995 was the last day of trading preceding the public
announcement of the Merger.
3 Per share amounts of Fifth Third Common Stock reflect the three-for-two
stock split effected in the form of a stock dividend declared December 19, 1995
and payable January 12, 1996.
</TABLE>
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
-xviii-
<PAGE> 21
KENTUCKY ENTERPRISE BANCORP, INC.
800 MONMOUTH STREET
NEWPORT, KENTUCKY 41071
(606) 261-3050
AND
FIFTH THIRD BANCORP
FIFTH THIRD CENTER
CINCINNATI, OHIO 45263
(513) 579-5300
______________________________________________________________________________
PROXY STATEMENT AND PROSPECTUS
______________________________________________________________________________
GENERAL INFORMATION
This Proxy Statement and Prospectus is being furnished to the
shareholders of Kentucky Enterprise Bancorp, Inc. ("Kentucky Enterprise") in
connection with the solicitation by the Board of Directors of Kentucky
Enterprise of proxies to be used at an Annual Meeting of Shareholders (the
"Annual Meeting") to be held on February 14, 1996, at 10:00 a.m., Eastern
Standard Time, at Kentucky Enterprise Bank, F.S.B., located at Highland and
Newman Avenues, Ft. Thomas, Kentucky, and at any adjournments thereof.
This Proxy Statement and Prospectus, and the enclosed Fifth Third 1994 Annual
Report to Shareholders, and the enclosed form of proxy are first being sent to
shareholders of Kentucky Enterprise on or about January 16, 1996.
PURPOSES OF THE ANNUAL MEETING
At the Annual Meeting, shareholders of Kentucky Enterprise will be
asked to approve an Affiliation Agreement and related Agreement of Merger, as
amended and restated, dated as of August 28, 1995 between Fifth Third Bancorp
("Fifth Third") and Kentucky Enterprise (the "Affiliation Agreement" and the
"Merger Agreement", respectively), and elect three Class II directors for a
term of three years. Pursuant to the Affiliation Agreement and the Merger
Agreement, Kentucky Enterprise will merge into Fifth Third (the "Merger"). See
"PROPOSAL 1 - MERGER OF KENTUCKY ENTERPRISE INTO FIFTH THIRD" below.
MEETING INFORMATION
SHARES ENTITLED TO VOTE; VOTING AND REVOCATION OF PROXIES
Holders of record of Kentucky Enterprise Common Stock at the close of
business on January 8, 1996 (the "Record Date") are entitled to receive
notice of, and to vote at, the Annual Meeting. At the close of business of the
Record Date, there were approximately 2,801,024 shares of Kentucky Enterprise
Common Stock outstanding. Each share of Kentucky Enterprise Common Stock will
be entitled to one vote.
Shares represented by proxies properly signed and returned will be
voted at the Annual Meeting in accordance with the instructions thereon, unless
revoked. If a proxy is signed and returned without voting instructions, the
shares represented thereby will be voted FOR the approval of the Affiliation
Agreement and the Merger Agreement, and at the discretion of the proxy holders
as to any other matters which may properly come before the Annual Meeting.
Each proxy may be revoked at any time before it is exercised by submitting a
later
-1-
<PAGE> 22
dated proxy, by attending the Annual Meeting and voting in person, or by giving
notice of revocation to Kentucky Enterprise in a writing addressed to and
received by the Secretary of Kentucky Enterprise before the Annual Meeting. A
subsequently dated proxy will, if properly presented, revoke a prior proxy.
Any shareholder may attend the Annual Meeting and vote in person whether or not
such shareholder has previously given a proxy.
SOLICITATION OF PROXIES
Following the mailing of proxy solicitation materials, directors,
officers and employees of Kentucky Enterprise and Fifth Third may solicit
proxies by mail, telephone, telegraph and personal interviews. Kentucky
Enterprise will bear the expense of proxy solicitation, including reimbursement
of reasonable out-of-pocket expenses incurred by brokerage houses and other
custodians, nominees and fiduciaries in forwarding proxy solicitation materials
to the beneficial owners of stock held of record by such persons.
PROPOSAL 1 - MERGER OF KENTUCKY ENTERPRISE INTO FIFTH THIRD
Pursuant to the Affiliation Agreement and the Merger Agreement, each
shareholder of Kentucky Enterprise shall receive for each share of Kentucky
Enterprise Common Stock, $0.01 par value per share ("Kentucky Enterprise Common
Stock"), which such shareholder holds at the effective time of the Merger (the
"Effective Time"), .5735 of a share of Fifth Third Common Stock, no par value
per share ("Fifth Third Common Stock") (the "Exchange Ratio"). Based on the
closing price per share of Fifth Third Common Stock on the Nasdaq National
Market on December 28, 1995, the value of .5735 of a share of Fifth Third Common
Stock was $27.53. The Exchange Ratio and such share price have been adjusted to
reflect the three-for-two stock split of Fifth Third Common Stock effected in
the form of a stock dividend declared December 19, 1995 and payable January 12,
1996. The Exchange Ratio shall be adjusted so as to give the Kentucky
Enterprise shareholders the economic benefit of any further stock dividends,
reclassifications, recapitalizations, split-ups, exchanges of shares,
distributions or combinations or subdivisions of Fifth Third Common Stock
effected before the Effective Time.
TERMS AND CONDITIONS OF THE PROPOSED MERGER
The following description contains, among other information, summaries
of certain provisions of the Affiliation Agreement and the Merger Agreement and
is qualified in its entirety by reference to the full text thereof, copies of
which are appended as Annex A and Annex B, respectively, to this Proxy
Statement and Prospectus and are incorporated herein by reference.
BACKGROUND OF, AND REASONS FOR, THE MERGER
In January of 1995 the Board of Directors concluded that it would be
in the best interests of Kentucky Enterprise's shareholders for the Board to
undertake a detailed review of Kentucky Enterprise's strategic alternatives,
and specifically to examine whether the operation of Kentucky Enterprise as an
independent entity would continue to represent the best means of maximizing
long-term shareholder value. To this end, the Board formed a Strategic
Alternatives Committee to facilitate the strategic evaluation process.
Additionally, the Board engaged Trident Financial Corporation ("Trident") as
its financial advisor in March of 1995 to, among other things, provide the
Board with a written report examining Kentucky Enterprise's strategic
alternatives and estimating the acquisition value of Kentucky Enterprise, and
to provide certain services to Kentucky Enterprise in the event the Board chose
either to pursue an acquisition of another entity or the sale or merger of
Kentucky Enterprise.
On April 6, 1995, the Board of Directors held a special meeting to
discuss whether it would be in the best interests of Kentucky Enterprise's
shareholders for Kentucky Enterprise to pursue an independent strategy or to
consider soliciting proposals from other financial institutions regarding a
possible affiliation with Kentucky Enterprise. The meeting was attended by
legal counsel and a representative of Trident. Trident presented the Board of
Directors with a detailed written analysis of Kentucky Enterprise's strategic
alternatives for enhancing shareholder value. The analysis provided the basis
for the Board's evaluation of the following strategic options for Kentucky
Enterprise: (1) remaining independent; (2) pursuing acquisitions of other
financial institutions; and (3) pursuing a sale or merger of Kentucky
Enterprise. The analysis included an estimate of the acquisition value of
Kentucky
-2-
<PAGE> 23
Enterprise, both currently and at various future dates assuming certain
projected financial results. Kentucky Enterprise's future as an independent
entity was evaluated using its business plan and management's projections.
This data, various methodologies of valuation, and Trident's conclusions were
included in Trident's written report.
On the basis of Trident's written analysis and information, the Board
discussed Trident's estimates of Kentucky Enterprise's current and future
acquisition value, the projected earnings of Kentucky Enterprise and the
ongoing consolidation in the financial institutions industry in Kentucky
Enterprise's market area as well as in the Cincinnati metropolitan area and the
United States generally. Trident compared Kentucky Enterprise's financial
performance to that of its peer group and analyzed the trading value of its
stock. Trident then provided an estimate of what Kentucky Enterprise's stock
should have been trading for in the market based on Kentucky Enterprise's
financial performance. Trident concluded that the then current trading value
of Kentucky Enterprise's stock represented a significant premium over an
appropriate market price based upon Kentucky Enterprise's performance, and
informed the Board that the stock price appeared to reflect significant
speculation that Kentucky Enterprise would be acquired in the near future.
Trident also discussed the prospects for pursuing an independent
strategy and how much Kentucky Enterprise would be required to earn in order to
maintain its current stock trading value. Trident also presented a list of
thrift institutions that Kentucky Enterprise could consider acquiring and
addressed the possibility of stock repurchases. Trident pointed out that stock
repurchases would not be a viable alternative because of the dilutive effect
that they would have given the then current market price of Kentucky
Enterprise's stock. Trident also pointed out that special dividends might not
be feasible because, among other things, shareholders would be subject to
income tax on the dividends received. Ultimately, Trident's analysis concluded
that a sale or merger of Kentucky Enterprise represented the best way to
maximize long-term shareholder value. Trident recommended that Kentucky
Enterprise solicit from other financial institutions indications of interest in
acquiring Kentucky Enterprise.
Following Trident's presentation, the Board discussed in detail the
advantages and disadvantages of an independent strategy, including a strategy
of acquiring other institutions, versus pursuing a sale or merger of Kentucky
Enterprise, and Trident responded to several questions raised by Board members.
The process of soliciting expressions of interest in a possible acquisition of
Kentucky Enterprise, as well as a list of possible acquirors, were also
discussed. The Board debated the relative merits of continuing to operate
independently versus affiliating with another financial institution, and which
course would be most likely to enhance long-term shareholder value. On the
basis of these discussions and the information provided by Trident, the Board
determined that it would be in the best interests of shareholders to consider
alternatives to remaining independent, and to solicit from other financial
institutions indications of interest in an affiliation with Kentucky
Enterprise. The Board then authorized Trident to prepare a confidential
memorandum to be furnished to selected financial institutions in connection
with the solicitation of indications of interest in an affiliation with
Kentucky Enterprise, with the memorandum and the list of recipients subject to
the Board's approval.
On May 25, 1995, the Board held a special meeting, with Trident and
Kentucky Enterprise's legal counsel present, to discuss (1) certain key issues
to be negotiated in a possible sale of Kentucky Enterprise to another financial
institution, (2) the procedures to be followed in soliciting expressions of
interest from potential acquirors, and (3) which financial institutions should
be contacted regarding a possible acquisition of Kentucky Enterprise. Trident
gave a detailed presentation regarding certain financial aspects of a sale
transaction and both Trident and Kentucky Enterprise's legal counsel responded
to questions from members of the Board. Trident presented the Board with a
list of potential acquirors and gave a detailed explanation of the relative
merits of each institution it had selected. Members of the Board added
information with respect to their knowledge of and views regarding certain of
the companies selected by Trident. On the basis of these discussions, the
Board authorized Trident to solicit indications of interest from seven
institutions.
During the month of May 1995, a confidential memorandum containing
financial and other information was prepared by Trident with the assistance of
Kentucky Enterprise. Commencing on June 1, 1995, after execution and delivery
of confidentiality agreements by the recipients, Trident delivered the
confidential memorandum to Fifth
-3-
<PAGE> 24
Third and the six other thrift and bank holding companies identified by Trident
and the Board as potential strategic merger partners. Each company was asked
to submit its indication of interest (including the value it would propose for
a contemplated acquisition of Kentucky Enterprise, the form of consideration
and other relevant information) by July 10, 1995.
The Board of Directors held a special meeting on July 12, 1995, with
Trident and Kentucky Enterprise's legal counsel present. The purpose of the
meeting was to update the Board on developments in the process of exploring a
possible sale of Kentucky Enterprise, particularly the results of Kentucky
Enterprise's solicitation of expressions of interest from potential acquirors.
Trident related to the Board that, among the seven institutions contacted, only
Fifth Third and one other institution had submitted formal indications of
interest. Fifth Third's preliminary indication of interest was in a range of
between $20.23 and $21.22 per share. The other indication of interest was at a
price of $16.95 per share. Trident reviewed in detail each of the two written
expressions of interest received. After a lengthy discussion, the Board
determined to have Trident contact Fifth Third to establish a schedule for
conducting a due diligence investigation of Kentucky Enterprise's business and
operations. The Board also authorized Trident to contact the other prospective
acquirer and inform such prospective acquirer that it would only be invited to
perform a due diligence investigation in the event that it raised the price
specified in its indication of interest to at least approximate the current
trading price of Kentucky Enterprise's common stock, which was at that time
approximately $21.00 per share.
On July 18, 1995, Trident was informed by the other prospective
acquirer that it could not offer a price close to what Kentucky Enterprise's
stock was trading for on the open market and discussions with that institution
ceased.
In response to extraordinary trading activity in Kentucky Enterprise's
stock, on July 20, 1995 Kentucky Enterprise issued a press release stating that
it had contacted several financial services companies about a possible sale of
Kentucky Enterprise.
On July 28, 1995, following completion of its due diligence, Fifth
Third submitted a revised indication of interest at a price of $21.22 per share
payable in Fifth Third Common Stock. A special meeting of the Board was
convened on July 31, 1995, again with Trident and Kentucky Enterprise's legal
counsel present. Trident discussed in detail Fifth Third's new indication of
interest. Kentucky Enterprise's legal counsel and Trident discussed and
answered questions from Board members regarding the process involved if the
Board decided to proceed with Fifth Third. After significant discussion on the
matter, the Board determined to commence negotiations with Fifth Third.
During the month of August, 1995 representatives of Trident and
Kentucky Enterprise's legal counsel held extensive discussions regarding the
terms of a potential merger of Kentucky Enterprise and Fifth Third.
The Board of Directors held a special meeting on August 28, 1995 to
consider and vote upon the proposed business combination with Fifth Third.
Trident and Kentucky Enterprise's legal counsel were present at the meeting to
address the Board regarding Fifth Third's proposal. Trident gave a summary of
the financial terms of the proposed combination with Fifth Third, as well as
the results of Trident's due diligence examination of Fifth Third.
Trident also discussed the advantages and disadvantages to Kentucky
Enterprise of engaging in the proposed business combination with Fifth Third.
According to Trident, the advantages of the Merger included: (i) the fair
price offered by Fifth Third, (ii) the increased liquidity offered by the Fifth
Third Common Stock as compared to the Kentucky Enterprise Common Stock, (iii)
the fact that Fifth Third pays a higher dividend than Kentucky Enterprise and
on a per share basis that would result in a greater dividend payment to
Kentucky Enterprise's shareholders; (iv) the fact that the Merger would allow
Kentucky Enterprise's shareholders to escape the increasingly uncertain and
often hostile environment for small to medium sized savings institutions; (v)
for those Kentucky Enterprise employees who would continue as employees of
Fifth Third, the competitive benefits package offered to Fifth Third employees;
and (vi) the greater access for Kentucky Enterprise's customers to products and
services as part of Fifth Third. Trident advised that the two most significant
disadvantages to the Merger with Fifth Third would
-4-
<PAGE> 25
be the expected layoffs resulting from the combination and the loss of Kentucky
Enterprise's separate identity. Trident additionally gave the Board its
written opinion that the consideration to be received by the shareholders in
the proposed business combination was fair, as of August 28, 1995, from a
financial point of view.
Kentucky Enterprise's legal counsel then reviewed the terms of the
Merger with the Board of Directors. Upon conclusion of the presentation by
Kentucky Enterprise's legal counsel, the Board of Directors discussed the
merits of the Merger with Fifth Third. In reaching its determination that the
Merger is in the best interests of Kentucky Enterprise and its shareholders,
the Board considered, among other things: (i) the value being offered Kentucky
Enterprise's shareholders by Fifth Third in relation to the market value, book
value and earnings per share of the Kentucky Enterprise Common Stock; (ii)
information concerning the financial condition, results of operations and
prospects of Fifth Third and Kentucky Enterprise, including the long-term
equity growth potential of Kentucky Enterprise as compared to Fifth Third and,
in particular, Fifth Third's dividend yield, earnings per share, and stock
price history; (iii) the competitive environment for financial institutions
generally; (iv) the compatibility of the respective business management
philosophies of Kentucky Enterprise and Fifth Third; (v) the ability of Fifth
Third to provide comprehensive financial services in relevant markets; (vi) the
financial terms of other recent business combinations in the local financial
services industry; (vii) the fact that Fifth Third, as a larger financial
institution company, has the financial resources to serve the lending and
deposit needs of the local communities served by Kentucky Enterprise, thereby
enhancing the related long-term customer service potential for Kentucky
Enterprise's customer base; and (viii) the opinion of Kentucky Enterprise's
financial advisor, Trident, that the consideration to be received by Kentucky
Enterprise's shareholders is fair to such shareholders from a financial point
of view. In addition to the adequacy of the consideration to be paid in
connection with the Merger, the Board considered the following factors, among
others it deemed relevant, in determining to approve the Merger: (A) the
social and economic effects of the Merger on Kentucky Enterprise, its
subsidiaries, employees, depositors, loan and other customers and creditors and
the other elements of the communities in which Kentucky Enterprise and its
subsidiaries operate or are located; and (B) the ability of Kentucky Enterprise
to fulfill its corporate objectives as a financial institution holding company
and on the ability of Kentucky Enterprise Bank to fulfill the objectives of a
federally insured financial institution under applicable statutes and
regulations.
Fifth Third's primary reason for consummating the Merger is to further
a long range commitment of realigning and expanding its branch system to better
meet and satisfy the needs of its customers, including those in Kentucky
Enterprise's service area.
All of the members of Kentucky Enterprise's Board of Directors have
indicated their intention to vote their shares of Kentucky Enterprise Common
Stock in favor of the Merger. As of September 30, 1995, on a fully diluted
basis, such individuals, together with directors of Kentucky Enterprise Bank,
beneficially owned 611,727 shares, or approximately 22.24% of the then
outstanding shares of Kentucky Enterprise Common Stock.
RECOMMENDATION
Kentucky Enterprise's Board of Directors has unanimously approved the
Affiliation Agreement and the Merger Agreement and the transactions
contemplated thereby, and recommends approval thereof by the shareholders of
Kentucky Enterprise. Kentucky Enterprise's Board of Directors believes that
the terms of the Merger are fair to, and in the best interests of, Kentucky
Enterprise and its shareholders.
THE BOARD OF DIRECTORS OF KENTUCKY ENTERPRISE HAS UNANIMOUSLY APPROVED THE
MERGER AND RECOMMENDS A VOTE IN FAVOR OF THE APPROVAL OF THE AFFILIATION
AGREEMENT AND THE MERGER AGREEMENT.
VOTE REQUIRED
The presence in person or by proxy of the holders of a majority of the
outstanding shares of Kentucky Enterprise Common Stock will constitute a quorum
for the transaction of business at the Annual Meeting.
-5-
<PAGE> 26
APPROVAL OF THE MERGER REQUIRES THE AFFIRMATIVE VOTE OF AT LEAST TWO-THIRDS OF
THE OUTSTANDING SHARES OF KENTUCKY ENTERPRISE COMMON STOCK ENTITLED TO VOTE.
Broker non-votes will not be treated as votes cast and, therefore, will have
the same effect as a vote against the proposal.
OPINION OF TRIDENT FINANCIAL CORPORATION
Kentucky Enterprise retained Trident to act as its financial advisor
and to render a fairness opinion in connection with the Merger. As part of its
engagement, Trident performed a valuation analysis of Kentucky Enterprise in an
acquisition context. On April 6, 1995, Trident presented its valuation report
(the "Valuation Report") to Kentucky Enterprise's Board of Directors.
On August 28, 1995, Trident met with Kentucky Enterprise's Board of
Directors to review the proposed terms of the Affiliation Agreement and the
Merger Agreement. At that time, Trident presented a report ( the "Merger
Analysis and Due Diligence Report") to Kentucky Enterprise's Board of Directors
summarizing the financial terms of the Merger and providing updated market
information with respect to thrift mergers and acquisitions. Trident also
compared Fifth Third's offer to the valuation of Kentucky Enterprise set forth
in the Valuation Report and analyzed the advantages and disadvantages of the
Merger from a financial point of view. Trident further reported on its
financial analysis and on-site due diligence examination of Fifth Third. In
addition, Trident rendered its written opinion to Kentucky Enterprise's Board
of Directors to the effect that, as of that date, the consideration to be
received by Kentucky Enterprise's shareholders pursuant to the Merger was fair
to them from a financial point of view.
Trident delivered its updated written opinion to Kentucky Enterprise's
Board of Directors as of the date of this Proxy Statement and Prospectus
stating that, as of such date, the consideration to be received by the
shareholders of Kentucky Enterprise in the Merger is fair from a financial
point of view. Trident has consented to the inclusion of such opinion and the
related disclosure in the Proxy Statement and Prospectus which will be
circulated to Kentucky Enterprise's shareholders.
TRIDENT'S OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF KENTUCKY
ENTERPRISE AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE CONSIDERATION TO BE RECEIVED BY KENTUCKY ENTERPRISE'S SHAREHOLDERS
BASED ON CONDITIONS AS THEY EXISTED AND COULD BE EVALUATED AS OF THE DATE OF
THE OPINION. TRIDENT'S OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
KENTUCKY ENTERPRISE SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE
ANNUAL MEETING, NOR DOES TRIDENT'S OPINION ADDRESS THE UNDERLYING BUSINESS
DECISION TO EFFECT THE MERGER. THIS SUMMARY OF TRIDENT'S OPINION IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION, WHICH IS
ATTACHED TO THIS PROXY STATEMENT AND PROSPECTUS AS ANNEX C. SHAREHOLDERS ARE
URGED TO READ TRIDENT'S OPINION IN ITS ENTIRETY FOR A DESCRIPTION OF THE
ASSUMPTIONS MADE AND MATTERS CONSIDERED AND THE LIMITS ON THE REVIEW UNDERTAKEN
IN RENDERING SUCH OPINION.
In connection with rendering its opinion, Trident reviewed and
analyzed, among other things, the following: (i) the Affiliation Agreement and
the Merger Agreement; (ii) this Proxy Statement and Prospectus; (iii) certain
publicly available information concerning Kentucky Enterprise and its wholly
owned subsidiary, Kentucky Enterprise Bank, including the audited financial
statements of Kentucky Enterprise and Kentucky Enterprise Bank for each of the
years in the three-year period ended June 30, 1995 and the unaudited financial
statements of Kentucky Enterprise and Kentucky Enterprise Bank for the three
months ended September 30, 1995 (prior to fiscal year 1994 and Kentucky
Enterprise Bank's conversion from mutual to capital stock form of ownership,
the financial statements include the accounts of Kentucky Enterprise Bank only;
see "KENTUCKY ENTERPRISE BANCORP, INC. - Description of Business"); (iv)
certain publicly available information concerning Fifth Third, including the
audited financial statements of Fifth Third for each of the years in the
three-year period ended December 31, 1994 and the
-6-
<PAGE> 27
unaudited financial statements of Fifth Third for the nine months ended
September 30, 1995; (v) certain other internal information, primarily financial
in nature, concerning the business and operations of Kentucky Enterprise and
Fifth Third furnished to Trident by Kentucky Enterprise and Fifth Third for
purposes of Trident's analysis; (vi) certain information with respect to the
pricing and trading of Kentucky Enterprise Common Stock; (vii) certain
information with respect to the pricing and trading of Fifth Third Common
Stock; (viii) certain publicly available information with respect to other
companies that Trident believed to be comparable to Kentucky Enterprise and
Fifth Third and the trading markets for such other companies' securities; and
(ix) certain publicly available information concerning the nature and terms of
other transactions that Trident considered relevant to its inquiry. Trident
also met with certain officers and employees of Kentucky Enterprise and Fifth
Third to discuss the foregoing, as well as other matters which it believed
relevant to its inquiry.
In its review and analysis, and in arriving at its opinion, Trident
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it or that was publicly available and did not
attempt independently to verify any such information. The financial
information provided to Trident by Kentucky Enterprise was of the type normally
produced by the management of Kentucky Enterprise and reviewed by the Kentucky
Enterprise Board of Directors at its regular meetings and the Kentucky
Enterprise Board had no reason to believe that Trident's reliance thereon was
unreasonable. The Kentucky Enterprise Board, however, did not specifically
review the information, projections, assumptions and other information provided
by management to Trident for accuracy and completeness. Trident did not
conduct a physical inspection of the properties or facilities of Kentucky
Enterprise or Fifth Third, nor did it make or obtain any independent
evaluations or appraisals of any of such properties or facilities. While
Kentucky Enterprise's Board of Directors has carefully reviewed Trident's
opinion, the Board has relied upon the expertise of Trident in preparing the
opinion and determining the methodologies and appropriateness of assumptions
used in rendering its opinion and, accordingly, did not undertake to
independently review the methodologies and appropriateness of the assumptions
used by Trident in reaching its determination as to the fairness of the Merger.
In conducting its analyses and arriving at its opinion as expressed
herein, Trident considered such financial and other factors as it deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial condition and results of operations of
Kentucky Enterprise and Fifth Third, including interest income, interest
expense, net interest income, net interest margin, interest sensitivity,
non-interest expense, earnings, dividends, book value, return on assets, return
on equity, capitalization, the amount and type of non-performing assets and the
reserve for loan losses; (ii) the business prospects of Kentucky Enterprise and
Fifth Third; (iii) the economies in Kentucky Enterprise's and Fifth Third's
market areas; (iv) the historical and current market for Kentucky Enterprise
Common Stock and Fifth Third Common Stock and for the equity securities of
certain other companies that Trident believed to be comparable to Kentucky
Enterprise and Fifth Third; and (v) the nature and terms of certain other
acquisition transactions that Trident believed to be relevant. Trident also
took into account its assessment of general economic, market, financial and
regulatory conditions and trends, as well as its knowledge of the financial
institutions industry, its experience in connection with similar transactions,
and its knowledge of securities valuation generally. Trident's opinion
necessarily was based upon conditions in existence and subject to evaluation on
the respective dates of its opinion. Trident's opinion is, in any event,
limited to the fairness, from a financial point of view, of the consideration
to be received by the holders of Kentucky Enterprise Common Stock in the Merger
and does not address Kentucky Enterprise's underlying business decision to
effect the Merger.
Trident met with the Board of Directors of Kentucky Enterprise at
various times between April 6, 1995 and August 28, 1995 to present analyses
contained in a series of reports which serve as the basis for Trident's
opinion. Two key reports presented by Trident were the Valuation Report dated
April 6, 1995 and the Merger Analysis and Due Diligence Report dated August 28,
1995. The following is a brief summary of the Valuation Report presented by
Trident to the Board of Directors of Kentucky Enterprise on April 6, 1995:
FINANCIAL ANALYSIS OF KENTUCKY ENTERPRISE. Trident examined Kentucky
Enterprise's financial performance for the period June 30, 1991 through
December 31, 1994 by analyzing the composition of its balance sheet, adjusting
and normalizing its earnings, and calculating a variety of operating and
financial ratios for Kentucky
-7-
<PAGE> 28
Enterprise. Trident also studied the trading of Kentucky Enterprise Common
Stock since its mutual-to-stock conversion in December 1993, and compared the
performance of its stock to certain stock indices.
PEER GROUP ANALYSIS. Trident evaluated Kentucky Enterprise's
strengths and weaknesses by comparing the financial performance of Kentucky
Enterprise to that of the following groups of Savings Association Insurance
Fund-insured, Office of Thrift Supervision-regulated thrift institutions: (i)
all United States institutions; (ii) all institutions in Kentucky, Indiana and
Ohio; (iii) all Kentucky institutions; (iv) all United States institutions with
total assets between $200 million and $400 million; and (v) all Kentucky,
Indiana and Ohio institutions with total assets between $200 million and $400
million (the "Aggregates"). This analysis compared a number of Kentucky
Enterprise's historical financial ratios to those of the Aggregates, including
but not limited to: (i) the balance sheet composition as a percentage of total
assets at September 30, 1994; (ii) the loan portfolio as a percentage of total
assets at September 30, 1994; (iii) the investment portfolio as a percentage of
total assets at September 30, 1994; (iv) asset quality at September 30, 1994.
Trident also compared Kentucky Enterprise's growth rates between December 31,
1991 and September 30, 1994, its yields on assets and costs of liabilities and
its income and expense data for 1993 and for the nine months ended September
30, 1994 to those of the Aggregates.
COMPARISON TO ACTIVELY TRADED THRIFTS. Trident compared Kentucky
Enterprise to the following groups of actively traded thrifts as of April 4,
1995: (i) all United States thrifts; (ii) United States thrifts with assets
between $200 million and $400 million; (iii) all Midwest thrifts; (iv) all
Kentucky thrifts; and (v) fourteen actively traded thrifts Trident believed
were most similar to Kentucky Enterprise in terms of size, capital structure,
profitability and asset quality. Trident compared Kentucky Enterprise to the
aforementioned groups of actively traded thrifts on the basis of its balance
sheet, GAAP capital, regulatory capital, asset quality, loan loss reserves,
asset and deposit growth, return on average assets, return on average equity,
and the components of earnings during the trailing four quarters. Trident also
compared Kentucky Enterprise's pricing ratios to the pricing ratios for other
actively traded thrifts.
FINANCIAL PROJECTIONS. With input from Kentucky Enterprise's
management, Trident prepared six-year financial projections for Kentucky
Enterprise beginning December 31, 1994. The projections were based on certain
assumptions, including minimal asset growth, modest loan growth, no deposit
growth, a gradually increasing interest-rate spread, a flat interest-rate
environment, an increasing cash dividend, and a 35% tax rate. These financial
projections were used to estimate Kentucky Enterprise's valuation in an
acquisition context at various future dates, and the resulting returns to
shareholders by continuing to remain an independent financial institution.
VALUATION OF KENTUCKY ENTERPRISE. Trident estimated the fair market
value of Kentucky Enterprise in an acquisition context. In valuing Kentucky
Enterprise, Trident considered three different approaches to value: the asset
approach, the income approach and the market approach.
The asset approach considers the market value of a company's assets
and liabilities, as well as any intangible value the company may have. Trident
estimated Kentucky Enterprise's net asset value by adjusting the carrying value
of its assets and liabilities to reflect current market values (rather than
liquidation values). In addition, the net asset value of Kentucky Enterprise
was adjusted downward based on an estimate of the impact of recapturing
Kentucky Enterprise's bad debt reserve for tax purposes and estimated
transaction and other costs. Finally, Trident increased Kentucky Enterprise's
net asset value for the assumed exercise of outstanding options to purchase
Kentucky Enterprise Common Stock. Based on the adjustments discussed above,
Trident estimated Kentucky Enterprise's fully diluted net asset value to be
approximately $45 million or $14.97 per share. After determining Kentucky
Enterprise's net asset value, Trident added an intangible premium to reflect
the estimated value of its customer relationships. According to the asset
approach, the total value of Kentucky Enterprise is the sum of its net asset
value and its intangible value. Based on a branch purchase methodology and
intangible ("core deposit") premiums observed in the market for thrift
acquisitions, as well as Trident's knowledge of Kentucky Enterprise, Trident
applied premiums equal to 6% and 10% of core deposits to Kentucky Enterprise's
estimated fully diluted net asset value. Using the asset approach, Trident
established a reference range of $19.50 to $22.50 per share of Kentucky
Enterprise Common Stock.
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Trident also used an income approach in its valuation of Kentucky
Enterprise by discounting Kentucky Enterprise's projected future earnings plus
merger cost savings of 25% to 75% as a result of an assumed acquisition of
Kentucky Enterprise. The projected earnings were discounted to the present at
rates of 14%, 15% and 16%. The discount rates chosen were estimates of the
required rates of return for holders or prospective holders of shares of
financial institutions similar to Kentucky Enterprise, based on a number of
factors including prevailing interest rates, the pricing ratios of publicly
traded financial institutions, the financial condition and operating results of
Kentucky Enterprise, as well as Trident's general knowledge of valuation, the
securities markets and acquisition values in other mergers of financial
institutions. Trident adjusted the resulting values to reflect the cost of
recapturing the tax bad debt reserve and certain merger-related expenses.
Using the income approach, Trident established a reference range of $8.00 to
$12.75 per share of Kentucky Enterprise Common Stock.
In the market approach, Trident analyzed certain median pricing ratios
(e.g., price to book value, price to tangible book value, price to reported
earnings, price to assets, and the premium paid over tangible book value as a
percentage of core deposits) resulting from selected completed thrift merger
transactions, as well as recently announced pending transactions. In applying
the market approach, Trident considered the pricing ratios for the following
groups of thrift merger transactions: (i) all pending thrift merger
transactions (45 transactions); (ii) all pending thrift mergers announced
during the 90 days prior to April 3, 1995 (the date of the market data) (16
transactions); (iii) all pending thrift mergers involving thrifts located in
the Midwest (15 transactions); (iv) all pending thrift mergers involving
thrifts located in the State of Kentucky (2 transactions); (v) all pending
thrift mergers in which the aggregate consideration was between $50 million and
$75 million (6 transactions); (vi) all pending thrift mergers in which the
target thrift had assets between $200 million and $400 million (7
transactions); (vii) all pending thrift mergers in which the target thrift had
a return on assets of between 0.00% and 0.60% (3 transactions); (viii) all
pending thrift mergers in which the target thrift had a return on equity of
between 0% and 5% (2 transactions); (ix) all pending thrift mergers in which
the target thrift had a tangible equity ratio of between 12% and 20% of assets
(8 transactions); and (x) all pending thrift mergers in which the target thrift
had a nonperforming assets to assets ratio of between 0.0% and 0.5% (18
transactions). Trident also considered the pricing ratios for eight pending or
completed thrift merger transactions in which the target thrift was of similar
size and capital structure as Kentucky Enterprise, and in which the target
thrift had similar profitability and asset quality. Trident then performed a
comparison of a number of financial ratios for Kentucky Enterprise to those of
the target thrift institutions. Based on Kentucky Enterprise's financial
condition and results of operations, as well as other factors, relative to the
groups of thrift mergers noted above, Trident chose ranges of pricing ratios to
apply to Kentucky Enterprise. Trident chose price to book value ratios of 110%
to 130%, resulting in per share values of $19.00 to $22.50; price to tangible
book value ratios of 110% to 130%, resulting in per share values of $19.00 to
$22.50; price to assets ratios of 18% to 22%, resulting in per share values of
$18.50 to $22.50; and premiums over tangible book value as a percentage of core
deposits of 3% to 7%, resulting in per share values of $20.00 to $23.00. The
price to earnings multiple did not produce meaningful results, and therefore
was not used in the analysis. Based on these derived ranges of value, Trident
established a reference range of $19.00 to $23.00 per share using the market
approach.
Trident then reviewed the results from the three approaches, and after
consideration of all relevant facts, reconciled the acquisition values
generated by each approach and determined a final range of $19.00 to $23.00 per
share for the acquisition value of Kentucky Enterprise. Trident did not apply
specific weights to the three individual approaches, but Trident gave greater
consideration to the asset and market approaches in reconciling the reference
ranges and estimating the final range of value for Kentucky Enterprise.
The following is a brief summary of the Merger Analysis and Due
Diligence Report presented to the Board of Directors of Kentucky Enterprise on
August 28, 1995:
SUMMARY OF PROPOSED TRANSACTION. Trident presented a summary of the
financial terms of the Merger. Trident also compared the pricing ratios for
the Merger with the median pricing ratios for selected groups of pending thrift
mergers and acquisitions. Trident discussed the advantages and disadvantages
of the Merger from a financial point of view.
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REVIEW OF DUE DILIGENCE EXAMINATION OF FIFTH THIRD. Trident presented
a summary of its on-site due diligence examination of Fifth Third. Fifth
Third's historical balance sheets and income statements were presented, along
with a variety of financial ratios that analyzed Fifth Third's financial
condition and operating results through June 30, 1995. Trident discussed Fifth
Third's strengths and weaknesses, peer group comparisons, profitability,
dividends, financial condition, loan portfolio composition, asset quality, loan
loss reserve coverage, asset classifications, its non-banking activities,
business strategy, growth, Fifth Third's previous mergers and acquisitions, its
banking subsidiaries, recent regulatory examinations of Fifth Third, recent
bank analysts' reports on Fifth Third, and other issues. Trident reported that
during its investigation, Trident did not discover any conditions that would
prevent it from rendering its fairness opinion to Kentucky Enterprise's Board
of Directors. As discussed above, Trident relied, without independent
verification, upon the accuracy and completeness of all of the financial and
other information provided by Fifth Third.
FIFTH THIRD'S STOCK PRICING. Trident examined the trading activity of
Fifth Third Common Stock between August 24, 1994 and August 24, 1995, and
compared the performance of Fifth Third Common Stock to certain stock indices.
Trident also compared Fifth Third and the pricing of Fifth Third Common Stock
to other regional commercial banks, commercial banks of a similar size and all
actively traded commercial banks as of August 24, 1995.
The summaries of Trident's Valuation Report, Merger Analysis and Due
Diligence Report, and opinion set forth above reflect all the material
analysis, factors and assumptions considered by Trident and the material
valuation methodologies used by Trident in arriving at its opinion as to
fairness described above. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial or summary description.
Trident believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses, without
considering all of the analyses, or all of the above summary, without
considering all factors and analyses, would create an incomplete view of the
processes underlying the analyses set forth in Trident's reports and its
opinion. Therefore, the ranges of valuations resulting from any single
analysis described above should not be taken to be Trident's view of the actual
value of Kentucky Enterprise or the combined company. In performing its
analyses, Trident made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of Kentucky Enterprise or Fifth Third. The
results of the specific analyses performed by Trident may differ from Kentucky
Enterprise's actual values or actual future results as a result of changing
economic conditions, changes in company strategy and policies, as well as a
number of other factors. Such individual analyses were prepared to provide
valuation guidance solely as part of Trident's overall valuation analysis and
the determination of the fairness of the consideration to be received by
Kentucky Enterprise's stockholders, and were provided to Kentucky Enterprise's
Board of Directors in connection with the delivery of Trident's opinion. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future. In addition, as described
above, Trident's opinion and presentations to Kentucky Enterprise's Board of
Directors were among the many factors taken into consideration by Kentucky
Enterprise's Board of Directors in making its determination to approve the
Merger.
Trident, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwriting, and valuations for corporate
and other purposes. Trident has extensive experience with the valuation of
financial institutions. Kentucky Enterprise's Board of Directors selected
Trident as its financial advisor because of its previous experience with
Trident, because Trident is a nationally recognized investment banking firm
specializing in financial institutions and because of its substantial
experience in transactions similar to the Merger. Trident is not affiliated
with either Kentucky Enterprise or Fifth Third.
For its services as financial advisor, Kentucky Enterprise paid
Trident a retainer of $5,000, a fee of $10,000 upon the delivery of the
Valuation Report, and a fee of $25,000 upon execution of the Affiliation
Agreement and the Merger Agreement. An additional fee equal to $150,000 plus
2% of the amount by which the aggregate value of the Merger exceeds $65 million
(and therefore contingent upon such value), less $25,000, will be payable to
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Trident upon consummation of the Merger (a balance due of approximately
$485,000 based on a share price of $48.00 for Fifth Third Common Stock, as
adjusted for the three-for-two stock split). Kentucky Enterprise has also
agreed to reimburse Trident for its reasonable out-of-pocket expenses and to
indemnify Trident against certain liabilities, including certain liabilities
under federal securities laws.
EFFECTIVE TIME
The Effective Time of the Merger will, unless the parties agree
otherwise, occur on a Friday which is as soon as possible following the date
that all conditions precedent contained in the Affiliation Agreement have been
met or waived, including the expiration of all applicable waiting periods. It
is anticipated that the Merger will be consummated in the spring of 1996,
although no assurance can be given in this regard. Kentucky Enterprise and
Fifth Third each will have the right, but not the obligation, to terminate the
Affiliation Agreement if the Effective Time does not occur on or before June
30, 1996, subject to certain conditions.
In connection with the Merger, Fifth Third also wishes to consummate
certain related transactions (the "Related Transactions") which are as follows:
(i) have Fifth Third Bank of Northern Kentucky, Inc. ("Fifth Third Northern"),
a wholly owned subsidiary of Fifth Third, purchase substantially all of the
assets and assume substantially all of the liabilities of Kentucky Enterprise
Bank ("Purchase and Assumption"); (ii) maintain certain assets and certain
liabilities which remain after the Purchase and Assumption in Kentucky
Enterprise Bank, which will be renamed Fifth Third Savings Bank of Northern
Kentucky, F.S.B. ("Fifth Third Savings Bank"); and (iii) move Fifth Third
Savings Bank's (formerly Kentucky Enterprise Bank) main office to the current
location of its Limaburg Road branch located in Hebron, Boone County, Kentucky.
Prior to the Effective Time, Kentucky Enterprise will dissolve all of
its direct or indirect subsidiaries other than Kentucky Enterprise Bank.
CONVERSION OF SHARES OF KENTUCKY ENTERPRISE COMMON STOCK
Each share of Kentucky Enterprise Common Stock (excluding treasury
shares) which is issued and outstanding immediately prior to the Effective Time
will be converted at the Effective Time into Fifth Third Common Stock and cash
in lieu of any fractional shares of Fifth Third Common Stock. See "Exchange
Ratio" below.
EXCHANGE RATIO
At the Effective Time, each of the shares of Kentucky Enterprise
Common Stock (excluding treasury shares) then issued and outstanding shall be
converted by virtue of the Merger and without further action into .5735 of a
share of Fifth Third Common Stock (the "Exchange Ratio"). Based on the closing
price per share of Fifth Third Common Stock on the Nasdaq National Market on
December 28, 1995, the value of .5735 of a share of Fifth Third Common Stock was
$27.53. The Exchange Ratio and such share price have been adjusted to reflect
the three-for-two stock split of Fifth Third Common Stock effected in the form
of a stock dividend declared December 19, 1995 and payable January 12, 1996.
The Exchange Ratio shall be adjusted so as to give the Kentucky Enterprise
shareholders the economic benefit of any further stock dividends,
reclassifications, recapitalizations, split-ups, exchanges of shares,
distributions or combinations or subdivisions of Fifth Third Common Stock
effected before the Effective Time. Certificates representing shares of Fifth
Third Common Stock will be distributed to Kentucky Enterprise shareholders upon
the surrender of their certificates for shares of Kentucky Enterprise Common
Stock to Fifth Third.
NO FRACTIONAL SHARES
Only whole shares of Fifth Third Common Stock will be issued in
connection with the Merger. In lieu of fractional shares, each shareholder of
Kentucky Enterprise Common Stock otherwise entitled to a fractional share of
Fifth Third Common Stock will be paid therefor in cash in an amount equal to
the amount of such fraction multiplied by the Applicable Market Value Per Share
of Fifth Third Common Stock, as defined in the Merger
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Agreement attached hereto as Annex B. No such shareholder will be entitled to
dividends, voting rights or other rights in respect of any such fractional
share.
EXCHANGE OF CERTIFICATES
After the Effective Time, holders of certificates previously
representing shares of Kentucky Enterprise Common Stock will cease to have any
rights as shareholders of Kentucky Enterprise and their sole rights will
pertain to the shares of Fifth Third Common Stock into which their shares of
Kentucky Enterprise Common Stock will have been converted pursuant to the
Merger Agreement. As soon as practicable after the Effective Time, Fifth Third
will send to each former Kentucky Enterprise shareholder a letter of
transmittal for use in submitting to Fifth Third, acting as Exchange Agent (the
"Exchange Agent"), certificates (or with instructions for handling lost
Kentucky Enterprise stock certificates) formerly representing shares of
Kentucky Enterprise Common Stock to be exchanged for certificates representing
Fifth Third Common Stock (and, to the extent applicable, cash in lieu of
fractional shares of Fifth Third Common Stock) which the former shareholders of
Kentucky Enterprise are entitled to receive as a result of the Merger.
Shareholders who become holders of Fifth Third Common Stock in the Merger will
not be entitled to receive any dividends or other distributions which may be
payable to holders of record of Fifth Third Common Stock following the
Effective Time until they have surrendered and exchanged their certificates
evidencing ownership of shares of Kentucky Enterprise Common Stock. Any
dividends payable on Fifth Third Common Stock after the Effective Time will be
paid to the Exchange Agent and, upon receipt of the certificates representing
shares of Kentucky Enterprise Common Stock, the Exchange Agent will forward to
Kentucky Enterprise shareholders (i) certificates representing their shares of
Fifth Third Common Stock, (ii) dividends declared thereon subsequent to the
Effective Time (without interest) and (iii) the cash value of any fractional
shares (without interest). KENTUCKY ENTERPRISE'S SHAREHOLDERS ARE REQUESTED
NOT TO SUBMIT STOCK CERTIFICATES UNTIL THEY HAVE RECEIVED WRITTEN INSTRUCTIONS
TO DO SO.
At the Effective Time, the stock transfer books of Kentucky Enterprise
will be closed and no transfer of Kentucky Enterprise Common Stock will
thereafter be made on such books. If a certificate formerly representing
shares of Kentucky Enterprise Common Stock is presented to Kentucky Enterprise
or Fifth Third, it will be forwarded to the Exchange Agent for cancellation and
exchange for a certificate representing shares of Fifth Third Common Stock.
FEDERAL INCOME TAX CONSEQUENCES
Pursuant to the terms of the Affiliation Agreement, Kentucky
Enterprise will receive the opinion of Dinsmore & Shohl, counsel to Fifth
Third, dated the Effective Time, describing certain material federal income tax
consequences of the Merger, but which will not address material tax
consequences to dissenting Kentucky Enterprise shareholders. The following
discussion summarizes the material federal income tax consequences of the
Merger to Kentucky Enterprise shareholders.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW NECESSARILY IS NOT
SPECIFIC TO THE SITUATION OF A PARTICULAR SHAREHOLDER AND IS INCLUDED FOR
GENERAL INFORMATION ONLY. EACH OF KENTUCKY ENTERPRISE'S SHAREHOLDERS SHOULD
CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE,
LOCAL AND OTHER TAX LAWS.
The federal income tax consequences to any of Kentucky Enterprise's
shareholders depend upon (i) the form of consideration received in exchange for
the shares of Kentucky Enterprise Common Stock actually owned by him or her,
and (ii) in the case of any of Kentucky Enterprise's shareholders receiving
cash, or a combination of cash and Fifth Third Common Stock, the type of
consideration received in exchange for shares of Kentucky Enterprise Common
Stock deemed to be constructively owned by him or her under Section 318(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), if any. Generally,
under Section 318(a), a shareholder is deemed constructively
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to own shares owned directly or indirectly by certain related individuals
(including spouses, children, grandchildren and parents) or by certain related
entities (including partnerships, trusts, estates and corporations in which the
shareholder owns, directly or indirectly, 50% or more in value of the stock).
Under Section 318(a), if any person has an option to acquire stock, such stock
is considered as owned by such person.
KENTUCKY ENTERPRISE SHAREHOLDERS RECEIVING SOLELY FIFTH THIRD COMMON
STOCK. A Kentucky Enterprise shareholder who receives solely Fifth Third
Common Stock in exchange for all shares of Kentucky Enterprise Common Stock
actually owned by him or her will not recognize any gain or loss upon such
exchange. The tax basis of the Fifth Third Common Stock received in such
exchange will be equal to the basis of the shares of Kentucky Enterprise Common
Stock surrendered and, provided the shares of Kentucky Enterprise Common Stock
surrendered were held as capital assets at the time of such exchange, the
holding period of the Fifth Third Common Stock received will include the
holding period of the shares of Kentucky Enterprise Common Stock surrendered.
KENTUCKY ENTERPRISE SHAREHOLDERS RECEIVING SOLELY CASH. If all the
shares of Kentucky Enterprise Common Stock actually owned and deemed to be
constructively owned under Code Section 318(a) by a Kentucky Enterprise
shareholder are exchanged solely for cash upon the exercise of dissenters'
rights, such Kentucky Enterprise shareholder will recognize capital gain or
loss (provided he or she held the shares actually owned by him or her as
capital assets at the time of the exchange) measured by the difference between
such shareholder's tax basis in the shares of Kentucky Enterprise Stock
actually owned by him or her and the amount of cash received by him or her in
exchange for such shares.
If a Kentucky Enterprise shareholder exchanges all the shares of
Kentucky Enterprise Common Stock actually owned by him or her solely for cash
upon the exercise of dissenters' rights but shares of Kentucky Enterprise
Common Stock constructively owned by him or her under Code Section 318(a) are
exchanged in whole or in part for Fifth Third Common Stock, then the tax
consequences to such shareholder will be determined under Code Section 302
which deals with redemptions. Section 302 contains three tests that are
relevant in this context to determine whether a redemption is taxed as ordinary
income or as a capital gain or loss (provided that the shares were held as
capital assets at the time of the exchange). Under Section 302, a redemption
to the extent of available undistributed earnings and profits, is treated as a
dividend resulting in ordinary income unless it (1) is "not essentially
equivalent to a dividend"; (2) is "substantially disproportionate" with respect
to the shareholder; or (3) completely terminates the shareholder's interest.
If one of those tests is satisfied, capital gain or loss recognized will be
measured by the difference between the amount of cash received by the
shareholder in exchange for the shares of Kentucky Enterprise Common Stock
actually owned by him or her and his or her tax basis in those shares. If none
of the tests is satisfied, the shareholder will be treated as having received
dividend income equal to the amount of cash received (without deduction for
such shareholder's tax basis in the Kentucky Enterprise shares).
Whether the transaction will be "not essentially equivalent to a
dividend" with respect to a Kentucky Enterprise shareholder depends upon the
particular circumstances applicable to such shareholder, there being no precise
mathematical formula whereby it is possible to assure satisfaction of this
test. On the other hand, the "substantially disproportionate" test is a
mathematical test. The transaction will be "substantially disproportionate"
with respect to a Kentucky Enterprise shareholder if his or her percentage
ownership of Fifth Third Common Stock after the Merger (considering shares
actually and constructively owned) is:
(i) less than 50% of all Fifth Third Common Stock; and
(ii) less than 80% of his or her hypothetical percentage
ownership of the total number of shares of Fifth Third
Common Stock immediately after the Merger if all of the
Kentucky Enterprise Common Stock had been exchanged for
Fifth Third Common Stock (considering shares actually and
constructively owned).
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The third test is the complete termination of interest, which only
can be satisfied if all the Kentucky Enterprise shares actually and
constructively owned by a Kentucky Enterprise shareholder are exchanged solely
for cash upon the exercise of dissenters' rights, except that Code Section 302
sets forth a procedure, which, under certain circumstances, allows a waiver of
the constructive ownership rules as they apply to family members.
Under the rules of Section 302, a Kentucky Enterprise shareholder
who receives cash or exercises dissenters' rights for any Kentucky Enterprise
shares actually owned by him or her risks having such amounts treated as a
dividend rather than as capital gains if any shares of Kentucky Enterprise
Common Stock constructively owned by him or her are exchanged in whole or in
part for Fifth Third Common Stock, the substantially disproportionate test is
not met, and the shareholder cannot or does not waive constructive ownership of
the shares held by others but which are attributed to him or her.
CASH RECEIVED IN LIEU OF FRACTIONAL SHARES. No fractional shares
of Fifth Third Common Stock will be issued pursuant to the Merger Agreement. A
shareholder of Kentucky Enterprise who receives cash in lieu of a fractional
share will be treated as having received such fractional share of Fifth Third
Common Stock and then as having received such cash in redemption of such
fractional share subject to the provisions of Section 302 of the Code. The
circumstances under which cash is being issued in lieu of a fractional share
interest appear to satisfy the Internal Revenue Service ruling guidelines under
which the receipt of such cash will qualify for capital gain or loss treatment
(provided such fractional interest is held as a capital asset at the time of
such exchange).
Because of the complexity of the tax laws, and because the tax
consequences to any particular shareholder may be affected by specific matters
not common to all shareholders, it is recommended that Kentucky Enterprise
shareholders consult their personal tax advisors concerning the consequences of
the Merger to them, including the consequences of the application of state and
local tax laws, if any.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon receipt by Fifth
Third of a letter from Fifth Third's independent public accountants to the
effect that the Merger will qualify for pooling of interests accounting
treatment.
Under pooling of interests accounting, as of the Effective Time,
the assets and liabilities of Kentucky Enterprise will be added to those of
Fifth Third at their recorded book values and the shareholders' equity account
of Kentucky Enterprise will be included on Fifth Third's consolidated balance
sheet.
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to Sections 1701.84 and 1701.85 of the General Corporation
Law of Ohio (individually, "Section 1701.84" and "Section 1701.85"), copies of
which are attached to this Proxy Statement and Prospectus as Annex D, a
shareholder of Kentucky Enterprise may dissent from the proposed corporate
action to approve the Affiliation Agreement and the Merger Agreement and
receive payment of the fair cash value of his or her shares upon compliance
with the procedures and subject to the conditions set forth therein. The
following discussion is not a complete statement of the law relating to
dissenters' rights and is qualified in its entirety by reference to Annex D.
This discussion and Annex D should be reviewed carefully by any shareholder who
wishes to preserve his or her dissenters' rights because failure to comply with
the procedures set forth herein and therein will result in the loss of
dissenters' rights.
To be entitled to demand payment for his or her shares, a
shareholder of Kentucky Enterprise must not have voted such shares in favor of
the proposal to adopt the Affiliation Agreement and the Merger Agreement. A
shareholder's vote in favor of the proposal will waive his or her dissenters'
rights.
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Not later than ten days after the Annual Meeting of Kentucky
Enterprise, any shareholder intending to enforce his or her dissenters' rights
under Section 1701.85 (a "dissenting shareholder"), must deliver to Kentucky
Enterprise a written demand (a "demand") for payment to him or her of the fair
cash value of the shares as to which he or she seeks relief. A written demand
must state the dissenting shareholder's address, the number and class of such
shares and the amount claimed as the fair cash value of the shares.
If Kentucky Enterprise sends to the dissenting shareholder, at the
address specified in his or her demand, a request for the certificates
representing the shares as to which he or she seeks relief, the dissenting
shareholder, within fifteen days from the date of the sending of the request,
must deliver to Kentucky Enterprise the certificates requested, in order that
Kentucky Enterprise may endorse them with a legend reflecting that demand for
the fair cash value of such shares has been made. Kentucky Enterprise must
promptly return the endorsed certificates to the dissenting shareholder. THE
DISSENTING SHAREHOLDER'S FAILURE TO DELIVER SUCH CERTIFICATES TO KENTUCKY
ENTERPRISE WILL TERMINATE HIS OR HER RIGHTS AS A DISSENTING SHAREHOLDER, AT THE
OPTION OF KENTUCKY ENTERPRISE, EXERCISED BY WRITTEN NOTICE SENT TO THE
DISSENTING SHAREHOLDER WITHIN TWENTY DAYS AFTER THE LAPSE OF THE FIFTEEN-DAY
PERIOD, UNLESS A COURT FOR GOOD CAUSE SHOWN OTHERWISE DIRECTS.
Unless Kentucky Enterprise and the dissenting shareholder have come
to an agreement on the fair cash value per share of the dissenting
shareholder's shares, the dissenting shareholder or Kentucky Enterprise (or
Fifth Third, if past the Effective Time) within three months after the service
of the demand by the dissenting shareholder, may file a complaint in the Court
of Common Pleas of Cuyahoga County. Other dissenting shareholders, within the
period of three months, may join as plaintiffs, or may be jointed as defendants
in any such proceeding, and any two or more proceedings may be consolidated.
The complaint must contain a brief statement of the facts entitling
the dissenting shareholder to the relief demanded. No answer to such complaint
is required. Upon the filing of the complaint, the court, on motion of the
petitioner, shall enter an order fixing a date for a hearing on the complaint
and requiring that a copy of the complaint and a notice of the filing and of
the date for hearing be given to the respondent or defendant in the manner in
which summons is required to be served or substituted service is required to be
made in other cases.
On the day fixed for the hearing on the complaint or any
adjournment of it, the court must determine from the complaint and from
evidence submitted by either party whether the dissenting shareholder is
entitled to be paid the fair cash value of his or her shares and, if so, the
number and class of such shares. If the court finds that the dissenting
shareholder is so entitled, the court may appoint one or more persons as
appraisers to receive evidence and to recommend a decision on the amount of the
fair cash value. The court thereupon must make a finding as to the fair cash
value of a share, as of the day prior to the Annual Meeting of Kentucky
Enterprise, exclusive of any appreciation or depreciation in market value
resulting from the Merger, and the court must enter judgment against Kentucky
Enterprise for the payment of it, with interest at such rate and from such date
as the court considers equitable. If during the pendency of any proceeding
instituted under Section 1701.85, a suit or proceeding is or has been
instituted to enjoin or otherwise to prevent the carrying out of the Merger,
any dissent proceeding will be stayed until the final determination of the
other suit or proceeding. The fair cash value of the shares as agreed upon by
the parties or as fixed under Section 1701.85 must be paid within thirty days
after the date of final determination of such value, the effective date of the
amendment to the articles, or the consummation of the other action involved,
whichever occurs last.
The right of a dissenting shareholder to receive the fair cash
value of his or her shares will terminate if: (1) the dissenting shareholder
has not complied with the requirements of Section 1701.85, unless Kentucky
Enterprise by its directors waives such failure; (2) Kentucky Enterprise
abandons or is finally enjoined or prevented from carrying out, or the
shareholders rescind their adoption, of the Merger; (3) the dissenting
shareholder withdraws his or her demand, with the consent of Kentucky
Enterprise by its directors; or (4) Kentucky Enterprise and the dissenting
shareholder have not come to an agreement as to the fair cash value per share
and neither Kentucky Enterprise nor the dissenting shareholder have filed a
complaint within the period provided by Section 1701.85.
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<PAGE> 36
From the time that the dissenting shareholder gives his or her
demand until either the termination of the rights and obligations arising from
such demand or the purchase of his or her shares by Kentucky Enterprise, all
other rights accruing from the shares, including voting and dividend or
distribution rights, are suspended. If during the suspension, any dividend or
distribution is paid in money upon shares of such class, or any dividend,
distribution or interest is paid in money upon any securities issued in
extinguishment of or in substitution for such shares, an amount equal to the
dividend, distribution or interest, which except for the suspension would have
been payable upon the shares or securities, must be paid to the holder of
record as a credit upon the fair cash value of the shares. If the dissenting
shareholder's right to receive the fair cash value of his or her shares is
terminated other than by the purchase of the shares by Kentucky Enterprise, all
rights of the dissenting shareholder will be restored and all distributions
which, except for the suspension, would have been made shall be made to the
holder of record of the shares at the time of termination.
Shareholders wishing to exercise their dissenters' rights should
consult their own counsel.
CONDUCT PENDING MERGER; REPRESENTATIONS AND WARRANTIES
Kentucky Enterprise has agreed, among other things, that prior to
the Effective Time it will carry on its business in the ordinary course.
Kentucky Enterprise also has agreed to give Fifth Third and Fifth Third's
representatives reasonable access during business hours to its facilities and
personnel. Kentucky Enterprise further has agreed that, without Fifth Third's
prior written consent, it will not, among other things: make any changes in its
capital or corporate structures; issue any additional shares of Kentucky
Enterprise Common Stock, except upon exercise of any stock options granted
prior to the date of the Affiliation Agreement; issue any securities of any
kind; or make any material changes in its method of business operations.
Kentucky Enterprise also has agreed not to make or become obligated to make any
capital expenditures in excess of $10,000, nor make or renew any agreement for
services to be provided to Kentucky Enterprise or permit the automatic renewal
of any such agreement, except any agreement for services having a term of not
more than three months or requiring the expenditure of not more than $10,000.
Kentucky Enterprise additionally has agreed not to: declare or pay any cash
dividends on its stock other than normal and customary cash dividends paid in
amounts and at times Kentucky Enterprise historically has paid them; pay any
stock dividends or make any other distributions on its stock; and provide any
increases in employee salaries or benefits other than in the ordinary course of
business.
Fifth Third and Kentucky Enterprise have made numerous
representations and warranties to each other with respect to financial and
other matters. These include, without limitation, representations and
warranties to the effect that both Fifth Third and Kentucky Enterprise have the
corporate power and authorization to enter into the proposed transaction, that
each will have provided the other with financial statements and that Fifth
Third has enough authorized Fifth Third Common Stock with which to accomplish
the proposed transaction. No representations or warranties made by either
Kentucky Enterprise or Fifth Third will survive beyond the Effective Time.
Thereafter, neither Kentucky Enterprise, Fifth Third, nor any officer or
director of either of them will have any liability or obligation with respect
to such representations or warranties, with the exception of any
misrepresentations, breaches of warranties or violations of covenants that were
made with intent to defraud.
CONDITIONS TO CLOSING
The Affiliation Agreement and the Merger Agreement must be approved
by the affirmative vote of holders of at least two-thirds of the outstanding
shares of Kentucky Enterprise Common Stock entitled to vote. The Merger also
must be approved in writing by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"), the Office of Thrift Supervision ("OTS")
and the Kentucky Department of Financial Institutions, applications for which
have been filed, and must comply with any applicable waiting periods. No
assurance can be given that the required governmental approvals will be
forthcoming.
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<PAGE> 37
The obligations of Kentucky Enterprise and Fifth Third to
consummate the Merger also are subject to receipt of an opinion of counsel to
Fifth Third with respect to certain tax matters. See "PROPOSAL 1 - MERGER OF
KENTUCKY ENTERPRISE INTO FIFTH THIRD - Federal Income Tax Consequences."
Fifth Third's and Kentucky Enterprise's obligations to consummate
the Merger are subject to additional conditions set forth in the Affiliation
Agreement, including, but not limited to, the absence at the Effective Time of
any material actions, proceedings or investigations of any kind pending or
threatened with respect to the transactions contemplated by the Affiliation
Agreement and the Merger Agreement and both institutions having performed all
of the obligations required of them under the Affiliation Agreement and the
Merger Agreement.
Fifth Third's obligation to consummate the Merger is further
subject to conditions set forth in the Affiliation Agreement, including but not
limited to, the continuing truth and accuracy in all material respects of all
of the representations and warranties of Kentucky Enterprise, Kentucky
Enterprise's performance of all of the obligations required of it under the
Affiliation Agreement and the Merger Agreement in all material respects,
delivery by Kentucky Enterprise's counsel of a certain legal opinion addressed
to Fifth Third, Kentucky Enterprise's obligation to discontinue any ongoing
obligation to continue contributions to various qualified benefit plans and to
discontinue the accrual of further benefits thereunder, Kentucky Enterprise
Bank's obligation to terminate its Salary Savings and Investment Plan and to
distribute benefits after the receipt by Kentucky Enterprise of a favorable
determination letter from the Internal Revenue Service with respect to the
termination and to provide Fifth Third with a copy of such resolution, the
receipt of an analysis concerning the contributions and benefits under all such
plans, the receipt of all determination letters from the Internal Revenue
Service with respect to all such plans, the receipt of a copy of all amendments
to such plans, the receipt of a copy of any group annuity contract used as a
source of funding for any such plan without Fifth Third's consent (except for
acceleration of vesting under plans which by their terms provide for such
acceleration upon a change of control), no occurrence of any discretionary
acceleration of vesting under any plan without Fifth Third's consent (except
for acceleration of vesting under plans which by their terms provide for such
acceleration upon a change in control), no occurrence of any distribution from
any plan without Fifth Third's prior written consent (except as provided in the
Affiliation Agreement), the aggregate amount of shareholders' equity of
Kentucky Enterprise immediately prior to the Effective Time, as shown by and
reflected on its books and records of accounts on a consolidated basis in
accordance with generally accepted accounting principles consistently applied,
being not less than $49,028,000 (Kentucky Enterprise's total shareholders'
equity at June 30, 1995) and that reflected in Kentucky Enterprise Bank's
audited financial statements at June 30, 1995, respectively, the total issued
and outstanding shares of Kentucky Enterprise Common Stock not exceeding
3,015,300 shares and all options to purchase Kentucky Enterprise Common Stock
being exercised and fully paid and there being no outstanding options to
purchase Kentucky Enterprise Common Stock and the termination of any stock
option plan or arrangement, and the receipt of a letter from Deloitte & Touche
to the effect that the Merger will qualify for "pooling of interests"
accounting treatment (unless such letter cannot be issued as provided in the
Affiliation Agreement). Certain extraordinary events are excluded by the
Affiliation Agreement from affecting these latter calculations.
Kentucky Enterprise's obligation to consummate the Merger is
further subject to conditions set forth in the Affiliation Agreement, including
but not limited to, the continuing truth and accuracy in all material respects
of Fifth Third's representations and warranties, Fifth Third's performance of
all of the obligations required of it under the Affiliation Agreement and the
Merger Agreement in all material respects, delivery by counsel employed by The
Fifth Third Bank of a certain legal opinion addressed to Kentucky Enterprise,
registration by Fifth Third of the shares of Fifth Third Common Stock to be
issued to Kentucky Enterprise shareholders and listing of those shares on the
Nasdaq National Market.
AMENDMENT; WAIVER; TERMINATION
The Affiliation Agreement and the Merger Agreement may be amended,
modified or supplemented by the written agreement of each of the parties, upon
the authorization of each company's respective Board of Directors at any time
before or after approval of the Merger by Kentucky Enterprise shareholders,
without further approval
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<PAGE> 38
of Kentucky Enterprise's shareholders, except that no amendment, modification
or supplement may be effected without Kentucky Enterprise shareholder approval
if to do so would change in any manner adverse to such shareholders the
consideration provided pursuant to the Affiliation Agreement and Merger
Agreement.
The Affiliation Agreement and the Merger Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time by
written notice delivered by Fifth Third to Kentucky Enterprise or by Kentucky
Enterprise to Fifth Third in the following instances: (1) by Fifth Third or
Kentucky Enterprise, if there has been a material misrepresentation, a material
breach of warranty or a material failure to comply with any covenant on the
part of the other party with respect to the representations, warranties and
covenants set forth in the Affiliation Agreement and such misrepresentation,
breach or failure to comply has not been cured within thirty (30) days after
notice, provided the party in default has no right to terminate for its own
default; (2) by Fifth Third or Kentucky Enterprise, in each case taken as a
whole, if the business or assets or financial condition of the other party have
materially and adversely changed from that in existence at June 30, 1995, other
than changes attributable to or resulting from any change in law, regulation or
generally accepted accounting principles, changes in interest rates, economic,
financial or market conditions affecting the banking or thrift industry
generally or changes that may occur as a consequence of actions or inactions
that either party is expressly obligated to take under the Affiliation
Agreement; (3) by Fifth Third or Kentucky Enterprise, if the Merger has not
been consummated by June 30, 1996, provided the terminating party is not in
material breach or default of any representation, warranty or covenant
contained in the Affiliation Agreement on the date of such termination; (4) by
the mutual written consent of Fifth Third and Kentucky Enterprise; (5)
automatically if Kentucky Enterprise shareholders fail to approve the
Affiliation Agreement and the Merger Agreement; or (6) by Fifth Third or
Kentucky Enterprise, if any event occurs which renders impossible of
satisfaction in any material respect one or more of the conditions to the
obligations of the other party to effect the Merger, and non-compliance is not
waived by the unaffected party.
EFFECT ON KENTUCKY ENTERPRISE EMPLOYEES
Fifth Third is obligated to use its best efforts to employ at Fifth
Third or other Fifth Third subsidiaries or affiliates as many of the employees
of Kentucky Enterprise and Kentucky Enterprise Bank who desire employment
within the Fifth Third holding company system as possible, to the extent of
available positions and consistent with Fifth Third's standard staffing levels
and personnel policies. In this regard, upon consummation of the Merger, Fifth
Third Northern will operate, except for the Hebron branch, Kentucky
Enterprise's existing offices as branches of Fifth Third Northern. Fifth Third
Savings Bank will operate the Hebron branch as its main and sole office. In
addition, Fifth Third Northern currently operates a number of existing bank
branches in the Northern Kentucky area. Each employee of Kentucky Enterprise
who becomes an employee of Fifth Third or its subsidiaries at or immediately
subsequent to the Merger will be entitled to participate in all employee
benefit plans sponsored by Fifth Third or its subsidiaries on the same terms
and to the same extent as similarly situated Fifth Third employees. Such
employees shall receive credit for their period of service to Kentucky
Enterprise for purposes of determining eligibility, participation and vesting
in all Fifth Third employee benefit plans, but not for the purposes of
determining the benefits accrued under the Fifth Third Master Retirement Plan.
Continuing employees will not be subject to any exclusion or penalty for pre-
existing conditions that were covered under Kentucky Enterprise Bank's medical
plan immediately prior to the Effective Time or any waiting period relating to
coverage under Fifth Third's medical plan.
Those employees who are not to be employed by Fifth Third and who
sign and deliver a termination and release agreement in the form acceptable to
Fifth Third and Kentucky Enterprise, shall be entitled to severance pay equal
to, in the case of a salaried employee other than an officer, one week's pay
for each year of service up to a maximum of eight week's pay; in the case of an
officer, one week's pay for each year of service up to a maximum of ten week's
pay; and, in the case of an hourly employee, one week's pay for each year of
service up to a maximum of six week's pay. Fifth Third will provide prior
notice to Kentucky Enterprise such that employees terminated by Kentucky
Enterprise can be given appropriate advance notice of termination. Fifth Third
will provide limited out placement services and assistance to these employees.
Nothing contained in the Affiliation Agreement shall be construed or
interpreted to limit or modify in any way Fifth Third's at will employment
policy.
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<PAGE> 39
EMPLOYEE STOCK OWNERSHIP PLAN
The Affiliation Agreement provides that since Fifth Third does not
currently have an employee stock ownership plan ("ESOP") for its employees,
Kentucky Enterprise's ESOP shall be terminated by Fifth Third immediately after
the first publication of financial results of Fifth Third reflecting at least
30 days of combined financial results of Fifth Third and Kentucky Enterprise.
The assets of the ESOP shall be distributed to participants or their
beneficiaries as soon as practicable after the later to occur of termination of
the ESOP or the receipt of a favorable determination letter from the Internal
Revenue Service as to the effect of the ESOP's termination on its tax-qualified
status. Kentucky Enterprise's ESOP has unallocated assets with a fair market
value exceeding the outstanding balance of the loan secured by those assets.
Without changing the existing vesting and allocation provisions of the ESOP,
Fifth Third and Kentucky Enterprise have agreed that the participants in the
ESOP will benefit from this investment. Therefore, after the Effective Time
and until termination of the ESOP, the ESOP will be continued for the sole
benefit of the participants. Following payment of the outstanding balance of
the ESOP loan through the sale of unallocated shares, any excess assets shall
be returned to the ESOP for allocation to ESOP participants.
INTERESTS OF MANAGEMENT
Certain executive officers and directors of Kentucky Enterprise
have interests in the Merger in addition to their interests as shareholders of
Kentucky Enterprise Common Stock generally. These interests are summarized
below.
SEVERANCE PAYMENTS. It is not anticipated that Fifth Third will
enter into employment agreements with any officer of Kentucky Enterprise or
Kentucky Enterprise Bank in connection with the transactions contemplated by
the Affiliation Agreement. Four executive officers of Kentucky Enterprise are
parties to employment agreements with Kentucky Enterprise and Kentucky
Enterprise Bank that provide for severance payments upon the occurrence of
certain events, including termination of their respective employment under such
agreements following a change in control of Kentucky Enterprise. For a
detailed description of the terms of these agreements, see "PROPOSAL 2 -
ELECTION OF DIRECTORS - Executive Compensation - Employment and Retirement
Agreements." As a result of the Merger, officers White, Egan, Ballinger and
Taeuber are expected to receive severance payments under these agreements
totalling approximately $1,466,551, $564,765, $564,955 and $331,812,
respectively. As a condition to receiving these severance payments each of
these officers will sign a termination and release agreement and, Mr. White
will sign an agreement not to compete with Fifth Third or its subsidiaries in
Kentucky or Southern Ohio for two years after the Effective Time and Messrs.
White, Egan, Ballinger and Taeuber will sign agreements not to solicit
customers or employees of Kentucky Enterprise or Kentucky Enterprise Bank or
any of their subsidiaries for three years after the Effective Time. In no
event will any of these officers receive any payment that would be considered
an "Excess Parachute Payment" under Section 280G of the Internal Revenue Code
of 1986, as amended. See "PROPOSAL 1 - MERGER OF KENTUCKY ENTERPRISE INTO
FIFTH THIRD - Effect on Kentucky Enterprise Employees."
SUPPLEMENTAL RETIREMENT AGREEMENT. The Merger will also have the
effect of accelerating the vesting of certain retirement benefits under the
Supplemental Executive Retirement Agreement ("SERA") entered into with the
President and Chief Executive Officer of Kentucky Enterprise and Kentucky
Enterprise Bank. For a detailed description of the terms of the SERA, see
"PROPOSAL 2 - ELECTION OF DIRECTORS - Executive Compensation - Supplemental
Retirement Agreement." The value of the benefits expected to be received by
Mr. White under the SERA is approximately $1,118,776.
RESTRICTED STOCK AWARDS. Kentucky Enterprise has previously issued
to its four executive officers shares of Kentucky Enterprise Common Stock
pursuant to Kentucky Enterprise's Management Recognition Plans ("MRPs"). These
plans restrict the transfer of such shares based upon vesting requirements
contained in the plans and also provide for the immediate vesting of all such
shares, along with cash bonuses to defray executive tax expenses, upon
a change in control of Kentucky Enterprise. As a result of the Merger, at the
Effective Time, Messrs. White, Egan, Ballinger and Taeuber would become
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<PAGE> 40
immediately vested in 17,634 shares, 7,054 shares, 7,054 shares and
3,526 shares of Kentucky Enterprise Common Stock, respectively, and the cash
bonuses associated therewith. The Kentucky Enterprise Common Stock vesting
under such plans and the associated cash bonuses will have an approximate
aggregate value (assuming a price of $48.67 per share of Fifth Third Common
Stock in the Merger) of $686,248, $274,515, $274,515 and $137,218, respectively.
STOCK OPTIONS. One of the conditions to Fifth Third's obligations
under the Affiliation Agreement is that all options to purchase Kentucky
Enterprise Common Stock shall have been exercised and fully paid at least one
week prior to the closing date of the Merger. For information regarding the
number and value of unexercised options held by the four executive officers of
Kentucky Enterprise at the end of fiscal year 1995, see "PROPOSAL 2 - ELECTION
OF DIRECTORS - Executive Compensation - Option Exercises and Year-end Value
Table." Non-employee directors of Kentucky Enterprise currently hold 132,250 of
unexercised options.
The Affiliation Agreement provides that all provisions for
indemnification and limitation of liability now existing in favor of the
directors or officers of Kentucky Enterprise, Kentucky Enterprise Bank or any
of their subsidiaries, arising under applicable Ohio and Federal law and under
the Kentucky Enterprise Articles of Incorporation and Code of Regulations or
the Kentucky Enterprise Bank Charter and Bylaws shall survive the Merger, shall
be assumed by Fifth Third and shall continue in full force and effect with
respect to acts or omissions occurring on or prior to the Effective Time and
for a period of five years thereafter, or in the case of matters occurring
prior to the Effective Time which have not been resolved prior to the fifth
anniversary of the Effective Time, until such matters are finally resolved.
Fifth Third also shall purchase and keep in force for such five-year period $25
million of directors' and officers' liability insurance to provide coverage for
acts or omissions of the type currently covered by Kentucky Enterprise's
existing directors' and officers' liability insurance for acts or omissions
occurring on or prior to the Effective Time, but only to the extent such
insurance may be purchased or kept in full force on commercially reasonable
terms, taking into account the cost thereof and the benefits provided thereby.
Fifth Third has agreed that all rights to indemnification existing in favor of
officers and directors and employees of Fifth Third affiliates shall be
accorded to officers and directors and employees of Kentucky Enterprise who
become affiliated with any Fifth Third affiliate in such capacities after the
Effective Time and that such indemnification will relate to covered actions or
inactions only after the Effective Time.
EFFECTS OF MERGER
Upon consummation of the Merger, Kentucky Enterprise will merge
with and into Fifth Third and Kentucky Enterprise will cease to exist as a
separate entity. In Related Transactions, Fifth Third plans to, simultaneously
with the Merger: (i) have its wholly owned subsidiary, Fifth Third Northern,
purchase substantially all of the assets and assume substantially all of the
liabilities of Kentucky Enterprise Bank (except certain assets and liabilities
which will remain those of Kentucky Enterprise Bank); (ii) move Kentucky
Enterprise Bank's main office to the current location of its Limaburg Road,
Hebron branch; and (iii) change the name of Kentucky Enterprise Bank to Fifth
Third Savings Bank of Northern Kentucky, F.S.B.
The Board of Directors of Fifth Third and Fifth Third Northern
after the Merger is consummated will consist of all of the members of such
Boards of Directors who are in office at the Effective Time, each of whom will
continue to serve as directors for the term for which such directors were
elected, subject to the applicable Code of Regulations and in accordance with
law. The officers of Fifth Third and Fifth Third Northern after the Merger is
consummated will be those officers who are in office at the Effective Time,
subject to the applicable Code of Regulations and in accordance with law.
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PROPOSAL 2 - ELECTION OF DIRECTORS
Kentucky Enterprise's Board of Directors is composed of nine
members. Kentucky Enterprise's Amended Articles of Incorporation require that
directors be divided into three classes, as nearly equal in number as possible,
each class to serve for a three-year period, with approximately one-third of
the directors elected each year. The Board of Directors has nominated John D.
Coldiron, Robert C. Egan and Andrew W. Loschiavo, all of whom are currently
members of Class II of the Board, to serve as directors for a three-year
period.
If any nominee is unable to serve, the shares represented by all
valid proxies will be voted for the election of such substitute as the Board of
Directors may recommend or the size of the Board may be reduced to eliminate
the vacancy. At this time, the Board knows of no reason why any nominee might
be unavailable to serve.
Under Kentucky Enterprise's Code of Regulations, directors shall be
elected by a majority of those votes cast by shareholders at the Annual
Meeting. Votes which are not cast at the Annual Meeting, either because of
abstentions or broker non-votes, are not considered in determining the number
of votes which have been cast for or against the election of a nominee.
Unless otherwise specified on the proxy, it is intended that the
persons named in the proxies solicited by the Board will be voted for the
election of the named nominees.
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
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The following table sets forth the names of the Board's nominees
for election as directors of Kentucky Enterprise and of those directors who
will continue to serve as such after the Annual Meeting. Also set forth is
certain other information with respect to each person's age, the year he first
became a director of Kentucky Enterprise's wholly owned subsidiary, Kentucky
Enterprise Bank, the expiration of his term as a director and the number and
percentage of shares of Kentucky Enterprise Common Stock beneficially owned.
All of the individuals were initially appointed as director of Kentucky
Enterprise in 1993 in connection with Kentucky Enterprise's incorporation.
<TABLE>
<CAPTION>
Shares of Common
Year First Stock Beneficially
Age at Elected as Current Term Owned at Percent
Name June 30, 1995 Director to Expire September 30, 1995 (1) of Class (2)
---- ------------- -------- --------- ---------------------- ------------
BOARD NOMINEES FOR TERMS TO EXPIRE IN 1998
<S> <C> <C> <C> <C> <C>
John D. Coldiron 68 1975 1995 28,148 0.93%
Robert C. Egan 70 1963 1995 53,225 1.77
Andrew W. Loschiavo 71 1960 1995 49,099 1.63
DIRECTORS CONTINUING IN OFFICE
John J. Osterman 75 1962 1996 34,756 1.15
Howard W. Wendling 73 1969 1996 37,219 1.23
James T. White 63 1972 1996 163,697 5.43
William A. Fennell, Sr. 66 1960 1997 46,634 1.55
Mentor E. Graves 86 1953 1997 23,225 0.77
Robert B. Hoppenjans 80 1966 1997 19,099 0.63
____________________
<FN>
(1) Includes stock held in joint tenancy; stock owned as tenants in
common; stock owned or held by a spouse or other member of the
individual's household; stock allocated through an employee benefit
plan of Kentucky Enterprise; stock in which the individual either has
or shares voting and/or investment power; and stock subject to options
exercisable within 60 days. Each person or relative of such person
whose shares are included herein exercises sole (or shared with the
spouse or other relative) voting and dispositive power as to the
shares reported. Does not include shares with respect to which
Directors Egan, Fennell and Graves may have "voting power" by virtue
of their positions as trustees of the trust holding 211,600 shares
under Kentucky Enterprise's ESOP. The ESOP trustees must vote all
allocated shares held in the ESOP in accordance with the instructions
of the participants. Unallocated shares and allocated shares for
which no timely direction is received are voted by the ESOP trustees
in proportion to the participant-directed voting of allocated shares.
Does not include 156,625 shares beneficially owned by five directors
of Kentucky Enterprise Bank who do not serve as directors of Kentucky
Enterprise.
(2) In calculating the percentage of shares outstanding, the number of
shares outstanding includes any shares of Kentucky Enterprise Common
Stock which the person has the right to acquire within 60 days of
September 30, 1995.
</TABLE>
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<PAGE> 43
The principal occupation of each director of Kentucky Enterprise for
the last five years is set forth below.
JOHN D. COLDIRON was elected as a director of Kentucky Enterprise Bank in
1975. He is a professional engineer and owner of Coldiron Development of Fort
Thomas, Kentucky. He received his Bachelor of Science degree in Civil
Engineering from Ohio State University in 1955. Mr. Coldiron served as a
director with Security Savings & Loan of Newport, Kentucky prior to its merger
with the Kentucky Enterprise Bank in 1980. He is a member of many civic
organizations, including the Fort Thomas Lions Club, the Cincinnati Art Museum,
the Cincinnati Historical Society and the Cincinnati Preservation Society.
ROBERT C. EGAN was elected as a director in 1963. He served as the
Managing Officer and Chief Executive Officer of United Building Association of
Newport, Kentucky prior to its merger with Kentucky Enterprise Bank in 1978.
Mr. Egan served as the Executive Vice President of Kentucky Enterprise Bank
until his retirement in 1986. He is the father of Senior Vice President Jerry
J. Egan.
ANDREW W. LOSCHIAVO was elected as a director of Kentucky Enterprise Bank
in 1960. He served as a director with Acme Federal Savings & Loan of
Covington, Kentucky prior to its merger with Kentucky Enterprise Bank in 1981.
Mr. Loschiavo presently serves as a director of Tours Travel Agency in
Covington, Kentucky.
JOHN J. OSTERMAN was elected as a director of Kentucky Enterprise Bank in
1962. He served as the Chief Executive Officer of General Savings and Loan of
Crescent Springs, Kentucky prior to its merger with Kentucky Enterprise Bank in
1981. Mr. Osterman served as Senior Vice President of Kentucky Enterprise Bank
until his retirement in 1984.
HOWARD W. WENDLING was elected as a director of Kentucky Enterprise Bank in
1969. He is the Chairman of the Board of Wendling Printing of Newport,
Kentucky. Mr. Wendling also served as the President and director of Security
Savings & Loan of Newport, Kentucky prior to its merger with Kentucky
Enterprise Bank in 1980. Mr. Wendling also served as former Mayor pro tem and
Councilman for the City of Ft. Thomas for 19 years. In 1988 he received the
Small Business Person of the Year Award sponsored by the Northern Kentucky
Chamber of Commerce.
JAMES T. WHITE joined Kentucky Enterprise Bank in 1960. He was elected to
the Board of Directors in 1972. He was named President in 1973 and was made
the President/Chief Executive Officer of Kentucky Enterprise Bank in 1974.
Currently he serves as the President and Chief Executive Officer of Kentucky
Enterprise Bank. Mr. White also serves as a director of the Savings &
Community Bankers of America, director of St. Luke Hospital and Chairman of the
St. Luke Community Foundation of Fort Thomas, Kentucky, director of the
Northern Kentucky University Foundation, and is a member of the Northern
Kentucky Chamber of Commerce. He previously served as Vice Chairman and
director of the Federal Home Loan Bank of Cincinnati. He is a graduate of the
Institute of Financial Education Graduate School at Indiana University,
Bloomington, Indiana.
WILLIAM A. FENNELL, SR. was elected as a director in 1960. He is President
of Challenger Piping Inc. of Newport, Kentucky. He received a Bachelor of
Science degree in Mechanical Engineering from Purdue University in 1950. He
presently serves as a director of Saint Luke Hospital, located in Fort Thomas,
Kentucky. Mr. Fennell served as the Vice President and was a director of the
United Building Association of Newport, Kentucky prior to its merger with
Kentucky Enterprise Bank in 1978.
MENTOR E. GRAVES currently serves as Chairman of the Board. Mr. Graves
previously served as President of Kentucky Enterprise Bank until his retirement
in 1974. He was elected as a director in 1953. Mr. Graves has also been
involved with the Saint Luke Community Foundation of Saint Luke Hospital, Fort
Thomas, Kentucky.
ROBERT B. HOPPENJANS was elected as a director in 1966. Mr. Hoppenjans
retired as Sales Manager of Standard Castings of Cincinnati, Ohio in 1987 and
also served as a director with General Savings & Loan of Crescent Springs,
Kentucky prior to its merger with Kentucky Enterprise Bank in 1981.
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<PAGE> 44
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of Kentucky Enterprise meets quarterly and may have
additional special meetings. During the fiscal year ended June 30, 1995, the
Board met 16 times. No director attended fewer than 75% of the total number of
Board meetings held during the fiscal year ended June 30, 1995 and the total
number of meetings held by committees on which such director served during such
fiscal year.
The Board of Directors as a whole serves as a nominating committee for
selecting the Board nominees for election as directors. The Board of Directors
met once in this capacity during the fiscal year ended June 30, 1995.
Kentucky Enterprise's audit committee consists of Directors Coldiron,
Hoppenjans and Graves, who serves as its Chairman. This committee meets as
needed to review the internal audit function and internal accounting controls
and to approve the audit policies. This committee has the responsibility of
controlling, supervising and making necessary changes in the internal audit
program. During the fiscal year ended June 30, 1995, this committee met once.
Kentucky Enterprise's compensation committee consists of Directors Egan,
Fennell and Graves, who serves as its Chairman. The committee establishes
compensation levels and reviews the reasonableness of all salaries. All salary
increases are ratified and affirmed by the full Board on a yearly basis. This
committee meets as needed. During the fiscal year ended June 30, 1995, this
committee met twice.
For a description of holders of 5% of Kentucky Enterprise Common Stock and
the holdings of such stock by Kentucky Enterprise's executive officers, The
Kentucky Enterprise Board of Directors Compensation Committee Report on
Executive Compensation, Compensation of the Chief Executive Officer, Executive
Officers' and Directors' Compensation, Interests of Management and the
performance of Kentucky Enterprise Common Stock, see headings containing such
information under "KENTUCKY ENTERPRISE BANCORP, INC." and "PROPOSAL 1 - MERGER
OF KENTUCKY ENTERPRISE INTO FIFTH THIRD - Interests of Management."
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
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<PAGE> 45
EXECUTIVE OFFICERS OF KENTUCKY ENTERPRISE
The following sets forth information with respect to executive officers of
Kentucky Enterprise who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE(1) TITLE
- ---- --- -----
<S> <C> <C>
Michael P. Ballinger 41 Treasurer of Kentucky Enterprise and Kentucky Enterprise Bank
Jerry J. Egan 43 Secretary of Kentucky Enterprise; Senior Vice President/Senior
Loan Officer of Kentucky Enterprise Bank
David W. Taeuber 55 Senior Vice President and Assistant Secretary of Kentucky
Enterprise and Kentucky Enterprise Bank
______________________
<FN>
(1) At June 30, 1995.
</TABLE>
MICHAEL P. BALLINGER joined Kentucky Enterprise in 1975 and served as
Controller of Kentucky Enterprise Bank until 1980. He now serves as Treasurer
of Kentucky Enterprise and Kentucky Enterprise Bank. Mr. Ballinger holds a
Bachelor of Science degree in accounting from Northern Kentucky University,
Highland Heights, Kentucky.
JERRY J. EGAN previously served with United Building Association of
Newport, Kentucky. He served as a Branch Manager and Loan Officer for United
Building Association prior to its merger with Kentucky Enterprise in 1978. Mr.
Egan now serves as Secretary of Kentucky Enterprise and a Senior Vice President
of Kentucky Enterprise Bank in charge of the lending operation for Kentcky
Enterprise Bank and also acts as Kentucky Enterprise Bank's Community
Reinvestment Act Officer. He received his Bachelor of Arts degree from
Northern Kentucky Unviersity in Highland Heights, Kentucky. Mr. Egan currently
is a member of the Northern Kentucky Chamber of Commerce, Northern Kentucky
Association for the Retarded and the Villa Hills Civic Club. He is the son of
Director Robert C. Egan.
DAVID W. TAEUBER previously served as the Vice President and Treasurer of
General Savings and Loan of Crescent Springs, Kentucky prior to its merger with
Kentucky Enterprise Bank in 1981. Mr. Taeuber presently serves as a Senior
Vice President and Assistant Secretary of Kentucky Enterprise and Kentucky
Enterprise Bank. He is a graduate of the Institute of Financial Education
Graduate School at Indiana University, Bloomington, Indiana.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW AND OBJECTIVES. Composed exclusively of outside company directors
Egan, Fennell and Graves and Kentucky Enterprise Bank director Dobbling, the
Compensation Committee (the "Committee") of the Kentucky Enterprise Board of
Directors establishes Kentucky Enterprise's and Kentucky Enterprise Bank's
executive compensation policies. The Committee is responsible for developing
Kentucky Enterprise's and Kentucky Enterprise Bank's executive compensation
policies generally and for implementing those policies for Kentucky
Enterprise's and Kentucky Enterprise Bank's executive officers, including the
Chief Executive Officer. The Committee's overall objectives in designing and
administering the specific elements of Kentucky Enterprise's and Kentucky
Enterprise Bank's executive compensation program include the following:
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<PAGE> 46
o To align executive compensation with increases in shareholder
value.
o To provide incentives for executive officers for the long term
success of Kentucky Enterprise Bank and Kentucky Enterprise.
o To attract, retain and motivate executive officers for the
long term success of Kentucky Enterprise Bank and Kentucky
Enterprise.
o To facilitate stock ownership through the granting of stock
options and through share awards issued through the ESOP and
through the MRP.
In furtherance of these objectives, Kentucky Enterprise's and Kentucky
Enterprise Bank's executive compensation program consists of the following
components.
BASE SALARY. The Board of Directors of Kentucky Enterprise Bank approved
the terms of the employment agreements with Kentucky Enterprise Bank's three
non-CEO executive officers, which set forth the base salary of such executive
officers. In December 1994, the Board of Directors reviewed the performance of
the three non-CEO executive officers and, after determining that each officer's
performance met the Board's requirements, approved a one-year extension of the
then current expiration date of each officer's employment agreement. In
establishing base salaries, a number of factors are considered, including the
officer's experience, tenure, abilities and performance, as well as the
contribution that each executive makes to the overall success of Kentucky
Enterprise Bank. The President makes recommendations to the Board after
consideration of such factors and comparison of salaries paid to executive
officers of other savings and loan holding companies, nondiversified banks, and
other financial institutions similar in size, market capitalization and other
characteristics to Kentucky Enterprise Bank. The Board's objective is to
provide for base salaries that are generally competitive with the salary paid
to executive officers by Kentucky Enterprise Bank's peers. The Committee
determined that, based on (i) each of the three non-CEO executive officers'
contribution to Kentucky Enterprise and Kentucky Enterprise Bank; (ii) the
information in the three compensation surveys regarding the salary levels of
similarly positioned executives in similarly sized institutions; (iii) the
recommendation of the CEO that salary increases be awarded to these
individuals; and (iv) the fact that none of the officers had received salary
increases since 1992, the Committee should recommend to the full Board of
Directors salary increases for Messrs. Ballinger, Egan and Taeuber of $7,500,
$7,500 and $4,000, respectively. The Board of Directors reviewed the
recommendation of the Committee and approved the salary increases.
BONUSES. The Committee reviews the specific performance of Kentucky
Enterprise each year to determine the payment of bonuses. No performance-based
bonuses were paid to the executive officers of Kentucky Enterprise during
fiscal year 1995 except for a Christmas bonus of one week's pay which was paid
to all employees of Kentucky Enterprise Bank. However, pursuant to the terms
of Kentucky Enterprise's MRPs, Kentucky Enterprise is required to pay each
participant a cash bonus equal to the amount of the federal and state tax
benefit to be received by Kentucky Enterprise and Kentucky Enterprise Bank as a
result of such participant's recognition of ordinary income from the vesting of
an MRP award. In fiscal year 1995, Kentucky Enterprise paid cash bonuses
pursuant to the MRPs to Messrs. White, Ballinger, Egan and Taeuber of $151,279,
$60,510, $60,510 and $30,259, respectively.
STOCK RELATED AWARD PLANS. The Committee believes that stock related award
plans are an important element of compensation since they provide executives
with incentives linked to the performance of the Kentucky Enterprise Common
Stock.
STOCK OPTION AND INCENTIVE PLANS. In connection with Kentucky Enterprise
Bank's stock conversion, Kentucky Enterprise adopted a stock option and
incentive plan as a means of providing directors and key employees the
opportunity to acquire a proprietary interest in Kentucky Enterprise and to
link their interest with those of Kentucky Enterprise's shareholders. By
encouraging stock ownership, Kentucky Enterprise seeks to attract, retain and
motivate the best available personnel for positions of substantial
responsibility and to provide additional incentive to directors
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<PAGE> 47
and employees of Kentucky Enterprise and Kentucky Enterprise Bank to promote
the success of the business of Kentucky Enterprise.
Under this plan, participants are eligible to receive stock options, stock
appreciation rights ("SARs") and shares of restricted stock. Awards under the
plan are subject to vesting and forfeiture as determined by the Committee.
Options and SARs are granted at the market value of the Kentucky Enterprise
Common Stock on the date of grant, and restricted stock is granted at no cost.
Thus, such awards increase in value only if Kentucky Enterprise's stock price
increases. The Committee believes that this plan aligns shareholder and
officer's interests and helps to retain and motivate executive officers to
improve long term shareholder value.
MANAGEMENT RECOGNITION PLANS. In connection with Kentucky Enterprise
Bank's stock conversion, Kentucky Enterprise adopted the MRPs to reward
personnel of experience and ability in key positions of responsibility, and to
encourage their continued service with Kentucky Enterprise and Kentucky
Enterprise Bank. Awards under these plans vest over a period of three years,
and will be subject to forfeiture in the event employment is terminated prior
to that time. The Committee believes that because allocations under these
plans increase executives' ownership interest in Kentucky Enterprise, they will
further align the interests of executives with those of Kentucky Enterprise's
shareholders generally, and will thus increase their sensitivity to the
interests of Kentucky Enterprise's shareholders and their attentiveness to the
promotion of long term shareholder value.
DEFERRED COMPENSATION PLANS. Kentucky Enterprise and Kentucky Enterprise
Bank have established separate deferred compensation plans for the benefit of
the directors of Kentucky Enterprise and Kentucky Enterprise Bank (see
"Directors' Compensation"), as well as Kentucky Enterprise's President,
Secretary and Treasurer, Kentucky Enterprise Bank's President, Senior Vice
Presidents and Treasurer, and such other officers or key employees as Kentucky
Enterprise's or Kentucky Enterprise Bank's Board of Directors may by resolution
select. Pursuant to the terms of these plans, eligible officers may elect to
defer receipt of up to 25% of their future compensation. Deferred amounts are
credited to a bookkeeping account in the participant's name, which is credited
quarterly with the investment return which would have resulted if such amounts
had been invested, based upon the participant's choice, between either the
Kentucky Enterprise Common Stock or Kentucky Enterprise's highest annual rate
of interest on certificates of deposit, regardless of their term. Among the
purposes of these plans are to attract and retain directors and executive
officers by permitting them to elect to have Kentucky Enterprise Common Stock
measure the appreciation or depreciation of their deferred compensation and to
provide them with a direct equity interest in Kentucky Enterprise and thereby
strengthen the connection between the interest of officers and directors and
the interests of Kentucky Enterprise's shareholders.
OTHER COMPENSATION PLANS. Kentucky Enterprise and Kentucky Enterprise Bank
have also adopted certain broad-based employee benefit plans in which executive
officers have been permitted to participate, including the ESOP and Kentucky
Enterprise Bank's 401(k) employee savings plan which was amended in connection
with Kentucky Enterprise Bank's stock conversion to permit participant
investment in Kentucky Enterprise Common Stock, so as to further align
employees' and shareholders' long-term financial interest.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
GENERALLY. Mr. White has been employed by Kentucky Enterprise Bank for
over 35 years, and has served as President and Chief Executive Officer for over
20 years. In establishing Mr. White's compensation generally, the Committee
takes into account that Mr. White has been principally responsible not only for
executive duties as President of Kentucky Enterprise Bank but also for the
supervision and conduct of the daily operations of Kentucky Enterprise Bank,
and as such has been assuming the responsibilities not only for the president
of a financial institution, but also a chief executive officer and chief
operating officer. The Committee also considers the extent to which Kentucky
Enterprise Bank's financial and managerial strength is attributable to Mr.
White's leadership, experience and skills
BASE SALARY AND BONUS. The base salary of the Chief Executive Officer is
established by the terms of his employment agreement with Kentucky Enterprise
Bank, described above. After determining that Mr. White's performance met the
Board's requirements, the Board approved a one-year extension of the term of
Mr. White's
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<PAGE> 48
employment agreement. In addition to the qualitative factors listed above, in
order to determine Mr. White's base salary the Committee considered Kentucky
Enterprise Bank's performance in the areas of regulatory capital compliance,
asset quality, interest rate risk, regulatory CAMEL rating, profitability and
market position. The Committee also reviewed data concerning compensation paid
to chief executive officers of similarly situated thrift and non-diversified
banks both regionally and nationally. The Committee believes that Mr. White's
salary is generally competitive with the salary paid to chief executive
officers with comparable qualifications and duties, including length of
service, with similarly situated institutions. For fiscal year 1995, at his
request, no increase in base salary was granted to Mr. White, and no such
increase has been granted to Mr. White since December 1992. In view of the
awards granted to Mr. White in connection with Kentucky Enterprise Bank's stock
conversion, the only bonus compensation with the exception of the bonus paid
pursuant to the MRP, received by Mr. White in fiscal year 1995 was a Christmas
bonus of one week's pay which was paid to all Kentucky Enterprise Bank's
employees.
SUPPLEMENTAL RETIREMENT AGREEMENT. In connection with Kentucky Enterprise
Bank's stock conversion, the Committee approved a SERA with Mr. White. In
approving the SERA, the Committee reviewed, among other things, a survey of the
retirement benefits provided to chief executive officers of thrift institutions
comparable to Kentucky Enterprise Bank, and concluded that the SERA was
appropriate in order to provide Mr. White with retirement benefits comparable
to those typical of chief executive officers with more than 30 years of service
to their institutions.
Kentucky Enterprise's executive compensation program takes into account the
contribution each executive in the organization makes to the overall success of
Kentucky Enterprise and Kentucky Enterprise Bank. The Committee believes that
the executive compensation program serves Kentucky Enterprise and all of its
shareholders by providing a direct link between the interests of executive
officers and those of shareholders generally, and by helping to attract and
retain qualified executive officers who are dedicated to the long-term success
of Kentucky Enterprise.
COMPENSATION COMMITTEE
ROBERT C. EGAN
WILLIAM A. FENNELL, SR.
MENTOR E. GRAVES
WILLIAM F. DOBBLING
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<PAGE> 49
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth cash and
noncash compensation for each of the last three fiscal years awarded to or
earned by the Executive Officers of Kentucky Enterprise and Kentucky Enterprise
Bank.
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
---------------------------------- ------------ --------
Restricted Securities
Name and Fiscal Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus (1) Compensation Award(s) Options Payouts Compensation(2)
------------------ ----- ------ ------- ------------ -------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James T. White 1995 $271,449 $156,359 $ __ $ __ __ $ __ $ 10,176
President and Chief 1994 271,000 5,080 __ 529,000 66,125 __ 16,968
Executive Officer 1993 264,739 28,152 __ N/A N/A __ 16,104
Michael P. Ballinger 1995 79,424 61,904 __ -- -- __ 1,991
Treasurer and Chief 1994 75,599 1,394 __ 211,600 26,450 __ 3,120
Financial Officer 1993 72,601 15,565 __ N/A N/A __ 2,559
Jerry J. Egan 1995 78,689 61,904 __ __ __ __ 3,008
Secretary 1994 74,925 1,394 __ 211,600 26,450 __ 3,216
1993 72,612 15,565 __ N/A N/A __ 2,660
David W. Taeuber 1995 68,523 31,496 __ __ __ __ 2,845
Senior Vice 1994 66,212 1,237 __ 105,800 13,225 __ 3,409
President and 1993 64,724 9,446 __ N/A N/A __ 3,132
Assistant Secretary
____________________
<FN>
(1) Bonus includes MRP Tax Bonus in fiscal year 1995.
(2) All other compensation in fiscal year 1995 consists of director's fees
of $7,200 with respect to Mr. White, $2,976, $699, $792 and $1,371 in
premiums on disability insurance and $0, $1,292, $2,216, and $1,474 in
401(k) matching contributions for Messrs. White, Ballinger, Egan and
Taeuber, respectively.
</TABLE>
OPTION EXERCISES AND YEAR-END VALUE TABLE. The following table sets
forth information concerning the value of options held by the Executive
Officers at the end of fiscal year 1995. No options were granted or exercised
during fiscal year 1995.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at Fiscal Year-End at Fiscal Year-End
(All Immediately Exercisable) (All Immediately Exercisable)(1)
-------------------------------------------------------------------
<S> <C> <C>
James T. White 66,125 $652,984
Michael P. Ballinger 26,450 261,194
Jerry J. Egan 26,450 261,194
David W. Taeuber 13,225 130,597
____________________
<FN>
(1) Calculated as the difference between the fair market value of the
underlying Kentucky Enterprise Common Stock at June 30, 1995 ($19.875)
and the exercise price.
</TABLE>
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<PAGE> 50
EMPLOYMENT AND RETIREMENT AGREEMENTS. Kentucky Enterprise and Kentucky
Enterprise Bank have entered into separate employment agreements (the
"Employment Agreements") with Mr. James T. White as President and Chief
Executive Officer of Kentucky Enterprise and Kentucky Enterprise Bank, Mr.
Jerry J. Egan as Senior Vice President and Senior Loan Officer of Kentucky
Enterprise Bank and Secretary of Kentucky Enterprise, Mr. Michael P. Ballinger
as Treasurer of Kentucky Enterprise and Kentucky Enterprise Bank, and Mr. David
W. Taeuber as Senior Vice President and Assistant Secretary of Kentucky
Enterprise and Kentucky Enterprise Bank (collectively, the "Executives") and
Kentucky Enterprise has entered into the SERA with the President and Chief
Executive Officer of Kentucky Enterprise and Kentucky Enterprise Bank. The
Employment Agreements and the SERA have been approved by the OTS.
The Employment Agreements became effective on December 16, 1993, and have
terms of three years. On each anniversary date from the date of commencement
of the Employment Agreements, the term of employment will be extended for an
additional one-year period beyond the then effective expiration date, upon a
determination by the Board of Directors that the performance of the Executive
has met the required standards and that such Employment Agreement should be
extended. The Employment Agreements provide for inclusion of the Executives in
any discretionary bonus plans, retirement and medical plans, customary fringe
benefits and vacation and sick leave. Kentucky Enterprise Bank's Employment
Agreements provide for payment of a current annual base salary to Messrs.
White, Egan, Ballinger and Taeuber in the amounts of $265,357, $81,383, $81,383
and $69,520, respectively, and provide the Executives with a salary review by
the Board of Directors not less often than annually. Rather than providing a
base salary, Kentucky Enterprise's Employment Agreements guarantee the
performance of Kentucky Enterprise Bank's obligations under its Employment
Agreements.
Each Employment Agreement will terminate upon the Executive's death or
disability, and is terminable by Kentucky Enterprise or Kentucky Enterprise
Bank with or without "just cause" (as defined in the Employment Agreement). If
an Executive is terminated without "just cause," he shall be entitled to salary
and benefits up to the date of the termination of the term of the Employment
Agreement (plus any renewal term) plus salary for an additional 12-month
period, not to exceed three years. In the event of termination for "just
cause," the Executive will not be entitled to any salary or benefits for any
period after such determination. If an Employment Agreement is terminated due
to the Executive's "disability" (as defined in the Employment Agreements), the
Executive will be entitled to a continuation of his compensation and benefits
through the date on which such disability is established and the Employment
Agreement is terminated. The Executive is able to voluntarily terminate his
Employment Agreement by providing 60 days' written notice to the Boards of
Directors of Kentucky Enterprise Bank or Kentucky Enterprise, in which case the
Executive is entitled to receive only his compensation and benefits up to the
date of termination.
Each Employment Agreement contains provisions stating that in the event of
the Executive's involuntary termination of employment in connection with, or
within one year after, any change in control of Kentucky Enterprise Bank or
Kentucky Enterprise, other than for "just cause," the Executive will be paid
within 10 days of such termination an amount equal to the "Parachute Payment"
of 2.99 times his "base amount," as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986 (the "Code"). In no event, however, may the
Executive's Parachute Payment exceed the difference between 2.99 times his
"base amount," as defined in Section 280G(b)(3) of the Code and the sum of any
other parachute payments, as defined under Section 280G(b)(2) of the Code, that
the Executive receives on account of the change in control. "Control"
generally refers to the acquisition, by any person or entity, of the ownership
or power to vote more than 25% of Kentucky Enterprise Bank's or Kentucky
Enterprise's voting stock, the control of the election of a majority of
Kentucky Enterprise Bank's or Kentucky Enterprise's directors or the exercise
of a controlling influence over the management or policies of Kentucky
Enterprise Bank or Kentucky Enterprise. In addition, under the Employment
Agreements, a change in control occurs when, during any consecutive two-year
period, directors of Kentucky Enterprise or Kentucky Enterprise Bank at the
beginning of such period cease to constitute two-thirds of the Board of
Directors of Kentucky Enterprise or Kentucky Enterprise Bank, unless the
election of replacement directors was approved by a two-thirds vote of the
initial directors then in office. The Employment Agreement also provides for a
similar lump sum payment to be made in the event of the Executive's voluntary
termination of employment within one year following a change in control, upon
the occurrence, or within 90 days thereafter, of certain specified events
following the change in control, which have not been consented to in writing by
the Executive, including (i) requiring the Executive to move his personal
residence or perform his principal executive functions more than 35 miles from
Kentucky Enterprise Bank's current primary office, (ii) materially reducing the
Executive's base compensation as then in effect, (iii) failing to maintain
existing employee benefit plans, including material vacation, fringe benefits,
stock option and retirement plans, (iv) permanently assigning, or assigning
without the Executive's prior written consent, duties and responsibilities to
the Executive which are materially different than those normally
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<PAGE> 51
associated with his position with Kentucky Enterprise or Kentucky Enterprise
Bank, (v) materially diminishing the Executive's authority and responsibility,
and (vi) in the case of Mr. White, failing to re-elect him to Kentucky
Enterprise's or Kentucky Enterprise Bank's Board of Directors. The aggregate
payments that would be made to Messrs. White, Egan, Ballinger and Taeuber
assuming their termination of employment under the foregoing circumstances at
June 30, 1995 would have been approximately $1.0 million, $335,000, $335,000
and $242,000, respectively.
SUPPLEMENTAL RETIREMENT AGREEMENT. Pursuant to the terms of the SERA, upon
Mr. White's termination of employment with Kentucky Enterprise or Kentucky
Enterprise Bank, for reasons other than death, disability or removal for "just
cause," he would be entitled to receive annual payments from Kentucky
Enterprise in an amount equal to (i) the product of his "Vested Percentage" and
60% of his "Average Annual Compensation," less (ii) his "Annual Offset Amount."
Under the SERA, "Vested Percentage" means 20% per full year of service with
Kentucky Enterprise following the Conversion (up to a maximum Vested Percentage
of 100%), "Final Average Compensation" means Mr. White's highest annual
compensation for three of the five calendar years preceding his termination of
employment and "Annual Offset Amount" means the sum of the social security
benefits and retirement benefits which he would receive in the form of a 50%
joint and survivor annuity under Kentucky Enterprise Bank's Pension Plan upon
his termination of employment. Such annual payments shall be made for the
remainder of Mr. White's life, with a 50% benefit payable to his surviving
spouse, if any.
In the event Mr. White terminates employment due to disability as
determined under his employment agreement, he would receive annual payments for
life in the amount of 60% of his Final Average Compensation less his Annual
Offset Amount, beginning two months after termination of employment. In the
event Mr. White's wife survives him, she shall be entitled to receive 50% of
the amount he would have received had he retired on the date of his death,
assuming his Vested Percentage was 100%. Termination for "just cause" (as
determined under the Employment Agreements) would result in his forfeiture of
all retirement benefits, unless Kentucky Enterprise Bank's Board of Directors
determines to the contrary. In the event Kentucky Enterprise Bank terminates
Mr. White's employment for other than "just cause" or in the event of
termination of employment in connection with a change in control (as defined in
the Employment Agreements) which triggers the payment of compensation to him
under the terms of the Employment Agreements, then his Vested Percentage shall
be deemed to be 100%, and the present value of the benefits payable to him
would be paid in one lump sum within 10 days of termination of employment.
The Merger will constitute a change in control for purposes of these
agreements. For a discussion of the benefits to which Officers White, Egan,
Ballinger and Taeuber are entitled under these agreements in connection with
the Merger, see "PROPOSAL 1 - MERGER OF KENTUCKY ENTERPRISE INTO FIFTH THIRD -
Interests of Management," " - Severance Payments" and " - Supplemental
Retirement Agreement."
TRANSACTIONS WITH MANAGEMENT. During the fiscal year ended June 30, 1995,
Kentucky Enterprise Bank paid $283,596 to Daniel J. Zalla and Associates, a law
firm, for legal services rendered to Kentucky Enterprise Bank. Daniel J. Zalla
is the brother of A. Martin Zalla, a director of Kentucky Enterprise Bank.
During the fiscal year ended June 30, 1995, Kentucky Enterprise Bank paid
$90,535 to Fennell Appraisal Services for appraisals on mortgage loans
originated by Kentucky Enterprise Bank. Fennell Appraisal Services is owned by
Bradley Fennell, the son of Director William A. Fennell.
Management believes that the terms of such transactions were as favorable
as those that would have been available in comparable transactions with
non-affiliated persons.
Under legislation enacted in 1989, Kentucky Enterprise Bank's loans to
directors and executive officers must be made on substantially the same terms,
including interest rates, as those prevailing for comparable transactions and
must not involve more than the normal risk of repayment or present other
unfavorable features. Kentucky Enterprise Bank has a policy of offering loans
to officers and directors in the ordinary course of business, on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons. These loans do not
involve more than the normal risk of collectibility or present other
unfavorable features. Loans made prior to 1989 to officers and directors may
have had certain loan fees waived or reduced, and/or certain interest rates
reduced, although no loans were granted at rates lower than Kentucky Enterprise
Bank's cost of funds.
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<PAGE> 52
DIRECTORS' COMPENSATION
Each member of the Board of Directors of Kentucky Enterprise and Kentucky
Enterprise Bank receives a total monthly retainer of $600 which covers services
in both capacities. All of the directors also serve on a quarterly basis on
the Executive Committee for which they receive $75 for each Committee meeting
attended. With the exception of Mentor E. Graves, who receives $3,400 in fees
for his services on the audit and investment committees, no director receives
fees for serving on any other committee. Full time salaried officers receive
no fees for their service on any committees. In addition to monthly board
fees, directors may receive medical, dental and cancer insurance which is paid
by Kentucky Enterprise Bank. The Chairman of the Board, Mentor E. Graves,
receives a supplemental retirement benefit of $10,000 per year paid monthly.
These payments will continue during Mr. Graves' life.
All members of the Board of Directors of Kentucky Enterprise and Kentucky
Enterprise Bank are eligible to participate in Kentucky Enterprise's and
Kentucky Enterprise Bank's deferred compensation plans, pursuant to which
directors may elect to defer the receipt of all or part of their future fees.
Deferred amounts are credited to a bookkeeping account in the participant's
name, which will also be credited quarterly with the investment return which
would have resulted if such deferred amounts had been invested, based upon the
participant's choice, between either Kentucky Enterprise Common Stock or
Kentucky Enterprise's highest annual rate of interest on certificates of
deposit, regardless of their term. At the election of the participant,
distributions are either in a lump sum or monthly over a period of not more
than 10 years.
The President and Chief Executive Officer of Kentucky Enterprise Bank is
eligible to participate in Kentucky Enterprise's and Kentucky Enterprise Bank's
benefit plans, and the non-employee directors of Kentucky Enterprise and
Kentucky Enterprise Bank are eligible to participate in Kentucky Enterprise's
Option Plan. Pursuant to the Option Plan, each non-employee director who joins
Kentucky Enterprise's Board of Directors will receive, on the date of joining
the Board, options to purchase 2% of the shares of Kentucky Enterprise Common
Stock reserved for issuance under the Option Plan (5,290 shares as of the date
hereof) at an exercise price equal to the fair market value of a share of
Kentucky Enterprise Common Stock on the date of the grant. No grants were made
during fiscal year 1995.
Under Kentucky Enterprise Bank's director emeritus program, directors who
attain the age of 60 years and who have served on the Board for 20 years may
elect to become a director emeritus. Directors who elect to become a director
emeritus are entitled to receive compensation only for so long as (i) they do
not accept employment or serve as a director or consultant to any other
financial institution or financial institution holding company in competition
with Kentucky Enterprise Bank, (ii) they do not solicit any customers or
depositors of Kentucky Enterprise Bank to terminate or change their
relationship with Kentucky Enterprise Bank and (iii) they promote the good will
of Kentucky Enterprise Bank in such manner as may be requested. Directors
emeritus receive annually amounts equal to their most recent 12 months' regular
directors' compensation for a number of years equal to one-third of their
number of years of service. Payments are made monthly until the death of a
director emeritus or until the amount of accrued time has expired, whichever
occurs first. In no event, however, shall payments be made exceeding 120
months. A director who is terminated for cause or is subject to certain
regulatory sanctions would be ineligible to serve as a director emeritus. The
director emeritus program was amended in fiscal year 1995 to provide that in
the event of a "change in control" (as such term is defined in the Option
Plan), each member of the Board of Directors, regardless of his or her age or
years of service, shall be entitled to receive the benefits described above
with the amount of benefits to be received calculated based on each director's
years of service as of the date of the change in control. Additionally, in the
event of a change in control, the requirement that a director promote the good
will of Kentucky Enterprise is waived.
RECOMMENDATION
Kentucky Enterprise's Board of Directors has unanimously approved the
proposed slate of directors and recommends approval thereof by the shareholders
of Kentucky Enterprise.
VOTE REQUIRED
The presence in person or by proxy of the holders of a majority of the
outstanding shares of Kentucky Enterprise Common Stock will constitute a quorum
for the transaction of business at the Annual Meeting. ELECTION OF THE
PROPOSED
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<PAGE> 53
DIRECTORS REQUIRES THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE
OUTSTANDING SHARES OF KENTUCKY ENTERPRISE COMMON STOCK ENTITLED TO VOTE.
Broker non-votes will not be treated as votes cast and therefore, will have the
same effect as a vote against the proposal.
RESALE OF FIFTH THIRD COMMON STOCK BY AFFILIATES
No restrictions on the sale, pledge, transfer or other disposition of the
shares of Fifth Third Common Stock issued pursuant to the Merger will be
imposed solely as a result of the Merger, other than restrictions on the
transfer of such shares issued to any Kentucky Enterprise shareholders who may
be deemed to be an "affiliate" of Fifth Third or Kentucky Enterprise for
purposes of Rule 145 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"). Directors, executive officers or holders of 10% or
more of the outstanding shares of Kentucky Enterprise Common Stock may be
deemed to be affiliates of Kentucky Enterprise for purposes of Rule 145.
Affiliates may not sell, pledge, transfer or otherwise dispose of the shares of
Fifth Third Common Stock issued to them in exchange for their shares of
Kentucky Enterprise Common Stock, unless the requirements of Rule 145(d) are
satisfied or the sale, pledge, transfer or disposition is otherwise in
compliance with the Securities Act and the rules and regulations promulgated
thereunder. Generally, under Rule 145(d), an affiliate of Kentucky Enterprise
will be permitted to sell, pledge, transfer or otherwise dispose of his or her
shares of Fifth Third Common Stock received pursuant to the Merger if one of
the following is satisfied:
(1) The shares are sold in "brokers' transactions" or in transactions
directly with a "market maker," the affiliate does not solicit or arrange for
the solicitation of purchase orders or make any payments in connection with the
sale to anyone other than the broker or market maker and the number of shares
sold, together with all other sales of Fifth Third Common Stock by such
affiliate within the preceding three months, does not exceed one percent of the
outstanding shares of Fifth Third Common Stock; or
(2) The affiliate is not an affiliate of Fifth Third and has been the
beneficial owner of Fifth Third Common Stock for at least two years, and there
is publicly available certain information regarding Fifth Third.
In addition, shares of Fifth Third Common Stock issued to affiliates in the
Merger may not be sold, pledged, transferred or otherwise disposed of until
such time as financial results covering at least 30 days of combined operations
of Fifth Third and Kentucky Enterprise have been published within the meaning
of Section 201.01 of the Securities and Exchange Commission's Codification of
Financial Reporting Policies.
Share certificates for Fifth Third Common Stock issued to affiliates of
Kentucky Enterprise will bear a legend as follows:
The shares of stock evidenced by this certificate are subject to
restrictions on transfer and may only be transferred after the Issuer
has received an opinion from its counsel that the transfer will be in
compliance with the requirements of Rule 145(d) promulgated under the
Securities Act of 1933 or pursuant to an exemption from registration
under such Act, or pursuant to a registration statement under such
Act. The Issuer will mail a copy of Rule 145(d) to the shareholder
without charge within five (5) days after written request therefor.
The foregoing is only a general statement of the restrictions on the
disposition of the shares of Fifth Third Common Stock to be issued in the
Merger. Accordingly, those shareholders of Kentucky Enterprise who may be
affiliates of Kentucky Enterprise should confer with legal counsel with respect
to the resale restrictions.
FIFTH THIRD BANCORP
DESCRIPTION OF BUSINESS
Fifth Third is an Ohio corporation organized in 1975 as a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (the
"Bank Holding Company Act"), and subject to regulation by the Federal Reserve
Board. Fifth Third, with its principal office located in Cincinnati, is a
multi-bank holding company that owns all of the outstanding stock of six
commercial banks with 277 offices in 35 counties in Ohio. Those banks are:
The Fifth Third Bank, The Fifth Third Bank
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<PAGE> 54
of Northwestern Ohio, N.A., Fifth Third Bank of Northeastern Ohio, The Fifth
Third Bank of Western Ohio, The Fifth Third Bank of Southern Ohio and The Fifth
Third Bank of Columbus. Fifth Third also directly owns all of the outstanding
capital stock of two commercial banks with 73 offices in fifteen counties in
Kentucky. Those banks are: The Fifth Third Bank of Northern Kentucky, Inc.
and Fifth Third Bank of Kentucky, Inc. Fifth Third also owns all the
outstanding capital stock of one commercial bank which maintains 28 offices in
seven counties in Indiana. This bank is the Fifth Third Bank of Central
Indiana. Further, Fifth Third owns all the outstanding capital stock of one
commercial bank which maintains four (4) offices in one county in Florida.
This bank is Fifth Third Bank of Florida.
In addition, Fifth Third is a multiple savings and loan holding company
registered under the Home Owners' Loan Act, owning all of the outstanding
capital stock of Fifth Third Savings Bank of Western Kentucky, F.S.B., a
federally chartered savings bank located in Mayfield, Kentucky and all of the
outstanding capital stock of Fifth Third Savings Bank of Northern Ohio, F.S.B.,
a federally chartered savings bank located in Kent, Ohio. As a savings and
loan holding company, Fifth Third is registered with and subject to regulation
by the OTS.
Fifth Third, through its wholly owned subsidiary, Fifth Third Bank of
Northeastern Ohio, has agreed to purchase certain assets and assume certain
liabilities of First Nationwide Bank, A Federal Savings Bank, San Francisco,
California ("First Nationwide"). Fifth Third Bank of Northeastern Ohio will
acquire all of the assets and assume all of the liabilities of twenty-eight
(28) branches of First Nationwide located in the Cleveland, Ohio area.
Twenty-six (26) of those branches will be operated as full-service banking
centers and two (2) branches will be closed.
Fifth Third, through its wholly owned subsidiaries, The Fifth Third Bank
and Fifth Third Bank of Columbus, has agreed to purchase certain assets and
assume certain liabilities of NBD Bank ("NBD"), Columbus, Ohio. The Fifth
Third Bank will acquire all of the assets and assume all of the liabilities of
eight (8) branches of NBD located in the Dayton, Ohio area. Fifth Third Bank
of Columbus will acquire all of the assets and assume all of the liabilities of
seventeen (17) branches of NBD located in the Columbus, Ohio area. It is yet
to be determined how many of those branches will be operated as full service
banking centers and how many of those branches will be closed.
On November 17, 1995, Fifth Third, through its wholly owned subsidiary, The
Fifth Third Bank, purchased certain assets and assumed certain liabilities of
Bank One, Cincinnati, N.A. ("Bank One Cincinnati"), Cincinnati, Ohio. The
Fifth Third Bank acquired all of the assets and assumed all liabilities of
seven (7) branches of Bank One Cincinnati located in the Cincinnati, Ohio area.
Two (2) of those branches are being operated as full-service banking centers
and five (5) branches were closed.
On September 22, 1995, Fifth Third, through its wholly owned subsidiary,
The Fifth Third Bank, completed the purchase of certain assets and the
assumption of certain liabilities of PNC Bank, Ohio, N.A., Cincinnati, Ohio
("PNC Bank Ohio"). The Fifth Third Bank acquired all of the assets and assumed
all of the liabilities of twelve (12) branches of PNC Bank Ohio located in the
Dayton, Ohio area. Eight (8) of the twelve branches are being operated as
full-service banking centers and four (4) branches were closed.
On September 8, 1995, Fifth Third completed its acquisition of Bank of
Naples, Naples, Florida. Pursuant to that transaction, Fifth Third Trust Co. &
Savings Bank, F.S.B. ("5/3 Naples"), a wholly owned subsidiary of Fifth Third,
was merged with and into Bank of Naples and Bank of Naples became a wholly
owned subsidiary of Fifth Third. Simultaneously with the merger, Bank of
Naples changed its name to Fifth Third Bank of Florida.
On July 21, 1995, Fifth Third consummated its acquisition of Falls
Financial, Inc. ("Falls Financial"). In a related transaction, Fifth Third
Bank of Northeastern Ohio ("Fifth Third Northeastern") acquired all of the
branches except one (1), and acquired substantially all of the assets and
assumed substantially all of the liabilities of Falls Savings Bank, F.S.B.
("Falls F.S.B."). Then, Falls F.S.B. became owned by Fifth Third, changed its
name to Fifth Third Savings Bank of Northern Ohio, F.S.B. ("Northern Ohio") and
moved its main office to Kent, Ohio. The acquired offices of Falls F.S.B. are
operated as branches of Fifth Third Northeastern. The total amount of deposits
assumed by Fifth Third Northeastern in the transaction was approximately $480
million and that remaining in Northern Ohio was approximately $22 million.
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<PAGE> 55
On June 23, 1995, Fifth Third, through The Fifth Third Bank, completed the
purchase of certain assets and assumption of certain liabilities of Bank One,
Dayton, N.A. ("Bank One Dayton"). The Fifth Third Bank acquired all of the
assets and assumed all of the liabilities of a single branch of Bank One Dayton
located in Lebanon, Ohio, and that branch is currently being operated as a
full-service banking center.
On April 20, 1995, Fifth Third completed the merger of its wholly owned
subsidiary, Fifth Third Bank of Southeastern Indiana, with and into Fifth Third
Bank of Central Indiana, which is also a wholly owned subsidiary of Fifth
Third. All of the branches being operated by Fifth Third Bank of Southeastern
Indiana became branches of Fifth Third Bank of Central Indiana, which remains a
wholly owned subsidiary of Fifth Third.
On January 20, 1995, Fifth Third, through its wholly owned subsidiary, The
Fifth Third Bank, consummated its acquisition of Mutual Federal Savings Bank of
Miamisburg, A Stock Savings Bank ("Mutual Federal"). Mutual Federal was merged
into The Fifth Third Bank. The former offices of Mutual Federal were retained
and are being operated as full-service banking centers of The Fifth Third Bank.
The total amount of deposits involved in the transaction was $57 million.
On August 26, 1994, Fifth Third consummated its acquisition of The
Cumberland Federal Bancorporation, Inc., a savings and loan holding company,
and its wholly owned subsidiary, The Cumberland Federal Savings Bank
("Cumberland FSB"). In a related transaction, Fifth Third Bank of Kentucky,
Inc. ("Fifth Third Kentucky"), acquired all branch offices except one and
acquired substantially all of the assets and assumed substantially all of the
liabilities of Cumberland FSB. Then, Cumberland FSB changed its name to Fifth
Third Savings Bank of Western Kentucky, FSB ("Western Kentucky") and moved its
main office to Mayfield, Kentucky. The acquired offices of Cumberland FSB are
operated as branches of Fifth Third Kentucky, except that Fifth Third later
sold three of such branches. The total amount of deposits assumed by Fifth
Third Kentucky in such transaction was $793 million and that remaining in
Western Kentucky was $31 million. Prior to the Cumberland transaction, Fifth
Third was a unitary savings and loan holding company which owned all of the
outstanding stock of 5/3 Naples which had one office in Naples, Florida.
On June 3, 1994, Fifth Third completed the acquisition of The National
Bancorp of Kentucky, Inc. Pursuant to that transaction, The National Bancorp
of Kentucky, Inc. was merged into Fifth Third, and The National Bancorp of
Kentucky, Inc.'s wholly owned subsidiaries, The First National Bank of
Falmouth, Falmouth, Kentucky ("FNB") and The National Bank of Cynthiana,
Cynthiana, Kentucky ("NBC"), became wholly owned subsidiaries of Fifth Third.
Simultaneously with the merger, FNB was merged with and into Fifth Third Bank
of Northern Kentucky, Inc. and NBC was merged with and into Fifth Third Bank
of Central Kentucky, Inc., n/k/a Fifth Third Bank of Kentucky, Inc. The total
amount of deposits transferred to Fifth Third's subsidiaries was approximately
$80 million.
On May 20, 1994, Fifth Third, through three of its affiliate banks,
completed the purchase of certain assets and the assumption of certain
liabilities of Citizens Federal Bank, a Federal Savings Bank, Miami, Florida
("Citizens"). The three affiliates acquired all of the assets and assumed all
of the liabilities of eight branches of Citizens located throughout Ohio.
Seven of the eight branches are being operated as full- service banking centers
and one branch was closed.
At September 30, 1995, Fifth Third, its affiliated banks and other
subsidiaries had consolidated total assets of $17.2 billion, consolidated total
deposits of $11.7 billion and consolidated total stockholders' equity of $1.6
billion.
Fifth Third, through its subsidiaries, engages primarily in commercial,
retail and trust banking, investment services and leasing activities and also
provides credit life, accident and health insurance, discount brokerage
services and property management for its properties. Those subsidiaries
consist of The Fifth Third Company, Fifth Third Securities, Inc., The Fifth
Third Leasing Company, Fifth Third Community Development Company, Midwest
Payment Systems, Inc. ("MPS") and Fountain Square Insurance Company. Fifth
Third's affiliates provide a full range of financial products and services to
the retail, commercial, financial, governmental, educational and medical
sectors, including a wide variety of checking, savings and money market
accounts, and credit products such as credit cards, installment loans, mortgage
loans and leasing. Each of the banking affiliates has deposit insurance
provided by the Federal Deposit Insurance Corporation ("FDIC") through the Bank
Insurance Fund ("BIF"), and the savings bank affiliates have deposit insurance
provided by the FDIC through the Savings Association Insurance Fund ("SAIF").
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<PAGE> 56
Fifth Third, through its banking subsidiaries, operates for itself and
other financial institutions a proprietary automated teller machine ("ATM")
network, Jeanie(R). The Jeanie system participates in a shared ATM network
called "Money Station(R)," which includes several Ohio bank holding companies
and over 1,000 ATM's. The "Money Station" network participates in another
shared ATM network called "PLUS System(R)," which is a nationwide network with
over 17,000 participating ATM's. The Fifth Third Bank, through its wholly
owned subsidiary, MPS, also provides electronic switch services for several
regional banks and bank holding companies in Ohio, Kentucky and Illinois.
Fifth Third is a corporate entity legally separate and distinct from its
affiliates. The principal source of Fifth Third's income is dividends from its
affiliates. There are certain regulatory restrictions as to the extent to
which the affiliates can pay dividends or otherwise supply funds to Fifth
Third. See "DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE RIGHTS OF
SHAREHOLDERS."
CAPITAL REQUIREMENTS FOR FIFTH THIRD
The Federal Reserve Board, the Office of the Comptroller of the Currency
and the FDIC maintain guidelines to implement risk-based capital requirements
for state member banks and bank holding companies. The guidelines provide for
a systematic analytical framework that makes regulatory capital requirements
more sensitive to differences in risk profiles among banking organizations,
takes off-balance sheet exposures into explicit account in assessing capital
adequacy and minimizes disincentives to holding liquid, low-risk assets.
Under the guidelines, banking organizations are required to have capital
equivalent to 8 percent of assets, weighted by risk. Banking organizations
must have at least 4 percent Tier 1 capital, which consists of core capital
elements including common shareholders' equity, retained earnings and perpetual
preferred stock, to weighted risk assets. The other half of required capital
(Tier 2) can include, among other supplementary capital elements, limited-life
preferred stock and subordinated debt and loan loss reserves up to certain
limits.
Under Federal Reserve Board policy, a holding company is expected to act as
a source of financial strength to each subsidiary bank and to commit resources
to support each of its subsidiaries. This support may be required at times
when, absent such Board policy, the holding company may not find itself able to
provide it.
Fifth Third, and each of its subsidiary banks, is in compliance with both
the current leverage ratios and the final risk-based capital standards. As of
September 30, 1995, Fifth Third had a leverage ratio of 9.47%, its Tier 1
risk-based capital ratio was 10.99% and its total risk-based capital ratio was
14.35%.
BANK HOLDING COMPANIES IN GENERAL
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions.
As a bank holding company, Fifth Third is registered with and subject to
regulation by the Federal Reserve Board. A bank holding company is required to
file with the Federal Reserve Board an annual report and such additional
information as the Federal Reserve Board may require pursuant to the Bank
Holding Company Act.
The Federal Reserve Board also may make examinations of a holding company
and each of its subsidiaries. The Bank Holding Company Act requires each bank
holding company to obtain the prior approval of the Federal Reserve Board
before it may acquire substantially all of the assets of any bank, or before it
may acquire ownership or control of any voting shares of any bank if, after
such acquisition, it would own or control directly or indirectly, more than 5%
of the voting shares of such bank.
The Bank Holding Company Act also restricts the types of businesses and
operations in which a bank holding company and its subsidiaries (other than
bank subsidiaries) may engage. Generally, permissible activities are limited
to banking and activities found by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto.
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<PAGE> 57
The operations of the subsidiary banks of Fifth Third are subject to
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be made and the
types of services which may be offered. Various consumer laws and regulations
also affect the operations of these banking subsidiaries.
National banks are subject to the supervision of and are regularly examined
by the Comptroller of the Currency. In addition, national banks may be members
of the Federal Reserve System and their deposits are insured by the FDIC and,
as such, may be subject to regulation and examination by each agency. State
chartered banking corporations are subject to federal and state regulation of
their business and activities, including, in the case of banks chartered in
Ohio, by the Ohio Division of Banks, in the case of banks chartered in
Kentucky, by the Kentucky Department of Financial Institutions, and in the case
of banks chartered in Indiana, by the Indiana Department of Financial
Institutions.
ACQUISITIONS OF SAVINGS ASSOCIATIONS BY HOLDING COMPANIES
Section 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 1843) ("BHC
Act") prohibits bank holding companies from acquiring or retaining shares of
any company that is not a bank or is not engaging in any activity other than
managing and controlling banks, except under certain circumstances. The
primary exception permits bank holding companies to conduct activities and
acquire companies solely in activities the Federal Reserve Board has determined
in to be closely related to banking and a proper incident thereto. Section 346
of the Reigle Community Development and Regulatory Improvement Act of 1994
("Section 346") amends amended Section 4 of the BHC Act to establish a new
notice procedure for obtaining Federal Reserve Board approval under Section
4(a)(2) and 4(c)(8) of the BHC Act. Under Section 346, a proposal requiring
Federal Reserve Board approval under Section 4(a)(2) or 4(c)(8) may be
consummated 60 days after providing the Federal Reserve Board with complete
written notice of the proposal, unless the notice period is extended as
provided in the statute. Section 346 also permits proposals to be consummated
at any time during this notice period if approved by the Federal Reserve Board
during this period. This interim rule replaced the application procedures of
Section 4(c)(8) of the BHC Act with a new notice procedure and streamlined the
procedures for obtaining Federal Reserve Board approval for nonbanking
proposals in several respects. The interim rule contemplates action by the
Federal Reserve Board on nonbanking proposals involving listed activities
(including the acquisition of a thrift or thrift assets) within 30 days after a
notice containing all of the information required by the rule has been received
by the Federal Reserve Board. In approving the activities contained in such a
notice, the Federal Reserve Board is precluded from opposing any restrictions
on transactions between the bank holding company and the acquired savings
association, except as required by Section 23A or 23B of the Federal Reserve
Act or any other applicable law.
Section 18(c) of the Federal Deposit Insurance Act ("FDI Act") (12 U.S.C.
1828(c)) authorizes the Federal Reserve Board to approve the application of a
bank to effect a merger, consolidation, acquisition of assets or assumption of
deposit liabilities, and, incident thereto, to establish a branch or branches
pursuant to Section 9 of the Federal Reserve Act (12 U.S.C. 321) and Section
5(d)(3) of the FDI Act (12 U.S.C. 1815(d)(3)) authorizes the Federal Reserve
Board to approve the application of a bank to effect a merger, consolidation or
acquisition of assets or assumption of deposit liabilities of a savings
association by a bank that is insured by the BIF.
ADDITIONAL INFORMATION
For more detailed information about Fifth Third, reference is made to the
Fifth Third Annual Report on Form 10-K for the year ended December 31, 1994 and
the Fifth Third Quarterly Reports on Form 10-Q for the periods ended March 31,
1995, June 30, 1995 and September 30, 1995, which are incorporated herein by
reference and to the Fifth Third Annual Report to Shareholders which
accompanies this Proxy Statement and Prospectus. See "AVAILABLE INFORMATION"
and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
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<PAGE> 58
KENTUCKY ENTERPRISE BANCORP, INC.
DESCRIPTION OF BUSINESS
Kentucky Enterprise was incorporated under the laws of the State of Ohio to
become a savings and loan holding company with Kentucky Enterprise Bank, as its
sole subsidiary. Kentucky Enterprise was incorporated at the direction of the
Board of Directors of Kentucky Enterprise Bank in August 1993 and acquired all
of the capital stock of Kentucky Enterprise Bank issued in connection with
Kentucky Enterprise Bank's conversion from mutual to stock form on December 16,
1993. Kentucky Enterprise's principal business is the business of Kentucky
Enterprise and its subsidiaries.
Kentucky Enterprise is classified as a unitary savings and loan holding
company subject to regulation by the OTS. Prior to its acquisition of the
capital stock of Kentucky Enterprise Bank, Kentucky Enterprise had no assets
and no liabilities and engaged in no business activities. Since the
acquisition, Kentucky Enterprise has not engaged in any significant activity
other than holding the stock of Kentucky Enterprise Bank and investing its
share ($11.1 million) of the net proceeds of Kentucky Enterprise Bank's
conversion in investment securities. At September 30, 1995, Kentucky
Enterprise had total assets of $281.4 million, deposits of $227.4 million and
shareholders' equity of $49.5 million.
The executive offices of Kentucky Enterprise are located at 800 Monmouth
Street, Newport, Kentucky 41071, and its main telephone number is (606)
261-3050.
Kentucky Enterprise Bank is a federally chartered savings bank which
conducts its business through its main office in Newport, Kentucky and ten
other offices located throughout Northern Kentucky. Kentucky Enterprise Bank's
principal business consists of attracting deposits from the general public
through a variety of deposit programs and investing these funds in loans
secured by first mortgages on single-family residences located in Kentucky
Enterprise Bank's market area. To a limited extent, and primarily as an
accommodation to its customers, Kentucky Enterprise Bank also originates
multi-family residential and commercial real estate loans. Kentucky Enterprise
Bank also originates consumer loans, the majority of which are home equity
loans, and has significant holdings in mortgage-backed securities. Kentucky
Enterprise Bank derives its income principally from interest earned on loans
and, to a lesser extent, other fees, and from interest earned on investments.
RECENT DEVELOPMENTS
AMENDMENT TO BIF INSURANCE PREMIUM SCHEDULE; PREMIUM ASSESSMENT. On August
8, 1995, the FDIC approved a significant reduction in the deposit insurance
premiums charged to those financial institutions that are members of the BIF.
No similar reduction was approved for institutions, such as Kentucky Enterprise
Bank, that are members of the SAIF. This amendment creates a significant
disparity between the deposit insurance premiums paid by BIF and SAIF members.
A number of proposals have been considered to recapitalize the SAIF in order to
eliminate the premium disparity. The Senate and the House of Representatives
have both, as part of a budget reconciliation package to balance the federal
budget, approved legislation requiring a one time assessment of .85% of insured
deposits to be imposed on all SAIF-insured deposits held as of March 31, 1995.
This assessment would be payable on January 1, 1995 and would result in a
one-time charge of up to approximately $2.0 million, which would have the
effect of reducing Kentucky Enterprise Bank's tangible and core capital to
$35.0 million, or 13.1%, of adjusted total assets, and risk-based capital to
$35.6 million, or 35.2%, of risk-weighted assets, on a pro forma basis as of
June 30, 1995. If such a special assessment were required and the SAIF as a
result was fully recapitalized, it would have the effect of reducing Kentucky
Enterprise Bank's deposit insurance premiums to the SAIF, thereby increasing
net income in future periods.
Also under consideration by Congress are proposals relating to merger of
the BIF and SAIF, the elimination of the thrift charter and the federal tax law
implications of conversion to a national bank. Kentucky Enterprise is unable
to accurately predict at this time whether any of these proposals will be
adopted in their current form or the impact of these proposals on Kentucky
Enterprise.
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<PAGE> 59
LENDING ACTIVITIES
GENERAL. Kentucky Enterprise Bank's primary lending activity is the
origination of conventional mortgage loans for the purpose of constructing,
purchasing or refinancing owner-occupied, one- to four-family residential
properties in its primary market area. The remainder of Kentucky Enterprise
Bank's portfolio of residential mortgage loans consists primarily of home
equity lines of credit secured by mortgages on residential real estate. To a
limited extent, and primarily as an accommodation to its customers, Kentucky
Enterprise Bank originates multi-family residential and commercial real estate
loans. Kentucky Enterprise Bank also originates consumer loans, the majority
of which are home equity loans.
Prior to the 1980s, Kentucky Enterprise Bank's residential lending
activities consisted primarily of originating fixed rate mortgage loans with
maturities of up to 30 years for retention in the loan portfolio. Fundamental
changes in the regulation of savings institutions in the early 1980s and then
prevailing economic conditions combined to increase significantly both the
level and volatility of Kentucky Enterprise Bank's cost of funds. Since the
early 1980s, Kentucky Enterprise Bank has sought to build a more rate-sensitive
loan portfolio by originating adjustable rate mortgages and purchasing
adjustable rate mortgage-backed securities. The types of adjustable rate
mortgages offered have a one-year, three-year and five-year adjustment period
tied to the comparable U.S. Treasury Constant Maturity Index. All adjustable
rate mortgage loans originated are retained in Kentucky Enterprise Bank's loan
portfolio.
In addition to adjustable rate mortgage loans, Kentucky Enterprise Bank
offers fixed rate mortgage loans. Prevailing market conditions, regulatory
considerations, and the need for a balanced portfolio have necessitated that
Kentucky Enterprise Bank offer fixed rate mortgages. Kentucky Enterprise
Bank's lending activities have been and continue to be affected by the change
in market interest rates in recent periods. In an environment of declining
interest rates, borrowers tend to prefer long term, fixed rate mortgage loans
rather than shorter term, adjustable rate mortgage loans. Since it is a
portfolio lender, i.e., all of its loans are originated for retention in
portfolio rather than for sale in the secondary market, Kentucky Enterprise
Bank's fixed rate loan originations are a function of the level of interest
rate risk that Kentucky Enterprise Bank is willing to accept given its capital,
profitability and other factors. Kentucky Enterprise Bank actively monitors
the interest rate environment, prepayment activity, interest rate risk and
other factors in developing its strategy with respect to the volume and pricing
of its fixed rate loans and in its lending activities generally. Kentucky
Enterprise Bank's pricing policy for the origination of fixed rate and
adjustable rate mortgage loans is designed to be competitive with the mortgage
rates offered by competing lenders in Kentucky Enterprise Bank's market area.
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<PAGE> 60
ANALYSIS OF LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO
Set forth below is selected data relating to the composition of
Kentucky Enterprise Bank's loan and mortgage-backed securities portfolio by
type of loan and type of security at the dates indicated. At June 30, 1995,
Kentucky Enterprise Bank had no concentrations of loans exceeding 10% of total
loans other than as disclosed below.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
1995 1994 1993
-------------------- ------------------- -------------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan or Security:
- ------------------------
Real estate loans --
Construction loans . . . . . . . . . $ 5,328 3.43% $ 4,405 3.33% $ 2,710 2.05%
One- to four-family residential . . . 138,155 88.86 115,919 87.59 117,424 88.72
Multi-family residential . . . . . . 916 0.59 2,009 1.52 1,248 .94
Non-residential . . . . . . . . . . . 2,555 1.64 2,099 1.59 2,757 2.08
Consumer loans --
Automobiles . . . . . . . . . . . . . 706 0.45 475 .36 696 .53
Savings account loans . . . . . . . . 1,995 1.28 1,929 1.46 2,104 1.59
Home equity loans . . . . . . . . . . 5,808 3.74 5,474 4.13 5,373 4.06
Other . . . . . . . . . . . . . . . . 22 0.01 32 .02 43 .03
--------- ------ ---------- ------ --------- ------
155,485 100.00% 132,342 100.00% 132,355 100.00%
====== ====== ======
Less:
Loans in process . . . . . . . . . . (2,842) (3,021) (1,530)
Discounts and other . . . . . . . . . (413) (329) (205)
Loan loss reserve . . . . . . . . . . (490) (455) (393)
--------- ---------- ---------
Loans, net . . . . . . . . . . . . $ 151,740 $ 128,537 $ 130,227
========= ========== =========
Mortgage-backed securities:
CMOs and REMICs . . . . . . . . . . . $ 7,876 11.34% $ 12,074 16.29% $ 24,361 28.94%
FHLMC . . . . . . . . . . . . . . . . 24,751 35.63 21,953 29.61 23,033 27.36
FNMA . . . . . . . . . . . . . . . . 31,429 45.25 34,073 45.96 29,619 35.18
GNMA . . . . . . . . . . . . . . . . 5,401 7.78 6,034 8.14 7,172 8.52
----------------- -------- ------ --------- -------
Total mortgage-backed securities . 69,457 100.00% 74,134 100.00% 84,185 100.00%
====== ====== ======
Net premiums (discounts) . . . . . (523) 98 1,516
--------- --------- ---------
Net mortgage-backed securities . . $ 68,934 $ 74,232 $ 85,701
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
1992 1991
----------------- -------------------
Amount % Amount %
------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan or Security:
- ------------------------
Real estate loans --
Construction loans . . . . . . . . . $ 4,526 3.12% $ 1,779 1.15%
One- to four-family residential . . . 127,528 87.85 140,271 90.48
Multi-family residential . . . . . . 1,719 1.18 2,423 1.56
Non-residential . . . . . . . . . . . 2,732 1.88 3,234 2.09
Consumer loans --
Automobiles . . . . . . . . . . . . . 1,419 .98 2,979 1.92
Savings account loans . . . . . . . . 2,433 1.68 2,532 1.63
Home equity loans . . . . . . . . . . 4,571 3.15 1,603 1.04
Other . . . . . . . . . . . . . . . . 235 .16 206 .13
--------- ------ ---------- ----
145,163 100.00% 155,027 100.00%
====== ======
Less:
Loans in process . . . . . . . . . . (2,688) (865)
Discounts and other . . . . . . . . . (111) (261)
Loan loss reserve . . . . . . . . . . (133) (39)
--------- ---------
Loans, net . . . . . . . . . . . . $ 142,231 $ 153,862
========= =========
Mortgage-backed securities:
CMOs and REMICs . . . . . . . . . . . $ 7,127 9.74% $ 3,000 6.31%
FHLMC . . . . . . . . . . . . . . . . 23,118 31.59 16,720 35.19
FNMA . . . . . . . . . . . . . . . . 35,157 48.04 22,419 47.19
GNMA . . . . . . . . . . . . . . . . 7,781 10.63 5,372 11.31
--------- ------ --------- -----
Total mortgage-backed securities . 73,183 100.00% 47,511 100.00%
====== ======
Net premiums (discounts) . . . . . 1,245 608
--------- ---------
Net mortgage-backed securities . . $ 74,428 $ 48,119
========= =========
</TABLE>
<PAGE> 61
LOAN AND MORTGAGE-BACKED SECURITIES MATURITY SCHEDULE
The following table sets forth certain information at June 30, 1995
regarding the dollar amount of loans and mortgage-backed securities maturing in
Kentucky Enterprise Bank's portfolio based on their contractual terms to
maturity, including scheduled repayments of principal. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less.
<TABLE>
<CAPTION>
Due after Due after Due after
Due during the year ending 3 through 5 through 10 through Due after 15
June 30, 5 years after 10 years after 15 years after years after
------------------------------ June 30, June 30, June 30, June 30,
1996 1997 1998 1995 1995 1995 1995
------ ------ ------- ----------- ----------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage . . $ 85 $ 495 $ 652 $ 1,936 $ 12,557 $ 46,226 $ 78,800
Real estate construction -- -- -- -- 30 246 2,210
Consumer . . . . . . . . 7,110 422 421 484 66 -- --
Mortgage-backed
securities . . . . . . 951 -- 1,143 -- 54 9,590 57,196
-------- -------- -------- -------- -------- -------- ---------
Total . . . . . . . $ 8,146 $ 917 $ 2,216 $ 2,420 $ 12,707 $ 56,062 $ 138,206
======== ======== ======== ======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Total
---------
<S> <C>
Real estate mortgage . . $140,751
Real estate construction 2,486
Consumer . . . . . . . . 8,503
Mortgage-backed
securities . . . . . . 68,934
--------
Total . . . . . . . $220,674
========
</TABLE>
The following table sets forth the dollar amount of all loans and
mortage-backed securities due after June 30, 1996 which have predetermined
interest rates and have floating or adjustable rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
---------------- ----------------
(In thousands)
<S> <C> <C>
Real estate mortgage . . . . . . . . . . . . . $ 73,396 $ 67,270
Real estate construction . . . . . . . . . . . 1,064 1,422
Consumer . . . . . . . . . . . . . . . . . . . 1,373 20
Mortgage-backed securities . . . . . . . . . . 27,042 40,941
---------- ----------
Total . . . . . . . . . . . . . . . . . . . $ 102,875 $ 109,653
========== ==========
</TABLE>
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LOAN ORIGINATIONS AND PURCHASES OF MORTGAGE-BACKED SECURITIES
Mortgage loans, which are originated through salaried loan personnel,
are attributable to depositors, walk-in customers, advertising and referrals
from real estate brokers and developers. Construction loan originations are
attributable largely to Kentucky Enterprise Bank's reputation and longstanding
relationships with builders in its market area. All loan applications are
evaluated by Kentucky Enterprise Bank's staff to ensure compliance with Kentucky
Enterprise Bank's underwriting standards. See " - Loan Underwriting Policies."
Due to strong competition for loans in Kentucky Enterprise Bank's
primary market area, which has limited Kentucky Enterprise Bank's opportunities
for the origination of adjustable rate mortgage loans, and for the origination
of fixed rate loans at rates that do not present an unacceptable level of
interest rate risk for loans held in its portfolio, Kentucky Enterprise Bank
has been active in using excess funds to purchase mortgage-backed securities.
Approximately 59.4% of Kentucky Enterprise Bank's mortgage-backed securities
provide for adjustable interest rates. It is Kentucky Enterprise Bank's policy
to purchase mortgage-backed securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") or the
Governmental National Mortgage Association ("GNMA"), when such securities can
be acquired at attractive yields, and where the investment characteristics of
such securities complement Kentucky Enterprise Bank's asset/liability
management objectives, primarily as to interest rate adjustments and terms to
maturity. At June 30, 1995, Kentucky Enterprise Bank held $68.9 million in
mortgage-backed securities and mortgage-related securities, all of which were
collateralized by single-family mortgage loans.
Kentucky Enterprise Bank also invests in mortgage-related securities
such as collateralized mortgage obligations and real estate mortgage investment
conduits (collectively, "CMO/REMICs"). At June 30, 1995 Kentucky Enterprise
Bank's investment in CMO/REMICs totaled $7.9 million, or 2.8% of total assets.
Kentucky Enterprise Bank did not purchase any CMO/REMICs in fiscal year 1995.
CMO/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
lives that differ from the underlying collateral as a whole. Kentucky
Enterprise Bank invests in these securities as an alternative to mortgage loans
or mortgage-backed securities generally to satisfy the short to intermediate
term portion of its asset/liability management strategy. At June 30, 1995,
Kentucky Enterprise Bank's CMO/REMICs, which had predominantly adjustable
rates, had weighted average lives of approximately 19 years. All of the
CMO/REMICs owned by Kentucky Enterprise Bank are insured or guaranteed either
directly or indirectly through mortgage-backed securities underlying the
obligations by either the FNMA or FHLMC.
The CMO/REMICs owned by Kentucky Enterprise Bank include both fixed
rate and floating rate instruments. Kentucky Enterprise Bank owns no interest
only or principal only CMO/REMICs. The fixed rate CMO/REMICs owned by Kentucky
Enterprise Bank at June 30, 1995 are short-term investments with remaining
lives ranging from one to three years. All fixed rate CMO/REMICs are currently
paying principal or are scheduled to repay principal in accordance with a
predetermined schedule. The floating rate CMO/REMICs owned by Kentucky
Enterprise Bank at June 30, 1995 are scheduled to repay principal in accordance
with a predetermined schedule, and pay interest and reset monthly based on 11th
District Cost of Funds, LIBOR and the 10 year Treasury Index. The securities
have lifetime interest caps of 9.0%, 9.5% and 10.5%. At June 30, 1995, $2.1
million or 26.6% of the CMO/REMICs were fixed rate instruments with an average
yield of 6.0%, and $5.8 million or 73.4% were floating rate instruments with an
average yield of 5.6%.
CMO/REMICs are subject to repayment by the mortgagors of the
underlying collateral at any time. Such prepayment may subject Kentucky
Enterprise Bank's CMO/REMICs to yield and price volatility. To assess this
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 Kentucky Enterprise Bank to annually test its CMO/REMICs to determine
whether they are high-risk or nonhigh-risk securities. The policy established
a three part risk measurement test for fixed rate, and a one part test for
floating rate, CMO/REMIC's and other mortgage derivative securities.
Securities failing any one of the tests are deemed to
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be high-risk securities. At June 30, 1995, all Kentucky Enterprise Bank's
CMO/REMIC's met the criteria established by the policy to be designated as
nonhigh-risk securities for continued classification as suitable investments.
Prepayments in Kentucky Enterprise Bank's mortgage-related securities
portfolio may be affected by declining and rising interest rate environments.
In a low and falling interest rate environment, prepayments would be expected
to increase. In such an event, Kentucky Enterprise Bank's fixed rate
CMO/REMICs purchased at a premium price could result in actual yields to
Kentucky Enterprise Bank that are lower than anticipated yields. Kentucky
Enterprise Bank's floating rate CMO/REMICs would be expected to generate lower
yields as a result of the effect of falling interest rates on the indexes for
determining payment of interest. Additionally, the increased principal
payments received may be subject to reinvestment at lower rates. Conversely,
in a period of rising rates, prepayments would be expected to decrease, which
would make less principal available for reinvestment at higher rates. In a
rising rate environment, floating rate instruments would generate higher yields
to the extent that the indexes for determining payment of interest did not
exceed the life-time interest rate caps. Such prepayment may subject Kentucky
Enterprise Bank's CMO/REMICs to yield and price volatility.
Kentucky Enterprise Bank has historically invested in mortgage-backed
securities as an alternative investment to supplement its lending efforts and
maintain compliance with certain regulatory requirements. See "Regulation of
Kentucky Enterprise Bank - Qualified Thrift Lender Test." Further, under the
OTS's risk-based capital requirement, GNMA mortgage-backed securities have a
zero percent risk weighting, and FNMA, FHLMC and AA-rated private
mortgage-backed securities have a risk weight of 20%, in contrast to the 50%
risk weight carried by one- to four-family performing residential loans. See
"Regulation of Kentucky Enterprise Bank - Regulatory Capital Requirements."
Mortgage-backed securities may also be used as collateral for borrowings and
through repayments, as a source of liquidity. Further, since they are
primarily adjustable rate, Kentucky Enterprise's mortgage-backed securities are
helpful in limiting Kentucky Enterprise Bank's interest rate risk. Kentucky
Enterprise Bank's mortgage-backed securities purchases increased during fiscal
1993 in response to decreased loan originations and reduced demand for
adjustable rate mortgage loans as a result of declines in market interest
rates. In fiscal year 1994, mortgage-backed securities purchases decreased as
a result of management's decision to purchase primarily short-term investment
securities in the low interest rate environment which prevailed in the first
half of the fiscal year. In the second half of fiscal 1994, as interest rates
began to rise, management sought to purchase mortgage-backed securities that
had fixed rates as well as adjustable rate mortgage-backed securities to
increase asset yield without incurring excessive interest rate risk. In fiscal
year 1995, mortgage-backed securities purchases decreased further as a result
of asset allocation strategies which continued to emphasize the origination of
mortgage loans for retention in Kentucky Enterprise Bank's portfolio. The
mortgage-backed securities purchased in 1995 had fixed rates in order to
increase asset yields. Management has and will continue to actively monitor
loan originations, the interest rate environment, repayment activity, interest
rate risk and other factors in determining its strategy with respect to
mortgage-backed security purchases.
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<PAGE> 64
Set forth below is a table showing Kentucky Enterprise Bank's loan
origination and mortgage-backed securities purchase activity for the periods
indicated. For these periods, Kentucky Enterprise Bank purchased no loans and
sold no loans.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1995 1994 1993
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction loans . . . . . . . . . . . . . . . . . $ 8,337 $ 4,572 $ 4,752
One- to four-family . . . . . . . . . . . . . . . . . 31,643 29,448 17,840
Multi-family . . . . . . . . . . . . . . . . . . . . -- 1,000 140
Non-residential and other . . . . . . . . . . . . . . 123 644 25
Consumer loans . . . . . . . . . . . . . . . . . . . . 5,415 4,048 5,364
--------- --------- ---------
Total loans originated . . . . . . . . . . . . . . . $ 45,518 $ 39,712 $ 28,121
========= ========= =========
Mortgage-backed securities purchased . . . . . . . . . . $ 7,020 $ 18,466 $ 32,811
========= ========= =========
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. Kentucky
Enterprise Bank historically has been and continues to be an originator of
owner-occupied, one- to four-family residential properties located in northern
Kentucky. At June 30, 1995, approximately $138.2 million or 62.6% of Kentucky
Enterprise Bank's loan and mortgage-backed securities portfolios consisted of
loans secured by one- to four-family residential properties which were
primarily owner-occupied, single family residences.
Kentucky Enterprise began originating adjustable rate residential
mortgage loans in 1984 and currently offers one-year, three-year and five-year
adjustable rate mortgage loans with rate adjustments indexed to the weekly
average yield on U.S. Treasury securities adjusted to a constant comparable
maturity (the "Index") of one, three, or five years, plus a margin of 2.75%.
The interest rates on these mortgages are adjustable once a year, once every
three years, or once every five years with limitations on upward or downward
adjustments of two percentage points per adjustment period, and a lifetime cap
of six percentage points on upward rate adjustments, and two percentage points
on downward rate adjustments.
The retention of adjustable rate mortgage loans in Kentucky Enterprise
Bank's loan portfolio helps reduce Kentucky Enterprise Bank's exposure to
increases in interest rates. However, there are unquantifiable credit risks
resulting from potential increased costs to the borrower as a result of
repricing of adjustable rate mortgage loans. It is possible that during
periods of rising interest rates, the risk of default on adjustable rate
mortgage loans may increase due to the upward adjustment of interest costs to
the borrower. Further, the majority of the adjustable rate mortgages
originated by Kentucky Enterprise Bank generally provide for initial rates of
interest below the rates which would prevail were the index used for pricing
applied initially. At June 30, 1995, the one-year, three-year, and five-year
adjustable rate mortgage loans were offered at rates ranging from approximately
1 1/4% to 2 1/4% below the fully indexed rate. These loans are subject to
increased risk of delinquency or default as the higher, fully-indexed rates of
interest subsequently comes into effect, replacing the lower initial rate. It
is Kentucky Enterprise Bank's policy however, to qualify borrowers on all
one-year adjustable rate mortgage loans based on the Index plus the applicable
margin. Borrowers on three-year and five-year adjustable rate mortgage loans
are qualified based on the initial note rate. At June 30, 1995, Kentucky
Enterprise Bank's loan portfolio included $72.9 million in fixed rate, one- to
four-family residential mortgage loans or 33.0%, of Kentucky Enterprise Bank's
loan and mortgage-backed securities portfolios, and $65.3 million in adjustable
rate one- to four-family residential mortgage loans, or 29.6% of Kentucky
Enterprise Bank's loan and mortgage-backed securities portfolios.
Although adjustable rate mortgage loans allow Kentucky Enterprise Bank
to increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate ceiling contained in adjustable rate mortgage loan contracts.
Accordingly, there can be no assurance that
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<PAGE> 65
yields on Kentucky Enterprise Bank's adjustable rate mortgages will adjust
sufficiently to compensate for increases in Kentucky Enterprise Bank's cost of
funds. Kentucky Enterprise originated approximately $22.7 million in
adjustable rate mortgage loans for the year ended June 30, 1995. Adjustable
rate mortgage loans amounted to approximately $69.2 million, or 31.3% of the
loan and mortgage-backed securities portfolios at June 30, 1995.
Kentucky Enterprise, consistent with its asset/liability management
strategies, also originates 15 to 30 year fixed rate mortgage loans on one- to
four-family residential properties. Kentucky Enterprise Bank originated
approximately $17.4 million in fixed rate loans for the year ended June 30,
1995. Fixed rate loans amounted to approximately $74.9 million, or 34.0% of
the loan and mortgage-backed securities portfolio at June 30, 1995.
Approximately 26.8% of Kentucky Enterprise Bank's current fixed rate loan
originations have terms of 15 years. All fixed rate loans are underwritten
according to Kentucky Enterprise Bank's lending guidelines which generally
conform to FHLMC or FNMA guidelines. To date, all fixed rate loans originated
by Kentucky Enterprise Bank have been retained in portfolio, and management
currently has no plans to become involved in loan sales. In general, Kentucky
Enterprise originates residential mortgage loans with loan-to-value ratios of
up to 95% with private mortgage insurance required for loans with loan-to-value
ratios greater than 80%.
During fiscal year 1995, Kentucky Enterprise Bank offered fixed rate
loans to low to moderate income and first-time home buyers on behalf of the
Kentucky Housing Corporation, which also funded the loans, and for which
Kentucky Enterprise served as originating agent. Kentucky Enterprise Bank
received a fee of 1.50% for originating such loans. Kentucky Enterprise Bank
did not retain servicing on loans originated on behalf of the Kentucky Housing
Corporation. Subsequent to fiscal year end, Kentucky Enterprise Bank ceased
its participation in this program.
CONSUMER LENDING. The consumer loans originated by Kentucky
Enterprise Bank include home equity loans, automobile loans and loans secured
by savings deposits, which represented 2.6%, 0.3% and 0.9% of Kentucky
Enterprise Bank's total loan and mortgage-backed securities portfolios,
respectively, at June 30, 1995.
Automobile loans are secured by both new and used cars and are
generally limited to the lesser of 80% of the purchase price or the loan value
as published by the National Automobile Dealers Association. Automobile loans
are only made to the borrower-owner on a direct basis. New cars are financed
for a period of up to 60 months, while used cars are generally financed for 48
months or less. Insurance coverage is required on all automobile loans, with
Kentucky Enterprise listed as loss payee.
Kentucky Enterprise Bank makes savings account loans for up to 90% of
the depositor's savings account balance. The interest rate is normally three
percentage points above the rate paid on the savings account and the account
must be pledged as collateral to secure the loan. Savings account loans are
payable on demand. Interest is due on a monthly basis. At June 30, 1995,
loans on savings accounts totalled $2.0 million, or 0.9% of Kentucky Enterprise
Bank's total loan and mortgage-backed securities portfolios.
Kentucky Enterprise Bank's home equity loans are generally made on the
security of residential real estate, normally do not exceed 80% of the
appraised value of the property, less the outstanding principal of the first
mortgage, and have terms of up to seven years. Kentucky Enterprise Bank's home
equity loans require the monthly payment of 1.50% of the unpaid principal or a
minimum of $100, until maturity, when the remaining unpaid principal, if any,
is due. Kentucky Enterprise Bank's home equity loans bear variable rates of
interest indexed to the prime interest rate, plus a margin of one and one-half
percentage points. Interest rates on these loans can be adjusted monthly. At
June 30, 1995, total outstanding home equity loans amounted to $5.8 million, or
2.6% of Kentucky Enterprise Bank's total loan and mortgage-backed securities
portfolios.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or 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. The remaining
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<PAGE> 66
deficiency often does not warrant further substantial collection efforts
against the borrower. In addition, consumer loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which
can be recovered on such loans. Such loans may also give rise to claims and
defenses by a consumer loan borrower against an assignee of such loans such as
Kentucky Enterprise Bank, and a borrower may be able to assert against such
assignee claims and defenses which it has against the seller of the underlying
collateral.
In underwriting consumer loans, Kentucky Enterprise Bank places
primary emphasis on the borrower's credit history and an analysis of the
borrower's income and expenses, perceived ability to repay the loan and the
value of the collateral, if any. At June 30, 1995, none of Kentucky Enterprise
Bank's consumer loans were 90 days or more delinquent. Kentucky Enterprise
Bank's policy is generally to fully provide for losses in consumer loans not
secured by real property at such time as the loan becomes more than 90 days
delinquent.
CONSTRUCTION LENDING. Kentucky Enterprise engages in construction
lending to qualified borrowers for construction of primarily single-family
residential properties. These properties are limited to Kentucky Enterprise
Bank's market area. At June 30, 1995, total outstanding construction loans
amounted to $5.3 million or 2.4% of Kentucky Enterprise Bank's total loan and
mortgage-backed securities portfolios, all of which were for the construction
of single-family homes. Generally, loans for the construction of
owner-occupied, single-family residential properties are made on the same terms
as those of permanent loans and are structured to convert to permanent loans
upon completion of construction. Construction terms are limited to six months,
during which time the borrower is required to make monthly payments of accrued
interest on the outstanding loan balance. All construction loans are secured
by a first lien on the property under construction. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Kentucky Enterprise Bank reviews and inspects each project at the commencement
of the construction loan. Construction loans are underwritten on the basis of
the estimated value of the property as completed and loan-to-value ratios must
conform to the requirements for the permanent loan. Borrowers must satisfy all
credit requirements which would apply to Kentucky Enterprise Bank's permanent
mortgage loan financing for the subject property.
Though it is not actively involved in construction lending to
professional builders, Kentucky Enterprise Bank limits this type of lending to
a maximum of three loans to selected local developers to build single-family
dwellings where a permanent purchase commitment has been obtained. Generally,
Kentucky Enterprise Bank does not lend to contractors for speculative housing
construction.
Construction financing generally is considered to involve a higher
degree of risk of loss than long term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result
in delays and cost overruns. If the estimate of construction cost proves to be
inaccurate, Kentucky Enterprise Bank may be required to advance funds beyond
the amount originally committed to permit completion of the development. If
the estimate of the value proves to be inaccurate, Kentucky Enterprise Bank may
be confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment. Kentucky Enterprise Bank
has sought to minimize its risk in construction lending by offering such
financing primarily to persons who intend to occupy the completed structure, or
select local developers to whom Kentucky Enterprise Bank has loaned funds in
the past, and limiting construction lending to the northern Kentucky market
area, with which management is familiar. All construction loans in Kentucky
Enterprise Bank's loan portfolio were performing according to their terms at
June 30, 1995.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. Kentucky Enterprise
has not actively pursued multi-family (i.e. more than four units) or commercial
real estate lending. The multi-family and commercial real estate loans
originated by Kentucky Enterprise Bank have generally been made to small
businesses and have primarily been secured by apartments, retail stores, office
buildings, warehouses and other income- producing property. To a very
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<PAGE> 67
limited extent, and mainly as an accommodation to its customers, Kentucky
Enterprise Bank originates loans on churches located in the northern Kentucky
area. At June 30, 1995, loans secured by multi-family, commercial real estate
and church properties constituted approximately $1.9 million, $694,000 and
$899,000, or 0.9%, 0.3% and 0.4% of Kentucky Enterprise Bank's total loan and
mortgage-backed securities portfolios, respectively. The three largest loans
in this category at June 30, 1995, were a $962,000 participation loan
(representing a 19.6% interest) with six other Kentucky financial institutions
secured by 27 buildings containing 326 rental apartments in Jefferson County,
Kentucky, a $475,000 loan secured by a church located in Boone County, Kentucky
and a $194,000 loan secured by a church located in Campbell County, Kentucky.
All of these loans were current and performing at June 30, 1995.
Real estate loans in this category generally have terms of 25 years
and are typically made in amounts not exceeding 75% of the lesser of the
appraised value or purchase price of the property. All loans require regular
monthly payments of principal and interest. Adjustable rate loans are indexed
to the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year, three years or five years, plus a negotiated margin.
Multi-family and commercial real estate lending entails significant
additional risks as compared with residential property lending. These loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly affected by supply and demand conditions in the market for office
and retail space, and, as such, may be subject to a greater extent to adverse
conditions in the economy generally. To minimize these risks, Kentucky
Enterprise generally limits this type of lending to its market area and to
borrowers with which it has substantial experience or who are otherwise well
known to Kentucky Enterprise Bank. It is Kentucky Enterprise Bank's policy to
obtain personal guarantees and annual financial statements from all principals
obtaining multi-family and commercial real estate loans.
The aggregate amount of loans which a federally chartered savings
institution may make on the security of liens on non-residential real property
may not exceed 400% of the institution's capital. The limits on
non-residential real property lending do not require divestiture of any loan or
investment that was lawful when made. Under this standard, at June 30, 1995,
Kentucky Enterprise Bank was permitted to invest in non-residential real
property loans in an aggregate amount equal to $148.2 million. This
restriction has not had a material impact on Kentucky Enterprise's business.
LOAN UNDERWRITING POLICIES. Lending activities are subject to
Kentucky Enterprise Bank's written, non-discriminatory underwriting standards
and to loan origination procedures prescribed by Kentucky Enterprise Bank's
Board of Directors and management. Detailed loan applications are obtained to
determine the borrower's ability to repay, and the more significant items on
these applications are verified through the use of credit reports, financial
statements and confirmations. Property valuations are performed by independent
outside appraisers approved by Kentucky Enterprise Bank's Board of Directors.
All loans must be approved by a minimum of two members of a loan committee,
which consist of five loan officers. All loans exceeding $250,000 must be
approved by the Executive Loan Committee, which consists of members of the
Board of Directors who serve quarterly.
It is Kentucky Enterprise Bank's policy to record a lien on the real
estate securing the loan and to obtain a title opinion from Kentucky Enterprise
Bank's legal counsel which indicates whether or not the property is free of
prior liens or encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in the 100 year flood plain
as designated by the Department of Housing and Urban Development, paid flood
insurance policies. Borrowers whose loans have loan-to-value ratios exceeding
80% are required to advance funds on a monthly basis to a mortgage escrow
account from which Kentucky Enterprise Bank makes disbursements for items such
as real estate taxes, hazard insurance and private mortgage insurance.
Applications for real estate loans are underwritten in accordance with
Kentucky Enterprise Bank's own lending guidelines, which generally conform to
FHLMC and FNMA standards, although Kentucky Enterprise Bank does not use the
standard FHLMC or FNMA loan documents.
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<PAGE> 68
Kentucky Enterprise Bank makes one- to four-family residential,
owner-occupied mortgage loans with loan-to-value ratios of up to 95% if private
mortgage insurance is obtained on the portion of the principal amount in excess
of 80% of the appraised value or sale price, whichever is less. Kentucky
Enterprise Bank generally limits the loan-to-value ratios on one- to
four-family residential non owner-occupied mortgage loans and improved property
(including but not limited to multi-family, commercial real estate and
churches) mortgage loans to 75%. All loan-to-value ratios adopted by Kentucky
Enterprise Bank conform to regulations established by the federal banking
agencies, including the OTS.
Loan applicants are promptly notified in writing of Kentucky
Enterprise Bank's decision. If the loan is approved, the notification will
provide that Kentucky Enterprise Bank's commitment will terminate within 60
days of the loan application. Commitment periods may be extended for good
cause and upon written approval, but may be conditioned upon requalification by
the borrower. Commitments for periods longer than 60 days may be granted for a
fee of .25% of the loan amount for each additional 30-day period.
Under applicable law, with certain limited exceptions, loans and
extensions of credit by a savings association to a person outstanding at one
time shall not exceed 15% of the association's unimpaired capital and surplus.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of unimpaired capital and surplus. Applicable
law additionally authorizes savings institutions to make loans to one borrower,
for any purpose, in an amount not to exceed $500,000 or in an amount not to
exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to
develop residential housing, provided (1) the purchase price of each
single-family dwelling in the development does not exceed $500,000, (2) the
savings institution is and continues to be in compliance with its fully
phased-in regulatory capital requirements, (3) the loans comply with applicable
loan-to-value requirements, (4) the aggregate amount of loans made under this
authority does not exceed 150% of unimpaired capital and surplus, and (5) the
Director of the OTS, by order, permits the savings association to avail itself
of this higher limit. Under these limits, Kentucky Enterprise Bank's loans to
one borrower were limited to $5.6 million at June 30, 1995. At that date,
Kentucky Enterprise Bank had no lending relationships in excess of its
loans-to-one-borrower limit. Kentucky Enterprise Bank's five largest loans
ranged from $373,000 to $962,000. All of these loans were current as of June
30, 1995.
INTEREST RATES AND LOAN FEES. Interest rates charged by Kentucky
Enterprise Bank on mortgage loans are primarily determined by competitive loan
rates offered in its market area. Mortgage loan rates reflect factors such as
general interest rate levels, the supply of money available to the savings
industry and the demand for such loans. These factors are in turn affected by
general economic conditions, the monetary policies of the federal government,
including the Federal Reserve Board, the general supply for money in the
economy, tax policies and governmental budget matters.
In addition to the interest earned on loans, Kentucky Enterprise Bank
receives fees in connection with loan commitments and originations, loan
modifications, late payments and fees for miscellaneous services related to its
loans. Loan origination fees are calculated as a percentage of the loan
principal. Kentucky Enterprise Bank typically receives fees of up to 3.0
points (one point being equal to 1% of the principal amount of the loan) in
connection with the origination of fixed rate and adjustable rate residential
mortgages. All fee income is recognized by Kentucky Enterprise Bank in
accordance with guidelines established by Statement of Financial Accounting
Standards No. 91. See Note 1(e) of the Notes to Kentucky Enterprise's
Consolidated Financial Statements.
NON-PERFORMING LOANS AND ASSET CLASSIFICATION. It is Kentucky
Enterprise Bank's policy to continually monitor its loan portfolio to
anticipate and address potential and actual delinquencies. When a borrower
fails to make a payment on a loan, Kentucky Enterprise Bank takes immediate
steps to have the delinquency cured and the loan restored to current status.
Loans which are delinquent 15 days incur a late fee of 5% of the monthly
principal and interest payment due. As a matter of policy, Kentucky Enterprise
Bank will contact the borrower after the loan has been delinquent 15 days. If
payment is not promptly received, the borrower is contacted again, and efforts
are made to formulate an affirmative plan to cure the delinquency. If the loan
continues in a delinquent status for 90
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<PAGE> 69
days or more, Kentucky Enterprise Bank generally initiates legal proceedings
and/or charges off the loan. Loans are placed on a non-accrual status when, in
the opinion of management, the collection of additional interest is doubtful.
Real estate or property acquired by Kentucky Enterprise Bank as a
result of foreclosure is classified as real estate owned or property owned
until such time as it is sold. When such property is acquired, it is recorded
at the lower of the unpaid principal balance or its fair market value. Any
required write-down of the loan to its fair market value is charged to the
allowance for loan losses.
At June 30, 1995, loans 90 days or more past due totaled $265,000 of
which $249,000 represented one- to four-family residential mortgage loans.
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
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<PAGE> 70
The following table sets forth information with respect to Kentucky
Enterprise Bank's non-performing assets at the dates indicated. At the dates
shown, Kentucky Enterprise Bank had no restructured loans within the meaning of
SFAS No. 15.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
non-accrual basis: (1)
Real estate:
Residential . . . . . . . . . . . . . . . $ 249 $ 219 $ 348 $ 650 $ 824
Commercial . . . . . . . . . . . . . . . 16 52 -- -- 111
------ ------ ------- ------ -------
Total . . . . . . . . . . . . . . . . . $ 265 $ 271 $ 348 $ 650 $ 935
====== ====== ======= ====== =======
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential . . . . . . . . . . . . . . . $ -- $ 18 $ 16 $ 36 $ 84
Commercial . . . . . . . . . . . . . . . -- -- -- -- --
Consumer . . . . . . . . . . . . . . . . . -- 20 20 3 --
------ ------ ------- ------ -------
Total . . . . . . . . . . . . . . . . . $ -- $ 38 $ 36 $ 39 $ 84
====== ====== ======= ====== =======
Total of nonaccrual and 90 days
past due loans . . . . . . . . . . . . $ 265 $ 309 $ 384 $ 689 $ 1,019
====== ====== ======= ====== =======
Percentage of total loans . . . . . . . . . . 0.17% .24% .29% .48% .66%
====== ====== ======= ====== =======
Other real estate owned, net . . . . . . . . $ -- $ -- $ 53 $ 131 $ 171
====== ====== ======= ====== =======
____________________
<FN>
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely.
Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income,
depending on assessment of the collectibility of the loan.
</TABLE>
During the year ended June 30, 1995, gross interest income of $21,000
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the period. Interest on such loans included
in income during such period amounted to $8,000.
At June 30, 1995, there were no loans which were excluded from the
table above, where known information about possible credit problems of
borrowers caused management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
disclosure as non-accrual, 90 days past due or restructured. In addition,
Kentucky Enterprise Bank does not have any significant concentrations of real
estate loans or commitments in areas experiencing deteriorating economic
conditions.
Federal regulations require savings institutions to review their
assets on a regular basis and to classify them as "substandard," "doubtful" or
"loss," if warranted. Assets classified as substandard or doubtful require the
institution to establish general allowances for loan losses. If an asset or
portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount. An asset
which does not currently warrant classification but which possesses weaknesses
or deficiencies deserving close attention is required to be designated as
"special mention." Currently, general loss allowances established to cover
possible losses related to assets classified substandard or
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<PAGE> 71
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as
regulatory capital. OTS examiners may disagree with the insured institution's
classifications and amounts reserved. If an institution does not agree with an
examiner's classification of assets, it may appeal this determination to the
OTS.
Kentucky Enterprise Bank has determined that as of June 30, 1995, it
had $201,000 of assets classified as special mention, $222,000 of assets
classified as substandard, no assets classified as doubtful, and no assets
classified as loss.
ALLOWANCE FOR LOAN LOSSES. In originating loans, Kentucky Enterprise
Bank recognizes that credit losses will be experienced and that the risk of
loss will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loans. It is management's policy to maintain an adequate allowance for
loan losses based on, among other things, Kentucky Enterprise Bank's and the
industry's historical loan loss experience, evaluation of economic conditions
and regular reviews of delinquencies and loan portfolio quality.
Kentucky Enterprise Bank's methodology for establishing the allowance
for loan losses takes into consideration probable losses that have been
identified in connection with specific loans as well as losses in the loan
portfolio that have not been identified but may be expected to occur.
Management conducts monthly reviews of the loan portfolio and evaluates the
need to establish allowances on the basis of this review. As part of its
review, management grades loans for which collection in full may not be
reasonably assured using a classification system similar to that employed by
OTS examiners. Loans subject to grading include delinquent loans and any loans
that have been placed on a watch list. Specific allowances are provided for
individual loans when ultimate collection of the loan is considered
questionable by management based on the current payment status of the loan and
the fair value or the net realizable value of the security for the loan. At
the date of foreclosure or at the date Kentucky Enterprise Bank determines a
property is an "in-substance foreclosed" property, Kentucky Enterprise Bank
transfers the property to real estate acquired through foreclosure at the lower
of cost or fair value. Any portion of the outstanding loan balance in excess
of fair value is charged off against the allowance for losses on loans.
Kentucky Enterprise Bank does occasionally record partial charge offs on
individual loans. If, upon ultimate disposition of the property, net sales
proceeds exceed the net carrying value of the property, a gain on sale of real
estate is recorded. Any losses realized on sale are charged to the allowance
for losses on real estate acquired through foreclosure.
General allowances are established by management on at least a monthly
basis based on an assessment of risk in Kentucky Enterprise Bank's loan
portfolio as a whole, taking into consideration the composition and quality of
the portfolio, delinquency trends, current charge-off and loss experience,
real estate market conditions and economic conditions generally. Additional
provisions for losses on loans are made in order to bring the allowance to a
level deemed adequate.
Management continues to actively monitor Kentucky Enterprise Bank's
asset quality and to charge off loans against the allowance for loan losses
when appropriate or to provide specific loss reserves when necessary. Although
management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions differ substantially from
the economic conditions in the assumptions used in making the initial
determinations.
While Kentucky Enterprise Bank believes it has established its
existing allowances for loan losses in accordance with generally accepted
accounting principles, there can be no assurance that regulators, in reviewing
Kentucky Enterprise Bank's loan portfolio, will not request Kentucky Enterprise
Bank to significantly increase its allowance for loan losses, thereby
negatively affecting Kentucky Enterprise Bank's financial condition and
earnings.
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<PAGE> 72
The following table sets forth an analysis of Kentucky Enterprise
Bank's allowance for loan losses for the periods indicated. There were no
recoveries on the loans charged off during the periods.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period . . . . . . . $ 454,818 $ 393,318 $ 133,318 $ 38,500 $ 75,000
--------- --------- ---------- --------- ---------
Loans charged off:
Real estate -- mortgage:
Residential . . . . . . . . . . . . . . . -- 4,500 -- -- 43,000
Commercial . . . . . . . . . . . . . . . -- -- -- 18,500 7,000
--------- --------- ---------- --------- ---------
Total charge-offs . . . . . . . . . . . . . . -- 4,500 -- 18,500 50,000
--------- --------- ---------- --------- ---------
Provision for loan losses . . . . . . . . . . 35,000 66,000 260,000 113,318 13,500
--------- --------- ---------- --------- ---------
Balance at end of period . . . . . . . . . . $ 489,818 $ 454,818 $ 393,318 $ 133,318 $ 38,500
========= ========= ========== ========= =========
Ratio of net charge-offs to average
loans outstanding during the period . . . . -- % * -- % .01% .03%
========= ========= ========== ========= =========
____________________
<FN>
(*) Not meaningful.
</TABLE>
For a discussion of Kentucky Enterprise Bank's provision for loan
losses during fiscal year 1995, see "KENTUCKY ENTERPRISE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994."
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
-52-
<PAGE> 73
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
Percent Percent Percent
of Loans of Loans of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential . . . . . . . . . $406,000 89.45% $ 380,000 89.11% $ 321,000 89.66%
Commercial . . . . . . . . . 50,000 1.64 30,000 1.59 28,500 2.08
Real estate - construction . . -- 3.43 -- 3.33 -- 2.05
Consumer . . . . . . . . . . . 33,818 5.48 44,818 5.97 43,818 6.21
-------- ------- --------- ------ --------- ------
Total allowance for
loan losses . . . . . . $489,818 100.00% $ 454,818 100.00% $ 393,318 100.00%
======== ====== ========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1992 1991
----------------------- -----------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
------ ----------- -------- -----------
<S> <C> <C> <C> <C>
Real estate - mortgage:
Residential . . . . . . . . . $ 89,200 89.03% $ 20,000 92.04%
Commercial . . . . . . . . . 28,500 1.88 18,500 2.09
Real estate - construction . . -- 3.12 -- 1.15
Consumer . . . . . . . . . . . 15,618 5.97 -- 4.72
-------- ------ ---------- ------
Total allowance for
loan losses . . . . . . $133,318 100.00% $ 38,500 100.00%
======== ====== ========= ======
</TABLE>
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<PAGE> 74
INVESTMENT ACTIVITIES
Kentucky Enterprise maintains a securities portfolio as a result of
the net proceeds it retained from Kentucky Enterprise Bank's stock conversion.
Currently, Kentucky Enterprise's securities portfolio consists of cash, federal
funds sold and U.S. government issues with stated maturities of five years or
less. The portfolio is invested primarily in U.S. government securities in
order for Kentucky Enterprise to qualify to exempt individual shareholders of
Kentucky Enterprise's common stock from ad valorem taxation by the State of
Kentucky.
The securities portfolio of Kentucky Enterprise, which is available
for all corporate purposes, is classified in accordance with Financial
Accounting Standards Board Statement (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Kentucky Enterprise Bank is permitted under federal and state law to
make certain investments, including investments in securities issued by various
federal agencies and state and municipal governments, deposits at the Federal
Home Loan Bank ("FHLB") of Cincinnati, certificates of deposit in federally
insured institutions, certain bankers' acceptances and federal funds. It may
also invest, subject to certain limitations, in commercial paper having one of
the two highest investment ratings of a nationally recognized credit rating
agency, and certain other types of corporate debt securities and mutual funds.
Federal regulations require Kentucky Enterprise Bank to maintain an
investment in FHLB stock and a minimum amount of liquid assets which may be
invested in cash and specified securities. From time to time, the OTS adjusts
the percentage of liquid assets which savings and loan associations are
required to maintain.
Kentucky Enterprise Bank purchases securities pursuant to guidelines
established by and under the supervision of Kentucky Enterprise Bank's
Investment Committee pursuant to OTS Thrift Bulletin 52. The stated objective
of the investment guidelines is to obtain the highest possible yield while
maintaining safety of principal and liquidity. To this end, the guidelines
give priority to the preservation of assets while maintaining flexibility
through diversification of investments. Kentucky Enterprise Bank's liquidity
portfolio may consist of certain securities with maturity limits ranging up to
five years, including investments in U.S. government and federal agency
obligations, municipal obligations, commercial paper, mutual funds, federal
funds, and certificates of deposit. Kentucky Enterprise Bank's investment
policy limits investments in commercial paper to securities in one of the four
highest categories. Currently, Kentucky Enterprise Bank's portfolio consists of
cash, federal funds sold, U.S. government issues, federal agency issues, FHLB
of Cincinnati overnight funds and FHLB stock. Kentucky Enterprise Bank's
securities portfolio has decreased as funds from maturing securities have been
used to fund increased mortgage lending and deposit withdrawals. Kentucky
Enterprise Bank purchased securities with longer terms in fiscal year 1995 in
order to obtain higher yields. The securities purchased have maturities
ranging from two years and five months to four years and one month at June 30,
1995. Although recent purchases have been for longer terms, at June 30, 1995,
the weighted average maturity of Kentucky Enterprise Bank's securities
portfolio was approximately one year.
Recent purchases of securities by Kentucky Enterprise Bank, par amount
of $5,000,000, have been classified in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" as available
for sale and are carried at fair value. The remainder of Kentucky Enterprise
Bank's securities is classified as held to maturity and is carried at amortized
cost.
Kentucky Enterprise Bank is required to maintain average daily
balances of liquid assets (cash, deposits maintained pursuant to Federal
Reserve Board requirements, time and savings deposits in certain institutions,
obligations of state and political subdivisions thereof, shares in mutual funds
with certain restricted investment policies, highly rated corporate debt, and
mortgage loans and mortgage-backed securities with less than one year to
maturity or subject to repurchase within one year) equal to a monthly average
of not less than a specified percentage (currently 5%) of its net withdrawable
savings deposits plus short-term borrowings. Savings associations are also
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<PAGE> 75
required to maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of their net withdrawable
savings accounts and borrowings payable in one year or less. Monetary
penalties may be imposed for failure to meet liquidity requirements. The
average liquidity and short-term liquidity ratios of Kentucky Enterprise Bank
for the month of June 1995 were 19.6% and 16.2%, respectively. Kentucky
Enterprise Bank's relatively high liquidity ratios are a result of management's
asset/liability management strategies. See "KENTUCKY ENTERPRISE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Asset/Liability Management."
The following table sets forth the carrying value of Kentucky
Enterprise's securities portfolio and other liquid assets at the dates
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------
1995 1994 1993
------ ------ ------
(In thousands)
<S> <C> <C> <C>
U.S. government and agency securities . . . . . . . . . . $ 44,054 $ 61,451 $ 38,854
Federal funds sold . . . . . . . . . . . . . . . . . . . 2,000 7,000 4,000
Interest-earning deposits and certificates of deposit . . 3,831 2,770 5,027
FHLB stock . . . . . . . . . . . . . . . . . . . . . . . 3,542 3,324 3,167
--------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 53,427 $ 74,545 $ 51,048
========= ========= =========
</TABLE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for Kentucky Enterprise's securities
portfolio and other liquid assets at June 30, 1995 excluding FHLB stock.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Total Investment Portfolio
------------------ ------------------- --------------------------------
Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Value Yield
------- ------- ------- ------- ------- ----- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities:
Available for sale . . $ 1,493 5.19% $ 15,034 6.43% $16,527 $16,527 6.31%
Held to maturity . . . 26,027 4.09 1,500 7.02 27,527 27,396 4.25
Federal funds sold . . . 2,000 5.75 -- -- 2,000 2,000 5.75
Interest-earning deposits
and certificates of
deposit . . . . . . . . 3,831 5.65 -- -- 3,831 3,831 5.65
------- -------- ------- -------
Total . . . . . . . $33,351 4.42 $ 16,534 6.48 $49,885 $49,754 5.10
======= ======== ======= =======
</TABLE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Kentucky Enterprise
Bank's funds for lending, investment activities and general operations. In
addition to deposits, Kentucky Enterprise derives funds from loan principal and
interest repayments, maturities of investment securities and interest payments
thereon. Although loan repayments are a relatively stable source of funds,
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds, or on a longer
term basis for general operational purposes.
-55-
<PAGE> 76
DEPOSITS. Kentucky Enterprise Bank attracts deposits principally from
within its primary market area by offering a variety of deposit instruments,
including checking accounts, money market accounts, regular savings accounts,
retirement savings plans, and certificates of deposit which range in maturity
from seven days to five years.
Kentucky Enterprise Bank competes for deposits with other institutions
in its market areas by offering deposit instruments that are competitively
priced and by providing customer service through convenient and attractive
offices, knowledgeable and efficient staff and hours of service that meet
customers' needs. Deposit terms vary according to the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Maturities, terms, service fees and withdrawal penalties for deposit
accounts are established by Kentucky Enterprise Bank on a periodic basis.
Kentucky Enterprise generally reviews its deposit mix and pricing on a weekly
basis, and has the ability to change rates daily. In determining the
characteristics of its deposit accounts, Kentucky Enterprise considers the
rates offered by competing institutions, funds acquisition and liquidity
requirements, growth goals, and federal regulations. Kentucky Enterprise Bank
does not accept brokered deposits and does not bid for public unit accounts.
Kentucky Enterprise Bank has in the past used premium programs to
attract long term deposits. Management currently has no plans to offer such
programs in the near future.
Kentucky Enterprise has a substantial IRA deposit base of $45.0
million, or 19.8% of total deposits, at June 30, 1995. Management attributes
Kentucky Enterprise's success in attracting IRA deposits to Kentucky Enterprise
Bank's reputation and to the popularity of this type of deposit product in
Kentucky Enterprise Bank's market areas. Kentucky Enterprise Bank does not
seek to attract IRA deposits by rate. Management believes that IRA deposits
provide a valuable source of relatively stable long term funds which are
helpful in Kentucky Enterprise Bank's asset/liability management.
Savings deposits in Kentucky Enterprise Bank at June 30, 1995 were
represented by the various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Percentage of
Rate (1) Term Category Amount Balances Total Savings
- -------- ------- -------- ------ -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
--% None Demand Accounts $ 50 $ 60 0.03%
-- None Christmas Club accounts 5 318 0.14
2.50 None Passbook savings accounts 50 35,883 15.79
2.25 None NOW accounts 50 21,857 9.62
2.50 None Variable Rate Money Market Accounts 1,000 15,950 7.02
Certificates of Deposit
-----------------------
3.27 3 months Fixed Term, Fixed Rate 500 1,116 0.49
or less
5.11 3-6 months Fixed Term, Fixed Rate 500 10,175 4.48
5.70 6-12 months Fixed Term, Fixed Rate 500 23,160 10.19
5.42 6-12 months Fixed Term, Variable Rate 500 716 0.32
5.69 1-2 years Fixed Term, Fixed Rate 500 43,295 19.05
4.72 1-2 years IRA Fixed Term, Fixed Rate 500 9,062 3.99
6.13 1-2 years IRA Fixed Term, Variable Rate 500 22,559 9.92
5.07 2-3 years Fixed Term, Fixed Rate 500 11,607 5.10
6.27 3-5 years Fixed Term, Fixed Rate 500 14,107 6.20
5.60 3-5 years IRA Fixed Term, Fixed Rate 500 13,380 5.89
7.15 Over 5 years Fixed Term, Fixed Rate 500 3,694 1.63
----------- --------
152,871 67.26
Accrued Interest on Deposits 329 0.14
----------- --------
$ 227,268 100.00%
=========== ======
____________________
<FN>
(1) Represents weighted average interest rate.
</TABLE>
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<PAGE> 77
The following tables set forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- -----------------------
Interest- Interest- Interest-
Bearing Bearing Bearing
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance . . . . . $77,925 $151,151 $88,845 $153,949 $88,466 $166,570
Average rate . . . . . . 2.33% 5.24% 2.57% 4.73% 2.91% 5.23%
</TABLE>
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
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<PAGE> 78
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by Kentucky Enterprise Bank between
the dates indicated.
<TABLE>
<CAPTION>
Balance at Balance at Balance at
June 30, % of June 30, % of Increase June 30, % of Increase
1993 Deposits 1994 Deposits (Decrease) 1995 Deposits (Decrease)
-------- -------- -------- -------- ---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts:
Demand accounts . . . . . . . . . $ 33 0.01% $ 44 .02% $ 11 $ 60 0.03% $16
Christmas club accounts . . . . . 394 0.16 335 .14 (59) 318 0.14 (17)
Interest bearing accounts:
Passbook savings . . . . . . . . 43,383 17.45 42,644 18.24 (739) 35,883 15.79 (6,761)
NOW accounts . . . . . . . . . . 20,492 8.24 22,854 9.79 2,362 21,857 9.62 (997)
Variable rate money market
accounts . . . . . . . . . . . 23,365 9.41 19,621 8.39 (3,744) 15,950 7.02 (3,671)
-------- ------- -------- ------ -------- -------- ------- -------
87,667 35.27 85,498 36.58 (2,169) 74,068 32.60 (11,430)
Certificates of Deposit:
Three months or less . . . . . . 1,540 0.62 1,587 .68 47 1,116 0.49 (471)
Over three months to six months . 19,162 7.71 14,488 6.20 (4,674) 10,175 4.48 (4,313)
Over six months to one year . . . 27,389 11.02 23,880 10.21 (3,509) 23,876 10.51 (4)
Over one year to two years . . . 24,971 10.05 29,733 12.72 4,762 43,295 19.05 13,562
Over one year to two years - IRA 30,474 12.26 26,531 11.35 (3,943) 31,621 13.91 5,090
Over two years to three years . . 17,195 6.92 14,979 6.41 (2,216) 11,607 5.10 (3,372)
Over three to five years . . . . 13,785 5.54 14,605 6.25 820 14,107 6.20 (498)
Over three to five years - IRA . 20,451 8.23 18,361 7.85 (2,090) 13,380 5.89 (4,981)
Over five years . . . . . . . . . 5,660 2.27 3,898 1.67 (1,762) 3,694 1.63 (204)
-------- ------- -------- ------ -------- -------- ------ -------
160,627 64.62 148,062 63.34 (12,565) 152,871 67.26 4,809
Accrued interest on deposits . . . 262 0.11 195 .08 (67) 329 0.14 134
-------- ------- -------- ------ -------- -------- ------ -------
Total deposits . . . . . . . . $248,556 100.00% $233,755 100.00% $(14,801) $227,268 100.00% $(6,487)
======== ====== ======== ====== ======== ======== ====== =======
</TABLE>
For information regarding deposit outflows during fiscal year 1995,
see "KENTUCKY ENTERPRISE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Financial Condition".
-58-
<PAGE> 79
The following table sets forth the time deposits in Kentucky
Enterprise Bank classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1995 1994 1993
------ ------ ------
(In thousands)
<S> <C> <C> <C>
2 - 3.99% . . . . . . . . . . $ 8,592 $ 43,658 $ 45,413
4 - 5.99% . . . . . . . . . . 70,567 87,053 78,967
6 - 7.99% . . . . . . . . . . 70,945 10,604 21,703
8 - 9.99% . . . . . . . . . . 2,767 6,747 14,544
------------ ------------ -----------
$ 152,871 $ 148,062 $ 160,627
============ ============ ===========
</TABLE>
The following table sets forth the amount and remaining maturities of
time deposits in specified weighted average interest rate categories at June
30, 1995.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
---- -------- --------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
2 - 3.99% . . . . . . $ 8,592 $ -- $ -- $ -- $ 8,592
4 - 5.99% . . . . . . 54,234 9,437 4,068 2,828 70,567
6 - 7.99% . . . . . . 40,226 19,433 7,609 3,677 70,945
8 - 9.99% . . . . . . 1,759 209 28 771 2,767
--------- ---------- ----------- --------- ----------
$ 104,811 $ 29,079 $ 11,705 $ 7,276 $ 152,871
=========== ========== =========== ========= ==========
</TABLE>
The following table indicates the amount of Kentucky Enterprise Bank's
certificates of deposit of $100,000 or more by time remaining until maturity as
of June 30, 1995.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- --------------
(In thousands)
<S> <C>
Three months or less . . . . . . . . . . . . . . . . $ 130
Three through six months . . . . . . . . . . . . . . 1,059
Six through 12 months . . . . . . . . . . . . . . . 567
Over 12 months . . . . . . . . . . . . . . . . . . . 876
-------------
Total . . . . . . . . . . . . . . . . . . . $ 2,632
=============
</TABLE>
The following table shows activity in deposit accounts for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1995 1994 1993
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,883 $ 383,907 $ 273,889
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . 312,519 406,505 296,547
---------- --------- ----------
Net decrease before interest credited . . . . . . . . . . (14,636) (22,598) (22,658)
Interest credited . . . . . . . . . . . . . . . . . . . . . 8,149 7,797 9,450
---------- --------- ----------
$ (6,487) $ (14,801) $ (13,208)
========== ========= ==========
</TABLE>
-59-
<PAGE> 80
BORROWINGS. Kentucky Enterprise has not generally utilized borrowings
as a source of funds due to its high liquidity, except for Kentucky Enterprise
Bank's participation in the FHLB of Cincinnati's Affordable Housing Program.
Advances from the FHLB of Cincinnati are available, however, to supplement
Kentucky Enterprise Bank's supply of lendable funds and to meet deposit
withdrawal requirements. Kentucky Enterprise Bank currently has an outstanding
commitment for a Cash Management Advance in the amount of $13.0 million from
the FHLB of Cincinnati which expires February 3, 1996. To date, no funds have
been borrowed against the commitment which was obtained at no cost as a funding
source in the event of unanticipated cash needs. The FHLB of Cincinnati acts
as a central reserve bank providing credit for the savings associations within
its jurisdiction and certain other member financial institutions. As a member,
Kentucky Enterprise is required to own capital stock in the FHLB and is
authorized to apply for advances secured by such stock and by certain of
Kentucky Enterprise Bank's home mortgages and other assets (principally
securities which are obligations of, or guaranteed by, the United States).
Advances are made pursuant to several different programs, each of which has its
own interest rate and range of maturity.
At June 30, 1995, Kentucky Enterprise Bank had a $324,000 advance
outstanding from the FHLB. This advance was made pursuant to the FHLB of
Cincinnati's Affordable Housing Program, which is designed to assist lenders in
creating affordable housing for low and moderate income households within the
institutions' local communities. The advance matures in 2006 and bears a
current interest rate of 7.5%.
PROPERTIES
The following table presents property owned and leased by Kentucky
Enterprise Bank. Kentucky Enterprise Bank owns all of its offices except as
indicated.
<TABLE>
<CAPTION>
Net Book Value
Year as of Approximate
Opened June 30, 1995 (1) Square Feet
------ ----------------- -----------
<S> <C> <C> <C>
MAIN OFFICE:
800 Monmouth Street
Newport, Kentucky 41071 1922 $ 321,394 32,600
BRANCH OFFICES:
Highland Heights Branch
2801 Alexandria Pike
Highland Heights, Kentucky 41076 1958 $ 187,638 4,700
Alexandria Branch
7953 Alexandria Pike
Alexandria, Kentucky 41001 1961 $ 591,808 3,600
Hebron Branch
3007 Limaburg Road
Hebron, Kentucky 41018 1975 $ 139,248 2,400
Fort Thomas Branch (2)
50 N. Ft. Thomas Avenue
Ft. Thomas, Kentucky 41075 1977 $ 173,549 4,000
Newport Branch
916 Monmouth Street
Newport, Kentucky 41071 1957 $ 88,807 9,100
</TABLE>
-60-
<PAGE> 81
<TABLE>
<S> <C> <C> <C>
Ft. Thomas Branch
Highland & Newman Avenue
Ft. Thomas, Kentucky 41075 1964 $ 76,974 5,300
Newport Branch
735 Monmouth Street
Newport, Kentucky 41071 1943 $ 42,643 6,600
Falmouth Branch
412 U.S. 27
Falmouth, Kentucky 41040 1980 $ 187,681 2,300
Crescent Springs Branch
626 Buttermilk Pike
Crescent Springs, Kentucky 41017 1974 $ 129,386 6,800
Elsmere Branch
4501 Dixie Highway
Elsmere, Kentucky 41018 1960 $ 120,363 3,700
____________________
<FN>
(1) Represents the net book value of land, building, furniture, fixtures
and equipment owned by Kentucky Enterprise Bank.
(2) The location at 50 N. Ft. Thomas Avenue, Ft. Thomas, Kentucky is
built upon ground which is leased from Ft. Thomas Enterprises, Inc.
Kentucky Enterprise built and owns the building on the leased ground.
The initial date of the lease was January 1, 1977 and the initial
expiration date was December 31, 1986. The lease grants Kentucky
Enterprise the option to extend the lease for nine (9) ten (10) year
renewal periods. This renewal is automatic unless 90 days notice is
given of Kentucky Enterprise Bank's intention to cancel the lease.
The annual rental is $6,600 per year payable monthly.
</TABLE>
Kentucky Enterprise also owns four parcels of real estate with
single-family residences adjacent to two of its branch offices. Kentucky
Enterprise Bank collects an aggregate of $20,800 in annual lease payments on
these properties. Management has no plans regarding the future disposition or
use of any of these properties.
LEGAL PROCEEDINGS
From time to time, Kentucky Enterprise Bank is a party to various
legal proceedings incident to its business. There are no material legal
proceedings to which Kentucky Enterprise, Kentucky Enterprise Bank or its
subsidiaries is currently a party or to which any of their property is subject.
REGULATION
Kentucky Enterprise Bank, as a federally chartered stock savings
association, is a member of the FHLB System and its deposits are insured by
SAIF, which is administered by the FDIC. Kentucky Enterprise Bank is subject
to extensive regulation by the OTS. Examinations of Kentucky Enterprise Bank
are conducted by the OTS which has, in conjunction with the FDIC in certain
situations, enforcement powers. In addition, federal savings associations must
file reports with various governmental agencies, and may not enter into certain
transactions unless certain regulatory tests are met or governmental approval
is obtained. This supervision and regulation is intended primarily for the
protection of depositors and federal deposit insurance funds. Kentucky
Enterprise Bank is also subject to certain reserve requirements under
regulations of the Federal Reserve Board.
OTS regulations establish a schedule for the assessment of fees upon
all savings associations to fund the operations of the OTS. The regulation
also contains a schedule establishing fees for the various types of
applications and filings made by savings associations with the OTS. The
general assessment, to be paid on a semi-annual basis, is based upon the
savings association's total assets, including consolidated subsidiaries, as
reported in a recent
-61-
<PAGE> 82
quarterly thrift financial report. Effective January 1, 1993, the assessment
rate ranged from .0172761% of assets for associations with $67 million in
assets or less to .0045864% for associations with assets in excess of $35
billion.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") became effective December 19, 1991. Among other things, FDICIA
requires that on-site examinations of Kentucky Enterprise Bank by the OTS occur
at least once every 18 months (unless the FDIC has conducted a full-scope
examination during the period in question) and, after 1993, under certain
limited circumstances, once every 12 months. FDICIA also authorizes the FDIC
to assess insured institutions for the cost of FDIC examinations and requires
the OTS to assess federal associations for the costs of its examinations.
FDICIA also requires the OTS and the other federal banking regulators
to prescribe new standards relating to (a) internal controls, information
systems and internal audit systems; (b) loan documentation; (c) credit
underwriting; (d) asset growth; (e) interest rate exposure; and (f)
compensation, fees and benefits. The compensation standards must prohibit as
an unsafe and unsound practice any employment contract, compensation or benefit
agreement, fee arrangement, perquisite, stock option plan, post-employment
benefit or other compensatory arrangement that would provide any executive
officer, employee, director or principal shareholder with excessive
compensation, fees or benefits or that could lead to material financial loss to
the institution, although such standards generally do not apply to well
capitalized institutions. The OTS is also charged by FDICIA with prescribing
standards for federally insured savings associations and their holding
companies specifying (a) a maximum ratio of classified assets to capital; (b)
minimum earnings sufficient to absorb losses without impairing capital; and (c)
to the extent feasible, a minimum ratio of market value to book value for
publicly traded shares of the association or its holding company. Such
standards went into effect in December, 1993. The OTS, along with the other
banking agencies with respect to similar standards they must establish, have
sought comments from the industry on the substance of such standards. The
impact of these standards on the operations of Kentucky Enterprise and Kentucky
Enterprise Bank cannot be ascertained until the final standards are issued. In
addition, legislation was recently adopted which limited compensation standards
to situations involving safety or soundness concerns or enforcement
proceedings.
FDICIA also required the OTS and other federal banking agencies to
develop jointly a method for insured depository institutions to provide
supplemental disclosure of the estimated fair market value of assets and
liabilities, to the extent feasible and practicable, in financial statements or
reports required to be filed with the federal banking agencies.
FDICIA also included the Truth in Savings Act, which requires the
Federal Reserve Board to establish regulations providing for clear and uniform
disclosure of the rates, fees and terms of deposit accounts. The Federal
Reserve Board has adopted regulations, which became effective June 21, 1993,
requiring a specific disclosure before an account is opened, in regularly
provided statements and in advertisements, announcements and solicitations
initiated by a depository institution. The regulations prescribe detailed
disclosure of deposit account yield information, minimum balance requirements
and fee impact on the yield. The regulations also establish certain
recordkeeping requirements.
In addition, 18 months following the enactment of FDICIA, the OTS and
other federal banking agencies were required to revise their risk-based capital
standards to take adequate account of interest-rate risk, concentration of
credit risk, and the risks of nontraditional activities and to reflect the
actual performance and expected risk of multifamily mortgages.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Holders of Kentucky Enterprise Common Stock are entitled to vote at the
Annual Meeting. Shareholders of record as of the close of business on December
22, 1995 are entitled to one vote for each share of Kentucky Enterprise Common
Stock then held. As of the Record Date, there were approximately 2,801,024
shares of Kentucky Enterprise Common Stock issued and outstanding.
-62-
<PAGE> 83
Persons and groups owning in excess of 5% of Kentucky Enterprise
Common Stock are required to file certain reports regarding such ownership
pursuant to the Securities Exchange Act of 1934, as amended, with Kentucky
Enterprise and the Commission. Based on such reports (and certain other
written information received by Kentucky Enterprise), management knows of no
persons other than those set forth below who owned more than five percent (5%)
of the outstanding shares of Kentucky Enterprise Common Stock as of September
15, 1995. The following table sets forth, as of September 30, 1995, certain
information as to those persons who were the beneficial owners of more than
five percent (5%) of the outstanding shares of Kentucky Enterprise Common
Stock, each of the executive officers named on the compensation table presented
below under Executive Compensation and as to the shares of Kentucky Enterprise
Common Stock beneficially owned by all executive officers and directors of
Kentucky Enterprise as a group.
<TABLE>
<CAPTION>
Name Shares of Common Percent of
---- Stock Beneficially Owned Class(2)
at September 15, 1995(1) --------
-----------------------
<S> <C> <C>
James T. White 163,697 5.43%
Michael P. Ballinger 53,413 1.77
Jerry J. Egan 54,240 1.80
David W. Taeuber 38,639 1.28
Kentucky Enterprise Bancorp, Inc. 211,600 7.02
Employee Stock Ownership Plan
All directors and executive officers 601,394 19.94
of Kentucky Enterprise as a group (12
persons)(1)
____________________
<FN>
(1) Includes stock held in joint tenancy; stock owned as tenants in
common; stock owned or held by a spouse or other member of the
individual's household; stock allocated through an employee benefit
plan of Kentucky Enterprise; stock in which the individual either has
or shares voting and/or investment power; and stock subject to options
exercisable within 60 days. Each person or relative of such person
whose shares are included herein exercises sole (or shared with the
spouse or other relative) voting and dispositive power as to the
shares reported. Does not include shares with respect to which
directors Egan, Fennell and Graves may have "voting power" by virtue
of their positions as trustees of the trust holding 211,600 shares
under Kentucky Enterprise's Employee Stock Ownership Plan (the
"ESOP"). The ESOP trustees must vote all allocated shares held in the
ESOP in accordance with the instructions of the participants.
Unallocated shares and allocated shares for which no timely direction
is received are voted by the ESOP trustees in proportion to the
participant-directed voting of allocated shares. Does not include
156,625 shares beneficially owned by five directors of Kentucky
Enterprise Bank who do not serve as directors of Kentucky Enterprise.
(2) In calculating the percentage of shares outstanding, the number of
shares outstanding includes any shares of Kentucky Enterprise Common
Stock which the person has the right to acquire within 60 days of
September 15, 1995.
</TABLE>
STOCK PERFORMANCE GRAPH
The graph and table which follow show the cumulative total return on
Kentucky Enterprise Common Stock since the date of the completion of Kentucky
Enterprise's initial public offering, December 16, 1993, compared with the
cumulative total return of the NASDAQ National Market Index for U.S. companies
and the NASDAQ Bank
-63-
<PAGE> 84
Index over the same period. Cumulative total return on the stock or the index
equals the total increase in value since December 16, 1993 assuming
reinvestment of all dividends paid into the stock or the index, respectively.
The graph and table were prepared assuming that $100 was invested on December
16, 1993 in Kentucky Enterprise Common Stock and in the indexes.
CUMULATIVE TOTAL SHAREHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDEXES
December 16, 1993 through June 30, 1995
Cumulative Total Return
<TABLE>
<CAPTION>
11/93 6/94 6/95
----- ---- ----
<S> <C> <C> <C>
Kentucky Enterprise 100% 136% 127%
NASDAQ Stock Market - U.S. 100 94 125
NASDAQ Bank 100 111 125
</TABLE>
ADDITIONAL INFORMATION
See "AVAILABLE INFORMATION", "KENTUCKY ENTERPRISE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
"INDEX TO KENTUCKY ENTERPRISE FINANCIAL STATEMENTS."
-64-
<PAGE> 85
KENTUCKY ENTERPRISE MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Kentucky Enterprise was formed in August 1993 at the direction of
Kentucky Enterprise Bank for the purpose of becoming a unitary savings and loan
holding company for Kentucky Enterprise Bank as part of Kentucky Enterprise
Bank's stock conversion. The principal business of Kentucky Enterprise Bank,
and therefore Kentucky Enterprise, consists of accepting deposits from the
general public through its branches and investing these funds in loans secured
by single-family residential properties located in Kentucky Enterprise Bank's
primary market area. Kentucky Enterprise Bank also maintains a substantial
portfolio of investment securities and mortgage-backed securities and
originates a limited amount of consumer loans. Although Kentucky Enterprise
Bank has originated a limited amount of commercial real estate loans in the
past, it is not currently actively seeking to originate such loans.
Kentucky Enterprise Bank's net income is dependent primarily on its
net interest income, which is the difference between interest income earned on
its loan and securities portfolio and interest paid on interest-bearing
liabilities. To a lesser extent, Kentucky Enterprise Bank's net income is also
affected by the level of noninterest income, such as service charges, other
fees and dividends on Federal Home Loan Bank stock. In addition, net income is
affected by the level of operating expenses and the establishment of loan loss
reserves.
The operations of Kentucky Enterprise Bank and the entire thrift
industry are significantly affected by prevailing economic conditions,
competition and the monetary and fiscal policies of governmental agencies.
Lending activities are influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates and the availability of
funds. Kentucky Enterprise Bank's deposit flows and costs of funds are
influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings
in Kentucky Enterprise Bank's market area.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of Kentucky Enterprise's
net income, is derived from the difference or "spread" between the yield on
interest-earning assets and the cost of interest-bearing liabilities. Kentucky
Enterprise has sought to reduce its exposure to changes in interest rates by
matching more closely the effective maturities or repricing characteristics of
its interest-sensitive assets and liabilities. In order to reduce its exposure
to changes in interest rates, Kentucky Enterprise originates one-year,
three-year, and five-year adjustable rate mortgages with rate adjustments
indexed to the one-year, three-year and five-year Treasury Constant Maturity
Indices and purchases adjustable rate mortgage-backed securities. In
accordance with its interest rate risk policy, Kentucky Enterprise also
originates fixed rate mortgage loans for retention in its portfolio and
purchases fixed rate mortgage-backed securities. At June 30, 1995, Kentucky
Enterprise held approximately $115.9 million in loans and mortgage-backed
securities with adjustable interest rates, which represented approximately
52.5% of Kentucky Enterprise's total loan and mortgage-backed securities
portfolio. In addition, Kentucky Enterprise reduces interest rate risk by
maintaining a substantial portfolio of short term securities. At June 30,
1995, Kentucky Enterprise's securities portfolio and interest-bearing deposits
in other banks totaled $49.9 million with $33.4 million, or 66.9% maturing
within one year.
Kentucky Enterprise maintains a significant portfolio of
mortgage-backed securities guaranteed by the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and
the Government National Mortgage Association ("GNMA"). Mortgage- backed
securities entitle Kentucky Enterprise to receive a pro rata portion of the
cash flows from an identified pool of mortgages. Although mortgage-backed
securities generally offer lesser yields than the loans for which they are
exchanged, mortgage-backed securities present substantially lower credit risk
by virtue of the guarantees that secure them, are more liquid than individual
mortgage loans, and may be used to collateralize borrowings or other
obligations of Kentucky Enterprise. Kentucky Enterprise's mortgage-backed
securities at June 30, 1995 totaled $68.9 million with $40.9 million, or 59.4%,
having adjustable rates and $28.0 million, or 40.6% having fixed rates. In
fiscal year 1995, Kentucky Enterprise purchased
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<PAGE> 86
fixed rate mortgage-backed securities in order to increase asset yields.
Management will closely monitor the impact of retaining fixed rate loans and
purchasing fixed rate mortgage-backed securities on its asset/liability
management strategy and the effect on net interest income in the short and long
term, while considering Kentucky Enterprise's level of capital, Kentucky
Enterprise's presence in the market, interest rate conditions and other
factors.
Kentucky Enterprise's portfolio of mortgage-backed securities includes
mortgage-related securities such as collateralized mortgage obligations and
real estate mortgage investment conduits (collectively, "CMO/REMICs"). At June
30, 1995, Kentucky Enterprise's investments in CMO/REMICs totalled $7.9
million, or 2.8% of total assets compared to $12.1 million or 4.3% of total
assets at June 30, 1994. The decrease in CMO/REMICs is attributable to
management's decision to discontinue purchases of CMO/REMICs in the year in
lieu of other investment opportunities. All CMO/REMICs owned by Kentucky
Enterprise are insured or guaranteed either directly or indirectly through
mortgage-backed securities underlying the obligations by either the FNMA or
FHLMC.
INTEREST RATE SENSITIVITY ANALYSIS AND NET PORTFOLIO VALUE
In recent years, Kentucky Enterprise has measured its interest rate
sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain periods, based on assumptions
regarding loan prepayment and deposit decay rates formerly provided by the OTS.
However, the OTS now requires the computation of amounts by which the net
present value of an institution's cash flows from assets, liabilities and off
balance sheet items (the institution's net portfolio value, or "NPV") would
change in the event of a range of assumed changes in market interest rates.
The OTS also requires the computation of estimated changes in net interest
income over a four-quarter period. These computations estimate the effect on
an institution's NPV and net interest income of an instantaneous and permanent
1% to 4% increases and decreases in market interest rates. Kentucky Enterprise
Bank's Board of Directors has established maximum acceptable decreases of 45%
and 100% in net interest income and 50% and 90% in NPV given a 2% and 4%
instantaneous and permanent change in interest rates. At June 30, 1995, the
actual decreases in net interest income were approximately 5.0% and 7.5% and
the decreases in NPV were 19.0% and 42.5% given a 2% and 4% instantaneous and
permanent change in interest rates which were well below the maximum acceptable
decreases established by the Board of Directors.
The following table sets forth the interest rate sensitivity of
Kentucky Enterprise's net interest income and the net portfolio value as of
June 30, 1995 in the event of 1%, 2%, 3% and 4% instantaneous and permanent
increases and decreases in market interest rates, respectively.
<TABLE>
<CAPTION>
Net Interest Income Net Portfolio Value
--------------------------------------------- ---------------------------------
Change Estimated $ Change % Change Estimated $ Change % Change
in Rates Value From Base From Base Value From Base From Base
-------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+400 bp $ 8,643 $ (454) (5.0)% $ 27,677 $ (20,443) (42.5)%
+300 bp 9,000 (97) (1.1) 33,346 (14,774) (30.7)
+200 bp 9,309 212 2.3 38,973 (9,147) (19.0)
+100 bp 9,254 157 1.7 43,840 (4,280) (8.9)
0 bp 9,097 0 0.0 48,120 0 0.0
-100 bp 8,890 (207) (2.3) 51,299 3,179 6.6
-200 bp 8,640 (457) (5.0) 53,206 5,086 10.6
-300 bp 8,504 (593) (6.5) 55,305 7,185 14.9
-400 bp 8,414 (683) (7.5) 58,454 10,334 21.5
</TABLE>
The preceding table was prepared utilizing certain assumptions
regarding prepayment and decay rates provided by a private data processing and
research firm. The actual interest rate sensitivity of Kentucky Enterprise's
assets and liabilities could vary significantly from the information set forth
in the table due to market and other factors.
The following table summarizes the assumptions used to calculate
Kentucky Enterprise's interest rate sensitivity at June 30, 1995.
-66-
<PAGE> 87
PREPAYMENT RATES
<TABLE>
<CAPTION>
Change in Rates
-------------------------------------------------------------------------------
-400 b.p. -200 b.p. Base +200 b.p. +400 b.p.
--------- --------- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Adjustable Rate Mortgages:
Current Index . . . . . . . . . 33.0% 27.5% 20.5% 15.2% 11.5%
Lagging Index . . . . . . . . . 26.3 20.0 12.8 9.5 8.5
Fixed Rate Mortgages:
Short Maturities (five . . . . . 29.8 23.3 14.8 4.5 4.0
years or less)
Maturities greater than 5 years
Under 8% . . . . . . . . . . . 23.7 16.9 8.4 4.0 3.0
8.01-9% . . . . . . . . . . . 30.4 23.4 14.4 4.8 3.0
9.01-10% . . . . . . . . . . . 40.6 33.6 24.6 6.0 3.5
10.01-11% . . . . . . . . . . 36.7 30.9 21.2 6.8 3.8
11.01-12% . . . . . . . . . . 32.9 27.9 21.4 8.9 4.3
12.01-14% . . . . . . . . . . 29.9 25.9 20.9 9.2 4.0
14%> . . . . . . . . . . . . . 29.4 25.4 20.4 8.4 4.0
Other Loans
Second Mortgages . . . . . . . . 11.5 8.5 6.0 5.5 4.5
Non-Residential Mortgages . . . 10.5 7.5 6.5 5.5 4.5
Consumer Loans . . . . . . . . . 11.0 8.0 7.0 6.0 5.0
</TABLE>
DEPOSIT DECAY RATES
<TABLE>
<CAPTION>
Change in Rates
-------------------------------------------------------------------------------
-400 b.p. -200 b.p. Base +200 b.p. +400 b.p.
--------- --------- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Under 3 months . . . . . . . . . . 12.5% 10.0% 5.0% 7.5% 12.5%
3-6 months . . . . . . . . . . . . 12.5 10.0 5.0 7.5 12.5
7-12 months . . . . . . . . . . . . 30.0 20.0 10.0 15.0 25.0
13-36 months . . . . . . . . . . . 52.5 52.5 52.5 50.0 50.0
Over 36 months . . . . . . . . . . 100.0 100.0 100.0 100.0 100.0
</TABLE>
Certain shortcomings are inherent in the method of analysis presented
in both the computation of NPV and net interest income. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in differing degrees to changes in market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of adjustable rate loans in Kentucky Enterprise's
portfolio could decrease in future periods if market interest rates remain at
or decrease below current levels due to refinance activity. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the tables. Finally,
the ability of many borrowers to service their adjustable-rate debt may
decrease in the event of an interest rate increase.
The retention of adjustable-rate mortgage loans in Kentucky
Enterprise's portfolio helps reduce Kentucky Enterprise's exposure to changes
in interest rates. However, there are unquantifiable credit risks resulting
from potential increased costs to borrowers as a result of repricing of
adjustable-rate mortgage loans. It is possible that
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<PAGE> 88
during periods of rising interest rates, the risk of default on adjustable-rate
mortgage loans may increase due to the upward adjustment of interest cost to
the borrower.
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to
Kentucky Enterprise's average interest-earning assets and interest- bearing
liabilities and reflects the average yield on assets and the average cost of
liabilities for the periods and at the dates indicated. Such yields and costs
are derived by dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods indicated. During the
periods indicated, nonaccruing loans are included in the net loan category.
The table also presents information for the periods indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net yield on interest-earning
assets," which is its net interest income divided by the average balance of its
interest-earning assets. Net interest income is affected by the interest rate
spread and by the relative amounts of interest earning assets and
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income.
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
-68-
<PAGE> 89
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
1995 1994
------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable . . . . . . . . . . . . $ 141,369 $ 10,804 7.64% $ 123,605 $ 9,611 7.77%
Securities available for sale . . . . . . 11,523 684 5.94 5,799 196 3.38
Securities held to maturity . . . . . . . 42,711 1,921 4.50 58,859 2,709 4.60
Mortgage-backed securities . . . . . . . 73,295 4,500 6.14 75,166 3,524 4.68
Interest-bearing deposits in other banks. 5,608 195 3.48 12,469 305 2.44
--------- ---------- ---------- ---------
Total interest-earning assets . . . . . 274,506 18,104 6.60 275,898 16,345 5.92
---------- ---------
Noninterest-earning assets . . . . . . . . 6,525 6,929
--------- ----------
Total assets . . . . . . . . . . . . . $ 281,031 $ 282,827
========= ==========
Interest-bearing liabilities:
Deposits
Passbook and statement savings . . . . 38,310 943 2.46 $ 44,781 $ 1,216 2.72
Super money fund accounts . . . . . . . 17,483 398 2.28 21,364 485 2.27
NOW accounts . . . . . . . . . . . . . 22,129 478 2.16 22,700 557 2.45
Certificates . . . . . . . . . . . . . 151,151 7,925 5.24 153,949 7,277 4.73
--------- ---------- ---------- ---------
Total interest-bearing deposits . . . 229,073 9,744 4.25 242,794 9,535 3.93
Borrowings . . . . . . . . . . . . . . 329 25 7.60 356 27 7.58
--------- ---------- ---------- ---------
Total interest-bearing liabilities. . 229,402 9,769 4.26 243,150 9,562 3.93
---------- ---------
Noninterest-bearing liabilities . . . . . . 3,776 3,318
--------- ----------
Total liabilities . . . . . . . . . . . 233,178 246,468
Stockholders' equity . . . . . . . . . . . 47,853 36,359
--------- ----------
Total liabilities and
stockholders' equity . . . . . . . . $ 281,031 $ 282,827
========= ==========
Net interest income . . . . . . . . . . . . $ 8,335 $ 6,783
========== =========
Interest rate spread . . . . . . . . . . . 2.34% 1.99%
====== ======
Net yield on interest-earning assets . . . 3.04% 2.46%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.66% 113.47%
====== ======
<CAPTION>
Year Ended June 30,
-----------------------------------
1993
-----------------------------------
Average
Average Yield/
Balance Interest Cost
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable . . . . . . . . . . . . $ 137,417 $11,560 8.41%
Securities available for sale . . . . . . -- -- --
Securities held to maturity . . . . . . . 43,107 2,807 6.51
Mortgage-backed securities . . . . . . . 81,426 4,476 5.50
Interest-bearing deposits in other banks. 10,644 232 2.18
---------- ------- ------
Total interest-earning assets . . . . . 272,594 19,075 7.00
-------
Noninterest-earning assets . . . . . . . . 7,110
----------
Total assets . . . . . . . . . . . . . $ 279,704
==========
Interest-bearing liabilities:
Deposits
Passbook and statement savings . . . . $ 42,229 $1,269 3.00
Super money fund accounts . . . . . . . 25,240 765 3.03
NOW accounts . . . . . . . . . . . . . 20,997 532 2.53
Certificates . . . . . . . . . . . . . 166,570 8,674 5.21
---------- ------ ------
Total interest-bearing deposits . . . 255,036 11,240 4.41
Borrowings . . . . . . . . . . . . . . 382 28 7.54
---------- ------ ------
Total interest-bearing liabilities . 255,418 11,268 4.41
Noninterest-bearing liabilities . . . . . . 3,159
----------
Total liabilities . . . . . . . . . . . 258,577
Stockholders' equity . . . . . . . . . . . 21,127
----------
Total liabilities and
stockholders' equity . . . . . . . . $ 279,704
==========
Net interest income . . . . . . . . . . . . $7,807
======
Interest rate spread . . . . . . . . . . . 2.59%
======
Net yield on interest-earning assets . . . 2.86%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities 106.72%
======
</TABLE>
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<PAGE> 90
RATE/VOLUME ANALYSIS
The following table allocates the period-to-period changes in Kentucky
Enterprise's various categories of interest income and expense for major
components of interest-earning assets and interest-bearing liabilities. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes due to (i) changes in volume (calculated by
multiplying the change in average volume by the prior year's rate), (ii)
changes in rate (changes in rate multiplied by prior year's volume), and (iii)
changes in rate-volume (changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1995 vs. 1994
-----------------------------------------------
Increase (Decrease)
Due to
-----------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loan portfolio . . . . . . . . . . . . $ 1,380 $ (161) $ (23) $ 1,196
Mortgage-backed securities . . . . . . (88) 1,090 (27) 975
Securities held to maturity and available
for sale . . . . . . . . . . . . . . . (470) 200 (33) (303)
Other interest-earning assets . . . . . (169) 135 (75) (109)
-------- -------- -------- --------
Total interest-earning assets . . . . 653 1,264 (158) 1,759
Interest expense:
Savings deposits . . . . . . . . . . . (538) 792 (45) 209
Borrowings and FHLB advances . . . . . (2) -- -- (2)
-------- -------- -------- --------
Total interest-bearing liabilities . (540) 792 (45) 207
Change in net interest income . . . . . . $ 1,193 $ 472 $ (113) $ 1,552
======== ======== ======== ========
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1994 vs. 1993
-----------------------------------------------
Increase (Decrease)
Due to
-----------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loan portfolio . . . . . . . . . . . . $ (1,162) $ (879) $ 88 $ (1,953)
Mortgage-backed securities . . . . . . (344) (659) 51 (952)
Securities held to maturity and available
for sale . . . . . . . . . . . . . . . 1,403 (867) (433) 103
Other interest-earning assets . . . . . 40 28 4 72
-------- -------- --------- --------
Total interest-earning assets . . . . (63) (2,377) (290) (2,730)
Interest expense:
Savings deposits . . . . . . . . . . . (540) (1,224) 59 (1,705)
Borrowings and FHLB advances . . . . . (2) -- -- (2)
--------- -------- ---------- ---------
Total interest-bearing liabilities . (542) (1,224) 59 (1,707)
-------- -------- --------- --------
Change in net interest income . . . . . . $ 479 $ (1,153) $ (349) $ (1,023)
======== ======== ========= ========
</TABLE>
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<PAGE> 91
FINANCIAL CONDITION
Total assets of Kentucky Enterprise decreased $3.8 million, or 1.4%,
to $280.4 million at June 30, 1995 from $284.2 million at June 30, 1994. The
decrease in assets was primarily due to the decrease in cash, interest-bearing
deposits in other banks, and securities held to maturity resulting from a
decrease in savings deposits.
The composition of Kentucky Enterprise's assets has been affected by
Kentucky Enterprise's asset allocation strategies which have emphasized more
competitive pricing to originate mortgage loans for retention in portfolio.
Additionally, there has been increased investment in longer term, higher
yielding securities available for sale and fixed rate mortgage-backed
securities.
Securities available for sale increased $5.8 million, or 54.1%, to
$16.5 million at June 30, 1995 from $10.7 million at June 30, 1994 as a result
of classifying recent purchases of longer term securities as available for sale
in accordance with Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." It is
anticipated that all future purchases of investment securities will be
classified as available for sale.
Securities held to maturity decreased $23.2 million, or 45.7%, to
$27.5 million at June 30, 1995 from $50.7 million at June 30, 1994 due
primarily to using the proceeds from maturing securities to help fund the
increase in loans receivable and a decrease in savings deposits.
Mortgage-backed securities decreased $5.3 million, or 7.1%, to $68.9
million at June 30, 1995 from $74.2 million at June 30, 1994. The decrease was
due to the receipt of principal repayments of $12.6 million compared to
purchases of mortgage-backed securities in the amount of $7.0 million. All
mortgage-backed securities purchased had fixed rates in order to improve asset
yields. Principal repayments in excess of purchases were used to help fund the
increase in loans receivable.
Loans receivable increased $23.2 million, or 18.1%, to $151.7 million
at June 30, 1995 from $128.5 million at June 30, 1994. The increase was
primarily due to increased loan originations as a result of more competitive
pricing and decreased repayments of mortgage loans due to a decrease in
refinancing activity in the current interest rate environment.
Loan originations increased $5.8 million, or 14.6%, to $45.5 million
for the year ended June 30, 1995 from $39.7 million for the year ended June 30,
1994.
Deposits decreased $6.5 million, or 2.8%, to $227.3 million at June
30, 1995 from $233.8 million at June 30, 1994. For the year ended June 30,
1995, $8.1 million of interest was credited to deposit accounts as withdrawals
exceeded deposits by $14.6 million. Withdrawals occurred primarily in Kentucky
Enterprise's passbook savings accounts, NOW accounts, and money market deposit
accounts due to Kentucky Enterprise paying somewhat lower rates relative to
competitive market rates available on short term accounts in Kentucky
Enterprise's market area.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
NET INCOME. Net income increased $416,000, or 47.1%, to $1.3 million
for the year ended June 30, 1995 from $884,000 for the year ended June 30,
1994. The increase was primarily due to an increase in net interest income of
$1.6 million offset by an increase of $890,000 in noninterest expense and an
increase of $295,000 in income tax expense.
NET INTEREST INCOME. Net interest income increased $1.6 million, or
22.9%, to $8.3 million for the year ended June 30, 1995 from $6.8 million for
the year ended June 30, 1994. The increase was primarily due to an increase in
the interest rate spread to 2.34% for the year ended June 30, 1995 from 1.99%
for the year ended June
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<PAGE> 92
30, 1994. The improved interest rate spread was primarily due to asset
allocation strategies which emphasized increased lending to reduce liquidity
and the purchase of longer term, higher yielding securities available for sale
and fixed rate mortgage-backed securities.
INTEREST AND DIVIDEND INCOME. Total interest income increased $1.8
million, or 10.8%, to $18.1 million for the year ended June 30, 1995 from $16.3
million for the year ended June 30, 1994. The increase was primarily due to an
increase in interest income on loans receivable of $1.2 million in addition to
an increase in interest income on mortgage-backed securities of $1.0 million
offset by a decrease in interest income of $410,000 on investment securities
and interest-bearing deposits.
The $1.2 million increase in interest on loans receivable was
attributable to an increase of $17.8 million in the average outstanding balance
of loans receivable, resulting from an increased emphasis on lending, which
offset a decrease of 13 basis points in the average yield earned to 7.64% for
the year ended June 30, 1995 from 7.77% for the year ended June 30, 1994.
The $1.0 million increase in interest on mortgage-backed securities
was attributable to an increase of 146 basis points in the average yield earned
as a result of the purchase of fixed rate mortgage-backed securities and the
effect of higher interest rates on the adjustable rate mortgage-backed
securities held in the portfolio. The $410,000 decrease in interest income on
securities and interest-bearing deposits was due to a decrease of $17.3 million
in the outstanding average balance to $59.8 million for the year ended June 30,
1995 from $77.1 million for the year ended June 30, 1994.
INTEREST EXPENSE. Total interest expense increased $207,000, or 2.2%,
to $9.8 million for the year ended June 30, 1995 from $9.6 million for the year
ended June 30, 1994. The increase in interest expense was primarily due to an
increase of 33 basis points in average rates paid to 4.26% for the year ended
June 30, 1995 from 3.93% for the year ended June 30, 1994. The increase
attributable to average rates paid was largely offset by a decrease of $13.7
million in the average balance of interest-bearing deposits (see "Financial
Condition" for a discussion of this decrease) to $229.1 million for the year
ended June 30, 1995 from $242.8 million for the year ended June 30, 1994.
PROVISION FOR LOSSES ON LOANS. The provision for loan losses for the
year ended June 30, 1995 was $35,000 compared to $66,000 for the year ended
June 30, 1994. At June 30, 1995 the allowance for loan losses totaled $490,000
and represented .32% of net loans receivable and 184.9% of non-performing loans
as compared to $455,000 representing .35% of net loans receivable and 147.3% of
non-performing loans at June 30, 1994. The significant increase in the ratio
of the allowance for loan losses to non-performing loans to 184.9% for the year
ended June 30, 1995 from 147.3% for the year ended June 30, 1994 was due to a
decrease of $44,000, or 14.2%, in non-performing loans in addition to the
increased amount of the allowance for loan losses for the year ended June 30,
1995.
The provision for loan losses and the ratio of the allowance for loan
losses to total loans for the year ended June 30, 1995 was determined to be
adequate by management on the basis of its analysis of the factors to be
considered in determining reasonable estimable loan losses. Among the many
factors considered were an analysis of specific loans in portfolio, known and
inherent risk in the portfolio, estimated value of the underlying collateral,
assessment of general trends in relevant real estate markets, and current
prospective economic conditions including property values, employment and
occupancy rates, interest rates and other conditions that may affect a
borrower's ability to comply with repayment terms. Management will continue to
carefully monitor its exposure to loan losses, given continued growth in its
loan portfolio, to maintain adequate loan loss allowances.
There were no loans charged off during the year ended June 30, 1995
compared to $5,000 in loan charge offs for the year ended June 30, 1994.
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<PAGE> 93
NONINTEREST INCOME. Fee income and other service charges remained
relatively stable during the period, with noninterest income of $433,000 for
the year ended June 30, 1995 compared to $414,000 for the year ended June 30,
1994.
NONINTEREST EXPENSE. Total noninterest expense increased $890,000, or
15.0%, to $6.8 million for the year ended June 30, 1995 from $5.9 million for
the year ended June 30, 1994. The increase was primarily due to an increase of
$810,000 in compensation and benefits resulting primarily from the annually
computed cost amortization of conversion related stock benefit plans for
employees and management of Kentucky Enterprise. Additionally, there was an
$80,000 increase in other noninterest expenses due primarily to increased
operating expenses related to operating Kentucky Enterprise as a public entity.
INCOME TAX. The effective tax rate for the year ended June 30, 1995
was 31.8% as compared to 26.0% for the year ended June 30, 1994. The increase
in the effective tax rate resulted from the favorable settlement of tax issues
relating to prior years' examinations by the Internal Revenue Service which
amounted to $98,000 in fiscal year 1994. Total income tax expense increased
$295,000, or 95.2%, to $605,000 for the year ended June 30, 1995 from $310,000
for the year ended June 30, 1994. The increase in income tax expense was due
primarily to the improvement in Kentucky Enterprise's operating results.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1994 AND 1993
NET INCOME. Net income, before cumulative effect of accounting
change, decreased $665,000, or 42.9%, to $884,000 for the year ended June 30,
1994 from $1.5 million for the year ended June 30, 1993. The decrease was
primarily due to a decrease in net interest income of $1.0 million coupled with
an increase of $188,000 in noninterest expense due to an increase in
compensation and benefits. The decrease was partially offset by a decrease of
$194,000 in the provision for loan losses and a decrease of $455,000 in income
tax expense.
NET INTEREST INCOME. Net interest income decreased $1.0 million, or
13.1% to $6.8 million for the year ended June 30, 1994 from $7.8 million for
the year ended June 30, 1993. The decrease was primarily due to a decline in
interest rate spread to 1.99% for the year ended June 30, 1994 from 2.59% for
the year ended June 30, 1993. Interest bearing assets were more rate sensitive
than interest bearing liabilities, and as a result, the average yield on
interest earning assets declined at a faster rate than the average cost of
interest bearing liabilities in the prevailing interest rate environment.
INTEREST AND DIVIDEND INCOME. Total interest income decreased $2.7
million, or 14.3%, to $16.3 million for the year ended June 30, 1994 from $19.1
million for the year ended June 30, 1993. The decrease was primarily
attributable to a decrease in interest income on loans receivable of $1.9
million coupled with a decrease of $1.0 million in interest on mortgage-backed
securities.
The $1.9 million decrease in interest on loans receivable was
attributable to a decrease of $13.8 million in the outstanding average balance
of loans receivable accompanied by a decrease of 64 basis points in the average
yield earned to 7.77% for the year ended June 30, 1994 from 8.41% for the year
ended June 30, 1993. The $1.0 million decrease in interest on mortgage-backed
securities was attributable to a decrease of $6.3 million in the outstanding
average balance of mortgage-backed securities accompanied by a decrease in the
average yield earned of 82 basis points.
The funds received from the increased principal repayments on
mortgage loans and mortgage-backed securities and the net proceeds from the
conversion increased the outstanding average balance of investments by $21.6
million to $64.7 million for the year ended June 30, 1994 from $43.1 million
for the year ended June 30, 1993. The average yield earned on securities
decreased 202 basis points as a result of maturities of higher yielding
securities purchased in prior years and management's decision to invest in
securities with short term maturities in the low interest rate environment.
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<PAGE> 94
INTEREST EXPENSE. Total interest expense decreased $1.7 million, or
15.1%, to $9.6 million for the year ended June 30, 1994 from $11.3 million for
the year ended June 30, 1993. The decrease in expense was primarily due to a
decrease of $12.2 million in the average balance of savings deposits (see
"Financial Condition" for a discussion of this decrease) accompanied by a
decrease in the average rates paid of 48 basis points to 3.93% for the year
ended June 30, 1994 from 4.41% for the year ended June 30, 1993.
PROVISION FOR LOSSES ON LOANS. The provision for loan losses for the
year ended June 30, 1994 was $66,000 compared to $260,000 for the year ended
June 30, 1993. The amount of provision for loan losses for the year ended June
30, 1994 was derived by management as a result of its analysis of the factors
to be considered in determining reasonable estimable loan losses. Among the
many factors considered were analysis of specific loans in portfolio, known and
inherent risk in the portfolio, estimated value of the underlying collateral,
assessment of general trends in relevant real estate markets, and current
prospective economic conditions including property values, employment and
occupancy rates, interest rates and other conditions that may affect a
borrower's ability to comply with repayment terms.
At June 30, 1994 the allowance for loan losses in the amount of
$455,000 represented .35% of net loans receivable and 147.3% of non-performing
loans as compared to $393,000 representing .30% of net loans receivable and
102.4% of non-performing loans at June 30, 1993.
The provision for loan losses for the current year was deemed adequate
after comparing the ratio of the allowance for loan losses to total loans and
non-performing loans at June 30, 1994 and June 30, 1993.
There were loan charge offs of $5,000 for the year ended June 30, 1994
compared to no loan charge offs for the year ended June 30, 1993.
NONINTEREST INCOME. Fee income and other service charges decreased
$102,000, or 19.8%, to $414,000 for the year ended June 30, 1994 from $516,000
for the year ended June 30, 1993. The decrease was due primarily to a decrease
in NOW account service fees as a result of an increase in the number of NOW
accounts maintaining the required minimum balance necessary to avoid the
assessment of monthly service charges.
NONINTEREST EXPENSE. Total noninterest expense increased $188,000, or
3.3%, to $5.9 million for the year ended June 30, 1994 from $5.7 million for
the year ended June 30, 1993. The increase in noninterest expense was
primarily due to an increase of $211,000 in compensation and benefits
attributable to the adoption of employee and management benefit plans in
connection with Kentucky Enterprise Bank's conversion from a mutual to a stock
savings bank.
INCOME TAX. The effective tax rate for the year ended June 30, 1994
was 26.0% as compared to 33.1% for the year ended June 30, 1993. The reduction
in the effective tax rate resulted from the favorable settlement of tax issues
relating to prior years' examinations by the Internal Revenue Service which
amounted to $98,000. Total income tax expense decreased $455,000, or 59.5%, to
$310,000 for the year ended June 30, 1994 from $765,000 for the year ended June
30, 1993 primarily as a result of the decrease in operating results.
LIQUIDITY AND CAPITAL RESOURCES
On December 16, 1993, Kentucky Enterprise Bank completed its
conversion from a mutual to a stock federal savings bank and was simultaneously
acquired by Kentucky Enterprise. (See Note 2 of the Notes to Consolidated
Financial Statements included in "INDEX TO KENTUCKY ENTERPRISE FINANCIAL
STATEMENTS.") The net proceeds retained by Kentucky Enterprise from the
conversion, $11.1 million, have been sufficient for Kentucky Enterprise's
operations and are expected to continue to be adequate to satisfy Kentucky
Enterprise's future operations. Kentucky Enterprise's primary source of
liquidity is earnings from the net proceeds retained from the conversion. As
discussed in Note 2 of the Notes to the Consolidated Financial Statements,
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<PAGE> 95
Kentucky Enterprise Bank is subject to certain regulatory limitations with
respect to the payment of dividends to Kentucky Enterprise.
At June 30, 1995, Kentucky Enterprise's stockholders' equity was $49.0
million, or 17.5% of total assets compared to stockholders' equity of $46.8
million, or 16.4% of total assets at June 30, 1994, and retained earnings of
$21.8 million, or 8.0% of total assets at June 30, 1993. The increase in
stockholders' equity for the year ended June 30, 1995 was primarily due to net
income for the year and the amortization of the conversion related stock
benefit plans for employees and management of Kentucky Enterprise Bank.
Kentucky Enterprise Bank's primary sources of funds are deposits and
proceeds from principal and interest payments on loans and mortgage-backed
securities. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions, competition and other factors. Other sources of liquidity include
Kentucky Enterprise Bank's ability to obtain advances from the FHLB of
Cincinnati and to borrow against its securities portfolio. Kentucky Enterprise
Bank currently has an outstanding commitment to borrow up to $13 million from
the FHLB of Cincinnati which expires February 3, 1996. To date, no funds have
been drawn against the commitment. In addition, Kentucky Enterprise Bank
maintains a significant portfolio of securities held to maturity maturing
within one year as well as its portfolio of securities available for sale.
Kentucky Enterprise Bank is required to maintain a minimum level of
investments in specified liquid assets as defined by OTS regulations. This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows is an amount equal to 5.0% of the sum of
Kentucky Enterprise Bank's average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. Kentucky Enterprise
Bank's liquidity ratios were 19.6%, 30.4% and 22.2%, at June 30, 1995, 1994 and
1993, respectively. Management of Kentucky Enterprise seeks to maintain a
relatively high level of liquidity in order to retain flexibility in terms of
investment opportunities and deposit pricing. Because liquid assets generally
provide for lower rates of return, Kentucky Enterprise's relatively high
liquidity will, to a certain extent, result in lower rates of return on
Kentucky Enterprise's assets. The decrease in Kentucky Enterprise's liquidity
ratio at June 30, 1995 was attributable to the increase in mortgage lending and
the decrease in savings deposits. (See "Financial Condition" for discussion).
Kentucky Enterprise's most liquid assets are cash and cash
equivalents, which are short term, highly liquid investments with original
maturities of less than three months that are readily convertible to cash, and
include interest-bearing deposits and federal funds sold. The level of these
assets is dependent on Kentucky Enterprise's operating, financing and
investment activities during any given period. At June 30, 1995, 1994 and
1993, cash and cash equivalents totaled $7.9 million, $12.4 million and $11.4
million, respectively.
Kentucky Enterprise anticipates that it will have sufficient funds
available to meet its current commitments. At June 30, 1995, Kentucky
Enterprise had commitments to originate loans of $2.0 million and unadvanced
home equity lines of credit of $4.8 million. Certificates of deposit which are
scheduled to mature in one year or less at June 30, 1995, totaled $104.8
million. Management believes that a significant portion of such deposits will
remain with Kentucky Enterprise.
Kentucky Enterprise Bank is required by applicable law and regulations
to meet certain minimum capital standards. Such capital standards include a
tangible, a core and a risk-based capital requirement. At September 30, 1995,
Kentucky Enterprise Bank's level of capital qualified it as a well capitalized
institution under applicable regulations. (See Note 17 of the Notes to
Consolidated Financial Statements included in "INDEX TO KENTUCKY ENTERPRISE
FINANCIAL STATEMENTS.")
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<PAGE> 96
The following table represents Kentucky Enterprise Bank's capital
position at June 30, 1995 relative to its various regulatory capital
requirements.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in thousands)
----------------------
<S> <C> <C>
Tangible capital $37,046 13.80%
Tangible capital requirement 4,026 1.50
-------
Excess $33,020 12.30%
======= ======
Core capital $37,046 13.80%
Core capital requirement 8,057 3.00
------- ----
Excess $28,989 10.80%
======= ======
Total capital (i.e., core and
supplementary capital) $37,536 37.14%
Risk-based capital requirement 8,086 8.00
------- -----
Excess $29,450 29.14%
======= ======
Tier 1 capital $37,046 13.80%
Tier 1 capital requirement 10,737 4.00
------- -----
Excess $26,309 9.80%
======= ======
Tier 1 risk-based capital $37,046 36.65%
Tier 1 risk-based capital requirement 4,043 4.00
------- -----
Excess $33,003 32.65%
======= ======
<FN>
_____________
(1) Based upon adjusted total assets for purposes of the tangible, core and
Tier 1 capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirements.
</TABLE>
For a discussion of the proposed legislative action on deposit
insurance premiums, see "KENTUCKY ENTERPRISE BANCORP, INC. - Recent
Developments - Amendment to BIF Insurance Premium Schedule; Premium
Assessment."
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto, 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 (except for securities available for sale reported
at market value) without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Kentucky Enterprise's operations. Unlike
most industrial companies, nearly all the assets and liabilities of Kentucky
Enterprise are monetary in nature. As a result, interest rates have a greater
impact on Kentucky Enterprise's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
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<PAGE> 97
IMPACT OF NEW ACCOUNTING STANDARDS
On October 23, 1995, the Financial Accounting Standards Board issued
Statement (SFAS) No. 123, "Accounting for Stock-Based Compensation." This
Statement applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price. The Statement
covers transactions with employees and nonemployees and is applicable to both
public and nonpublic entities. SFAS No. 123 is effective for fiscal years
beginning after December 15, 1995. Kentucky Enterprise intends to adopt SFAS
No. 123 in its fiscal year ending June 30, 1997. Management does not expect
the adoption of SFAS No. 123 to have a material effect on Kentucky Enterprise's
financial condition or results of operations. For a discussion of new
accounting pronouncements which have an impact on Kentucky Enterprise, see
Notes 1 and 15 of the Notes to Consolidated Financial Statements included in
"INDEX TO KENTUCKY ENTERPRISE FINANCIAL STATEMENTS."
COMPARISON OF PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
The following discussion focuses on the consolidated financial condition of
Kentucky Enterprise and its subsidiary Kentucky Enterprise Bank at September
30, 1995 compared to June 30, 1995 and the consolidated results of operations
for the three months ended September 30, 1995 compared to the same period in
1994. This discussion should be read in conjunction with the interim financial
statements and footnotes included herein. See "INDEX TO KENTUCKY ENTERPRISE
FINANCIAL STATEMENTS."
Additionally, on August 28, 1995, Kentucky Enterprise entered into the
Affiliation Agreement and the Merger Agreement providing for the acquisition of
Kentucky Enterprise by Fifth Third. The Affiliation Agreement and the Merger
Agreement provide for the tax-free exchange of each issued and outstanding
share of Kentucky Enterprise Common Stock for .3823 shares of Fifth Third
Common Stock. The acquisition is subject to a number of conditions, including
receipt of regulatory approvals and the approval of Kentucky Enterprise's
shareholders. It is expected to close in the spring of 1996, subject to the
timely satisfaction of all conditions.
FINANCIAL CONDITION. Total assets increased $1.0 million, or .4%, to
$281.4 million at September 30, 1995 from $280.4 million at June 30, 1995. The
increase in assets was primarily due to increases in cash, interest-bearing
deposits and loans receivable offset by decreases in securities and
mortgage-backed securities.
Cash and interest-bearing deposits increased $8.4 million, or 106.7%, to
$16.3 million at September 30, 1995 from $7.9 million at June 30, 1995
primarily due to proceeds from maturing securities. As a result of the
scheduled maturities, securities decreased $7.5 million, or 17.0%, to $36.5
million at September 30, 1995 from $44.0 million at June 30, 1995. Kentucky
Enterprise has committed $7.9 million of the increase in cash and
interest-bearing deposits to purchase thirty-year mortgage-backed securities
which have fixed rates of interest for five years and then become one-year
adjustable rate mortgage-backed securities for the remaining term to maturity.
Mortgage-backed securities decreased $2.9 million, or 4.2%, to $66.0
million at September 30, 1995 from $68.9 million at June 30, 1995 due to normal
repayments of principal.
Loans receivable increased $3.0 million, or 1.9%, to $154.7 million at
September 30, 1995 from $151.7 million at June 30, 1995. The increase was
primarily due to an increase in fixed rate loans of $5.4 million offset by a
decrease in adjustable rate loans of $2.4 million. Kentucky Enterprise
continues to competitively price its fixed rate and adjustable rate mortgage
loans. Management believes the increase in fixed rate loans to be due to
borrower preference in the current interest rate environment.
Non-performing assets (which consist solely of non-performing loans, as
Kentucky Enterprise had no real estate owned at September 30, 1995) decreased
$14,000, or 5.3%, to $251,000, or .1% of total assets at September 30, 1995
from $265,000, or .1% of total assets at June 30, 1995.
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Deposits remained relatively stable at $227.4 million at September 30, 1995
compared to $227.3 million at June 30, 1995. Withdrawals continue to occur in
Kentucky Enterprise's passbook savings accounts, NOW accounts and money market
deposit accounts due to Kentucky Enterprise paying somewhat lower rates
relative to competitive market rates available on short term accounts in
Kentucky Enterprise's market area. The decrease in short term accounts was
offset by increases in Kentucky Enterprise's certificate of deposit accounts.
Stockholders' equity increased $485,000, or 1.0%, to $49.5 million at
September 30, 1995 from $49.0 million at June 30, 1995 primarily due to net
income for the quarter ended September 30, 1995.
COMPARISON OF OPERATING RESULTS FOR PERIODS ENDED SEPTEMBER 30, 1995 AND
1994.
NET INCOME. Net income increased $56,000, or 17.9%, to $368,000 for the
three months ended September 30, 1995 from $312,000 for the three months ended
September 30, 1994. The increase was primarily due to increased net interest
income partially offset by increased operating expenses.
NET INTEREST INCOME. Net interest income before the provision for loan
losses increased $197,000, or 9.6%, to $2.3 million for the three months ended
September 30, 1995 from $2.1 million for the three months ended September 30,
1994. The increase in net interest income was primarily due to an increase in
interest income of $504,000 resulting from increased mortgage lending and
higher rates of interest being earned on adjustable rate interest-bearing
assets. This increase in interest income was partially offset by an increase
of $307,000 in interest expense due to higher rates of interest being paid on
Kentucky Enterprise's deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three
months ended September 30, 1995 was $10,000 compared to no provision for the
three months ended September 30, 1994. At September 30, 1995 the allowance for
loan losses totaled $500,000 and represented .3% of net loans receivable and
199.2% of non-performing loans as compared to $454,000 representing .3% of net
loans receivable and 129.3% of non-performing loans at September 30, 1994.
There were no charge offs and no recoveries for the three months ended
September 30, 1995.
The provision for loan losses and the ratio of the allowance for loan
losses to total loans for the three months ended September 30, 1995 was
determined to be adequate by management on the basis of its analysis of the
factors to be considered in determining reasonable estimable loan losses.
Among the many factors considered were an analysis of specific loans in
portfolio, known and inherent risk in the portfolio, estimated value of the
underlying collateral, assessment of general trends in relevant real estate
markets, and current prospective economic conditions including property values,
employment and occupancy rates, interest rates and other conditions that may
affect a borrower's ability to comply with repayment terms. Management will
continue to monitor carefully its exposure to loan losses, given continued
growth in its loan portfolio, to maintain adequate loan loss allowances.
NON-INTEREST INCOME. Non-interest income decreased slightly to $103,000
for the three months ended September 30, 1995 from $115,000 for the three
months ended September 30, 1994 due to decreased amounts received in various
service charges and other fees.
NON-INTEREST EXPENSE. Non-interest expense increased $78,000, or 4.6%, to
$1.8 million for the three months ended September 30, 1995 from $1.7 million
for the three months ended September 30, 1994 due to increased compensation and
benefits expenses and increased professional fees incurred as a result of the
pending acquisition of Kentucky Enterprise by Fifth Third.
INCOME TAXES. Income tax expense increased $41,000 to $202,000 for the
three months ended September 30, 1995 from $161,000 for the three months ended
September 30, 1994 due to the increase in Kentucky Enterprise's income before
income taxes for the respective periods.
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LIQUIDITY. For a discussion of Kentucky Enterprise's liquidity and capital
resources see " --Liquidity and Capital Resources" above. The Kentucky
Enterprise Bank liquidity ratio was 19.0% at September 30, 1995. During the
three months ended September 30, 1995, Kentucky Enterprise Bank met all
regulatory liquidity requirements, and management believes that the level of
liquidity maintained is adequate to meet potential deposit outflows, loan
demand and normal operations.
The following table presents Kentucky Enterprise Bank's capital position at
September 30, 1995 relative to its various regulatory capital requirements:
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in thousands)
----------------------
<S> <C> <C>
Tangible capital $37,588 13.95%
Tangible capital requirement 4,041 1.50
------- -------
Excess $33,547 12.45%
======= ======
Core capital $37,588 13.95%
Core capital requirement 8,081 3.00
------- -----
Excess $29,507 10.95%
======= ======
Total capital (i.e., core and
supplementary capital) $38,088 37.04%
Risk-based capital requirement 8,227 8.00
------- -----
Excess $29,861 29.04%
======= ======
Tier 1 capital $37,588 13.95%
Tier 1 capital requirement 10,775 4.00
------- -----
Excess $26,813 9.95%
======= ======
Tier 1 risk-based capital $37,588 36.55%
Tier 1 risk-based capital requirement 4,114 4.00
------- -----
Excess $33,474 32.55%
======= ======
<FN>
(1) Based upon adjusted total assets for purposes of the tangible, core
and Tier 1 capital requirements, and risk-weighted assets for purposes
of the risk-based capital requirements.
</TABLE>
EFFECT OF GOVERNMENTAL POLICIES
The earnings of both Kentucky Enterprise and Fifth Third and its
subsidiaries are affected not only by domestic and foreign economic conditions,
but also by the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve Board, foreign governments and other
official agencies. The Federal Reserve Board can and does implement national
monetary policy, such as the curbing of inflation and combating of recession,
by its open market operations in United States Government securities, control
of the discount rate applicable to borrowings and the establishment of reserve
requirements against deposits and certain liabilities of depository
institutions. The actions of the Federal Reserve Board influence the growth of
bank loans, investments and deposits and affect interest rates charged on loans
or paid on deposits. The nature and impact of future changes in monetary and
fiscal policies are not predictable.
From time to time various proposals are made in the United States
Congress and in state legislatures and before various regulatory authorities
that would alter the powers or the existing regulatory framework for banks,
bank
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holding companies, savings banks and other financial institutions. It is
impossible to predict whether any of the proposals will be adopted and the
impact, if any, of such adoption on the business of Kentucky Enterprise or
Fifth Third and its subsidiaries.
DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE RIGHTS OF SHAREHOLDERS
Fifth Third is authorized to issue 140,000,000 shares of Fifth Third
Common Stock, no par value, and 500,000 shares of preferred stock, no par value
("Fifth Third Preferred Stock"). As of September 30, 1995, Fifth Third had
outstanding 100,363,760 shares of Fifth Third Common Stock and no shares of
Fifth Third Preferred Stock. This number of shares of Fifth Third Common Stock
reflects the three-for-two stock split effected in the form of a stock dividend
declared December 19, 1995 and payable January 12, 1996. Pursuant to Article
Fourth of Fifth Third's Second Amended Articles of Incorporation, as amended,
the Board of Directors of Fifth Third may, without further action of the
shareholders, (a) divide into one or more new series the authorized shares of
Fifth Third Preferred Stock which have not previously been designated, (b) fix
the number of shares constituting any such new series, and (c) fix the dividend
rates, payment dates, whether dividend rights shall be cumulative or
non-cumulative, conversion rights, redemption rights (including sinking fund
provisions) and liquidation preferences. Except as otherwise provided by law,
holders of any series of Fifth Third Preferred Stock shall not be entitled to
vote on any matter.
Kentucky Enterprise is authorized to issue 8,000,000 shares of
Kentucky Enterprise Common Stock, and 2,000,000 shares of preferred stock,
$0.01 par value per share ("Kentucky Enterprise Preferred Stock"). As of
September 30, 1995, Kentucky Enterprise had outstanding 2,750,800 shares of
Kentucky Enterprise Common Stock, and options to purchase a total of 269,500
shares of Kentucky Enterprise Common Stock, and no shares of Kentucky
Enterprise Preferred Stock. The Board of Directors of Kentucky Enterprise may,
pursuant to Article Fifth of its Amended Articles of Incorporation, (a) provide
for the specific terms of Kentucky Enterprise Preferred Stock to be issued in
series, and (b) state the rights, preferences, limitations and relative,
participating, optional or other special rights of the shares of each such
series, and the qualifications, limitations or restrictions thereof.
Set forth below is a description of Fifth Third Common Stock and
Kentucky Enterprise Common Stock. This description and analysis are brief
summaries of relevant provisions of the respective Articles of Incorporation of
Fifth Third and Kentucky Enterprise and are qualified in their entirety by
reference to such documents and to the parties' respective Codes of
Regulations.
Voting Rights
Holders of both Fifth Third Common Stock and Kentucky Enterprise
Common Stock are entitled to one vote per share on all matters submitted to a
vote of shareholders.
The Code of Regulations of Fifth Third and the Amended Articles of
Incorporation of Kentucky Enterprise provide for the division of their
respective Boards of Directors into three classes of approximately equal size.
Directors of each Board of Directors are elected for three-year terms, and the
terms of office of approximately one-third of the members of the classified
Board of Directors expire each year. This classification of Fifth Third's
Board may make it more difficult for a shareholder to acquire control of Fifth
Third and remove management by means of a hostile takeover.
Fifth Third's Second Amended Articles of Incorporation, as amended,
contains another potential anti-takeover device. As stated above, Fifth Third
is authorized to issue 500,000 shares of Fifth Third Preferred Stock, and its
Board of Directors may designate various characteristics and rights of such
stock, including conversion rights. Accordingly, as an anti-takeover measure,
Fifth Third's Board of Directors may authorize the conversion of shares of
Fifth Third Preferred Stock into any number of shares of Fifth Third Common
Stock and thus dilute the outstanding shares of Fifth Third Common Stock.
The holders of Fifth Third Common Stock have the right to vote
cumulatively in the election of directors. Under applicable Ohio law, unless a
corporation's articles of incorporation are amended to provide that no
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shareholder of the corporation may cumulate his or her voting power, each
shareholder has the right to vote cumulatively in the election of directors of
such corporation if (i) written notice is given by any shareholder of such
corporation to the President, a Vice President or the Secretary of such
corporation, not less than forty-eight hours before the time fixed for holding
the meeting at which directors are to be elected, indicating that such
shareholder desires that voting for the election of directors be cumulative,
and (ii) announcement of the giving of such notice is made upon the convening
of the meeting by the Chairman or the Secretary or by or on behalf of the
shareholder giving such notice. In such event, each shareholder will be
entitled to cumulate such voting power as he or she possesses and to give one
nominee as many votes as the number of directors to be elected multiplied by
the number of his or her shares, or to distribute such votes on the same
principle among two or more candidates, as each shareholder sees fit.
Pursuant to Kentucky Enterprise's Amended Articles of Incorporation,
the shareholders of Kentucky Enterprise do not have the right to vote
cumulatively in the election of directors.
Generally actions required to be taken by Kentucky Enterprise
shareholders under Ohio law require the affirmative vote of holders of a
majority of the shares of Kentucky Enterprise entitled to vote, except for
certain actions, including action on the Merger, which by statute require the
affirmative vote of the holders of at least two-thirds of the shares of
Kentucky Enterprise entitled to vote. Kentucky Enterprise's Amended Articles
of Incorporation do contain a super majority voting provision requiring the
affirmative vote of at least 80% of the outstanding shares entitled to vote and
a majority of the outstanding shares held by disinterested persons, with
respect to certain business combinations with "related persons" (generally
defined to include a person who beneficially owns 10% or more of the
outstanding shares of the Kentucky Enterprise Common Stock). The Amended
Articles of Incorporation of Kentucky Enterprise also require approval by 80%
of all of the outstanding shares entitled to vote to amend certain provisions
of the Amended Articles of Incorporation. With respect to Fifth Third, no vote
of its shareholders is required to approve the Merger. Generally actions
required to be taken by Fifth Third shareholders require the affirmative vote
of the holders of a majority of the shares of Fifth Third entitled to vote,
except for certain actions which by statute require a two-thirds vote.
DIVIDENDS
Holders of Fifth Third Common Stock and Kentucky Enterprise Common
Stock are each entitled to dividends as and when declared by the respective
Boards of Directors of each institution out of funds legally available for the
payment of dividends. Fifth Third and Kentucky Enterprise have, in the past,
declared and paid dividends on a quarterly basis, and intend to continue to do
so in the immediate future in such amounts as their respective Boards of
Directors shall determine.
Most of the revenues of Fifth Third and Kentucky Enterprise available
for payment of dividends derive from amounts paid to each such corporation by
its respective subsidiaries. Under applicable banking law, the total of all
dividends declared in any calendar year by a national bank or a state-chartered
bank may not, without the approval of the Comptroller of the Currency, the
Federal Reserve Board, or the FDIC, as the case may be, exceed the aggregate of
such bank's net profits (as defined) and retained net profits for the preceding
two years. Under the law applicable to federally chartered savings
associations, the amount of dividends which a savings association may make
without the approval of the OTS depends upon the amount of capital possessed by
such savings association. Savings associations, which have capital immediately
prior to, and on a pro forma basis after giving effect to, a proposed dividend
that is equal to or greater than the amount of their fully phased-in capital
requirements, are authorized to pay dividends during a calendar year up to 100%
of their net income during the calendar year plus the amount that would reduce
by one-half their surplus capital. Some associations that have capital
immediately prior to, and on a pro forma basis after giving effect to, a
proposed dividend that is equal to or in excess of their minimum capital
requirement, but less than their fully phased-in capital requirements, may pay
dividends equal to 75% of net income during the most recent four quarters
(minus dividends previously paid over that period). Savings associations which
have capital immediately prior to, or on a pro forma basis after giving effect
to, a proposed dividend that is less than the amount of their minimum capital
requirements, are not authorized to pay any dividend unless such association
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receives prior approval from the OTS or unless such association is operating in
compliance with an OTS approved capital plan and the dividend payment is
consistent with such capital plan.
The affiliates of Fifth Third include both state and nationally
chartered banks and two federally chartered savings banks. Under the
applicable regulatory limitations, during the year 1995, the affiliates of
Fifth Third could declare aggregate dividends limited to their 1995 eligible
net profits, as defined, and $271,979,000, the retained 1994 and 1993 net
income, without the approval of their respective regulators. The Comptroller
of the Currency, banking authorities of the States of Ohio, Indiana and
Kentucky, and the OTS, the principal regulators of such affiliates, have the
statutory authority to prohibit a depository institution under their
supervision from engaging in what, in their opinion, constitutes an unsafe or
unsound practice in conducting its banking or savings association business.
The payment of dividends could, depending upon the financial condition of
affiliates, be deemed to constitute such an unsafe or unsound practice.
Neither Kentucky Enterprise nor any affiliate of Fifth Third has ever been
prohibited from declaring dividends or restricted in paying any dividends
declared.
If, in the opinion of the applicable regulatory authority, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the depository institution, could include the payment of
dividends), such authority may require, after notice and hearing, that such
bank cease and desist from the practice. The Federal Reserve Board has similar
authority with respect to bank holding companies, and the OTS has similar
authority with respect to savings and loan holding companies. In addition, the
Federal Reserve Board, the Comptroller of the Currency and the FDIC have issued
policy statements which provide that insured banks and bank holding companies
should generally only pay dividends out of current operating earnings.
Finally, the regulatory authorities have established guidelines with respect to
the maintenance of appropriate levels of capital by a bank, bank holding
company, savings association or savings and loan holding company under their
jurisdiction. Compliance with the standards set forth in such guidelines could
limit the amount of dividends which Fifth Third and Kentucky Enterprise, and
their respective affiliates, may pay.
PREEMPTIVE RIGHTS
The Amended Articles of Incorporation of Kentucky Enterprise provide
that the holders of capital stock of Kentucky Enterprise are not entitled to
preemptive rights with respect to any shares or other securities of Kentucky
Enterprise that may be issued. Shareholders of Fifth Third also have no
preemptive rights.
RIGHTS UPON LIQUIDATION
In the event of any liquidation, dissolution or winding up of Kentucky
Enterprise, the holders of Kentucky Enterprise Common Stock would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of Kentucky Enterprise (including the payment of all fees, taxes and other
expenses incidental thereto), the remaining assets of Kentucky Enterprise
available for distribution. If Kentucky Enterprise Preferred Stock is issued,
the holders thereof may have priority over the holders of Kentucky Enterprise
Common Stock in the event of liquidation or dissolution. With respect to Fifth
Third, Fifth Third shareholders have identical rights on liquidation,
dissolution or winding up, subject to identical considerations in the event of
any issuance of Fifth Third Preferred Stock.
INDEMNIFICATION AND PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Fifth Third's Code of Regulations provides for the indemnification of
each director and officer of the corporation, to the fullest extent permitted
by Ohio law, against all expenses and liabilities reasonably incurred by or
imposed on him or her in connection with any proceeding or threatened
proceeding in which he or she may become involved by reason of his or her being
or having been a director or officer. Kentucky Enterprise's Amended Articles
of Incorporation also provide for the indemnification of each director and
officer of the corporation pursuant to applicable Ohio law. Generally, Ohio
law permits such indemnification provided that the person seeking to be
indemnified has acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests
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of the corporation, and with respect to any criminal action, had no reasonable
cause to believe his or her conduct was unlawful; provided, however, that in
the case of suit brought by or in the right of a corporation against one of its
directors or officers, no indemnification shall be paid with respect: to (i)
any claim, issue or matter as to which such person is adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation,
unless, and only to the extent that, the court of common pleas or the court in
which such action or suit was brought determines that, despite the adjudication
of liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the court
shall deem proper, and (ii) any action or suit in which the only liability
asserted against a director is for unlawful distributions. The grant of
indemnification in the context of a derivative or other comparable suit may
have a circular effect, inasmuch as any damages recovered in such action will
be offset by the cost of indemnification. If the Merger is consummated, Fifth
Third will assume all such obligations of Kentucky Enterprise for the
indemnification of its officers and directors.
Kentucky Enterprise's Amended Articles of Incorporation limit the
personal liability of directors, except that a director will be personally
liable for any action he takes or fails to take as a director if it is proved
by clear and convincing evidence that the director has not acted in good faith,
in a manner he reasonably believes to be in or not opposed to the best
interests of Kentucky Enterprise, or with the care that an ordinarily prudent
person in a like position would use under similar circumstances.
SHAREHOLDERS' MEETINGS; QUORUM
Special meetings of Fifth Third's shareholders may be called at any
time by the Board of Directors or by the shareholders of Fifth Third upon the
written application of the holders of at least 25% of all Fifth Third capital
stock entitled to vote on the matters to be considered at the meeting. Such
applications must set forth the purpose or purposes of the meeting. Special
meetings of Kentucky Enterprise's shareholders may be called at any time by the
Chairman of the Board, the President, the Board of Directors by action at a
meeting, or a majority of the Board of Directors acting without a meeting, and
must be called by the Chairman of the Board, the President or the Secretary
upon the written request of the holders of 50% of all the shares outstanding
and entitled to vote at the meeting. Such written request must state the
purpose or purposes of the meeting.
The presence in person or by proxy of the holders of a majority of the
aggregate number of the outstanding shares of any class or series of capital
stock voting at a meeting constitutes a quorum under the respective Codes of
Regulations of each institution.
SUBSCRIPTION, CONVERSION, REDEMPTION RIGHTS; STOCK NONASSESSABLE
Neither Fifth Third Common Stock nor Kentucky Enterprise Common Stock
has subscription or conversion rights, and there are no mandatory redemption
provisions applicable thereto.
Shares of Fifth Third Common Stock issued to shareholders of Kentucky
Enterprise pursuant to the Affiliation Agreement and the Merger Agreement will
be validly issued, fully paid and non-assessable, and will not, upon such
issuance, be subject to preemptive rights of any shareholder of Fifth Third.
CHANGE OF CONTROL PROVISIONS
The respective Articles of Incorporation and Codes of Regulations of
Fifth Third and Kentucky Enterprise contain various provisions which could make
more difficult a change in control of each corporation or discourage a tender
offer or other plan to restructure each corporation. Under Fifth Third's
Second Amended Articles of Incorporation, as amended, Fifth Third's Board of
Directors has the authority to issue 500,000 shares of Fifth Third Preferred
Stock and to fix the designations, powers, preferences and rights of such
shares and the qualifications, limitations or restrictions applicable thereto.
Kentucky Enterprise's Amended Articles of Incorporation grants Kentucky
Enterprise's Board of Directors the authority to issue 2,000,000 shares of
Kentucky Enterprise Preferred Stock and to fix the designations, powers,
preferences and rights of such shares and the qualifications, limitations
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or restrictions applicable thereto. Kentucky Enterprise's Amended Articles of
Incorporation also contains a super majority voting provision discussed under
"Voting Rights" above, which may discourage the acquisition of the beneficial
ownership, directly or indirectly, of more than 10% of Kentucky Enterprise
Common Stock.
Ohio corporation law also provides certain change of control
protective provisions. Section 1701.831 of the General Corporation Law of Ohio
sets forth the procedures for the acquisition of a control share of an Ohio
corporation which include the delivery of an acquiring person statement to the
target corporation and the affirmative vote of a majority of the shares held by
the shareholders of the target corporation prior to the acquisition of a
control share, at a meeting held for the purpose of voting on such acquisition.
Finally, Fifth Third's Code of Regulations and Kentucky Enterprise's Amended
Articles of Incorporation provide for the election of directors on a classified
basis.
The Ohio corporation statute also includes a provision which permits a
corporation's board of directors, when determining whether an acquisition
proposal or any other matter is in the best interest of the corporation, to
take into consideration the interests of the corporation's employees,
suppliers, creditors and customers, the economy of the state and the nation,
community and societal considerations and the long-term and short-term
interests of the corporation and its shareholders, including the possibility
that such interests may be best served by the continued independence of the
corporation. Kentucky Enterprise's Amended Articles of Incorporation contains
a provision which permits the Board of Directors to take into consideration
similar factors when evaluating an acquisition proposal.
[THE BALANCE OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK]
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<PAGE> 105
CERTAIN BENEFICIAL OWNERS OF FIFTH THIRD COMMON STOCK
The following table shows those persons known to Fifth Third to be the
beneficial owners of more than 5% of Fifth Third Common Stock at December 31,
1994:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT & NATURE OF OWNERSHIP(4) PERCENT OF CLASS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cincinnati Financial Corporation 19,624,358(1) 20.21
6200 South Gilmore
Fairfield, Ohio 45014
Fifth Third Bancorp 8,987,186(2) 9.26
Subsidiary Banks
Fifth Third Center
Cincinnati, Ohio 45263
The Western-Southern Life Insurance Company 6,637,883(3) 6.84
400 Broadway
Cincinnati, Ohio 45202
Ruane, Cunniff & Co. 5,434,533 5.60
767 Fifth Avenue, Suite 4701
New York, New York 10153
<FN>
(1) Cincinnati Financial Corporation owns 14,836,050 shares of Fifth Third
Common Stock. Cincinnati Insurance Company, a subsidiary of Cincinnati
Financial Corporation, owns 4,042,500 shares. Cincinnati Casualty Company,
another subsidiary, owns 315,000 shares. Cincinnati Life Insurance Company,
another subsidiary of Cincinnati Financial, owns 306,450 shares. In addition,
Mr. John J. Schiff, Jr., a director of Fifth Third and Chairman and a director
of Cincinnati Financial Corporation, individually beneficially owns 98,160
shares and Mr. Robert B. Morgan, a director of Fifth Third, who is President
and a director of Cincinnati Financial Corporation and Cincinnati Insurance
individually beneficially owns 19,448 shares. Also affiliated is a trust in
which John J. Schiff, Jr. and Thomas R. Schiff are trustees which owns 6,750
shares.
(2) There are five wholly owned bank subsidiaries of Fifth Third, which
are beneficial owners of 5,280,945 shares of Fifth Third Common Stock. The
banks hold these shares in a fiduciary capacity under numerous trust
relationships, none of which relates to more than 5% of the shares, and have
sole or shared voting power, and sole or shared investment decision over these
shares. The banks also hold shares in a non-discretionary capacity, and
disclaim any beneficial interest in all shares held in these capacities.
(3) The Western-Southern Life Insurance Company owns 997,083 shares of
Fifth Third Common Stock. Waslic Delaware Company, II, a subsidiary of The
Western-Southern Life Insurance Company, owns 5,620,275 shares. In addition,
Mr. John F. Barrett, a director, President and Chief Executive Officer of The
Western-Southern Life Insurance Company, and a director of Fifth Third,
individually beneficially owns 20,525 shares.
(4) Amounts of Fifth Third Common Stock reflect the three-for-two stock
split of Fifth Third Common Stock effected in the form of a stock dividend
declared December 19, 1995 and payable January 12, 1996.
</TABLE>
Fifth Third, its directors, executive officers and their affiliates
owned no shares of Kentucky Enterprise Common Stock outstanding on December 31,
1994.
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<PAGE> 106
FIFTH THIRD MANAGEMENT
The names and ages of the Directors and certain executive officers of
Fifth Third, their current positions and offices held with Fifth Third, their
business experience during the past five years and certain other information,
together with their beneficial ownership of Fifth Third Common Stock at
September 30, 1995, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SHARES OF FIFTH THIRD
COMMON STOCK BENEFICIALLY
OWNED AT SEPTEMBER 30,
1995(3)(6)(7)
NUMBER OF
NAME, AGE AND PRINCIPAL OCCUPATION DURING PAST FIVE DIRECTOR OF FIFTH SHARES PERCENT
YEARS; OTHER DIRECTORSHIPS(1) THIRD SINCE(2) OWNED OF CLASS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DIRECTORS
John F. Barrett, 46, President, Chief Executive Officer 1988 22,775 .0225
and Director of The Western-Southern Life Insurance
Company since March, 1994. Formerly, President and
Chief Operating Officer, The Western-Southern Life
Insurance Company.
Director of Cincinnati Bell Inc.(4)
Milton C. Boesel, Jr., 66, Counsel, Ritter, Robinson, 1989 17,487 .0173
McReady & James, Attorneys at Law, Toledo, Ohio,
formerly Ritter, Boesel & Robinson.
Clement L. Buenger, 68, Retired Chairman, Fifth Third 1971 399,900 .3958
and The Fifth Third Bank as of March, 1993. Retired as
Chief Executive Officer of Fifth Third and The Fifth
Third Bank as of January, 1991. Previously, President
of Fifth Third and The Fifth Third Bank.
Director of Cincinnati Gas & Electric Company.
Gerald V. Dirvin, 58, Retired April, 1994 as Director 1989 14,025 .0139
and Executive Vice President of The Procter & Gamble
Company, manufacturers of household and consumer
products which position Mr. Dirvin held since January,
1990. Formerly, Mr. Dirvin was Senior Vice President.
Director of Cintas Corporation and Northern Telecom Ltd.
Thomas B. Donnell, 48, Chairman, The Fifth Third Bank of 1984 212,207 .2100
Northwestern Ohio, N.A. (Toledo, Ohio), the resulting
institution from the November 12, 1991 merger of The
Fifth Third Bank of Northwestern Ohio, N.A. and The
Fifth Third Bank of Toledo, N.A. Formerly, President
and Chief Executive Officer of The Fifth Third Bank of
Northwestern Ohio, N.A.
Richard T. Farmer, 60, Chairman, Chief Executive Officer 1982 43,733 .0433
and Director, Cintas Corporation, a service company that
designs, manufactures and implements corporate identity
uniform programs.
Director of Safety-Kleen Corp.
</TABLE>
-86-
<PAGE> 107
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SHARES OF FIFTH THIRD
COMMON STOCK BENEFICIALLY
OWNED AT SEPTEMBER 30,
1995(3)(6)(7)
NUMBER OF
NAME, AGE AND PRINCIPAL OCCUPATION DURING PAST FIVE DIRECTOR OF FIFTH SHARES PERCENT
YEARS; OTHER DIRECTORSHIPS(1) THIRD SINCE(2) OWNED OF CLASS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John D. Geary, 68, Retired as President, Midland 1977 32,682 .0323
Enterprises Inc., a company engaged in inland waterway
transportation.
Ivan W. Gorr, 65, Retired in October, 1994 as Chairman 1991 9,528 .0094
and Chief Executive Officer of Cooper Tire & Rubber
Company, a manufacturer of tires and rubber products.
Director of Amcast Industrial Corporation, Arvin
Industries, Inc., Cooper Tire & Rubber Company and OHM
Corporation.
Joseph H. Head, Jr., 62, Chairman, Chief Executive 1987 68,532 .0678
Officer and Director, Atkins & Pearce, Inc.,
manufacturer of industrial textiles, since January,
1990. Previously, Mr. Head was a partner with Graydon,
Head & Ritchey, Counsel to The Fifth Third Bank.
Director of Baldwin Piano & Organ, Co.
Joan R. Herschede, 55, President and Chief Executive 1991 9,825 .0097
Officer of The Frank Herschede Company, retailer of
jewelry, china, crystal and silver.
William G. Kagler, 62, Chairman of the Executive 1983 23,468 .0232
Committee of the Board, and Director of Skyline Chili,
Inc., a restaurant chain and frozen food product
manufacturer, since November, 1994. Formerly,
Mr. Kagler was Chairman, CEO and Director of Skyline
Chili, Inc., since November, 1992, and President of
Kagler and Associates, Inc., a consulting firm serving
the food industry. Previously, Mr. Kagler was
President, Chief Executive Officer and Director of
Skyline Chili, Inc. Director of The Union Central Life
Insurance Company, The Ryland Group, Inc. and The Future
Now, Inc.
William J. Keating, 68, Retired Chairman and Publisher, 1980 65,174 .0645
The Cincinnati Enquirer, a regional newspaper, since
March, 1990. Previously, Mr. Keating was President and
Chief Executive Officer, Detroit Newspaper Agency.
Director of The Midland Co.
James D. Kiggen, 63, Chairman, President, Chief 1982 35,420 .0351
Executive Officer and Director, Xtek, Inc., manufacturer
of hardened steel parts.
Director of Cincinnati Bell, Inc. and United States
Playing Card Co.
</TABLE>
-87-
<PAGE> 108
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
SHARES OF FIFTH THIRD
COMMON STOCK BENEFICIALLY
OWNED AT SEPTEMBER 30,
1995(3)(6)(7)
NUMBER OF
NAME, AGE AND PRINCIPAL OCCUPATION DURING PAST FIVE DIRECTOR OF FIFTH SHARES PERCENT
YEARS; OTHER DIRECTORSHIPS(1) THIRD SINCE(2) OWNED OF CLASS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert B. Morgan, 60, President, Chief Executive Officer 1986 21,698 .0215
and Director of Cincinnati Financial Corporation and
Cincinnati Insurance Company since April, 1991.
Previously, Mr. Morgan was President and Director of
Cincinnati Financial Corporation and Cincinnati
Insurance Company.(4)
Michael H. Norris, 58, Retired as President and 1985 24,131 .0239
Director, The Deerfield Manufacturing Co., a fabricator
of sheet metal stampings, deep drawn parts and
assemblies, and retired as Group Vice President and
Director of the Ralph J. Stolle Company since January,
1994.
James E. Rogers, 48, Vice Chairman, President and Chief 1995 2,400 .0024
Operating Officer, CINergy Corporation. Previously,
Chairman, President and Chief Executive Officer of PSI
Energy, Inc.
Brian H. Rowe, 63, Chairman, GE Aircraft Engines, 1980 23,220 .0230
General Electric Company since September, 1993.
Previously Mr. Rowe was President and Chief Executive
Officer of GE Aircraft Engines, General Electric Company
since August, 1991. Formerly, Mr. Rowe was Senior Vice
President of GE Aircraft Engines, General Electric
Company.
George A. Schaefer, Jr., 49, President and Chief 1988 375,026 .3712
Executive Officer of Fifth Third and The Fifth Third
Bank since January, 1991. Previously, Mr. Schaefer was
President and Chief Operating Officer of Fifth Third and
The Fifth Third Bank.
Director of Community Mutual Insurance Company.
John J. Schiff, Jr., 51, Chairman and Director, John J. 1983 108,248 .1071
& Thomas R. Schiff & Co., Inc., an insurance agency.
Chairman and Director of Cincinnati Financial Corp. and
Cincinnati Insurance Co.
Director of Cincinnati Gas & Electric Company, Standard
Register Co. and Cincinnati Bengals.(4)
Dennis J. Sullivan, Jr., 63, Executive Counselor of Dan 1984 33,396 .0331
Pinger Public Relations, Inc., a public relations
agency, since February, 1993. Formerly, Director,
Executive Vice President and Chief Financial Officer of
Cincinnati Bell, Inc. and Cincinnati Bell Telephone
Company. Director of Community Mutual Insurance
Company, Access Corporation and The Future Now, Inc.
</TABLE>
-88-
<PAGE> 109
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SHARES OF FIFTH THIRD
COMMON STOCK BENEFICIALLY
OWNED AT SEPTEMBER 30,
1995(3)(6)(7)
NUMBER OF
NAME, AGE AND PRINCIPAL OCCUPATION DURING PAST FIVE DIRECTOR OF FIFTH SHARES PERCENT
YEARS; OTHER DIRECTORSHIPS(1) THIRD SINCE(2) OWNED OF CLASS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dudley S. Taft, 54, President and Director, Taft 1981 31,160 .0308
Broadcasting Company, owner and operator of television
broadcasting stations.
Director of The Union Central Life Insurance Company,
Cincinnati Gas & Electric Company, United States Playing
Card Co. and The Future Now, Inc.
EXECUTIVE OFFICERS
Michael D. Baker, 44, Executive Vice President of Fifth ---- 80,523 .0797
Third since August, 1995, and Senior Vice President of
The Fifth Third Bank. Previously, Mr. Baker was Senior
Vice President of Fifth Third since March, 1993.
P. Michael Brumm, 48, Executive Vice President of Fifth ---- 85,116 .0842
Third since August, 1995, and Chief Financial Officer
since 1990. Previously, Mr. Brumm was Senior Vice
President of Fifth Third and The Fifth Third Bank.
Michael K. Keating, 39, Executive Vice President of ---- 43,652 .0432
Fifth Third since August, 1995, and General Counsel of
Fifth Third since March, 1993. Previously, Mr. Keating
was Senior Vice President and Counsel of The Fifth Third
Bank since November, 1989, and Secretary of Fifth Third
and The Fifth Third Bank since January, 1994. Mr.
Keating is a son of Mr. William J. Keating, Director.
George W. Landry, 55, Executive Vice President of Fifth ---- 161,435 .1598
Third and The Fifth Third Bank.
Robert P. Niehaus, 49, Executive Vice President of Fifth ---- 94,781 .0938
Third since August, 1995, and Senior Vice President of
The Fifth Third Bank. Previously, Mr. Niehaus was
Senior Vice President of Fifth Third.
Stephen J. Schrantz, 45, Executive Vice President of ---- 114,227 .1131
Fifth Third and The Fifth Third Bank. Director of The
Frank Herschede Company.
All Directors and Executive Officers as a Group (27 ---- 2,153,762 2.1316
persons)(5)
<FN>
(1) Unless otherwise indicated, the director or officer has had the same
principal occupation for the past five years. Biographical
information given as of December 31, 1994.
</TABLE>
-89-
<PAGE> 110
(2) On April 15, 1975, the Board of Directors of The Fifth Third Bank
became the Board of Directors of Fifth Third pursuant to an Agreement
and Plan of Reorganization under which Fifth Third acquired The Fifth
Third Bank. Service on the Board of The Fifth Third Bank prior to
April 15, 1975 is reflected in the dates shown above. All of the
Directors are also directors of The Fifth Third Bank, except for
Messrs. Boesel, Donnell and Gorr, who are members of the Board of
Directors of The Fifth Third Bank of Northwestern Ohio, N.A.
(3) As reported to Fifth Third by the persons listed as of the date
stated. Includes shares held in the name of spouses, minor children,
certain relatives, trusts, estates and certain affiliated companies as
to which beneficial ownership may be disclaimed.
(4) Messrs. Morgan and Schiff, Jr. are officers and directors of
Cincinnati Financial Corporation, and Mr. Barrett is an officer and
director of The Western-Southern Life Insurance Company, whose
holdings of shares of Fifth Third Common Stock with their affiliates
are more fully set forth above under the caption "CERTAIN BENEFICIAL
OWNERS OF FIFTH THIRD COMMON STOCK."
(5) Shares of Fifth Third Common Stock held by The Fifth Third Bank in its
fiduciary capacity, as set forth above under the caption "CERTAIN
BENEFICIAL OWNERS OF FIFTH THIRD COMMON STOCK," are not included in
these totals.
(6) The amounts shown represent the total shares owned outright by such
individuals together with shares which are issuable upon the exercise
of all stock options which are currently exercisable. Specifically,
the following individuals have the right to acquire the shares
indicated after their names, upon the exercise of such stock options:
Mr. Baker, 32,345; Mr. Barrett, 12,938; Mr. Boesel, 12,938; Mr. Brumm,
30,470; Mr. Buenger, 4,500; Mr. Dirvin, 12,938; Mr. Donnell, 9,374; Mr.
Farmer, 12,938; Mr. Geary, 9,563; Mr. Gorr, 7,875; Mr. Head, 20,532;
Ms. Herschede, 4,500; Mr. Kagler, 4,500; Mr. M. Keating, 28,125; Mr.
W. Keating, 4,500; Mr. Kiggen, 12,938; Mr. Landry, 77,438; Mr. Morgan,
20,532; Mr. Niehaus, 30,470; Mr. Norris, 7,500; Mr. Rowe, 12,938; Mr.
Schaefer, 210,000; Mr. Schiff, 7,875; Mr. Schrantz, 74,063; Mr.
Sullivan, 4,500; and Mr. Taft, 4,500.
(7) Number of shares owned of Fifth Third Common Stock reflect the
three-for-two stock split of Fifth Third Common Stock effected in the
form of a stock dividend declared December 19, 1995 and payable
January 12, 1996.
LEGAL MATTERS
Certain legal matters will be passed upon for Kentucky Enterprise by
Housley Goldberg Kantarian & Bronstein, P.C., Washington, D.C. Counsel
employed by The Fifth Third Bank has rendered his opinion that the shares of
Fifth Third Common Stock to be issued to the shareholders of Kentucky
Enterprise in connection with the Merger have been duly authorized and, if
issued pursuant to the Affiliation Agreement and the Merger Agreement, will be
validly issued, fully paid and non-assessable under the current laws of the
State of Ohio. Dinsmore & Shohl, Cincinnati, Ohio, will render its opinion
with respect to certain federal income tax consequences of the Merger to Fifth
Third, Kentucky Enterprise and the shareholders of Kentucky Enterprise. At
December 1, 1995, attorneys at Dinsmore & Shohl beneficially owned 46,197
shares of Fifth Third Common Stock. The number of shares of Fifth Third Common
Stock beneficially owned by attorneys at Dinsmore & Shohl reflects the
three-for-two stock split of Fifth Third Common Stock effected in the form of a
stock dividend declared December 19, 1995 and payable January 12, 1996.
EXPERTS
The financial statements incorporated in this Proxy Statement and
Prospectus by reference from Fifth Third's 1994 Annual Report to Shareholders
which accompanies this Proxy Statement and Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which
is incorporated herein by reference (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to a change in the
method of accounting for debt and equity securities) and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
-90-
<PAGE> 111
The consolidated financial statements of Kentucky Enterprise as of
June 30, 1995 and 1994, and for each of the years in the three-year period
ended June 30, 1995, included herewith have been audited by KPMG Peat Marwick
LLP, independent auditors, as stated in their report (which report refers to
changes in the method of accounting for the employee stock ownership plan in
1995, certain investments in debt and equity securities in 1994, and income
taxes in 1993) and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
SHAREHOLDERS' PROPOSALS
If the Merger fails to be consummated, any shareholder proposal, in
order to be eligible for inclusion in the proxy materials for Kentucky
Enterprise's Annual Meeting of Shareholders which would be held in November,
1996, must be received by Kentucky Enterprise on or before June 15, 1996, at
its principal executive offices, 800 Monmouth Street, Newport, Kentucky 41071.
The Board of Directors will review any shareholder proposals that are filed as
required and will determine whether such proposals meet applicable criteria for
inclusion in the proxy statement for consideration at the 1996 Annual Meeting
of Shareholders.
RELATIONSHIP WITH INDEPENDENT AUDITORS
KPMG Peat Marwick LLP was Kentucky Enterprise's independent certified
public accountant for the 1995 fiscal year. The Board of Directors presently
intends to renew Kentucky Enterprise's arrangement with KPMG Peat Marwick LLP
to be its independent certified public accountant for the fiscal year ending
June 30, 1996. A representative of KPMG Peat Marwick LLP is expected to be
present at the Annual Meeting to respond to appropriate questions and to make a
statement, if so desired.
OTHER MATTERS
The Board of Directors of Kentucky Enterprise knows of no other
matters which may come before the Annual Meeting. However, if any matters
other than those set forth in the notice should be properly presented for
action, including any adjournment of the Annual Meeting, such matters will be
handled in accordance with applicable legal requirements.
-91-
<PAGE> 112
INDEX TO KENTUCKY ENTERPRISE FINANCIAL STATEMENTS
The following consolidated audited financial statements as of June 30, 1995 are
included in this registration statement:
<TABLE>
<S> <C>
Independent Auditors' Report F-1
Consolidated Statements of Financial Condition F-2
Consolidated Statements of Income F-3
Consolidated Statements of Changes in Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
The following consolidated unaudited financial statements as of and for the
three months ended September 30, 1995 are included in this registration
statement:
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition F-34
Consolidated Statements of Income F-35
Consolidated Statements of Cash Flows F-36
Notes to Consolidated Financial Statements F-37
</TABLE>
92
<PAGE> 113
Independent Auditors' Report
The Board of Directors and Stockholders
Kentucky Enterprise Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Kentucky Enterprise Bancorp, Inc. and subsidiary as of June 30, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kentucky Enterprise
Bancorp, Inc. and subsidiary as of June 30, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the American Institute of Certified Public
Accountants' Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans in 1995, and the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities in 1994, and No. 109, Accounting for
Income Taxes in 1993.
/s/ KPMG Peat Marwick LLP
Cincinnati, Ohio
July 28, 1995
F-1
<PAGE> 114
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,060,217 2,620,998
Interest-bearing deposits in other banks 5,830,918 9,770,181
Securities available for sale (amortized cost of $16,278,670 in
1995 and $10,833,394 in 1994) (note 3) 16,527,440 10,722,170
Securities held to maturity (market value of
$27,396,447 in 1995 and $49,928,845 in 1994) (note 3) 27,527,182 50,728,466
Mortgage-backed securities (market value of $68,604,087
in 1995 and $73,240,664 in 1994) (note 4) 68,933,746 74,232,452
Loans receivable held to maturity, net (note 5) 128,536,623
151,740,468
Federal Home Loan Bank of Cincinnati stock, at cost
(note 7) 3,542,200 3,324,300
Accrued interest receivable (note 8) 1,621,897 1,527,039
Premises and equipment (note 9) 2,059,491 2,209,078
Prepaid expenses and other assets 521,591 537,923
----------------- -----------
Total assets $ 280,365,150 284,209,230
================= ============
Liabilities and Stockholders' Equity
------------------------------------
Deposits (note 10) $ 227,268,535 233,755,202
Advances from Federal Home Loan Bank of Cincinnati (note 11) 324,000 351,000
Advances from borrowers for taxes and insurance 1,297,185 1,398,448
Income taxes (note 13):
Current - 47,706
Deferred 722,839 633,797
Accrued expenses and other liabilities 1,725,072 1,272,281
----------------- -----------
Total liabilities 231,337,631 237,458,434
Commitments and contingencies (note 16)
Stockholders' equity:
Serial preferred stock, $.01 par value; 4,000,000 shares
authorized; none issued - -
Common stock, $.01 par value; 8,000,000 shares authorized;
2,750,800 shares issued and outstanding 27,508 27,508
Additional paid-in capital 27,239,487 26,647,369
Retained earnings - substantially restricted (notes 2, 13, and 17) 23,474,974 22,693,565
Unrealized net gain (loss) on securities available for sale (note 3) 164,188 (73,408)
Employee stock ownership plan (note 15) (1,349,637) (1,662,571)
Management recognition plans (note 15) (529,001) (881,667)
----------------- -----------
Total stockholders' equity 49,027,519 46,750,796
----------------- -----------
Total liabilities and stockholders' equity $ 280,365,150 284,209,230
================= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 115
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable:
Mortgage loans $ 10,067,171 9,030,337 10,935,413
Consumer and other loans 737,190 580,725 625,027
Securities held to maturity and available for sale 2,605,270 2,905,112 2,806,777
Mortgage-backed securities 4,499,723 3,523,967 4,475,687
Interest-bearing deposits 194,945 305,218 232,379
--------------- ---------- ----------
Total interest income 18,104,299 16,345,359 19,075,283
--------------- ---------- ----------
Interest expense:
Deposits (note 10) 9,744,132 9,534,919 11,239,739
Federal Home Loan Bank of Cincinnati advances 24,841 26,869 28,849
--------------- ---------- ----------
Total interest expense 9,768,973 9,561,788 11,268,588
--------------- ---------- ----------
Net interest income 8,335,326 6,783,571 7,806,695
Provision for loan losses (note 5) 35,000 66,000 260,000
--------------- ---------- ----------
Net interest income after provision for loan 8,300,326 6,717,571 7,546,695
losses
--------------- ---------- ----------
Non-interest income - service charges and other fees 432,941 414,344 516,340
Non-interest expense:
Compensation and benefits 4,306,735 3,496,965 3,285,592
Occupancy expense 500,704 527,309 554,107
Federal insurance premiums 535,838 565,972 496,654
Data processing 322,132 324,967 353,859
Franchise and other taxes 255,067 226,523 233,486
Other real estate owned expense, net 10,220 70,335 37,829
Other, net 897,674 725,866 787,957
--------------- ---------- ----------
Total non-interest expense 6,828,370 5,937,937 5,749,484
--------------- ---------- ----------
Income before income tax expense and
cumulative effect of change in accounting
principle 1,904,897 1,193,978 2,313,551
Income tax expense (note 13) 605,000 310,000 765,000
--------------- ---------- ----------
Income before cumulative effect of change
in accounting principle 1,299,897 883,978 1,548,551
Cumulative effect at July 1, 1992 of change
in accounting for income taxes (note 13) - - 172,000
--------------- ---------- ----------
Net income $ 1,299,897 883,978 1,376,551
=============== ========== ==========
Weighted average shares outstanding 2,701,555 2,891,557 N/A
=============== ========== ==========
Net income per share since conversion (note 1) $ .48 .14 N/A
=============== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 116
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholder's Equity
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on Unallocated Unearned
Additional securities common common
Common paid-in Retained available stock held stock held
stock capital earnings for sale by ESOP by MRPs Total
----- ------- -------- -------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1992 $ - - 20,433,036 - - 20,433,036
Net income - - 1,376,551 - - - 1,376,551
-------- ---------- ---------- --------- ---------- --------- ----------
Balances at June 30, 1993 - - 21,809,587 - - - 21,809,587
Net income - - 883,978 - - - 883,978
Net proceeds from 2,433,400 shares of common 24,334 23,412,307 - - - - 23,436,641
stock issued in stock conversion (note 2)
Purchase of 105,800 shares of common stock by 1,058 1,056,942 - - - (1,058,000) -
management recognition plans (note 15)
Purchase of 211,600 shares of common stock by 2,116 2,113,884 - - (2,116,000) - -
employee stock ownership plan (note 15)
Amortization of employee stock ownership plan - 64,236 - - 453,429 176,333 693,998
and management recognition plans (note 15)
Unrealized loss on securities available for - - - (73,408) - - (73,408)
sale, net of tax -------- ---------- ---------- --------- ---------- --------- ----------
Balances at June 30, 1994 27,508 26,647,369 22,693,565 (73,408) (1,662,571) (881,667) 46,750,796
Net income - - 1,299,897 - - - 1,299,897
Dividends on common stock at $0.20 per share,
net of dividends on unallocated common stock
held by ESOP - - (518,488) - - - (518,488)
Amortization of employee stock ownership plan
and management recognition plans (note 15) - 592,118 - - 312,934 352,666 1,257,718
Unrealized gain on securities available
for sale, net of tax - - - 237,596 - - 237,596
--------- --------- ---------- --------- ---------- --------- ----------
Balances at June 30, 1995 $27,508 27,239,487 23,474,974 164,188 (1,349,637) (529,001) 49,027,519
========= ========== ========== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 117
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,299,897 883,978 1,376,551
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and accretion, net (366,721) 537,467 617,746
Depreciation of premises and equipment 163,197 187,805 191,457
Provision for loan losses 35,000 66,000 260,000
Provision for real estate owned losses - - 31,300
Federal Home Loan Bank of Cincinnati stock
dividend (217,900) (157,000) (136,300)
Management recognition plans amortization 516,114 176,333 -
Employee stock ownership plan amortization 741,604 453,429 -
Deferred taxes 3,621 (41,600) (111,000)
Change in:
Accrued interest receivable (94,858) (159,658) 375,586
Prepaid expenses and other assets 105,200 (20,536) (9,801)
Income taxes (173,551) (70,417) 73,001
Accrued expenses and other liabilities 452,791 410,236 449,282
Other, net - 69,801 (92,482)
----------------- ------------ ------------
Net cash provided by operating activities 2,464,394 2,335,838 3,025,340
----------------- ------------ ------------
Cash flows from investing activities:
Net (increase) decrease in loans receivable (23,125,104) 1,716,078 11,806,841
Purchases of securities:
Available for sale (10,357,339) (22,054,335) -
Held to maturity (1,406,902) (51,374,290) (24,702,620)
Proceeds from maturities of securities:
Available for sale 5,000,000 10,575,000 -
Held to maturity 24,500,000 39,500,000 32,746,000
Purchases of mortgage-backed securities (7,019,891) (18,466,435) (32,811,227)
Principal collected on mortgage-backed securities 12,591,826 29,935,435 21,538,162
Additions to premises and equipment (20,904) (42,528) (84,236)
Proceeds from disposal of premises and equipment 7,294 - 217,200
----------------- ------------ ------------
Net cash provided by (used in) investing
activities 168,980 (10,211,075) 8,710,120
----------------- ------------ ------------
Cash flows from financing activities:
Net decrease in deposits (6,486,667) (14,800,867) (13,208,089)
Proceeds from stock conversion, net of
conversion costs - 23,436,641 -
Repayments of advances from the Federal Home
Loan Bank of Cincinnati (27,000) (27,000) (27,000)
Dividends paid (518,488) - -
Net increase (decrease) in advances from
borrowers for taxes and insurance (101,263) 227,762 (136,513)
----------------- ------------ ------------
Net cash provided by (used in) financing
activities (7,133,418) 8,836,536 (13,371,602)
----------------- ------------ ------------
</TABLE>
F-5
<PAGE> 118
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents $ (4,500,044) 961,299 (1,636,142)
Cash and cash equivalents, beginning of year 12,391,179 11,429,880 13,066,022
------------------ ---------- -----------
Cash and cash equivalents, end of year $ 7,891,135 12,391,179 11,429,880
================== ========== ==========
Noncash activity:
Additions to real estate owned $ 19,481 - 58,027
Loans originated to finance the sale of real
estate owned - - 57,300
Unrealized (gain) loss on securities
available for sale (359,994) 111,224 -
Additional paid-in-capital for compensation
expense for tax purposes in excess of
amounts recognized for financial reporting
purposes $ 208,841 64,236 -
================== ========== ==========
Supplemental disclosures:
Interest paid on deposits $ 9,610,471 9,601,613 11,294,405
Interest paid on advances from Federal
Home Loan Bank of Cincinnati 24,841 26,869 28,849
Income taxes paid $ 455,000 415,000 975,000
================== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 119
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994 and 1993
(1)Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. A description of the more
significant accounting policies follows:
(a) Basis of Presentation
---------------------
The accompanying consolidated financial statements include the
accounts of Kentucky Enterprise Bancorp, Inc. (the "Company")
and its wholly-owned subsidiary, Kentucky Enterprise Bank,
F.S.B. (the "Bank"). The Company, an Ohio corporation, was
organized to act as the holding company of the Bank. All
intercompany accounts and transactions have been eliminated.
As more fully described in Note 2, the Bank completed its
conversion from the mutual to capital stock form of ownership
in fiscal 1994. Upon its conversion, the Company
simultaneously acquired all of the outstanding stock of the
Bank. Prior to fiscal year 1994, the financial statements
include the accounts of the Bank only.
The Bank's primary business activities include attracting
deposits from the general public and originating one-to-four
family residential property loans. The Bank also makes
construction and consumer loans and invests in mortgage-backed
and other securities. The Bank is subject to competition
from other financial institutions. Deposits at the Bank are
insured up to applicable limits by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation
(FDIC). The Bank is a Federally chartered savings bank and is
subject to comprehensive regulation, examination and
supervision by the FDIC and the Office of Thrift Supervision.
Certain fiscal 1994 and 1993 amounts have been reclassified to
conform with the current year presentation.
(b) Cash Equivalents
----------------
Cash equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other banks.
For purposes of the statements of cash flows, the Company
considers all short-term investments with a maturity at date
of purchase of 90 days or less to be cash equivalents.
F-7
<PAGE> 120
(c) Securities
----------
In May 1993, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity
Securities. SFAS No. 115 requires that debt and equity
securities be classified into one of three categories: held to
maturity, available for sale or trading. Securities held to
maturity are limited to debt securities that the holder has
the positive intent and the ability to hold to maturity; these
securities are reported at amortized cost. Securities held
for trading are limited to debt and equity securities that are
held principally to be sold in the near term; these securities
are reported at fair value, and unrealized gains and loss are
reflected in earnings. Securities held as available for sale
consist of all other securities; these securities are reported
at fair value, and unrealized gains and losses are not
reflected in earnings but are reflected as a separate
component of stockholders' equity, net of income taxes. Under
SFAS No. 115, securities that could be sold in the future
because of changes in interest rates or other factors may not
be classified as held to maturity.
In fiscal year 1994, the Company adopted SFAS No. 115.
Accordingly, all securities that the Company does not have the
ability or intent to hold to maturity are classified as
securities available for sale and are carried at fair value.
Securities classified as held to maturity are reported at
amortized cost. Unrealized gains and losses on securities
available for sale are reported as a separate component of
stockholders' equity, net of income taxes. The Company has no
investments classified as trading securities. The adoption of
SFAS No. 115 had no effect on the Company's fiscal year 1994
consolidated financial statements.
Premiums and discounts are recognized as interest income using
a method that approximates the level-yield method over the
period to maturity.
Gains and losses on the sale of securities are determined
using the specific identification method.
(d) Mortgage-Backed Securities
--------------------------
Mortgage-backed securities represent participating interests
in pools of long-term first mortgage loans originated and
serviced by the issuers of the securities. SFAS No. 115,
discussed above, also applies to investments in
mortgage-backed securities. These securities are carried at
unpaid principal balances, adjusted for unamortized premiums
and unearned discounts, as the Company has the ability and the
intent to hold these securities to maturity. Premiums and
discounts are amortized using the level-yield method over the
remaining period to contractual maturity, adjusted for
anticipated prepayments. Gains and losses on the sale of
mortgage-backed securities are determined using the specific
identification method.
F-8
<PAGE> 121
(e) Loans Receivable
----------------
Loans receivable are stated at unpaid principal balances, less
unearned discounts, net deferred loan origination fees and the
allowance for loan losses.
Discounts on first mortgage loans purchased are amortized to
income using the level-yield method over the remaining period
to contractual maturity, adjusted for anticipated prepayments.
Discounts on consumer loans are recognized over the lives of
the loans using the level-yield method.
Uncollectible interest on loans that are contractually ninety
days or more past due is charged off, or an allowance is
established. 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 cash
payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal
payments is back to normal, in which case the loan is returned
to accrual status.
Provisions for losses on loans are estimated periodically and
are charged to operations based on management's evaluation of
the loan portfolio. The allowance for possible loan losses is
based on a periodic analysis of the loan portfolio and
reflects an amount which in management's judgment is adequate
to provide for possible loan losses in the existing portfolio.
In evaluating the portfolio, management takes into
consideration numerous factors such as the Company's loan
growth, prior loss experience, present and potential risks of
the loan portfolio and current economic conditions. Loans are
charged off against the allowance for loan losses when the
collectibility of loan principal is unlikely. Recoveries of
loans previously charged off are credited to the allowance.
Management believes that the allowance for loan losses is
adequate. While management uses available information to
recognize losses on loans, future additions to the allowance
may be necessary based on unanticipated changes in economic
conditions, particularly in the Northern Kentucky region. In
addition, the FDIC and the Office of Thrift Supervision, as an
integral part of their examination process, periodically
review the Bank's allowance for losses. Such agencies may
require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the
time of their examination.
Loan fees received are accounted for in accordance with SFAS
No. 91, Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs
of Leases. Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized in
income using the level-yield method over the contractual lives
of the loans. Unamortized net fees are credited to income
when loans pay off prior to scheduled maturity. Accretion of
net loan fees on potential problem loans is suspended when, in
the opinion of management, such suspension is warranted.
In 1993, the FASB issued SFAS No. 114, Accounting by Creditors
for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures. These pronouncements require
that the expected loss of interest income on nonperforming
loans be taken into account when calculating
F-9
<PAGE> 122
loan loss reserves and that specified impaired loans be
measured based on either the present value of the expected
future cash flows discounted at the loan's effective interest
rate, the loan's observable market price, or at the fair value
of the collateral if the loan is collateral dependent.
The Company adopted SFAS No. 118 and 114 in fiscal year 1995
and 1994, respectively. The adoption of these standards did
not have a material effect on the Company's consolidated
financial statements.
(f) Real Estate Owned
-----------------
Real estate acquired through foreclosure or in-substance
foreclosure is reported at the lower of cost or fair value at
acquisition (or in-substance foreclosure) date, and
subsequently at the lower of its new cost or fair value, less
estimated selling costs.
(g) Premises and Equipment
----------------------
Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets. Estimated
useful lives are ten to fifty years for office buildings and
improvements and three to fifteen years for furniture,
fixtures and equipment.
(h) Income Taxes
------------
Effective July 1, 1992, the Company adopted SFAS 109,
Accounting for Income Taxes. SFAS 109 requires a change from
the deferred method of accounting for income taxes of
Accounting Principles Board (APB) Opinion 11 to the asset and
liability method of accounting for income taxes. Under the
asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes that
reenactment date. The Company has reported the cumulative
effect of that change in the method of accounting for income
taxes in the 1993 consolidated statement of income.
(i) Net Income Per Share
--------------------
Net income per share is computed by dividing net income by the
weighted average number of shares of common stock and common
stock equivalents, when dilutive, outstanding during the
period. Net income per share is not applicable for periods
prior to the completion of the Bank's stock conversion on
December 16, 1993. The 1994 net income per share has been
computed based upon net income for the period from January 1,
1994 to June 30, 1994. The effect on net income per share for
the post-conversion period from December 16, 1993 to December
31, 1993 is not meaningful.
F-10
<PAGE> 123
(j) Employee Stock Ownership Plan
-----------------------------
On November 22, 1993, the American Institute of Certified
Public Accountants issued Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans ("SOP
93-6"). SOP 93-6 requires that compensation expense be
recognized for shares committed to be released to directly
compensate employees in an amount equal to the fair value of
the shares committed. The difference between the fair value
of the shares committed to be released and the cost of such
shares is charged or credited to additional paid-in capital.
Additionally, ESOP shares that have been committed to be
released are considered outstanding for earnings per share
computations. Prior practice was to recognize compensation
expense based on the employer's contributions to the ESOP, and
to treat all shares held by the ESOP as outstanding shares in
the determination of earnings per share. The Company adopted
SOP 93-6 on July 1, 1994 on a prospective basis.
(2) Conversion to Stock Form of Ownership
-------------------------------------
On June 17, 1993, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from mutual to stock form. On December 16, 1993, the
Bank completed its Conversion and was simultaneously acquired by the Company.
On the date of the Conversion, the Company issued 2,433,400 shares of common
stock, $.01 par value, at $10 per share, and 211,600 and 105,800 shares,
respectively, were acquired by the Employee Stock Ownership Plan and Management
Recognition Plans. Net proceeds from the Conversion totaled $23,436,641. In
accordance with the Plan of Conversion, the Company retained approximately
$11,000,000 of the net proceeds and used the remaining to purchase all of the
outstanding stock of the Bank. The financial position and results of
operations of the Company only as of and for the year ended June 30, 1995 and
for the period from conversion through June 30, 1994 are presented in Note 18.
Costs related to the Conversion of $897,359 were charged against the Company's
proceeds from the sale of stock.
At the time of conversion, the Bank established a liquidation account in an
amount equal to the regulatory capital of the Bank as of the date of the most
recent financial statements contained in the final subscription prospectus.
The liquidation account will be reduced annually to the extent that eligible
account holders have reduced their qualifying deposits as of each anniversary
date. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution from
the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
Current regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not thereby be reduced below the
amount then required of the aforementioned liquidation account or applicable
regulatory capital requirements or if such dividend would not otherwise violate
regulatory requirements.
F-11
<PAGE> 124
(3) Securities
----------
The following summarizes securities available for sale at June 30, which are
comprised entirely of United States Government and agency obligations:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1995 $ 16,278,670 256,751 (7,981) 16,527,440
================ =========== ========== ==========
1994 $ 10,833,394 - (111,224) 10,722,170
================ =========== ========== ==========
</TABLE>
The amortized cost and market values of securities held to maturity at
June 30, which are comprised entirely of United States Government and
agency obligations are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995 $ 27,527,182 44,295 (175,030) 27,396,447
================ ========== ========== ==========
1994 $ 50,728,466 3,423 (803,044) 49,928,845
================ ========== ========== ==========
</TABLE>
The amortized cost and market value of debt securities at June 30, 1995, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
----------------------------- ---------------------------
Amortized Market Amortized Market
cost value cost value
---------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,497,390 1,493,285 26,027,182 25,852,152
Due after one year through
five years
14,781,280 15,034,155 1,500,000 1,544,295
---------------- ---------- ---------- ----------
$ 16,278,670 16,527,440 27,527,182 27,396,447
================ ========== ========== ==========
</TABLE>
F-12
<PAGE> 125
(4) Mortgage-Backed Securities
The carrying value and estimated market value of mortgage-backed securities,
all of which are held to maturity, at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------------------------------
Principal Unamortized Unearned Carrying Market
balance premiums discounts value value
---------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GNMA certificates $ 5,401,115 26,316 (18,189) 5,409,242 5,566,367
FHLMC certificates 24,750,533 228,510 (611,799) 24,367,244 24,373,368
FNMA certificates 31,429,442 292,789 (450,758) 31,271,473 31,189,263
Collaterialized Mortgage 7,876,022 9,765 - 7,885,787 7,475,089
Obligations ---------------- --------- ---------- ---------- ----------
$ 69,457,112 557,380 (1,080,746) 68,933,746 68,604,087
================ ========= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------------------------------------
Principal Unamortized Unearned Carrying Market
balance premiums discounts value value
---------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GNMA certificates $ 6,034,251 39,738 (21,170) 6,052,819 6,005,227
FHLMC certificates 21,953,106 312,794 (111,199) 22,154,701 22,033,595
FNMA certificates 34,073,095 353,301 (521,558) 33,904,838 33,259,268
Collateralized Mortgage
Obligations 12,073,778 46,316 - 12,120,094 11,942,574
---------------- ------- -------- ---------- ----------
$ 74,134,230 752,149 (653,927) 74,232,452 73,240,664
================ ========= ========== ========== ==========
</TABLE>
The carrying value and estimated market value of mortgage-backed securities,
held to maturity, at June 30 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995 $ 68,933,746 870,117 (1,199,776) 68,604,087
================= ======= ========= ==========
1994 $ 74,232,452 239,030 (1,230,818) 73,240,664
================= ======= ========= ==========
</TABLE>
Estimated market values for mortgage-backed securities are based on published
market or securities dealers' estimated prices.
F-13
<PAGE> 126
(5)
Loans Receivable Held to Maturity, Net
- ---------------------------------------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Mortgage loans:
Secured by one-to-four family residences $ 138,155,301 115,919,355
Secured by other properties 3,470,603 4,107,270
Construction loans 5,328,045 4,405,315
------------------ -----------
146,953,949 124,431,940
Undisbursed portion of construction loans (2,842,464) (3,021,594)
Unearned discounts (3,922) (9,133)
Net deferred loan origination fees (414,952) (384,005)
------------------ -----------
Net mortgage loans 143,692,611 121,017,208
------------------ -----------
Consumer and other loans:
Loans on deposit accounts 1,995,201 1,929,163
Home equity loans 5,807,743 5,473,727
Other 728,485 507,511
------------------ -----------
8,531,429 7,910,401
Net deferred loan origination costs 97,641 111,847
Unearned discounts (91,395) (48,015)
------------------ -----------
Net consumer and other loans 8,537,675 7,974,233
------------------ -----------
Allowance for loan losses (489,818) (454,818)
------------------ -----------
Total loans receivable, net $ 151,740,468 128,536,623
================== ===========
</TABLE>
Loans receivable included approximately $75,000,000 and $58,600,000 of
adjustable rate loans at June 30, 1995 and 1994, respectively.
F-14
<PAGE> 127
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 454,818 393,318 133,318
Provisions charged to income 35,000 66,000 260,000
Charge-offs - (4,500) -
------------- ------- -------
Balance, end of year $ 489,818 454,818 393,318
============= ======= =======
</TABLE>
F-15
<PAGE> 128
(6)
Real Estate Owned, Net
- ----------------------
There was no real estate owned as of June 30, 1995 and 1994.
Changes in the allowance for losses on real estate owned are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ - 28,500 28,500
Provision charged to income - - 31,300
Charge-offs - (28,500) (31,300)
----- ------- -------
Balance, end of year $ - - 28,500
===== ======= =======
</TABLE>
(7)
Investments Required by Law
- ---------------------------
A minimum of 1% of net home mortgage loans (mortgage loans and contracts
secured by residential property less loans in process on residential
property) is required to be maintained in Federal Home Loan Bank
common stock. This minimum requirement was $1,912,100 and
$1,668,200 at December 31, 1994 and 1993, respectively.
F-16
<PAGE> 129
(8) Accrued Interest Receivable
---------------------------
Accrued interest receivable as of June 30 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Securities $ 478,190 561,830
Mortgage-backed securities 353,500 366,886
Mortgage loans 718,785 543,804
Consumer and other loans 71,422 54,519
------------ ---------
$ 1,621,897 1,527,039
============ =========
</TABLE>
Accrued interest on loans receivable is net of an allowance for uncollected
interest of $14,643 and $19,568 at June 30, 1995 and 1994,
respectively.
F-17
<PAGE> 130
(9) Premises and Equipment
----------------------
Premises and equipment at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 600,462 600,462
Office buildings and improvements 3,017,661 3,011,666
Furniture, fixtures and equipment 881,580 873,965
------------ -----------
4,499,703 4,486,093
Accumulated depreciation (2,440,212) (2,277,015)
------------ -----------
$ 2,059,491 2,209,078
============ ===========
</TABLE>
(10) Deposits
--------
Deposit balances at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------------- --------------------
Weighted Weighted
average average
interest interest
Amount Percent rate Amount Percent rate
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts:
Demand accounts $ 59,472 - - $ 43,614 - -
Christmas Club accounts 317,519 .1% - 334,383 .1% -
Interest bearing accounts:
Passbook savings 35,883,509 15.8 2.50 42,644,353 18.3 2.50
NOW accounts 21,857,514 9.7 2.12 22,854,235 9.8 2.18
Variable rate money market
accounts 15,949,957 7.0 2.49 19,621,290 8.4 2.49
---------------------- ----------------------
74,067,971 32.6 2.31 85,497,875 36.6 2.40
Certificates of deposit:
3 months or less 1,115,727 .5 3.27 1,587,080 .7 3.02
Over 3 months to 6 months 10,175,449 4.5 5.11 14,488,060 6.2 3.29
Over 6 months to 1 year 23,875,513 10.5 5.72 23,879,638 10.2 3.72
Over 1 year to 2 years 74,916,442 33.0 5.70 56,263,585 24.1 4.79
Over 2 years to 3 years 11,607,283 5.1 5.07 14,979,125 6.4 4.76
Over 3 years to 5 years 27,487,456 12.1 5.95 32,966,091 14.1 6.06
Over 5 years 3,693,600 1.6 7.15 3,898,315 1.7 7.10
--------- --- ---- --------- --- ----
152,871,470 67.3 5.68 148,061,894 63.4 4.79
Accrued interest on deposits 329,094 .1 195,433 -
------- -- ------- ----------
Total Deposits $227,268,535 100.0% 4.59 $233,755,202 100.0% 3.91
============ ====== ============ ======
</TABLE>
F-18
<PAGE> 131
Scheduled maturities of certificate of deposit accounts at June 30, 1995
are summarized as follows:
In the year ending: (Thousands)
-----------------
June 30, 1996 104,811
June 30, 1997 29,079
June 30, 1998 11,705
June 30, 1999 4,665
June 30, 2000 and thereafter 2,611
-----------------
$ 152,871
=================
The Company held 71 and 57 deposit accounts at June 30, 1995 and 1994,
respectively, with balances greater than $100,000 with aggregate balances of
$8,901,361 at June 30, 1995 and $7,433,602 at June 30, 1994.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Passbook savings $943,116 1,215,745 1,268,698
NOW accounts 478,260 484,558 525,558
Money market deposit accounts 397,420 557,374 764,653
Certificates of deposit 7,925,336 7,277,242 8,680,830
--------- --------- ---------
Total interest expense $ 9,744,132 9,534,919 11,239,739
============ ========= ==========
</TABLE>
F-19
<PAGE> 132
(11)
Federal Home Loan Bank of Cincinnati Advances
- --------------------------------------------
Federal Home Loan Bank of Cincinnati (FHLB) advances represent funds
loaned to the Company for the purpose of making loans under the
Affordable Housing Program, as a part of the Community Reinvestment
Act. Pursuant to collateral agreements with the FHLB, advances are
secured in the amount of $486,000 by eligible mortgage collateral.
These advances bear interest at 7.5% and have a maturity date of
August 1, 2006.
(12) Fair Value of Financial Instruments
-----------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash Equivalents
----------------
For those short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities
---------------------
For marketable equity securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes. For other
securities held as investments, fair value equals quoted market price,
if available. If a quoted price is not available, fair values are
estimated using quoted market prices for similar securities.
F-20
<PAGE> 133
Mortgage-Backed Securities
--------------------------
Estimated market values for mortgage-backed securities are based on
published market or securities dealers' estimated prices.
Loans Receivable
----------------
For certain homogeneous categories of loans, such as some residential
mortgages and other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted
for differences in loan characteristics. The fair value of other
types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit Liabilities
-------------------
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
F-21
<PAGE> 134
The estimated fair values of the Company's financial instruments at June 30 are
as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------------ -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(Thousands) (Thousands) (Thousands) (Thousands)
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash equivalents $ 7,891 7,891 12,391 12,391
Investment securities 44,055 43,924 61,450 60,651
Mortgage-backed securities 68,934 68,604 74,232 73,365
Loans:
1-4 family adjustable rate
mortgages 68,811 69,083 53,127 53,584
1-4 family fixed rate mortgages 74,617 75,559 67,684 65,377
Consumer loans 2,632 2,620 2,436 2,419
Other residential 5,905 5,906 5,474 5,474
Non-accrual loans 265 265 271 271
Less: allowance for loan losses (490) (490) (455) (455)
------------- ---------- ----------- ------------
Net loans 151,740 152,943 128,537 126,670
============= ========== =========== ============
</TABLE>
F-22
<PAGE> 135
<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(Thousands) (Thousands) (Thousands) (Thousands)
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits:
Certificates of deposits 152,871 153,064 148,062 149,081
Money market deposits 15,950 15,950 19,621 19,621
Passbook 36,262 36,262 43,023 43,023
Now accounts 21,857 21,857 22,854 22,854
Accrued interest 329 329 195 195
----------- ---------- ---------- ----------
Total deposits 227,269 227,462 233,755 234,774
=========== ========== ========== ==========
FHLB advances 324 343 351 341
=== === === ===
</TABLE>
(13)
Income Taxes
Total income tax expense for the years ended June 30 was allocated as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statements of income $ 605,000 310,000 765,000
Stockholders' equity:
Additional paid-in-capital for compensation
expense for tax purposes in excess of
amounts recognized for financial reporting
purposes (208,841) (64,236) -
Unrealized gains (losses) on securities
available for sale 122,398 (37,816) -
-------------- --------- ---------
Total income tax expense $ 518,557 207,948 765,000
=============== ========= =========
</TABLE>
Income tax expense (benefit), from operations, for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <<C> <<C>
Federal:
Current $ 601,379 449,600 876,000
Deferred 56,387 (41,600) (111,000)
------------- ---------- ----------
657,766 408,000 765,000
State:
Current - - -
Deferred (52,766) - -
------------- ---------- ---------
(52,766) - -
Reduction of liability for income taxes,
upon settlement of open years with
IRS (98,000)
------------- ---------- ---------
$ 605,000 310,000 765,000
============= ========== =========
</TABLE>
F-23
<PAGE> 136
The actual income tax expense attributable to income from operations for
the years ended June 30, 1995, 1994 and 1993 differs from the "expected"
amounts for those years (computed by applying the statutory U.S. Federal
corporate tax rate of 34% to income before Federal income taxes) as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ------------------------
% of % of % of
pretax pretax pretax
Amount income Amount income Amount income
---------- ------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
tax expense $ 648,000 34.0 406,000 34.0 $ 786,000 34.0
Increase (decrease) in
income taxes resulting
from:
State income taxes,
net of Federal effect - - - -
(35,000) (1.8)
Settlement of IRS issue - - (98,000) (8.2) - -
Other (8,000) (.4) 2,000 .2 (21,000) (.9)
----------- ------- ------- ----- --------- ------
$ 605,000 31.8 310,000 26.0 $ 765,000 33.1
=========== ======= ======= ===== ========= ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax ssets and deferred tax liabilities at June 30 are presented
below:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Loan and real estate owned loss reserves $ 166,538 154,638
Deferred loan fees 158,593 132,702
Accrued expenses, principally due to
differences in compensation and benefit
accruals
515,316 348,753
Unrealized loss on investment securities - 37,816
Other 17,772 15,076
---------- ----------
Total gross deferred assets 858,219 688,985
Less-valuation allowance - -
---------- ----------
Net deferred tax assets 858,219 688,985
---------- ----------
</TABLE>
F-24
<PAGE> 137
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Statutory bad debt deduction 301,068 249,534
Deferred equity loan fee costs 105,278 38,028
Federal Home Loan Bank stock dividends 716,601 642,515
Premises and equipment, principally due to
differences in depreciation 183,417 208,966
Prepaid pension costs 185,621 175,044
Unrealized gain on investment securities 84,582 -
Other 4,491 8,695
-------------- ---------
Total gross deferred tax liability 1,581,058 1,322,782
-------------- ---------
Net deferred tax liability $ 722,839 633,797
============== =========
</TABLE>
No valuation allowance for deferred tax assets was recorded as of June
30, 1995, 1994 and 1993 as management believes that the amounts
representing future deferred tax benefits will more likely than
not be recognized since the Company is expected to have sufficient
taxable income of an appropriate character within the carryback
and carryforward period as permitted by the tax law to allow for
utilization of the future deductible amounts.
If certain provisions are met, the Company is allowed a special bad debt
deduction for additions to tax bad debt reserves established for
the purpose of absorbing losses. The allowable deduction is 8% of
income subject to tax before such deduction. If the amounts which
qualify as deductions for Federal income tax purposes are later
used for purposes other than to absorb loan losses, they will be
subject to Federal income tax at the then current corporate rate.
Retained earnings at June 30, 1995 include approximately $5,300,000
(representing allocations of earnings to bad debt deductions for
tax purposes only) for which no deferred Federal income tax
liability has been recognized.
(14)
Benefit Plans
-------------
The Company sponsors a defined benefit pension plan covering substantially all
employees. The plan provides pension benefits that are based on the
participant's annual rate of earnings, as defined, for a specified number of
years of service prior to retirement. Pension contributions are made to the
extent deductible under existing Federal tax regulations.
The following table sets forth the estimated funded status of the defined
benefit pension plan at June 30:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$2,081,000 and $1,788,000 $ 2,085,000 1,796,000
================ =========
Actuarial present value of projected benefit obligation
for service rendered to date 2,779,000 2,537,000
Less plan assets at fair value-primarily listed common
stocks, U.S. Government and agency securities and
collective funds 2,812,000 2,449,000
---------------- ---------
Plan assets in excess of (less than) projected benefit
obligation 33,000 (88,000)
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 249,000 370,000
Unrecognized net transition obligation 23,000 26,000
---------------- ---------
Prepaid pension cost included in other assets $ 305,000 308,000
================ =========
</TABLE>
F-25
<PAGE> 138
Net pension cost included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost benefits earned during the
period $ 151,000 102,000 94,000
Interest cost on projected benefit
obligation 177,000 156,000 130,000
Actual return of plan assets (199,000) (176,000) (82,000)
Net amortization and deferral 39,000 22,000 (49,000)
---------------- -------- -------
Net periodic pension cost $ 168,000 104,000 93,000
================ ======== =======
</TABLE>
Assumptions used in accounting for the plan for each of the years ended
June 30, 1995, 1994 and 1993 were:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rates 7.00% 7.00% 7.75%
Rates of increase in compensation levels 5.00% 5.25% 5.25%
Expected long-term rate of return on assets 7.00% 7.00% 7.75%
</TABLE>
The Company has a Director Emeritus Plan which is a funded program
designed to provide retirement benefits to members of the Board of
Directors after their retirement from active service on the board.
Any director who has met certain age and length of service
requirements may elect to resign from the board and receive an
annual amount equal to his/her most recent twelve months regular
directors compensation for a specified number of years based on
length of service, not to exceed ten years. Because the plan
covers a limited number of participants, the Bank is accounting
for the cost of each individual's benefits over that individual's
remaining service period to eligibility, using a 7.0% discount
rate. There were no retirees under this plan during the years
ended June 30, 1995, 1994 and 1993. An estimate of the
actuarially determined present value of future benefits of the
directors eligible to participate in the plan of approximately
$473,400 has been recorded in the financial statements as of June
30, 1995. The plan is fully funded with corresponding plan assets
of approximately $478,000. Plan expense was approximately $74,000
and $400,000 for the years ended June 30, 1995 and 1993,
respectively.
In August 1993, the Company sponsored a Deferred Compensation Plan
covering members of the Board of Directors and certain key employees.
Under the plan, members of the Board of Directors may elect to defer
all or a portion of their Directors' fees. Employees may elect to
defer up to 25% of calendar year compensation otherwise payable in
cash. Participants' investment options are restricted to the
Company's common stock or interest bearing deposits offered by the
Bank. Total Deferred Compensation Plan expense was approximately
$70,000 and $187,000 for the years ended June 30, 1995 and 1994,
respectively.
F-26
<PAGE> 139
In connection with the conversion, the Company adopted a Supplemental
Executive Retirement Agreement (SERA) in order to help secure the
continued service of the Chief Executive Officer (CEO) of the Bank and
Company. Upon termination of employment, the SERA will provide
additional retirement benefits. Benefits to be paid under the SERA
are accrued over the remaining period to the full eligibility date of
the covered executive. Expense for the years ended June 30, 1995 and
1994 was approximately $175,000 and $77,000, respectively.
Also, the Bank maintains a savings plan qualified under Section 401(k)
of the Internal Revenue Code, covering substantially all full-time
employees after one year of continuous employment. Total savings plan
expense was approximately $31,000, $52,000 and $44,000 for the years
ended June 30, 1995, 1994 and 1993, respectively.
(15)
STOCK BENEFIT PLANS
- -------------------
EMPLOYEE STOCK OWNERSHIP PLAN
- -----------------------------
Effective January 1993, the Company established the Employee Stock
Ownership Plan (ESOP) for the benefit of eligible employees, which
purchased 211,600 shares of the Company's common stock in December
1993. To be eligible, an employee must be 21 years of age and have
completed at least one year of service. Benefits under the ESOP
become 100% vested after five years of service and prior service is
includable. Shares are held in a suspense account for allocation
among the participants as contributions are made to the ESOP. Shares
released from the suspense account are allocated among participants
based on their pro rata annual compensation. The purchase of the
shares by the ESOP has been recorded in the consolidated financial
statements through a credit to common stock and additional paid-in
capital with a corresponding charge to a contra equity account for the
unallocated shares. The contra equity account will be reduced as the
shares are committed to be released to the participants. The Bank
intends to make annual contributions to the ESOP in an amount to be
determined by the Board of Directors, but not less than the amount for
shares allocated to participants under the ESOP. The ESOP requires
annual principal payments of $302,286 each December for a period of
seven years.
During 1995 and 1994, the Bank made a contribution to the ESOP in the
amount of $302,286. Compensation expense in 1994 included ESOP
expense of $453,429 consisting of the required payment due
December 16, 1993 to the ESOP, plus a monthly accrual of the
minimum amount committed to be released in the current year. As
discussed in Note 1, the Company adopted the provisions of SOP
93-6, "Employers' Accounting for Employee Stock Ownership Plans".
In accordance with SOP 93-6, compensation expense in 1995 included
$685,563 consisting of the fair value of the shares committed to
be released during 1995, plus the fair value of additional shares
released to reimburse the ESOP for dividends received on
previously allocated shares. As of June 30, 1995, there were
61,522 allocated shares. An additional 15,114 shares were
committed to be released as of June 30, 1995. The remaining
134,964 unallocated shares had a fair value of approximately
$2,680,000 at June 30, 1995.
MANAGEMENT RECOGNITION PLANS
- ----------------------------
The Company's Board of Directors established Management Recognition
Plans and Trusts (MRPs) as a method of providing key employees
with a proprietary interest in the Company in a manner designed to
encourage such individuals to remain with the Company.
F-27
<PAGE> 140
In fiscal 1994, the Bank contributed $1,058,000 to the MRPs for the
purpose of purchasing Company common stock. On December 16, 1993,
the MRP trusts purchased 105,800 shares of Company common stock.
All of these shares have been awarded as restricted stock, which
will vest at the annual rate of 33 1/3% of the restricted stock
granted. The shares issued to the MRPs have been recorded as
outstanding shares, and unearned compensation under the MRPs is
recorded as a reduction of stockholders' equity and is amortized
to operations as the shares are earned. The plan contains
provisions for forfeiture of unvested shares in the event of
termination and vesting in the event of death, disability,
retirement or a change in control.
The MRPs also provide that the Company will pay MRP participants an
amount in cash equal to the amount of the income tax benefits
which would be received by the Company and the Bank as a result of
the participant's recognition of ordinary income with respect to
the MRPs.
During the years ended June 30, 1995 and 1994, the Company recognized
$650,237 and $319,557, respectively, in compensation expense
related to the MRPs.
STOCK OPTION AND INCENTIVE PLAN
-------------------------------
In connection with the conversion, the Company's Board of Directors
adopted a stock option and incentive plan (the Plan). Under the
Plan, options to purchase a total of 264,500 shares of Company
common stock may be granted to the Company's directors and key
employees.
Upon consummation of the conversion in December 1993, stock options were
granted for the purchase of 264,500 shares, exercisable at the
market price at the date of grant of $10.00 per share. All of the
options are nontransferable stock options and have a term of 10
years. At June 30, 1995, all of these options remain outstanding
and exercisable.
(16)
COMMITMENTS
- -----------
OFF-BALANCE SHEET RISK
- ----------------------
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs
of its customers and to reduce its exposure to fluctuations in
interest rates. These financial instruments involve, to varying
degrees, elements of credit risk that are not recognized in the
consolidated statement of financial condition.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and obligations as it does for on-balance sheet
instruments. In extending commitments, the Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of
the counterparty.
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 a portion of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
F-28
<PAGE> 141
Financial instruments with off-balance sheet risk as of June 30, 1995 and
1994 were approximately as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------- -----------------------
Contract or Contract or
notional Fair notional Fair
amount value amount value
-------------- ------- --------- ---------
<S> <C> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Unadvanced lines of credit on
home equity loans $ 4,773,000 4,773,000 4,992,000 4,992,000
Loan commitments:
Adjustable (5.75% to 7.50%) 440,000 440,000 3,480,000 3,480,000
Fixed (7.38% to 9.38%) 1,575,000 1,575,000 1,175,000 1,175,000
</TABLE>
CONCENTRATION OF CREDIT RISK
- ----------------------------
The Company considers its primary market area for lending and savings
activities to be the immediate geographic area of Northern Kentucky
Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contractual obligation
is reliant upon the economic stability of the region.
F-29
<PAGE> 142
(17) REGULATORY CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) was signed into law on August 9, 1989; regulations for
savings institutions' minimum capital requirements went into
effect on December 7, 1989. In addition to its capital
requirements, FIRREA includes provisions for changes in the
Federal regulatory structure for institutions including a new
deposit insurance system, increased deposit insurance premiums and
restricted investment activities with respect to non-investment
grade corporate debt and certain other investments. FIRREA also
increases the required ratio of housing related assets in order to
qualify as an insured institution.
Regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5% of total assets, a minimum 3% leverage
(core) capital ratio and an 8% risk-based (total) capital ratio.
In conjunction with the risk-based capital requirement, the Office
of Thrift Supervision (OTS) has assigned risk-weighting factors to
all assets and certain commitments which are to be utilized in
computing the amount of required capital.
In addition, the OTS has proposed to amend its capital rule on the 3
percent core ratio requirements to reflect amendments made by the
Office of the Comptroller of the Currency to the capital
requirements for national banks. The proposal would establish a 3
percent core ratio for savings associations in the highest
regulatory rating category. All other savings associations would
be required to maintain core ratios of 4 percent to 5 percent.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was
signed into law on December 19, 1991. Regulations implementing
the prompt corrective action provisions of FDICIA became effective
on December 19, 1992. In addition to the prompt corrective action
requirements, FDICIA includes significant changes to the legal and
regulatory environment for insured depository institutions,
including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory
agencies, increased reporting requirements for insured
institutions, and new regulations concerning internal controls,
accounting, and operations.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." To be
considered "well capitalized," an institution must generally have
a leverage ratio of at least 5 percent, a Tier 1 risk-based
capital ratio of at least 6 percent, and a total risk-based
capital ratio of at least 10 percent.
At June 30, 1995, the Bank meets the regulatory requirements and expects
to meet these regulatory provisions in the future.
(18)
PARENT COMPANY FINANCIAL STATEMENTS
-----------------------------------
Condensed financial data for Kentucky Enterprise Bancorp, Inc. (Parent
company only) at June 30, 1995 and 1994 and for the year ended
June 30, 1995 and for the period from inception at December 16,
1993 to June 30, 1994 are as follows:
Condensed Statements of Financial Condition - June 30, 1995
and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets:
Cash on deposit $ 424,312 725,158
Investment in subsidiary 37,063,006 35,244,255
Securities available for sale 11,601,740 10,722,170
Accrued interest receivable 131,569 93,189
Other assets 13,705 3,409
----------------- ----------
Total assets $ 49,234,332 46,788,181
================= ==========
Liabilities and stockholders' equity:
Income taxes payable $ 171,705 7,185
Accrued expenses and other liabilities 35,108 30,200
Common stock 27,508 27,508
Additional paid-in capital 27,239,487 26,647,369
Retained earnings 23,474,974 22,693,565
Unrealized gain (loss) on securities available
for sale 164,188 (73,408)
Employee stock ownership plan (1,349,637) (1,662,571)
Management recognition plans (529,001) (881,667)
----------------- ----------
Total liabilities and stockholders' equity $ 49,234,332 46,788,181
================= ==========
</TABLE>
F-30
<PAGE> 143
Condensed Statements of Income
Year Ended June 30, 1995 and the
period from inception through June 30, 1994
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Interest income:
Securities available for sale $ 655,438 195,682
Interest bearing deposits 11,181 56,927
---------- -----------
Total interest income 666,619 252,609
Non-interest expense 238,375 116,079
---------- -----------
Income before Federal income taxes and equity in
earnings of subsidiary 428,244 136,530
Federal income tax expense 92,934 45,000
---------- -----------
Income before equity in earnings of subsidiary 335,310 91,530
Equity in earnings of subsidiary 964,587 792,448
---------- -----------
Net income $1,299,897 883,978
========== ===========
</TABLE>
F-31
<PAGE> 144
Condensed Statements of Cash Flows
Year ended June 30, 1995 and the
period from inception through June 30, 1994
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,299,897 883,978
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Equity in earnings of subsidiary (964,587) (792,448)
Securities amortization and accretion, net (84,935) (111,463)
Management recognition plans and employee stock
ownership plan amortization 428,752 -
Increase in accrued interest receivable (38,380) (93,189)
Increase in other assets (10,296) (3,409)
Increase in income taxes payable 42,122 45,000
Increase in accrued expenses and other liabilities 4,908 30,200
---------- -----------
Net cash provided by (used in) operating activities 677,481 (41,331)
---------- -----------
Cash flows from investing activities:
Purchase of common stock issued by subsidiary - (13,314,679)
Additional investment in subsidiary - (1,807,543)
Purchases of securities available for sale (5,459,839) (21,296,930)
Proceeds from maturities of securities available for sale 5,000,000 10,575,000
---------- -----------
Net cash used in investing activities (459,839) (25,844,152)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock - 26,610,641
Dividends paid on common stock (518,488) -
---------- -----------
Net cash provided by (used in) financing
activities (518,488) 26,610,641
---------- -----------
Net increase (decrease) in cash and cash equivalents (300,846) 725,158
Cash and cash equivalents at beginning of year 725,158 -
---------- -----------
Cash and cash equivalents at end of year $ 424,312 725,158
========== ===========
</TABLE>
F-32
<PAGE> 145
(19)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------
The following is a summary of the quarterly results of operations for the
years ended June 30, 1995 and 1994 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------
June 30, March 31, December 31, September 31,
1995 1995 1994 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total interest income $ 4,542 4,647 4,528 4,388
Total interest expense 2,567 2,454 2,415 2,332
Net interest income 1,975 2,193 2,113 2,056
Provision for loan losses 10 10 15 -
Non-interest income 103 105 109 115
Non-interest expense and
provision for income taxes 1,805 1,914 1,856 1,859
Net income 263 374 351 312
Earnings per common share .10 .13 .13 .12
since conversion
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------
June 30, March 31, December 31, September 30,
1994 1994 1993 1993
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total interest income $ 4,018 3,997 4,073 4,257
Total interest expense 2,248 2,251 2,498 2,564
Net interest income 1,770 1,746 1,575 1,693
Provision for loan losses - 16 25 25
Non-interest income 98 95 100 121
Non-interest expense and
provision for income taxes 1,606 1,681 1,537 1,424
Net income 262 144 113 365
Earnings per common share
since conversion .09 .05 N/A N/A
</TABLE>
The quarter ended June 30, 1995 contains year end adjustments to interest
income from certain mortgage loans and to premium amortization on
certain mortgage backed securities relating to prior quarters.
The impact of such adjustments is a charge to net income in the
quarter ended June 30, 1995 of approximately $170,000.
(20)
SUBSEQUENT EVENT - MERGER AGREEMENT (UNAUDITED)
- -----------------------------------------------
On August 28, 1995, the Corporation signed an agreement to merge with
Fifth Third Bancorp, a bank holding company based in Cincinnati,
Ohio, with banking offices in Ohio, Kentucky, Florida, and
Indiana. The merger is expected to be completed by early 1996,
subject to stockholder and regulatory approval. At that time,
each share of Kentucky Enterprise Bancorp, Inc. common stock
will be exchanged for 0.5735 shares of Fifth Third Bancorp
common stock. The Exchange Ratio reflects the three-for-two stock
split of Fifth Third Common Stock effected in the form of a stock
dividend declared December 19, 1995 and payable January 12, 1996.
F-33
<PAGE> 146
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30 June 30
Assets 1995 1995
------ ---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,102 2,060
Interest-bearing deposits in other banks 13,211 5,831
Securities available for sale 16,037 16,527
Securities held to maturity 20,512 27,527
Mortgage-backed securities, at cost 66,057 68,934
Loans receivable, net 154,699 151,741
Federal Home Loan Bank of Cincinnati stock, at cost 3,605 3,542
Accrued interest receivable 1,568 1,622
Premises and equipment 2,024 2,059
Prepaid expenses and other assets 589 522
-------- -------
Total assets $281,404 280,365
======== =======
Liabilities and Stockholders' Equity
------------------------------------
Deposits $227,414 227,269
Advances from Federal Home Loan Bank of Cincinnati 297 324
Advances from borrowers for taxes and insurance 1,588 1,297
Income taxes 667 723
Accrued expenses and other liabilities 1,926 1,725
Total liabilities $231,892 231,338
Contingencies (note 3)
Stockholders' equity:
Common stock 28 28
Additional paid-in capital 27,326 27,239
Retained earnings - substantially restricted 23,713 23,475
Unrealized net gain on securities available for sale 157 164
Employee stock ownership plan (1,271) (1,350)
Management recognition plans (441) (529)
----- -----
Total stockholders' equity 49,512 49,027
------ ------
Total liabilities and stockholders' equity $281,404 280,365
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
F-34
<PAGE> 147
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30
------------
1995 1994
---- ----
<S> <C> <C>
Interest income:
Loans receivable:
Mortgage loans $2,829 2,342
Consumer and other loans 210 179
Securities held to maturity and
Available for sale 615 714
Mortgage-backed securities 1,160 1,100
Interest-bearing deposits 78 53
----- -----
Total interest income 4,892 4,388
----- -----
Interest expense:
Deposits 2,633 2,325
Federal Home Loan Bank of Cincinnati advances 6 7
----- -----
Total interest expense 2,639 2,332
----- -----
Net interest income 2,253 2,056
Provision for Loan losses 10 --
----- -----
Net interest income after provision for loan losses 2,243 2,056
----- -----
Non-interest income - service charges and other fees 103 115
Non-interest expense:
Compensation and benefits 1,159 1,088
Occupancy expense 109 133
Federal insurance premiums 130 135
Data processing 77 75
Franchise and other taxes 66 60
Other, net 235 207
----- -----
Total non-interest expense 1,776 1,698
----- -----
Income before income tax expense 570 473
Income tax expense 202 161
--- ---
Net income $368 312
==== ====
Net income per share (note 2) $.14 .12
==== ====
Weighted Average Common Shares Outstanding 2,719,520 2,695,559
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 148
KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30
------------------
1995 1994
------- -------
<S> <C> <C>
Cash flows from operating activities $ 731 654
------- -------
Cash flows from investing activities:
Net increase in loans receivable (2,947) (6,175)
Purchases of securities:
Available for sale -- (2,007)
Held to maturity -- (1,523)
Proceeds from maturities of securities:
Available for sale 500 2,000
Held to maturity 7,000 5,500
Purchases of mortgage-backed securities -- (4,104)
Principal collected on mortgage-backed securities 2,871 3,954
Additions to premises and equipment (4) (6)
-------- ------
Net cash provided by (used in) investing activities 7,420 (2,361)
-------- -------
Cash flows from financing activities:
Net increase in deposits 145 68
Repayments of advances from the Federal Home Loan Bank of Cincinnati (27) (27)
Net increase in advances from borrowers for taxes and insurance 291 113
Dividends paid (138) (128)
------ -------
Net cash provided by financing activities 271 26
------- -------
Net increase (decrease) in cash and cash equivalents 8,422 (1,681)
Cash and cash equivalents, beginning of period 7,891 12,391
------- -------
Cash and cash equivalents, end of period $16,313 10,710
======= =======
Noncash activity - unrealized loss on securities available for sale $ 12 60
======= =======
Supplemental disclosures:
Interest paid on deposits $2,536 2,242
Interest paid on advances from Federal Home Loan Bank of Cincinnati 6 7
Income taxes paid 165 45
====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
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KENTUCKY ENTERPRISE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 1995
(Unaudited)
(1) BASIS OF PRESENTATION
The significant accounting policies followed by Kentucky Enterprise Bancorp,
Inc. (the "Company") and subsidiary for interim financial reporting are
consistent with the accounting policies followed for annual financial
reporting. All adjustments which are, in the opinion of management, necessary
for a fair presentation of the results for the periods reported have been
included in the accompanying unaudited consolidated financial statements and
all such adjustments are of a normal recurring nature. The accompanying
financial statements do not purport to contain all the necessary financial
disclosures required by generally accepted accounting principles that might
otherwise be necessary in the circumstances and should be read in conjunction
with the consolidated financial statements and notes thereto of the Company for
the year ended June 30, l995. Interim results for the three month periods ended
are not necessarily indicative of results for the entire year.
(2) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents, when dilutive,
outstanding during the period.
(3) CONTINGENCIES
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition, results of operations or liquidity.
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<PAGE> 150
ANNEX A
AFFILIATION AGREEMENT
This Affiliation Agreement ("Affiliation Agreement") dated as of August 28,
1995 is entered into by and between FIFTH THIRD BANCORP, a corporation
organized and existing under the corporation laws of the State of Ohio with its
principal office located in Cincinnati, Hamilton County, Ohio ("Fifth Third"),
and KENTUCKY ENTERPRISE BANCORP, INC., a corporation organized and existing
under the corporation laws of the State of Ohio, with its principal office
located in Newport, Campbell County, Kentucky ("Kentucky Enterprise").
W I T N E S S E T H:
WHEREAS, Fifth Third is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended, and Kentucky Enterprise is a unitary
savings and loan holding company under Section 10 of the Home Owners Loan Act,
as amended ("HOLA"), and Fifth Third and Kentucky Enterprise desire to effect a
merger under the authority and provisions of the corporation laws of the State
of Ohio pursuant to which at the Effective Time (as herein defined in Section
IX) Kentucky Enterprise will be merged into Fifth Third, with Fifth Third to be
and become the surviving corporation (the "Merger"); and
WHEREAS, under the terms of the Agreement of Merger ("Agreement of Merger")
between Fifth Third and Kentucky Enterprise appended hereto as Appendix A, the
terms of which are incorporated into this Agreement and made a part hereof,
each of the issued and outstanding shares of the Common stock, $.01 par value
per share, of Kentucky Enterprise which are issued and outstanding (excluding
any treasury shares and preferred shares) immediately prior to the Effective
Time will at the Effective Time be cancelled and extinguished and in
substitution therefor such Kentucky Enterprise shares will, at the Effective
Time, be converted into shares of the Common Stock, without par value, of Fifth
Third ("Fifth Third Common Stock"), all as more fully provided in this
Agreement and in the Agreement of Merger.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
Fifth Third and Kentucky Enterprise, agree together as follows:
I. OBLIGATIONS OF FIFTH THIRD AND KENTUCKY ENTERPRISE TO BE PERFORMED
PRIOR TO THE CLOSING.
A. Fifth Third will, prepare and cause to be filed at its expense such
applications and other documents with the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Kentucky
Department of Financial Institutions, the Office of Thrift Supervision, and any
other governmental agencies as are required to secure the requisite approval of
such agencies to the consummation of the transactions provided for in this
Agreement and in the Agreement of Merger, and the parties shall cooperate in
the preparation of an appropriate registration statement, including the
prospectus, proxy statement, and such other documents necessary to comply with
all federal and state securities laws relating to the registration and issuance
of the shares of Fifth Third Common Stock to be issued to the shareholders of
Kentucky Enterprise in this transaction (the expenses thereof, other than
accounting, legal, investment banking, financial consulting and associated
expenses of Kentucky Enterprise and its affiliates, to be paid by Fifth Third),
and any other laws applicable to the transactions provided for in this
Agreement and the Agreement of Merger. Fifth Third shall use all reasonable
efforts to file all such applications within sixty (60) days of the date of
this Agreement and to secure all such approvals. Kentucky Enterprise agrees
that it will, as promptly as practicable after request and at its own expense,
provide Fifth Third with all information and documents concerning Kentucky
Enterprise and its wholly-owned subsidiary, Kentucky Enterprise Bank, F.S.B.
("Thrift Subsidiary"), as shall be required in connection with preparing such
applications, registration statements and other documents and in
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connection with securing such approvals. Prior to filing any such applications
or other documents with the applicable governmental agencies, Fifth Third shall
provide, at least five (5) days prior to the filing date, copies thereof to
Kentucky Enterprise. Kentucky Enterprise shall have the right to review and
comment on the proxy statement included in the registration statement in an
appropriate manner prior to its filing. Fifth Third agrees that it will, as
promptly as practicable after request and at its own expense, provide Kentucky
Enterprise with all information and documents concerning Fifth Third and its
subsidiaries as shall be required in connection with preparing such
applications, registration statements and other documents which are to be
prepared and filed by Kentucky Enterprise and in connection with approvals
required to be obtained by Kentucky Enterprise hereunder. Prior to filing any
such applications, statements or other documents with the applicable
governmental agency, Kentucky Enterprise shall provide, at least five (5) days
prior to the filing date, copies thereof to Fifth Third.
II. REPRESENTATIONS AND WARRANTIES OF KENTUCKY ENTERPRISE.
Kentucky Enterprise represents and warrants to Fifth Third that as of the date
hereof or as of the indicated date, as appropriate, and except as otherwise
disclosed in Schedule 1 hereto delivered by Kentucky Enterprise to Fifth Third
prior to the execution of this Agreement by Fifth Third:
A. Kentucky Enterprise (i) is duly incorporated, validly existing and in
good standing as a corporation under the corporation laws of the State of Ohio
and is a registered unitary savings and loan holding company under the HOLA;
(ii) is duly authorized to conduct the business in which it is engaged; (iii)
has 8,000,000 shares, $.01 par value per share, of Common Stock ("Kentucky
Enterprise Common Stock") and 4,000,000 shares, $.01 par value per share, of
Preferred Stock ("Kentucky Enterprise Preferred Stock") authorized pursuant to
its Articles of Incorporation, which are the total number of shares Kentucky
Enterprise is authorized to have outstanding; (iv) has no outstanding
securities of any kind, nor any outstanding options, warrants or other rights
entitling another person to acquire any securities of Kentucky Enterprise of
any kind, other than (a) 2,750,800 shares of Kentucky Enterprise Common Stock,
which presently are authorized, duly issued and outstanding and fully paid and
nonassessable, and (b) options to purchase a total of 264,500 shares of
Kentucky Enterprise Common Stock which were granted to and are currently held
by the employees, officers and Directors of Kentucky Enterprise and/or Thrift
Subsidiary; and (v) owns of record and beneficially free and clear of all liens
and encumbrances, all of the 100,000 outstanding shares of the capital stock of
the Thrift Subsidiary, $.01 par value per share. Kentucky Enterprise has no
direct or indirect subsidiaries other than the Thrift Subsidiary and other than
Shamrock Service Corporation ("Shamrock"), a wholly-owned subsidiary of the
Thrift Subsidiary.
B. Thrift Subsidiary is duly incorporated, validly existing and in good
standing as a Federal Savings bank under the laws of the United States, and has
all the requisite power and authority to conduct the banking business as now
conducted by it; and Thrift Subsidiary does not have any outstanding securities
of any kind, nor any outstanding options, warrants or other rights entitling
another person to acquire any securities of any of the Thrift Subsidiary of any
kind, other than 100,000 shares of the capital stock, $.01 par value per share,
of all of the Thrift Subsidiary owned of record and beneficially by Kentucky
Enterprise.
C. Kentucky Enterprise has previously furnished to Fifth Third its
audited, consolidated statements of financial condition, statements of income,
statements of changes in stockholders' equity and statements of cash flows as
at June 30, 1994, and for the year then ended and the same statements for
Thrift Subsidiary as at June 30, 1993, together with the opinions of its
independent certified public accountants associated therewith. Kentucky
Enterprise also has previously furnished to Fifth Third (i) its unaudited,
separate statements of financial condition, statements of income, and
statements of changes in stockholders' equity as at June 30, 1994 and 1995, and
for the years then ended and those of Thrift Subsidiary as at June 30, 1993 and
for the year then ended, and (ii) the unaudited, separate reports of condition
and reports of income of the Thrift Subsidiary as at June 30, 1994 and 1995 and
for the years
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then ended. Such consolidated financial statements of Kentucky Enterprise and
unaudited, separate reports of condition and reports of income of the Thrift
Subsidiary fairly present the financial condition of Kentucky Enterprise and
the Thrift Subsidiary as of June 30, 1994 and 1995 and for the years covered
thereby in conformity with generally accepted accounting principles,
consistently applied (except for the omission of notes to unaudited statements
and year-end adjustments to interim results). There are no material
liabilities, obligations or indebtedness of Kentucky Enterprise or the Thrift
Subsidiary required to be disclosed in the financial statements so furnished
other than the liabilities, obligations or indebtedness disclosed in such
financial statements (including footnotes). Kentucky Enterprise shall furnish
Fifth Third with its audited consolidated statements of financial condition,
statements of income, statements of changes in stockholders' equity, and
statements of cash flows as at June 30, 1995, and for the year then ended,
together with the opinions of its independent certified accountants associated
therewith as soon as such statements are publicly available, and its unaudited,
consolidated financial statements as at July 31, 1995 and for the month then
ended together with the unaudited, separate financial statements of the Thrift
Subsidiary and unaudited, separate reports of condition and reports of income
of the Thrift Subsidiary as at July 31, 1995 and for the month then ended, as
soon as practicable, and shall continue to furnish such financial information
for subsequent monthly and quarterly periods to Fifth Third as soon as
practicable until the Closing Date.
D. Kentucky Enterprise and the Thrift Subsidiary have good and marketable
title to all of the material properties and assets reflected in its separate
statement of financial condition as at June 30, 1994 and which are still owned
by each and each has good and marketable title to all material properties and
assets acquired by it after such date and still owned by it, subject to (i) any
liens and encumbrances that do not materially adversely impair the use of the
property, (ii) statutory liens for taxes not yet due and payable and (iii)
minor defects and irregularities in title that do not materially adversely
impair the use of the property.
E. Except as disclosed in Schedule 1 and for events relating to the
business environment in general: (i) since June 30, 1995, to the date hereof
there have been no material adverse changes in the financial condition,
operations or business of Kentucky Enterprise and the Thrift Subsidiary on a
consolidated or separate basis; (ii) Kentucky Enterprise is not aware of any
events which have occurred since June 30, 1995 to the date hereof or which as
of the date hereof are reasonably certain to occur in the future and which
reasonably can be expected to result in any material adverse change in the
financial condition, operations or business of Kentucky Enterprise and the
Thrift Subsidiary on a consolidated or separate basis, excluding matters (which
shall include but not be limited to changes in general economic condition,
changes in interest rates, changes in laws or regulations or changes in
generally accepted accounting principles) of general application to the thrift
or banking industry; and (iii) since June 30, 1995, to the date hereof there
have been no material changes in the methods of business operations of Kentucky
Enterprise and the Thrift Subsidiary.
F. Except as disclosed in Schedule 1, there are no actions, suits,
proceedings, investigations or assessments of any kind pending, or to the best
knowledge of Kentucky Enterprise, threatened against Kentucky Enterprise or the
Thrift Subsidiary which reasonably can be expected to result in any material
adverse change in the financial condition, operations or business of Kentucky
Enterprise and the Thrift Subsidiary on a consolidated or separate basis.
G. Except as disclosed in Schedule 1, since June 30, 1995, to the date
hereof Kentucky Enterprise and the Thrift Subsidiary each has been operated in
the ordinary course of business, has not made any changes in its respective
capital or corporate structures, nor any material changes in its methods of
business operations and has not provided any increases in employee salaries or
benefits other than in the ordinary course of business. Except as disclosed in
Schedule I, since June 30, 1995, to the date hereof Kentucky Enterprise has not
declared or paid any dividends nor made any distributions of any other kind to
its shareholders.
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H. Except as disclosed in Schedule 1, Kentucky Enterprise and the Thrift
Subsidiary have timely filed all federal, state and local tax returns required
to be filed (after giving effect to all extensions) by them, respectively, and
have paid or provided for all tax liabilities shown to be due thereon or which
have been assessed against them, respectively. All tax returns filed by
Kentucky Enterprise or the Thrift Subsidiary through the date hereof constitute
complete and accurate representations of the tax liabilities of Kentucky
Enterprise and the Thrift Subsidiary for such years and accurately set forth
all items (to the extent required to be included or reflected in such returns)
relevant to its future tax liabilities, including the tax basis of its
properties and assets in all material respects.
I. Except as disclosed in Schedule 1, neither Kentucky Enterprise nor the
Thrift Subsidiary is a party to (i) any written employment contracts or written
contracts of any other kind with any of its officers, Directors or employees or
(ii) any material contract, lease or agreement of any other kind which is not
assignable as a result of the merger provided for herein without the consent of
another party, except for contracts, leases or agreements which do not have
terms extending beyond six months from the date of this Agreement or contracts,
leases or agreements (excluding contracts, leases and agreements pursuant to
which credit has been extended by the Thrift Subsidiary) which do not require
the annual expenditure of more than $10,000.00 thereunder.
J. Except as disclosed in Schedule 1, since June 30, 1995, to the date
hereof the Thrift Subsidiary has not incurred any unusual or extraordinary loan
losses which are material to Kentucky Enterprise and the Thrift Subsidiary on a
consolidated basis; to the best knowledge of Kentucky Enterprise and in light
of the Thrift Subsidiary's historical loan loss experience and its management's
analysis of the quality and performance of its loan portfolio, as of June 30,
1995, its reserve for loan losses was, in the opinion of Kentucky Enterprise,
adequate to absorb all known and reasonably anticipated losses as of such date.
K. Except as disclosed in Schedule 1, neither Kentucky Enterprise nor the
Thrift Subsidiary has, directly or indirectly, dealt with any broker or finder
in connection with this transaction and neither has incurred or will incur any
obligation for any broker's or finder's fee or commission in connection with
the transactions provided for in this Agreement and the Agreement of Merger.
L. 1. The Directors of Kentucky Enterprise, by resolution adopted by
the unanimous vote of all Directors present at a meeting duly called and held
in accordance with applicable law, have duly approved this Agreement and the
Agreement of Merger, and have directed that this Agreement and the Agreement of
Merger be submitted to a vote of Kentucky Enterprise's shareholders at the
annual or a special meeting of the shareholders to be called for that purpose,
all in accordance with and as required by law and in accordance with the
Articles of Incorporation and Code of Regulations of Kentucky Enterprise.
2. Kentucky Enterprise has the corporate power and authority to
enter into this Agreement and the Agreement of Merger and to carry out its
obligations hereunder and thereunder subject to certain required regulatory and
shareholder approvals. This Agreement and the Agreement of Merger, when
executed and delivered, will have been duly authorized and will constitute
valid and binding obligations of Kentucky Enterprise, enforceable in accordance
with their respective terms, except to the extent that (i) enforceability
thereof may be limited by insolvency, reorganization, liquidation, bankruptcy,
readjustment of debt or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and (ii) the
availability of certain remedies may be precluded by general principals of
equity, subject, however, to the receipt of requisite regulatory approvals and
the approval of Kentucky Enterprise's shareholders.
3. Except as disclosed in Schedule 1, neither the execution of
this Agreement or the Agreement of Merger, nor the consummation of the
transactions contemplated hereby and thereby, (i) conflicts with, results in a
breach of, violates or constitutes a default under, Kentucky Enterprise's
Articles of Incorporation or Code of Regulations or, to the best knowledge of
Kentucky Enterprise, any federal,
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state or local law, statute, ordinance, rule, regulation or court or
administrative order, or any agreement, arrangement, or commitment, to which
Kentucky Enterprise or the Thrift Subsidiary is subject or bound; (ii) to the
best knowledge of Kentucky Enterprise, results in the creation of or gives any
person the right to create any material lien, charge, encumbrance, or security
agreement or any other material rights of others or other material adverse
interest upon any material right, property or asset belonging to Kentucky
Enterprise or the Thrift Subsidiary other than such rights as may be given
dissenting shareholders of Kentucky Enterprise pursuant to Sections 1701.84 and
1701.85 of the Ohio Revised Code; (iii) except as disclosed in Schedule 1,
terminates or gives any person the right to terminate, amend, abandon, or
refuse to perform any material agreement, arrangement or commitment to which
Kentucky Enterprise or the Thrift Subsidiary is a party or by which Kentucky
Enterprise's or the Thrift Subsidiary's rights, properties or assets are
subject or bound; or (iv) to the best knowledge of Kentucky Enterprise,
accelerates or modifies, or gives any party thereto the right to accelerate or
modify, the time within which, or the terms according to which, Kentucky
Enterprise or the Thrift Subsidiary is to perform any duties or obligations or
receive any rights or benefits under any material agreements, arrangements or
commitments. For purposes of subparagraphs (iii) and (iv) immediately
preceding, material agreements, arrangements or commitments exclude agreements,
arrangements or commitments having a term expiring less than six months from
the date of this Agreement or which do not require the expenditure of more than
$10,000 (but shall include all agreements, arrangements or commitments pursuant
to which credit has been extended by the Thrift Subsidiary).
M. Complete and accurate copies of the (i) Articles of Incorporation and
Code of Regulations of Kentucky Enterprise and (ii) the Charter and Bylaws of
the Thrift Subsidiary in force as of the date hereof have been delivered to
Fifth Third.
N. To the best knowledge of Kentucky Enterprise and except as disclosed
in Schedule 1, neither Kentucky Enterprise nor the Thrift Subsidiary nor any
employee, officer or Director of any of them has knowingly engaged in any
activity or knowingly omitted to take any action which, in any material way,
has resulted or could result in the violation of (i) any local, state or
federal law (including without limitation the Bank Secrecy Act, the Community
Reinvestment Act, applicable consumer protection and disclosure laws and
regulations, including without limitation, Truth in Lending, Truth in Savings
and similar disclosure laws and regulations, and equal employment and
employment discrimination laws and regulations) or (ii) any regulation, order,
injunction or decree of any court or governmental body, the violation of either
of which could reasonably be expected to have a material adverse effect on the
financial condition of Kentucky Enterprise and the Thrift Subsidiary. To the
best knowledge of Kentucky Enterprise and except as disclosed in Schedule 1,
the Thrift Subsidiary possesses all licenses, franchises, permits and other
governmental authorizations necessary for the continued conduct of its business
without material interference or interruption.
O. To the best knowledge of Kentucky Enterprise and except as disclosed
in Schedule 1, neither this Agreement nor the Agreement of Merger nor any
report, statement, list, certificate or other information furnished by Kentucky
Enterprise or the Thrift Subsidiary to Fifth Third or its agents in connection
with this Agreement or any of the transactions contemplated hereby (including,
without limitation, any information which has been or shall be supplied with
respect to their business operations and financial condition for inclusion in
the proxy statement/prospectus and registration statement relating to the
merger) contains or shall contain (or, in the case of information relating to
the proxy statement/prospectus, at the time it is mailed, in the case of the
registration statement, at the time it becomes effective and in the case of the
proxy statement/prospectus and the registration statement, at the time the
annual or special meeting of shareholders of Kentucky Enterprise is held to
consider the adoption of this Agreement and the Agreement of Merger) an untrue
statement of material fact or omits or shall omit to state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading.
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P. To the best knowledge of Kentucky Enterprise and except as disclosed
in Schedule 1, there are no actions, proceedings or investigations pending
before any environmental regulatory body, with respect to or threatened against
or affecting Kentucky Enterprise or the Thrift Subsidiary in respect to any
"facility" owned, leased or operated by any of them (but excluding any
"facility" as to which sole interest of Kentucky Enterprise or the Thrift
Subsidiary is that of a lienholder or mortgagee, but including any "facility"
to which title has been taken pursuant to mortgage foreclosure or similar
proceedings and including any "facility" in which Kentucky Enterprise or the
Thrift Subsidiary ever participated in the financial management of such
facility to a degree sufficient to influence, or have the ability to influence,
the facility's treatment of hazardous waste) under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), or under any Federal, state, local or municipal statue, ordinance
or regulation in respect thereof, in connection with any release of any toxic
or "hazardous substance", pollutant or contaminant into the "environment"
which, if adversely determined, (a) would require the payment by Kentucky
Enterprise or the Thrift Subsidiary and/or require Kentucky Enterprise or the
Thrift Subsidiary to incur expenses of more than $10,000 (whether or not
covered by insurance) or (b) would otherwise have a material adverse effect on
Kentucky Enterprise or the Thrift Subsidiary, nor, to the best knowledge of
Kentucky Enterprise, is there any reasonable basis for the institution of any
such actions or proceedings or investigations which is probable of assertion,
nor are there any such actions or proceedings or investigations in which
Kentucky Enterprise or the Thrift Subsidiary is a plaintiff or complainant. To
the best knowledge of Kentucky Enterprise, neither Kentucky Enterprise nor the
Thrift Subsidiary is liable in any material respect under any applicable law
for any release by either of them or for any release by any other "person" of a
hazardous substance caused by the spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing of hazardous wastes or other chemical substances, pollutants or
contaminants into the environment, nor is Kentucky Enterprise or the Thrift
Subsidiary liable for any material costs (as a result of the acts or omissions
of Kentucky Enterprise or the Thrift Subsidiary or, to the best knowledge of
Kentucky Enterprise, as a result of the acts or omissions of any other
"person") of any remedial action including, without limitation, costs arising
out of security fencing, alternative water supplies, temporary evacuation and
housing and other emergency assistance undertaken by any environmental
regulatory body having jurisdiction over Kentucky Enterprise or the Thrift
Subsidiary to prevent or minimize any actual or threatened release by Kentucky
Enterprise or the Thrift Subsidiary of any hazardous wastes or other chemical
substances, pollutants and contaminants into the environment which would
endanger the public health or the environment. All terms contained in
quotation marks in this paragraph and the paragraph immediately following shall
have the meaning ascribed to such terms, and defined in, CERCLA.
To the best knowledge of Kentucky Enterprise and except as disclosed in
Schedule 1, each "facility" owned, leased or operated by Kentucky Enterprise or
the Thrift Subsidiary (but EXCLUDING any "facility" as to which the sole
interest of Kentucky Enterprise or the Thrift Subsidiary is that of a
lienholder or mortgagee, but INCLUDING any "facility" to which title has been
taken pursuant to mortgage foreclosure or similar proceedings and INCLUDING any
"facility" in which Kentucky Enterprise or the Thrift Subsidiary ever
participated in the financial management of such facility to a degree
sufficient to influence, or have the ability to influence, the facility's
treatment of hazardous waste) is, in all material respects, in compliance with
all applicable Federal, state, local or municipal statutes, ordinances, laws
and regulations and all orders, rulings or other decisions of any court,
administrative agency or other governmental authority relating to the
protection of the environment, except to the extent a failure to comply would
not have a material adverse effect on the business, operations and financial
condition of Kentucky Enterprise and the Thrift Subsidiary taken as a whole.
Q. 1. Benefit Plans. Schedule 1 lists the name and a short
description of each Benefit Plan (as herein defined), together with an
indication of its funding status (E.G., trust, insured or general company
assets). For purposes hereof, the term "Benefit Plan" shall mean any plan,
program, arrangement or system of employee or director benefits maintained by
Kentucky Enterprise or the Thrift Subsidiary for the benefit of employees,
former employees or Directors of Kentucky Enterprise or the Thrift Subsidiary
and
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shall include (a) any qualified retirement plan such as a pension, profit
sharing, stock bonus plan or employee stock ownership plan ("ESOP"), (b) any
plan, program or arrangement providing deferred compensation, bonus deferral or
incentive benefits, whether funded through trust or otherwise, and (c) any
welfare plan, program or policy providing vacation, severance, salary
continuation, supplemental unemployment, disability, life, health coverage,
retiree health, Voluntary Employees' Beneficiary Association, medical expense
reimbursement or dependent care assistance benefits, in any such foregoing case
without regard to whether the Benefit Plan constitutes an employee benefit plan
under Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the number of employees covered under such Benefit Plan.
2. Plan Documents, Reports and Filings. Except as disclosed on
Schedule 1, Kentucky Enterprise or the Thrift Subsidiary has provided true,
complete and correct copies of all plan documents, if any, comprising each
Benefit Plan, together with, when applicable, (a) the most recent summary plan
description, (b) the most recent actuarial and financial reports and the most
recent annual reports filed with any governmental agency and (c) all Internal
Revenue Service ("IRS") or other governmental agency rulings and determination
letters or any open requests for IRS rulings or letters with respect to Benefit
Plans.
3. Qualified Retirement Plan Compliance. With respect to each
Benefit Plan which is an employee pension benefit plan (as defined in Section
3(2) of ERISA) and which is intended to be qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended through the date hereof (the
"Code") (a "Qualified Benefit Plan"), except as disclosed on Schedule 1: (a)
the IRS has issued a determination letter which determined that such Qualified
Benefit Plan satisfied the requirements of Section 401(a) of the Code, and such
determination letter has not been revoked or threatened to be revoked by the
IRS; (b) to the best knowledge of Kentucky Enterprise, such Qualified Benefit
Plan is in material compliance with all qualification requirements of Section
401(a) of the Code; (c) to the best knowledge of Kentucky Enterprise, such
Qualified Benefit Plan is in substantial compliance with all notice, reporting
and disclosure requirements of ERISA and the Code; (d) any Qualified Benefit
Plan which is an ESOP as defined in Section 4975(e)(7) of the Code (an "ESOP
Qualified Benefit Plan") is in material compliance with the applicable
qualification requirements of Section 409 of the Code; and (e) to the best
knowledge of Kentucky Enterprise, any previously terminated Qualified Benefit
Plan was terminated in material compliance with the requirements of ERISA and
the Code, has received a favorable determination letter therefor, and the
liabilities of such Qualified Benefit Plan and the requirements of the Pension
Benefit Guaranty Corporation ("PBGC") were fully satisfied.
4. Welfare Plan Compliance. With respect to each Benefit Plan
which is an employee welfare benefit plan (as defined in Section 3(1) of ERISA)
(a "Welfare Benefit Plan"), except as noted on Schedule 1: (a) such Welfare
Benefit Plan, if it is intended to provide favorable tax benefits to plan
participants, has been, to the best knowledge of Kentucky Enterprise, in
compliance with applicable Code provisions; (b) such Welfare Benefit Plan has
been, to the best knowledge of Kentucky Enterprise, operated in substantial
compliance with all applicable notice, reporting and disclosure requirements of
ERISA and the Code; and (c) such Welfare Benefit Plan, if a group health plan
subject to the requirements of Section 4980B of the Code ("COBRA"), has been,
to the best knowledge of Kentucky Enterprise, operated in substantial
compliance with such COBRA requirements.
5. Prohibited Transactions. To the best knowledge of Kentucky
Enterprise, no prohibited transaction under Section 406 of ERISA and not exempt
under Section 408 of ERISA has occurred with respect to any Benefit Plan which
would result, with respect to any person, in (a) the imposition, directly or
indirectly, of a material excise tax under Section 4975 of the Code or (b)
material fiduciary liability under Section 409 of ERISA.
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6. Lawsuits or Claims. No material actions, suits or claims
(other than routine claims of benefits) are pending or, to the best knowledge
of Kentucky Enterprise, threatened against any Benefit Plan or against Kentucky
Enterprise or the Thrift Subsidiary with respect to any Benefit Plan.
7. Disclosure of Unfunded Liabilities. All material Unfunded
Liabilities with respect to each Benefit Plan have been recorded and disclosed
on the most recent financial statement of Kentucky Enterprise and the Thrift
Subsidiary or, if not, in Schedule 1. For purposes hereof, the term "Unfunded
Liabilities" shall mean any amounts properly accrued to date under generally
accepted accounting principles in effect as of the date of this Agreement
(GAAP), or amounts not yet accrued for GAAP purposes but for which an
obligation (which has legally accrued and cannot legally be eliminated and
which is subject to reasonable estimate) exists for payment in the future which
is attributable to any Benefit Plan, including but not limited to (a) severance
pay benefits, (b) deferred compensation or unpaid bonuses, (c) any liabilities
on account of the change in control which will result from this Agreement,
including any potential 20% excise tax under Section 4999 of the Code relating
to excess parachute payments under Section 280G of the Code, (d) any unpaid
pension contributions for the current plan year or any accumulated funding
deficiency under Section 412 of the Code and related penalties under Section
4971 of the Code, including unpaid pension contributions or funding
deficiencies owed by members of a controlled group of corporations which
includes Kentucky Enterprise or the Thrift Subsidiary and for which Kentucky
Enterprise or the Thrift Subsidiary is liable under applicable law, (e) any
authorized but unpaid profit sharing contributions or contributions under
Section 401(k) and Section 401(m) of the Code, (f) retiree health benefit
coverage and (g) unpaid premiums for contributions required under any group
health plan to maintain such plan's coverage through the Effective Time.
8. Defined Benefit Pension Plan Liabilities. To the best
knowledge of Kentucky Enterprise, Kentucky Enterprise and the Thrift Subsidiary
(or any pension plan maintained by any of them) have not incurred any material
liability to the PBGC or the IRS with respect to any Benefit Plan which is a
defined benefit pension plan, except for the payment of PBGC premiums pursuant
to Section 4007 of ERISA, all of which if due prior to the date of this
Agreement have been fully paid, and no PBGC reportable event under Section 4043
of ERISA has occurred with respect to any such pension plan. Except as
otherwise disclosed in Schedule 1, the benefit liabilities, as defined in
Section 4001(a)(16) of ERISA, of each Benefit Plan subject to Title IV of
ERISA, using the actuarial assumptions that would be used by the PBGC in the
event of termination of such plan, do not exceed the fair market value of the
assets of such plan. Neither Kentucky Enterprise, the Thrift Subsidiary nor
any controlled group member of Kentucky Enterprise or the Thrift Subsidiary
participates in, or has incurred any liability under Sections 4201, 4063 or
4064 of ERISA for a complete or partial withdrawal from a multiple employer
plan or a multi-employer plan (as defined in Section 3(37) of ERISA).
9. Independent Trustee. To the best knowledge of Kentucky
Enterprise, Kentucky Enterprise and the Thrift Subsidiaries (a) have not
incurred any asserted or unasserted material liability for breach of duties
assumed in connection with acting as an independent trustee of any employee
pension plan (as defined in Section 3(2) of ERISA) which is intended to be
qualified under Section 401(a) of the Code and which is maintained by an
employer unrelated in ownership to Kentucky Enterprise or the Thrift
Subsidiary, (b) have not authorized nor knowingly participated in a material
prohibited transaction under Section 406 of ERISA and not exempt under Section
408 of ERISA and (c) have not received notice of any material actions, suits or
claims (other than routine claims for benefits) pending or threatened against
the unrelated employer or against them.
10. Material. For purposes of this Paragraph Q as a whole, the
term "material" in connection with a liability shall mean a liability or loss,
taxes, penalties, interest and related legal fees in the total amount of
$10,000 or more, with such determination being made on the basis of the
aggregate affected participants of a Benefit Plan and not with respect to any
single participant.
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R. The investment portfolios of Kentucky Enterprise and the Thrift
Subsidiary consist of securities in marketable form. Except as disclosed in
Schedule 1, since June 30, 1995 to the date hereof neither Kentucky Enterprise
nor the Thrift Subsidiary has incurred any unusual or extraordinary losses in
its investment portfolio, and, except for matters of general application to the
thrift or banking industry (including, but not limited to, changes in laws or
regulations or generally accepted accounting principles) or for events relating
to the business environment in general, including market fluctuations and
changes in interest rates, Kentucky Enterprise is not aware of any events which
are reasonably certain to occur in the future and which reasonably can be
expected to result in any material adverse change in the quality or performance
of Kentucky Enterprise's and the Thrift Subsidiary's investment portfolio on a
consolidated basis.
S. Except as disclosed in Schedule 1, there are no actions, suits,
claims, proceedings, investigations or assessments of any kind pending, or to
the best knowledge of Kentucky Enterprise, threatened against any of the
Directors or officers of Kentucky Enterprise or the Thrift Subsidiary in their
capacities as such, and no Director or officer of Kentucky Enterprise or the
Thrift Subsidiary currently is being indemnified or seeking to be indemnified
by either Kentucky Enterprise or the Thrift Subsidiary pursuant to applicable
law or Kentucky Enterprise's Articles of Incorporation or Bylaws or the Thrift
Subsidiary's Charter or Bylaws.
T. Schedule 1 sets forth, among other things, exceptions to Kentucky
Enterprise's representations and warranties in this Section II. While Kentucky
Enterprise has used its best efforts to identify in Schedule 1 the particular
representation or warranty to which each such exception relates, each such
exception shall be deemed disclosed for purposes of all representations and
warranties in this Section II. The mere inclusion of an exception in Schedule
1 shall not be deemed an admission by Kentucky Enterprise that such exception
represents a material fact, event or circumstances or would result in a
material adverse effect to Kentucky Enterprise.
U. All representations and warranties contained in this Section II shall
expire at the Effective Time, and, thereafter, neither Kentucky Enterprise nor
the Thrift Subsidiary nor any officer or director of either of them shall have
any liability or obligations with respect thereto.
III. REPRESENTATIONS AND WARRANTIES OF FIFTH THIRD
Fifth Third represents and warrants to Kentucky Enterprise that as of the date
hereof or as of the indicated date, as appropriate:
A. Fifth Third is duly incorporated, validly existing and in good
standing as a corporation under the corporation laws of the State of Ohio, is a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended, and is duly authorized to conduct the business in which it is engaged,
and The Fifth Third Bank of Northern Kentucky, Inc. is duly incorporated,
validly existing and in good standing as a corporation under the corporation
laws of the State of Kentucky and is duly authorized to conduct the business in
which it is engaged.
B. Pursuant to Fifth Third's Second Amended Articles of Incorporation, as
amended, the total number of shares of capital stock it is authorized to have
outstanding is 140,500,000 of which 140,000,000 shares are classified as
Common Stock without par value ("Fifth Third Common Stock") and 500,000 shares
are classified as Preferred Stock without par value. As of the close of
business on July 31, 1995, 66,726,016 shares of Fifth Third Common Stock were
issued and outstanding and 0 shares were held in its treasury. As of the date
of this Agreement, no shares of its Preferred Stock have been issued. Fifth
Third does not have outstanding any stock options, subscription rights,
warrants or other securities entitling the holders to subscribe for or purchase
any shares of its capital stock other than options granted and to be granted to
employees and Directors under its stock option plans and $143,750,000 of 4 1/4%
Convertible
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Subordinated Notes due January 15, 1998 (the "Notes"). At July 31, 1995,
2,151,511 shares of Fifth Third Common Stock were reserved for issuance in
connection with outstanding options granted under it stock option plans and
938,728 shares were reserved for issuance under options to be granted in the
future. The Notes are convertible at any time prior to maturity at the option
of each holder thereof, unless previously redeemed, into shares of Fifth Third
Common Stock at a conversion price of $63-5/8 per share of Fifth Third Common
Stock (equivalent to a conversion rate of approximately 15.72 shares per $1,000
principal amount of the Notes), subject to adjustment for stock splits, stock
dividends and similar stock distributions. If all of the Notes were converted,
Fifth Third would issue a maximum of approximately 2,259,750 shares of Fifth
Third Common Stock to the holders of the Notes.
C. All shares of Fifth Third Common Stock to be received by the
shareholders of Kentucky Enterprise as a result of the merger pursuant to the
terms of this Agreement and the Agreement of Merger shall be, upon transfer or
issuance, validly issued, fully paid and non-assessable, and will not, upon
such transfer or issuance, be subject to the preemptive rights of any
shareholder of Fifth Third.
D. Fifth Third has furnished to Kentucky Enterprise its consolidated
financial statements as at December 31, 1992, December 31, 1993 and December
31, 1994 and for the respective years then ended together with the opinions of
its independent public accountants associated therewith. Such consolidated
financial statements fairly present the consolidated financial condition of
Fifth Third as of their respective dates and for the respective periods covered
thereby in conformity with generally accepted accounting principles
consistently followed throughout the periods covered thereby. Neither Fifth
Third nor any significant subsidiaries of Fifth Third have any material
liabilities, obligations or indebtedness required to be disclosed in such
financial statements other than the liabilities, obligations and indebtedness
disclosed in such financial statements (including footnotes). Fifth Third has
furnished to Kentucky Enterprise its unaudited consolidated financial
statements as at June 30, 1995, and for the six (6) months then ended and shall
furnish to Kentucky Enterprise its unaudited consolidated financial statements
as at September 30, 1995 and for the nine (9) months then ended a soon as such
statements publicly are available, and shall continue to furnish information
for subsequent calendar quarter periods to Kentucky Enterprise as soon as such
becomes publicly available until the Closing Date.
E. Except for events relating to the business environment in general:
(i) since June 30, 1995, to the date hereof there have been no material adverse
changes in the consolidated financial condition, operations or business of
Fifth Third; (ii) the chief executive officer and the chief financial officer
of Fifth Third are not aware of any events which have occurred since June 30,
1995, or which are reasonably certain to occur in the future and which
reasonably can be expected to result in any material adverse change in the
consolidated financial condition, operations or business of Fifth Third; and
(iii) since June 30, 1995, to the date hereof there have been no material
changes in the methods of business operations of Fifth Third and its
subsidiaries.
F. 1. The Executive Committee of the Board of Directors of Fifth
Third, by resolution adopted by the members present at a meeting duly called
and held, at which meeting a quorum was at all times present and acting, has
approved this Agreement and the Agreement of Merger, including reserving for
issuance to Kentucky Enterprise shareholder in accordance with this Agreement
and the Agreement of Merger a sufficient number of shares of Fifth Third Common
Stock. Approval and adoption of this Agreement and the Agreement of Merger by
the shareholders of Fifth Third is not required under Ohio law or under the
Second Amended Articles of Incorporation, as amended, or Code of Regulations of
Fifth Third.
2. Fifth Third has corporate power and authority to enter into
this Agreement and the Agreement of Merger and to carry out its obligations
hereunder and thereunder subject to certain required regulatory approvals.
This Agreement and the Agreement of Merger when executed and delivered, will
have been duly authorized and will constitute valid and binding obligations of
Fifth Third, enforceable in
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accordance with their terms except to the extent that (i) enforceability
thereof may be limited by insolvency, reorganization, liquidation, bankruptcy,
readjustment of debt or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and (ii) the
availability of certain remedies may be precluded by general principles of
equity, subject, however, to the receipt of requisite regulatory approvals.
3. Neither the execution of this Agreement or the Agreement of
Merger nor the consummation of the transactions contemplated hereby and
thereby, does or will (i) conflict with, result in a breach of, violate or
constitute a default, under Fifth Third's Second Amended Articles of
Incorporation, as amended, or Code of Regulations or, to the best knowledge of
its chief executive officer and chief financial officer, any federal, foreign,
state or local law, statute, ordinance, rule, regulation or court or
administrative order, or any agreement, arrangement, or commitment to which
Fifth Third is subject or bound; (ii) to the best knowledge of the chief
executive officer and chief financial officer of Fifth Third, result in the
creation of or give any person the right to create any material lien, charge,
encumbrance, security agreement or any other material rights of others or other
material adverse interest upon any material right, property or asset belonging
to Fifth Third or any of its subsidiaries other than such rights as may be
given the shareholders of Kentucky Enterprise pursuant to the provisions of
Sections 1701.84 and 1701.85 of the Ohio Revised Code; (iii) terminate or give
any person the right to terminate, amend, abandon, or refuse to perform any
material agreement, arrangement or commitment to which Fifth Third is a party
or by which Fifth Third's rights, properties or assets are subject or bound; or
(iv) accelerate or modify, or give any party thereto the right to accelerate or
modify, the time within which, or the terms according to which, Fifth Third is
to perform any duties or obligations or receive any rights or benefits under
any material agreement, arrangements or commitments.
G. Complete and accurate copies of (i) the Second Amended Articles of
Incorporation, as amended, and (ii) the Code of Regulations of Fifth Third in
force as of the date hereof have been delivered to Kentucky Enterprise.
H. To the best knowledge of the chief executive officer and chief
financial officer of Fifth Third, neither Fifth Third nor any of its
subsidiaries has knowingly engaged in any activity or omitted to take any
action which, in any material way, has resulted or could result in the
violation of (i) any local, state or federal law or (ii) any regulation, order,
injunction or decree of any court or governmental body, the violation of either
or which could reasonably be expected to have a material adverse effect on the
financial condition Fifth Third and its subsidiaries taken as a whole. To the
best knowledge of the chief executive officer and chief financial officer of
Fifth Third, Fifth Third and its subsidiaries possess all licenses, franchise,
permits and other governmental authorizations necessary for the continued
conduct of their businesses without material interference or interruption.
I. 1. To the best knowledge of the chief executive officer and chief
financial officer of Fifth Third, neither this Agreement or the Agreement of
Merger nor any report, statement, list, certificate or other information
furnished or to be furnished by Fifth Third to Kentucky Enterprise or its
agents in connection with this Agreement or any of the transactions
contemplated hereby (including, without limitation, any information which has
been or shall be supplied with respect to its business operations and financial
condition for inclusion in the proxy statement/prospectus and registration
statement relating to the merger) contains or shall contain (in the case of
information relating to the proxy statement/prospectus, at the time it is
mailed, and, in the case of the registration statement, at the time it becomes
effective and, in the case of the proxy statement/prospectus and the
registration statement, at the time the annual or special meeting of
shareholders of Kentucky Enterprise is held to consider the adoption of this
Agreement and the Agreement of Merger) an untrue statement of a material fact
or omits or shall omit to state a material fact necessary to make the
statements contained herein or therein, in light of the circumstances in which
they are made, not misleading.
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2. Fifth Third has furnished to Kentucky Enterprise or its agents
true and complete copies (including all exhibits and all documents incorporated
by reference) of the following documents as filed by Fifth Third with the SEC:
a. Fifth Third's Annual Report on Form 10-K for the year
ended December 31, 1994;
b. Fifth Third's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1995, and June 30, 1995;
c. any Current Report on Form 8-K with respect to any
event occurring after December 31, 1994 and prior to the date
of this Agreement;
d. any report filed by Fifth Third to amend or modify
any of the reports described above; and
e. all proxy statements prepared in connection with
meetings of Fifth Third's shareholders held subsequent to
December 31, 1994.
The information set forth in the documents described in this subsection 2
(including all exhibits thereto and all documents incorporated therein by
reference) did not, as of the dates on which such reports were filed with the
SEC, (a) contain any untrue statement of a material fact, (b) omit any material
fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading, or (c) omit any material exhibit required to be filed
therewith. Prior to the date hereof no event has occurred subsequent to
December 31, 1994 which Fifth Third is required to describe in a Current Report
on Form 8-K other than the Current Reports heretofore furnished by Fifth Third
to Kentucky Enterprise. Fifth Third timely shall furnish Kentucky Enterprise
will copies of all reports filed by Fifth Third with the SEC subsequent to the
date of this Agreement and until the Closing Date.
J. There are no actions, suits, proceedings, investigations or
assessments of any kind pending or, to the best knowledge of the chief
executive officer and chief financial officer of Fifth Third, threatened
against Fifth Third or any Fifth Third subsidiary, which reasonably can be
expected to result in any material adverse change in the consolidated financial
condition, operations or business of Fifth Third.
K. Since June 30, 1995, to the date hereof, none of Fifth Third's banking
subsidiaries and thrift subsidiaries has incurred any unusual or extraordinary
loan losses which would be material to Fifth Third on a consolidated basis; and
to the best knowledge and belief of the chief executive officer and chief
financial officer of Fifth Third, and in the light of such banking
subsidiaries' and thrift subsidiary's historical loan loss experience and their
managements' analysis of the quality and performance of their respective loan
portfolios, as of June 30, 1995 their consolidated reserves for loan losses are
adequate to absorb all known and reasonably anticipated losses as of such date.
L. Fifth Third and its subsidiaries have filed all federal, state and
local tax returns required to be filed (after giving effect to all extensions)
by them, respectively, and have paid or provided for all tax liabilities shown
to be due thereon or which have been assessed against them, respectively.
M. Fifth Third has not, directly or indirectly, dealt with any broker or
finder in connection with this transaction and has not incurred and will not
incur any obligation for any broker's or finder's fee or commission in
connection with the transactions provided for in this Agreement and the
Agreement of Merger.
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N. Fifth Third has no unfunded liabilities with respect to any Benefit
Plan (as such term is defined in subparagraph Q.1. of Section II hereof, but
applied to Fifth Third, its subsidiaries and affiliates) that are material,
either individually or in the aggregate, to Fifth Third on a consolidated basis
and that have not been recorded and disclosed as required by generally accepted
accounting principles (GAAP) in the most recent year-end, audited financial
statements of Fifth Third supplied to Kentucky Enterprise pursuant to Paragraph
D of Section III hereof.
O. The investment portfolios of Fifth Third and its subsidiaries and
affiliates consist of securities in marketable form. Since June 30, 1995, to
the date hereof Fifth Third and its affiliates, on a consolidated basis, have
not incurred any unusual or extraordinary losses in their respective investment
portfolios, and, except for events relating to the business environment in
general, including market fluctuations, the management of Fifth third is not
aware of any events which are reasonably certain to occur in the future and
which reasonably can be expected to result in any material adverse change in
the quality or performance of the investment portfolios of Fifth Third and its
affiliates on a consolidated basis.
P. As of the date hereof, Fifth Third is not aware of the existence of
any factor that would materially delay or materially hinder issuance of any of
the required regulatory approvals necessary to consummate the Merger or the
other transactions contemplated hereby.
All representations and warranties contained in this Section III shall expire
at the Effective Time, and thereafter, neither Fifth Third nor any officer or
Director of Fifth Third shall have any further liability or obligation with
respect thereto, except for any misrepresentations, breaches of warranties or
violations of covenants that were made with intent to defraud.
IV. OBLIGATIONS OF KENTUCKY ENTERPRISE BETWEEN THE DATE OF THIS AGREEMENT
AND THE EFFECTIVE TIME.
A. Kentucky Enterprise, in consultation with Fifth Third, will take all
actions necessary to call and hold its annual or a special meeting of its
shareholders as soon as practicable after the Fifth Third registration
statement relating to this transaction has been declared effective by the SEC
and under all applicable state securities laws for the purpose of approving and
adopting this Agreement, the Agreement of Merger and any other documents or
actions necessary to the consummation of the Merger provided for herein
pursuant to law. The Board of Directors of Kentucky Enterprise intends to
inform the shareholders of Kentucky Enterprise in the proxy materials relating
to the annual or special meeting that all Directors of Kentucky Enterprise
intend to vote all shares of Kentucky Enterprise Common Stock which they own of
record or have voting control over in favor of approving this Agreement, the
Agreement of Merger and any such other necessary documents or actions, and all
Directors will recommend approval of this Agreement and the Agreement of Merger
to the other shareholders of Kentucky Enterprise, subject only to such
Directors' fiduciary obligations, receipt by Kentucky Enterprise of an updated
fairness opinion dated as of immediately prior to the date of the proxy
statement and which is not withdrawn prior to the date of the shareholders'
meeting, and their review of Fifth Third's registration statement to be filed
with the SEC as set forth in Section I herein, and their reasonable
satisfaction with the information set forth therein.
B. (i) The merger between Kentucky Enterprise and Fifth Third is
intended to be structured to qualify for treatment under present accounting
rules as a pooling of interests and Kentucky Enterprise agrees that it will
not, except at the request of or upon agreement of Fifth Third, take any action
which would disqualify this treatment, under generally accepted accounting
principles. Consistent with generally accepted accounting principles, Kentucky
Enterprise agrees that on or before the Effective Time based on a review of the
Thrift Subsidiary's loan losses, current classified assets and commercial,
multi-family and residential mortgage loans and investment portfolio, Kentucky
Enterprise will work with Fifth Third with the goal of establishing collection
procedures, internal valuation reviews, credit policies and practices and
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general valuation allowances which are consistent with the guidelines used
within the Fifth Third holding company system. Fifth Third shall provide such
assistance and direction to Kentucky Enterprise as is necessary in conforming
to such polices, practices, procedures and asset dispositions which are
mutually agreeable between the date of this Agreement until the Effective Time;
and (ii) from the date of this Agreement until the Effective Time, Kentucky
Enterprise and the Thrift Subsidiary each will be operated in the ordinary
course of business, and neither of them will, without the prior written consent
of Fifth Third, which consent shall not be unreasonably withheld: make any
changes in its capital or corporate structures; issue any additional shares of
its Common Stock other than pursuant to the exercise of options granted prior
to the date hereof; issue any other equity securities, other than pursuant to
the exercise of options granted prior to the date hereof provided, however,
that from the date hereof until December 31, 1995, Messrs. White, Ballinger,
Egan and Taeuber shall not exercise in the aggregate more than fifty percent
(50%) of the non-incentive stock options which they hold as of the date hereof;
or, issue as borrower any long term debt or convertible or other securities of
any kind, or right to acquire any of its securities; make any material changes
in its method of business operations; make, enter into any agreement to make,
or become obligated to make, any capital expenditures in excess of $10,000;
make, enter into or renew any agreement for services to be provided to Kentucky
Enterprise or the Thrift Subsidiary or permit the automatic renewal of any such
agreement, except any agreement for services having a term of not more than
three months or requiring the expenditure of not more than $10,000 (for this
purpose the phrase "permit the automatic renewal" includes the failure to send
a notice of termination of such contract if such failure would constitute a
renewal); open for business any branch office which has been approved by the
appropriate regulatory authorities but not yet opened or apply to the
appropriate regulatory authorities to establish a new branch office or expand
any existing branch office; acquire, become obligated to acquire, or enter into
any agreement to acquire, any banking or non-banking company or any branch
offices of any such companies; declare or pay any cash dividends on its own
stock other than normal and customary cash dividends ($0.05) per quarter paid
in such amounts and at such times as Kentucky Enterprise historically has done
on its Common stock, provided this covenant shall only apply to Kentucky
Enterprise; pay any stock dividends or make any other distributions on its
stock other than cash dividends as described in the immediately preceding
clause; change or otherwise amend any Benefit Plans other than as contemplated
herein; and provide any increases in employee salaries or benefits other than
in the ordinary course of business or as described in Schedule 1. Kentucky
Enterprise agrees that it will not sell or otherwise dispose of or encumber any
of the shares of the capital stock of the Thrift Subsidiary which are now owned
by it.
V. COOPERATION AND OTHER OBLIGATIONS AND OTHER COVENANTS
A. Each of the parties hereto agrees to use its best efforts and to
cooperate with the other party in all reasonable respects in order to carry out
and consummate the transactions contemplated by this Agreement and the
Agreement of Merger at the earliest practicable time including, without
limitation, the filing of applications, notices and other documents with, and
obtaining approval from, appropriate governmental regulatory agencies.
B. Kentucky Enterprise agrees to permit Fifth Third, its officers,
employees, accountants, agents and attorneys, and Fifth Third agrees to permit
Kentucky Enterprise, its officers, employees, accountants, agents and
attorneys, to have reasonable access during business hours to their respective
books, records and properties, and those of the Thrift Subsidiary and The Fifth
Third Bank and The Fifth Third Bank of Northern Kentucky, Inc. as well, for the
purpose of making a detailed examination, or updating and amplifying prior
examinations, of the financial condition, assets, liabilities, legal
compliance, affairs and the conduct of the business of Kentucky Enterprise and
the Thrift Subsidiary or Fifth Third, The Fifth Third Bank, and The Fifth Third
Bank of Northern Kentucky, Inc. as the case may be, prior to the Effective
Time, and also to permit the monitoring of the foregoing on an ongoing basis
(such rights of examination and monitoring to be subject to the confidentiality
obligations set forth in such Paragraph VII.D. hereof);
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provided, however, that any such examination by Fifth Third or Kentucky
Enterprise shall not relieve Fifth Third or Kentucky Enterprise from any
responsibility or liability for any material misrepresentation or material
breach of warranty hereunder discovered in the course of or subsequently to
such examination and prior to the Effective Time.
VI. CONDITIONS PRECEDENT TO CLOSING.
A. Conditions to the Obligations of Each of the Parties:
The obligation of each of the parties hereto to consummate the transactions
provided for herein and in the Agreement of Merger is subject to the
fulfillment on or prior to the Effective Time of each of the following
conditions:
1. The shareholders of Kentucky Enterprise shall have duly
approved and adopted this Agreement and the Agreement of Merger in accordance
with and as required by law and in accordance with its Articles of
Incorporation and Code of Regulations.
2. All necessary governmental and regulatory orders, consents,
clearances and approvals and requirements shall have been secured and satisfied
for the consummation of such transactions, including without limitation, those
of the Federal Reserve System, the OCC, the Kentucky Department of Financial
Institutions, the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation to the extent required, including, without limitation,
any approval, consent, clearance, or waiver required under 12 C.F.R. Section
563b.3(i).
3. Dinsmore & Shohl, counsel for Fifth Third, or other counsel
reasonably acceptable to Fifth Third and Kentucky Enterprise, shall have
delivered an opinion as to certain federal tax aspects of the transaction
addressed to Kentucky Enterprise in substantially the form appended hereto as
Appendix B.
4. Prior to or at the Effective Time, no material investigation
by any state or federal agency shall have been threatened or instituted seeking
to enjoin or prohibit, or enjoining or prohibiting, the transactions
contemplated hereby and no material action or proceeding shall have been
threatened or instituted before any court or government body or authority,
seeking to enjoin or prohibit, or enjoining or prohibiting, the transactions
contemplated hereby other than investigations, actions and proceedings which
have been withdrawn prior to or at the Effective Time without material adverse
effect to Fifth Third or Kentucky Enterprise and other than regularly-scheduled
regulatory examinations.
5. Any waiting period mandated by law in respect of the final
approval by any applicable Federal regulator(s) of the transaction contemplated
herein shall have expired.
B. Conditions to the Obligations of Fifth Third:
The obligation of Fifth Third to consummate the transactions provided for
herein and in the Agreement of Merger is subject to the fulfillment at or prior
to the Effective Time of each of the following conditions unless waived by
Fifth Third in a writing delivered to Kentucky Enterprise which specifically
refers to the condition or conditions being waived:
1. All of the representations and warranties of Kentucky
Enterprise set forth in Section II of this Agreement shall be true and correct
in all material respects as of the date of this Agreement and at and as of the
Closing Date (as hereinafter defined) as if each such representation and
warranty was given on and as of the Closing Date, except (i) for any such
representations and warranties made as of a
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specified date, which shall be true and correct in all material respects as of
such date and (ii) for breaches of representations and warranties which would
not have, or would not reasonably be expected to have, a material adverse
effect on the business or operations of Kentucky Enterprise or the Thrift
Subsidiary taken as a whole.
2. Kentucky Enterprise shall have performed all of the
obligations required of it under the terms of this Agreement and the Agreement
of Merger in all material respects, except for breaches of obligations which
would not have, or would not reasonably be expected to have, any material
adverse effect on the business or operations of Kentucky Enterprise and the
Thrift Subsidiary taken as a whole.
3. Housley, Goldberg, Kantarian & Bronstein, P.C., counsel for
Kentucky Enterprise and the Thrift Subsidiary, shall have delivered an opinion
addressed to Fifth Third in substantially the form appended hereto as Appendix
C.
4. (a) With respect to the Qualified Benefit Plans, at least
sixty (60) days prior to the Effective Time: (1) Kentucky Enterprise or the
Thrift Subsidiary shall have taken any and all actions necessary to discontinue
any ongoing obligation after the Effective Time to continue contributions
(including employee 401(k) contributions) to any such defined contribution
plans and to discontinue after the Effective Time the accrual of further
benefits under any such defined benefits plans; (2) the Thrift Subsidiary shall
have adopted a resolution of its board of directors terminating the Thrift
Subsidiary's Salary Savings and Investment Plan as of a date prior to the
Effective Time and providing for the distribution of benefits after the receipt
of a favorable determination letter from the Internal Revenue Service with
respect to the termination and shall have provided Fifth Third with a copy of
such resolution, (3) Kentucky Enterprise or the Thrift Subsidiary shall have
provided Fifth Third with an analysis that contributions and benefits under the
Qualified Benefit Plans do not exceed the amount permitted under Section 415 of
the Code, (4) with respect to each Qualified Benefits Plan, Kentucky Enterprise
or the Thrift Subsidiary shall have provided Fifth Third will a copy of all
determination letters from the IRS (or if such a letter has been applied for,
but not yet received at the Effective Time, a copy of the application for such
determination letter), (5) Kentucky Enterprise or the Thrift Subsidiary shall
have provided Fifth Third with a copy of all amendments to the Qualified
Benefit Plans adopted on or before the Effective Time, and (6) Kentucky
Enterprise or the Thrift Subsidiary shall have provided Fifth Third with a copy
of any group annuity contract used as a source of funding for any Qualified
Benefit Plans.
(b) With respect to any Benefit Plan that provides for vesting of
benefits, there shall be no discretionary acceleration of vesting without Fifth
Third's consent whether or not such discretionary acceleration of vesting is
provided under the terms of the Benefit Plan; provided that a Benefit Plan
which pursuant to its terms provides for an acceleration of vesting upon a
change of control of Kentucky Enterprise shall not be deemed toinvolve a
discretionary acceleration of vesting and vesting thereunder shall accelerate
as ofthe Effective Time.
(c) No distribution shall be made from any Benefit Plan without
Fifth Third's consent, which consent will not be unreasonably withheld, except
that a distribution in the ordinary course or as contemplated in Section VII.B.
herein may be made if, prior to the distribution, Kentucky Enterprise has
provided Fifth Third the opportunity to review the proposed distribution.
5. The aggregate amount of consolidated shareholders' equity
(including Common Stock, Additional Paid-In Capital and Retained Earnings and
excluding Treasury Stock) of Kentucky Enterprise immediately prior to the
Effective Time, as shown by and reflected in its books and records of accounts
on a consolidated basis in accordance with generally accepted principles,
consistently applied, shall not be less than $49,028,000. The separate
shareholders' equity of Thrift Subsidiary immediately prior to the Effective
Time, as shown by and reflected in its books and records of accounts on a
separate basis in accordance with generally accepted accounting principles,
consistently applied, shall not be less than such
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shareholders' equity as reflected in Thrift Subsidiary's June 30, 1995 audited
financial statements. For purposes of this subparagraph 5 to Section VI.B.,
any expenses or accruals after the date hereof relating to (i) the adjustments
contemplated by Section IV.B.(i) herein, (ii) termination or funding of any of
Kentucky Enterprise's or the Thrift Subsidiary's Benefit Plans, as contemplated
herein, (iii) any extraordinary payment of assessment by or with respect to the
Savings Association Insurance Fund on the deposits of the Thrift Subsidiary,
(iv) acceleration of vesting under any of the Kentucky Enterprise or the Thrift
Subsidiary Benefit Plans, or (v) expenses associated with the Merger shall be
excluded for purposes of calculation of Kentucky Enterprise's and the Thrift
Subsidiary's shareholders' equity as contemplated herein.
6. Fifth Third's independent certified public accountants shall
have reviewed the unaudited consolidated financial statements of Kentucky
Enterprise as at the end of the month immediately preceding the Effective Time,
as well as the unaudited separate financial statements of the Thrift Subsidiary
as of the same date, performed such other auditing procedures as may be
requested by Fifth Third and reported in good faith that they are not aware of
any material modifications that should be made in order for such financial
statements to (i) be in conformity with generally accepted accounting
principles, consistently applied, excluding the presentation of footnotes, and
(ii) accurately state the financial condition and results of operations of
Kentucky Enterprise and each of the Thrift Subsidiary, and such modifications,
in either case, would have a material adverse effect on the financial condition
of Kentucky Enterprise or any of the Thrift Subsidiary.
7. The receipt of a certificate from Kentucky Enterprise and each
of the Thrift Subsidiary, executed by the chief executive officer and chief
financial officer of each, dated the Closing Date, certifying to their best
knowledge and belief that: (i) all of the representations and warranties set
forth in Section II hereof were true and correct as of the date of this
Agreement and as of the Closing Date in all material respects, except (y) for
any such representations and warranties made as of a specified date, which
shall be true and correct in all material respects as of such date and (z) for
breaches of representations and warranties which would not have, or would not
reasonably be expected to have, a material adverse effect on the business or
operations of Kentucky Enterprise and the Thrift Subsidiary taken as a whole;
and (ii) it has met and fully complied in all material respects with all of the
obligations required of it under the terms of this Agreement and the Agreement
of Merger, except for breaches of obligations which would not have, or would
not reasonably be expected to have, any material adverse effect on the business
or operations of Kentucky Enterprise and the Thrift Subsidiary taken as a
whole.
8. The total issued and outstanding shares of Kentucky Enterprise
Common Stock shall not exceed 3,015,300 shares and all options to purchase
Kentucky Enterprise Common Stock shall have been exercised and fully paid at
least one week prior to the Closing Date, there shall be no outstanding options
to purchase Kentucky Enterprise Common Stock and any stock option plan or
arrangement shall have been terminated.
9. Fifth Third shall have received a letter from Deloitte &
Touche, Fifth Third's independent public accountants, to the effect that the
Merger will qualify for "pooling of interests" accounting treatment unless such
letter cannot be issued by reason of (i) any agreement with respect to
treatment of the ESOP, or (ii) financing of exercises of options as
contemplated in Section VII.B.8 of this Agreement, in which case the receipt of
such letter shall not be a condition to the obligation of Fifth Third to
consummate the transactions provided for herein.
C. Conditions to the Obligations of Kentucky Enterprise:
The obligation of Kentucky Enterprise to consummate the transactions provided
for herein and in the Agreement of Merger is subject to the fulfillment at or
prior to the Effective Time of each of the following conditions unless waived
by Kentucky Enterprise in a writing delivered to Fifth Third which specifically
refers to the condition or conditions being waived:
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1. All of the representations and warranties of Fifth Third set
forth in Section III of this Agreement shall be true and correct in all
material respects as of the date of this Agreement and at and as of the Closing
Date as if each such representation and warranty was given on and as of the
Closing Date, except (i) for any such representations and warranties made as of
a specified date, which shall be true and correct in all material respects as
of such date and (ii) for breaches of representations and warranties which
would not have, or would not reasonably be expected to have, a material adverse
effect on the consolidated business or operations of Fifth Third.
2. Fifth Third shall have performed all of the obligations
required of it under the terms of this Agreement and the Agreement of Merger in
all material respects, except for breaches of obligations which would not have,
or would not reasonably be expected to have, any material adverse effect on the
consolidated business or operations of Fifth Third.
3. Paul L. Reynolds, counsel for Fifth Third, shall have
delivered an opinion addressed to Kentucky Enterprise in substantially the form
appended hereto as Appendix D.
4. The receipt of a certificate from Fifth Third, executed by its
chief executive officer and chief financial officer, dated the Closing Date,
certifying to their best knowledge and belief that: (i) all of the
representations and warranties set forth in Section III were true and correct
as of the date of this Agreement and as of the Closing Date, except (y) for any
such representations and warranties made as of a specified date, which shall be
true and correct in all material respects as of such date and (z) for breaches
of representations and warranties which would not have, or would not reasonably
be expected to have, a material adverse effect on the consolidated business or
operations of Fifth Third; and, (ii) Fifth Third has met and fully complied in
all material respects with all of the obligations required of it under the
terms of this Agreement and the Agreement of Merger, except for breaches of
obligations which would not have, or would not reasonably be expected to have,
any material adverse effect on the business or operations of Fifth Third.
5. Fifth Third shall have registered its shares of Common Stock
to be issued to the Kentucky Enterprise shareholders hereunder and pursuant to
the Agreement of Merger with the SEC pursuant to the Securities Act of 1933, as
amended, and with all applicable state securities authorities. The
registration statement with respect thereto shall have been declared effective
by the SEC and all applicable state securities authorities and no stop order
shall have been issued. The shares of Fifth Third Common Stock to be issued to
the Kentucky Enterprise shareholder hereunder shall have been authorized for
trading on the National Market System of the National Association of Securities
Dealers upon official notice of issuance.
6. Fifth Third's Trust Department, as the Exchange Agent (as
contemplated in the Agreement of Merger), shall acknowledge in writing to
Kentucky Enterprise that it is in receipt of (i) certificates representing a
whole number of shares of Fifth Third Common Stock to be issued to the
shareholders of Kentucky Enterprise pursuant to this Agreement and the
Agreement of Merger, and (ii) sufficient cash to be paid to the Kentucky
Enterprise shareholders for fractional shares.
VII. ADDITIONAL COVENANTS
A. The Thrift Subsidiary shall be either (i) merged with and into Fifth
Third Bank of Northern Kentucky, Inc. ("5/3"), to be effective the Effective
Time, or (ii) Fifth Third will maintain the Thrift Subsidiary as a separate
affiliate of Fifth Third and transfer substantially all of the assets of the
Thrift Subsidiary to 5/3, or (iii) The Thrift Subsidiary will be merged with
Fifth Third Savings Bank of Western Kentucky, F.S.B. ("5/3 F.S.B.") and
substantially all of the assets of the Thrift Subsidiary will be transferred to
5/3. The parties hereto agree to cooperate with one another to effect such
merger or other transaction. Upon
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consummation of any merger of the Thrift Subsidiary, the separate corporate
existence of the Thrift Subsidiary shall cease by operation of law. As soon as
reasonably practicable after the date of this Agreement, 5/3 or 5/3 F.S.B. and
Thrift Subsidiary shall enter into a Bank Plan of Merger mutually acceptable to
the parties.
B. 1. Fifth Third shall use its best efforts to employ at Fifth
Third or other Fifth Third subsidiaries or affiliates as many of the Kentucky
Enterprise and Thrift Subsidiary employees who desire employment within the
Fifth Third holding company system as possible, to the extent of available
positions and consistent with Fifth Third's standard staffing levels and
personnel policies; provided that such continuing employees will not be subject
to any exclusion or penalty for pre-existing conditions that were covered under
the Thrift Subsidiary's medical plan immediately prior to the Effective Time or
any waiting period relating to coverage under Fifth Third's medical plan. Each
employee of Kentucky Enterprise and the Thrift Subsidiary who becomes an
employee of Fifth Third or any of its subsidiaries or affiliates at or
immediately subsequent to the Merger shall be entitled to participate in all
employee benefit plans sponsored by Fifth Third or its subsidiaries or
affiliates on the same terms and to the same extent as similarly situated
employees. Such employees shall receive full credit for their period of
service to Kentucky Enterprise and the Thrift Subsidiary for purposes of
determining eligibility, participation and vesting in all Fifth Third employee
benefit plans but not for purposes of determining the benefits accrued under
the Fifth Third Master Retirement Plan.
2. Those employees who are not to be employed by Fifth Third and
who sign and deliver a termination and release agreement in the form acceptable
to Fifth Third and Kentucky Enterprise, shall be entitled to severance pay
equal to, in the case of officers of Kentucky Enterprise or the Thrift
Subsidiary, one week's pay for each year of service up to a maximum of ten (10)
weeks; in the case of a salaried employee who is not an officer, one weeks' pay
for each year of service up to a maximum of eight (8) weeks' pay; and, in the
case of an hourly employee, one week's pay for each year of service up to a
maximum of six (6) weeks' pay. Fifth Third shall provide sufficient
notification to Kentucky Enterprise of those employees it will not be hiring in
order that such employees terminated by Kentucky Enterprise can be given
appropriate notice of termination in advance of the effectiveness thereof and
Fifth Third shall provide limited out placement services and assistance to such
employees through Fifth Third's Human Resources Department. Nothing contained
in this Paragraph VII.B.2 shall be construed or interpreted to limit or modify
in any way Fifth Third's at will employment policy.
3. Any officer of Kentucky Enterprise or the Thrift Subsidiary
who has an employment agreement with Kentucky Enterprise or the Thrift
Subsidiary (each a "Contract Officer") shall, receive as of the Effective Time,
the severance or termination payments provided for in their respective
employment agreements ("Contract Payments") as their sole severance payments
from Kentucky Enterprise and Fifth Third in connection with the Merger. As a
condition to receiving their Contract Payments each Contract Officer shall sign
and deliver to Fifth Third a termination and release agreement and, as a
further condition, James T. White will execute and deliver an agreement not to
compete with Fifth Third or its subsidiaries in the Commonwealth of Kentucky or
Southern Ohio for a period of two years after the Effective Time and Messrs.
White, Egan, Ballinger and Taeuber will execute and deliver agreements not to
solicit customers or employees of Kentucky Enterprise, Thrift Subsidiary or any
of their subsidiaries for a period of three years after the Effective Time.
All such agreements shall be in a form reasonably acceptable to Fifth Third,
Kentucky Enterprise and the respective Contract Officers. Notwithstanding the
foregoing or any other provision of this Agreement, in no event shall any
Contract Officer receive any payment that would be considered an "Excess
Parachute Payment" pursuant to Section 280(G) of the Code.
4. Because Fifth Third does not currently have an ESOP for its
employees, the Kentucky Enterprise ESOP shall be terminated by Fifth Third
immediately after the first publication of financial statements by Fifth Third
reflecting at least thirty (30) days of combined financial results of Fifth
Third and Kentucky Enterprise and Fifth Third shall take all appropriate action
to effectuate such termination at such
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time. The assets of Kentucky Enterprise ESOP shall be distributed to
participants or their beneficiaries as soon as practicable after the later to
occur of termination of such ESOP or the receipt of a favorable determination
letter from the Internal Revenue Service as to the effect of the ESOP's
termination on its tax-qualified status under section 401 of the Code. Counsel
selected by Kentucky Enterprise shall be responsible for securing such
determination letter from the Internal Revenue Service including, if not
received prior thereto, subsequent to the Effective Time, all subject to the
prior review and approval (which approval will not be unreasonably withheld in
order to carry out the intent hereof) of Fifth Third and its counsel of the
filings with the IRS and notice to and opportunity to comment by Fifth Third
with respect to any other actions. Fifth Third and Kentucky Enterprise
acknowledge that the Kentucky Enterprise ESOP has unallocated assets with a
fair market value exceeding the outstanding balance of the loan secured by
those assets. Without changing the existing vesting and allocation provisions
in the Kentucky Enterprise ESOP, the parties agree that the participants in the
Kentucky Enterprise ESOP as of the Effective time will benefit from this
investment in accordance with the ESOP's terms. Therefore, after the Effective
Time and until termination of the Kentucky Enterprise ESOP as herein provided,
the Kentucky Enterprise ESOP will be continued for the sole benefit of the
participants in the Kentucky Enterprise ESOP as of the Effective Time in
accordance with the ESOP's terms. Following payment of the outstanding balance
of the Kentucky Enterprise ESOP loan through the sale of unallocated shares,
any excess assets shall be returned to the Kentucky Enterprise ESOP for
allocation to Kentucky Enterprise ESOP participants in accordance with terms of
the Kentucky Enterprise ESOP. During the period between the Effective Time and
the date the ESOP is terminated (as herein provided) each participant in the
ESOP as of the Effective Time shall be permitted to maintain his/her account in
the ESOP (no matter the size of the account balance) unless the participant
otherwise elects in accordance with the diversification provisions in said plan
as of the date hereof. Subject to the requirements of this paragraph and
paragraph VI. B. 4., each participant in he Kentucky Enterprise ESOP and/or the
Kentucky Enterprise Salary Savings and Investment Plan who becomes an employee
of Fifth Third may be given the opportunity to transfer (or roll over) his or
her benefit distributions into Fifth Third's 401(k) plan.
5. After the Effective Time, with respect to the Thrift
Subsidiary's Retirement Plan for Employees, Fifth Third shall either (1)
terminate said plan and make distributions to participants as soon as
practicable after receipt of a favorable determination letter from the Internal
Revenue Service with respect to the termination, or (ii) merge said plan into a
comparable Fifth Third plan. Each participant in such plan who becomes an
employee of Fifth Third may be given the opportunity to transfer (or roll over)
his or her distribution from such terminated plan into Fifth Third's 401(k)
plan. Prior to the Effective Time, the Thrift Subsidiary may, at any time,
amend (as necessary) its Retirement Plan for employees to permit participants
and their beneficiaries to elect to receive their accrued benefits in the form
of a lump sum payment rather than an annuity.
6. Fifth Third agrees to honor the obligations, in effect on the
Effective Time, of Kentucky Enterprise and the Thrift Subsidiary under the
following plans and arrangements (collectively, the "Non-qualified Plans") that
are described in the schedules provided under Section II.Q. hereof: (i) the
director emeritus plan, including the supplemental retirement arrangement with
Mentor E. Graves, (ii) the supplemental executive retirement agreement with
James T. White, (iii) the deferred compensation plans, and (iv) the trust
agreements associated with such plans and agreements. Notwithstanding the
foregoing, on or before the Effective Time, Kentucky Enterprise and the Thrift
Subsidiary may (following prior consultation with and review by Fifth Third of
the proposed actions) contribute to the trusts associated with the Non-
qualified Plans amounts projected by the Thrift Subsidiary to be sufficient to
enable the trusts to satisfy the obligations of Kentucky Enterprise and the
Thrift Subsidiary under the Non-qualified plans.
7. Notwithstanding any other provision of this Agreement, Fifth
Third agrees that Kentucky Enterprise and the Thrift Subsidiary may take such
actions on or before the Effective Time as are necessary or appropriate to
effectuate the purposes of this Section VII.B. (following prior consultations
with and review by Fifth Third of the proposed actions), including but not
limited to (i) the adoption and
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execution of agreements and amendments relating to the plans and programs
referenced herein, including the execution of agreements renewing the
employment agreements for an overall term not to exceed three years, and (iii)
the adoption and execution of any amendment required by applicable law.
8. Subject to normal credit evaluation and standard loan
guidelines, a Fifth Third subsidiary bank will provide financing to qualified
option holders to allow them to fully exercise all outstanding options as set
forth herein.
9. Notwithstanding anything to the contrary in this Agreement,
Kentucky Enterprise shall amend the Supplemental Executive Retirement Agreement
(the "SERA") with James T. White to provide that ordinary income arising from
exercise of his non-incentive stock options shall be disregarded when
calculating benefits payable under the SERA.
C. (i) From and after the Effective Time, Fifth Third shall assume the
obligations of Kentucky Enterprise and Thrift Subsidiary or any of their
subsidiaries arising under applicable Ohio and Federal law in existence as of
the date hereof or as amended prior to the Effective Time and under the
Kentucky Enterprise Articles of Incorporation and Code of Regulations or Thrift
Subsidiary Charter or Bylaws as in effect on the date hereof to indemnify ,
defend and hold harmless each person who is now, or has been at any time prior
to the date hereof or who become, prior to the Effective Time, an officer or
director of Kentucky Enterprise, Thrift Subsidiary, or any of their
subsidiaries (the "Indemnified Parties") against losses, claims, damages,
costs, expenses (including reasonable attorneys' fees), liabilities or
judgements or amounts that are paid in settlement (which settlement shall
require the prior written consent of Fifth Third) of or in connection with any
claim, action, suit, proceeding or investigation (a "Claim") in which an
Indemnified Party is, or is threatened to be made, a party or a witness based
in whole or in part on or arising in whole or in part out of the fact that such
person is or was a director or officer of Kentucky Enterprise, the Thrift
Subsidiary or any of their subsidiaries if such Claim pertains to any matter or
fact arising, existing or occurring prior to the Effective Time (including,
without limitation, the merger and the transactions contemplated by this
Agreement or the Agreement of Merger), regardless of whether such Claim is
asserted or claimed prior to, at or after the Effective Time. Fifth Third
shall pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law and
under the Kentucky Enterprise Articles of Incorporation or Code of Regulations
or Thrift Subsidiary's Charter or Bylaws. Fifth Third's assumption of the
indemnification obligations of Kentucky Enterprise, Thrift Subsidiary or any of
their subsidiaries as provided herein shall continue for a period of five years
after the Effective Time or, in the case of claims asserted prior to the fifth
anniversary of the Effective Time until such matters are finally resolved. Any
Indemnified Party wishing to claim indemnification under this provision, upon
learning of any Claim shall notify Fifth Third (but the failure to so notify
Fifth Third shall not relieve Fifth Third from any liability which Fifth Third
may have under this section except to the extent Fifth Third is materially
prejudiced thereby). Notwithstanding the foregoing, the Indemnified Parties as
a group may retain only one law firm to represent them with resect to each
matter under this section unless there is, under applicable standards of
professional conduct, a conflict on any one significant issue between the
positions of any two or more Indemnified parties.
(ii) From and after the Effective Time, the directors, officers and
employees of Kentucky Enterprise and its subsidiaries who become directors,
officers or employees of Fifth Third or any of its subsidiaries, except for the
indemnifications rights set forth in subparagraph (i) above, shall have
indemnification rights with prospective application only. The prospective
indemnification rights shall consist of such rights to which directors,
officers or employees of Fifth Third or the subsidiary by which such person is
employed are entitled under the provisions of the Articles of Incorporation of
Fifth Third or similar governing documents of Fifth Third or its applicable
subsidiaries, as in effect from time to time after the Effective Time, as
applicable, and provisions of applicable law as in effect form time to time
after the Effective Time.
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(iii) The obligations of Fifth Third provided under this Section
VII.C. are intended to benefit, and be enforceable against Fifth Third directly
by, the Indemnified parties, and shall be binding on all respective successors
of Fifth Third.
(iv) Fifth Third shall also purchase and keep in force for a five year
period, a policy of directors' and officers' liability insurance in the amount
of $25 million to provide coverage for acts or omissions of the type currently
covered by Kentucky Enterprise's existing directors' and officers' liability
insurance for acts or omission occurring on or prior to the Effective Time, but
only to the extent such insurance may be purchased or kept in full force on
commercially reasonable terms taking into account the cost thereof and the
benefits provided thereby. It is agreed that such costs shall be commercially
reasonable so long as they do not exceed 200% of the costs currently paid for
such coverage by Kentucky Enterprise.
D. Fifth Third will not disclose to others, shall not use in respect of
its (or any of its subsidiaries) business operations, and will hold in
confidence any non-public, confidential information disclosed to it by Kentucky
Enterprise concerning Kentucky Enterprise or the Thrift Subsidiary. Kentucky
Enterprise will not disclose to others, shall not use in respect of its (or any
of its subsidiaries) business operations, and will hold in confidence any
non-public, confidential information disclosed to it concerning Fifth Third or
any of its affiliates. In the event the Merger is not completed, all
non-public financial statements, documents and materials, and all copies
thereof, shall be returned to Kentucky Enterprise or Fifth Third, as the case
may be, and shall not be used by Fifth Third or Kentucky Enterprise, as the
case may be, in any way detrimental to Kentucky Enterprise or Fifth Third.
E. All notices under this Agreement or under the Agreement of Merger
shall be in wiring and shall be sufficient in all respects if delivered in
person or mailed by certified mail, return receipt requested, with postage
prepaid and addressed, if to Kentucky Enterprise to Mr. James T. White,
President and Chief Executive Officer, Kentucky Enterprise Bancorp, Inc., 800
Monmouth Street, Newport, Kentucky 41071, with a copy to Housley, Goldberg,
Kantarian & Bronstein, P.C., 1220 19th Street, N.W., Suite 700, Washington,
D.C. 20036, Attention: Leonard S. Volin, Esq.; if to Fifth Third, to Mr.
George A. Schaefer, Jr., President and Chief Executive Officer, Fifth Third
Bancorp, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, with a copy to Paul
L. Reynolds, Esq., Vice President and General Counsel, Fifth Third Bank, Legal
Division, 38 Fountain Square Plaza, 2nd Floor, Cincinnati, Ohio 45263. Such
notices shall be deemed to be received when delivered in person or when
deposited in the mail by certified mail, return receipt requested with postage
prepaid.
F. This Agreement and the Agreement of Merger (which together shall
constitute a single agreement), together with the written instruments
specifically referred to herein and such other written agreements delivered by
Fifth Third or Kentucky Enterprise to each other pursuant hereto constitute the
entire agreement between the parties with regard to the transactions
contemplated herein and in the Agreement of Merger and supersede any prior
agreements, whether oral or in writing, including that certain letter from
Fifth Third to Board of Directors, Kentucky Enterprise Bancorp, c/o Michael A.
Murphy, dated July 28, 1995. This Agreement and the Agreement of Merger may be
hereafter amended only by a written instrument executed by each of the parties
pursuant to Section X hereof.
G. During the period from the date of this Agreement to the Effective
Time, except with the prior approval of Fifth Third, Kentucky Enterprise shall
not, and shall not permit its representatives to, directly or indirectly,
subject to the exercise by the Directors of Kentucky Enterprise of their
fiduciary duties, initiate, solicit, negotiation with, encourage discussions
with, provide information to, or agree to a transaction with, any corporation,
partnership, person or other entity or group concerning any merger in which
neither Kentucky Enterprise or the Thrift Subsidiary is the acquire or any sale
of substantial assets, sale of shares of capital stock (or securities
convertible or exchangeable into or otherwise evidencing, or any agreement or
instrument evidencing, the right to acquire capital stock) or similar
transaction involving Kentucky Enterprise or the Thrift Subsidiary (any such
transaction being referred to herein as an
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"Acquisition Transaction"). Subject to the exercise by the Directors of
Kentucky Enterprise of their fiduciary duties, Kentucky Enterprise promptly
shall communicate to Fifth Third the terms of any proposal which it may receive
in respect of an Acquisition Transaction and any request by or indication of
interest on the part of any third party with respect to initiation of any
Acquisition Transaction or discussions with respect thereto.
H. Fifth Third and Kentucky Enterprise shall each indemnify and hold the
other harmless for any claim, liability or expense (including reasonable
attorneys' fees) arising from a misstatement or omission in the applications
submitted to regulatory agencies for approval of the transaction contemplated
by this Agreement and the Agreement of Merger relating to the indemnifying
party which is based or made in reliance upon any representation, warranty, or
covenant of such party in this Agreement or any certification, document, or
other information furnished or to be furnished by such party pursuant to this
Agreement. From and after Closing Date, this subsection shall be of no further
force or effect.
I. [Intentionally Left Blank]
J. [Intentionally Left Blank]
K. Fifth Third and Kentucky Enterprise shall agree with each other as to
the form and substance of any press release related to this Agreement and the
Agreement of Merger or the transactions contemplated hereby and thereby, and
shall consult with each other as to the form and substance of other public
disclosures related thereto, provided, however, that nothing contained herein
shall prohibit either party from making any disclosure which its counsel deems
required by law.
L. Each party hereto shall bear and pay all costs and expenses incurred
by it in connection with the transactions contemplated by this Agreement and
the Agreement of Merger, including, without limitation, fees, costs and
expenses of its own financial consultants, investment bankers, accountants and
counsel, without reduction or modification in the number of shares of Fifth
Third Common Stock to be issued hereunder. The expenses of printing and
mailing the prospectus/proxy statement shall be paid by Fifth Third.
M. 1. Between the date hereof and the Closing Date, Kentucky
Enterprise shall promptly advise Fifth Third in writing of any fact that, if
existing or known at the date hereof, would have been required to be set forth
or disclosed in or pursuant to this Agreement or of any fact that, if existing
or known at the date hereof, would have made any of the representations
contained herein untrue to any material extent, and which in each case, would
be likely to have a material adverse effect on Kentucky Enterprise and its
subsidiaries, taken as a whole.
2. Between the date hereof and the Closing Date, Fifth Third
shall promptly advise Kentucky Enterprise in writing of any fact that, if
existing or known at the date hereof, would have been required to be set forth
or disclosed in or pursuant to this Agreement or of any fact that, if existing
or known at the date hereof, would have made any of the representations
contained herein untrue to any material extent, and which in each case, would
be likely to have a material adverse effect on Kentucky Enterprise and its
subsidiaries, taken as a whole.
VIII. TERMINATION
A. This Agreement and the Agreement of Merger may be terminated at any
time prior to the Effective Time by written notice delivered by Fifth Third to
Kentucky Enterprise or by Kentucky Enterprise to Fifth Third in the following
instances:
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1. By Fifth Third or Kentucky Enterprise, if there has been a
material misrepresentation, a material breach of warranty or a material failure
to comply with any covenant on the part of the other party with respect to the
representations, warranties, and covenants set forth herein and such
misrepresentations, breach or failure to comply has not been cured (if capable
of cure) within thirty (30) days after receipt of written notice, provided, the
party in default shall have no right to terminate for its own default.
2. By Fifth Third or Kentucky Enterprise, in each case taken as a
whole, if the business or assets or financial condition of the other party
shall have materially and adversely changed from that in existence at June 30,
1995, other than any such change attributable to or resulting from any change
in law, regulation or generally accepted accounting principles, changes in
interest rates, economic, financial or market conditions affecting the banking
or thrift industry generally or changes that may occur as a consequence of
actions or inactions that either party hereto is expressly obligated to take
under this Agreement.
3. By Fifth Third or Kentucky Enterprise, if the merger
transaction contemplated herein has not been consummated by June 30, 1996,
provided the terminating party is not in material breach or default of any
representations, warranty or covenant contained herein on the date of such
termination.
4. By the mutual written consent of Fifth Third and
Kentucky Enterprise.
5. By Fifth Third if any event occurs which renders impossible of
satisfaction in any material respect one or more of the conditions to the
obligations of Fifth Third to effect the Merger set forth in Sections VI.A. and
B. herein and non-compliance is not waived by Fifth Third.
6. By Kentucky Enterprise if any event occurs which renders
impossible of satisfaction in any material respect one or more of the
conditions of the obligations of Kentucky Enterprise to effect the Merger as
set forth in Sections VI.A. and C. herein and non-compliance is not waived by
Kentucky Enterprise.
B. If Kentucky Enterprise shareholders, acting at a meeting held for the
purpose of voting upon this Agreement and the Agreement of Merger, fail to
approve such agreements in the manner required by law, then this Agreement and
the Agreement of Merger shall be deemed to be automatically terminated.
C. Upon termination as provided in this Section, this Agreement and the
Agreement of Merger, except for the provisions of Paragraphs D, H, K and L of
Section VII hereof shall be void and of no further force or effect, and, except
as provided in Paragraph H of Section VII hereof, neither party hereto not in
material breach or default of its representations, warranties and covenants
hereunder shall have any liability of any kind to the other party including but
not limited to liability for expenses incurred by the other party in connection
with this transaction; provided that no such termination shall relieve a
breaching party from liability for any uncured willful breach of a covenant,
undertaking, representation or warranty giving rise to such termination.
IX. CLOSING AND EFFECTIVE TIME
The consummation of the transactions contemplated by this Agreement and the
Agreement of Merger shall take place at a closing to be held at the offices of
Fifth Third in Cincinnati, Ohio on a Friday which is as soon as is reasonably
possible following the date that all of the conditions precedent to closing set
forth in Section VI hereof, including the waiting period required by any
banking or bank holding company
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regulatory agency after its approval of the Merger is issued before the
transaction may be consummated, have been fully met or effectively waived (the
"Closing Date"). Pursuant to the filing of articles or a certificate of merger
(which shall be acceptable to Kentucky Enterprise and Fifth Third) with the
Secretary of State of Ohio in accordance with law, this Agreement and the
Agreement of Merger, the Merger provided for herein and in the Agreement of
Merger shall become effective at the close of business on said day (the
"Effective Time"). By mutual agreement of the parties, the closing may be held
at any other time or place or on any other date and the effectiveness of the
Merger (and the Effective Time) may be changed by such mutual agreement. None
of the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for agreements of the parties which by their terms are intended to
be performed after the Effective Time.
X. AMENDMENT
This Agreement may be amended, modified or supplemented by the written
agreement of Kentucky Enterprise and Fifth Third upon the authorization of each
company's respective Board of Directors at any time before or after approval of
the Merger, this Agreement and the Agreement of Merger by the shareholders of
Kentucky Enterprise, but after any such approval by the shareholders of
Kentucky Enterprise no amendment shall be made (without further shareholder
approval) which changes in any manner adverse to such shareholders the
consideration to be provided to such shareholders pursuant to this Agreement
and the Agreement of Merger.
XI. GENERAL
This Agreement was made in the State of Ohio and shall be interpreted under the
laws of the United States and the State of Ohio. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns but except as set
forth herein none of the provisions hereof shall be binding upon and inure to
the benefit of any other person, firm or corporation whomsoever. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned or transferred by operation of law or otherwise by any party hereto
without the prior written consent of the other party; provided, however, that
the merger or consolidation of Fifth Third shall not be deemed an assignment
hereunder if Fifth Third is the surviving corporation in such merger or
consolidation and its Common Stock shall thereafter continue to be publicly
traded and issuable to Kentucky Enterprise shareholders pursuant to the terms
of this Agreement and the Agreement of Merger.
XII. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original for all purposes but such counterparts taken
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Affiliation Agreement
as of the date hereinabove set forth.
FIFTH THIRD BANCORP
(SEAL) By: /s/ Robert P. Niehaus
------------------------------
Name: Robert P. Niehaus
Title: Senior Vice President
Attest: /s/ Paul L. Reynolds
------------------------------
Name: Paul L. Reynolds
Title: Assistant Secretary
KENTUCKY ENTERPRISE BANCORP, INC.
(SEAL) By: /s/ James T. White
------------------------------
Name: James T. White
Title: President
Attest: /s/ Mentor E. Graves
------------------------------
Name: Mentor E. Graves
Title: Chairman
A-26
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ANNEX B
AMENDED AND RESTATED
AGREEMENT OF MERGER
OF
KENTUCKY ENTERPRISE BANCORP, INC.
(AN OHIO CORPORATION)
WITH AND INTO
FIFTH THIRD BANCORP
(AN OHIO CORPORATION)
UNDER THE NAME
FIFTH THIRD BANCORP
DATED AS OF AUGUST 28, 1995
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AMENDED AND RESTATED
AGREEMENT OF MERGER
OF
KENTUCKY ENTERPRISE BANCORP, INC.
(AN OHIO CORPORATION)
WITH AND INTO
FIFTH THIRD BANCORP
(AN OHIO CORPORATION)
UNDER THE NAME
FIFTH THIRD BANCORP
THIS AMENDED AND RESTATED AGREEMENT OF MERGER (the "Agreement of Merger") dated
as of August 28, 1995, between KENTUCKY ENTERPRISE BANCORP, INC., an Ohio
corporation (hereinafter called "Kentucky Enterprise "), and FIFTH THIRD
BANCORP, Cincinnati, Hamilton County, Ohio, an Ohio corporation (hereinafter
sometimes called the "Surviving Corporation" or "Fifth Third"), Kentucky
Enterprise and Fifth Third being hereinafter sometimes collectively called "the
Constituent Corporations";
W I T N E S S E T H:
WHEREAS, the Constituent Corporations deem it advisable for their benefit
respectively, and for the benefit of their respective shareholders, that
Kentucky Enterprise merge into Fifth Third pursuant to this Agreement and the
applicable provisions of the laws of the State of Ohio;
NOW, THEREFORE, the Constituent Corporations hereby agree each with the other,
in accordance with the applicable provisions of the laws of the State of Ohio,
that Kentucky Enterprise shall merge into Fifth Third with Fifth Third as the
Surviving Corporation and that the terms and conditions of such merger (the
"Merger") hereby agreed upon and the mode of carrying the same into effect are
and shall be as follows:
ARTICLE I
JURISDICTIONS
The jurisdictions under the laws of which each of the Constituent Corporations
exists are as follows: Fifth Third is a corporation which exists under the
laws of the State of Ohio and Kentucky Enterprise is a corporation which exists
under the laws of the State of Ohio.
ARTICLE II
THE MERGER
When this Agreement shall have been approved and adopted and shall have been
filed and recorded along with other necessary documents in accordance with the
laws of the State of Ohio, and the Merger becomes effective, the separate
existence of Kentucky Enterprise shall cease and Kentucky Enterprise shall be
merged into Fifth Third which will be the Surviving Corporation and which shall
continue its corporate existence under the laws of the State of Ohio under the
name "Fifth Third Bancorp".
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ARTICLE III
ARTICLES OF INCORPORATION
The Second Amended Articles of Incorporation, as amended, of Fifth Third of
record with the Secretary of State of Ohio at the time the Merger becomes
effective in accordance with the provisions of Section 4 of Article X hereof
(which are incorporated by reference herein and made a part of this Agreement
of Merger as though set out in full in the body hereof) shall be the Articles
of Incorporation of the Surviving Corporation, until further amended as
provided by law.
ARTICLE IV
DIRECTORS AND OFFICERS
The Directors of Fifth Third who are in office at the time the Merger becomes
effective shall be the directors of the Surviving Corporation, each of whom
shall continue to serve as a Director for the term for which he was elected,
subject to the Regulations of the Surviving Corporation nd in accordance with
law. The officers of Fifth Third who are in office at the time the Merger
becomes effective shall be the officers of the Surviving Corporation, subject
to the Regulations of the Surviving Corporation and in accordance with law.
ARTICLE V
REGULATIONS
The Regulations of Fifth Third at the time the Merger becomes effective shall
be the Regulations of the Surviving Corporation, until amended as provided
therein and in accordance with law.
ARTICLE VI
SERVICE OF PROCESS
The names and addresses of the statutory agents of each of the Constituent
Corporations and the Surviving Corporation upon whom any process, notice or
demand may be served are as follows: the statutory agent for Fifth Third, one
of the Constituent Corporations and the Surviving Corporation, is Paul L.
Reynolds, 38 Fountain Square Plaza, Cincinnati, Hamilton County, Ohio 45263;
the statutory agent for Kentucky Enterprise, one of the Constituent
Corporations, is CT Corporation Systems, 815 Superior Avenue N.E., Cleveland,
Ohio 44114.
ARTICLE VII
MODE OF EFFECTUATING CONVERSION OF SHARES
1. At the time the Merger becomes effective:
(a) All of the shares of the Common Stock without par value of Fifth Third
("Fifth Third Common Stock") that are issued and outstanding or held by Fifth
Third as treasury shares immediately prior to the time the Merger becomes
effective will remain unchanged and will remain outstanding or as treasury
shares, as the case may be, when the Merger becomes effective as shares of the
Common Stock without par value of the Surviving Corporation. Any stock
options, subscription rights, warrants or other securities outstanding
immediately prior to the time the Merger becomes effective, entitling the
holders to subscribe
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for of purchase any shares of the capital stock of any class of Fifth Third,
and any securities outstanding at such time that are convertible into shares of
the capital stock of any class of Fifth Third will remain unchanged and will
remain outstanding when the Merger becomes effective with the holders thereof
entitled to subscribe for, purchase or convert their securities into the number
of shares of the class of capital stock of Fifth Third to which they are
entitled under the terms of the governing documents.
(b) Each of the shares of the Common Stock, $.01 par value per share, of
Kentucky Enterprise ("Kentucky Enterprise Common Stock") (not including shares
held by stockholders who dissent and are entitled to payment under applicable
law ("Dissenting Shareholders") and shares held as treasury shares) that is
issued and outstanding immediately prior to the time the Merger becomes
effective will, when the Merger becomes effective by virtue of the Merger and
without any action on the part of Fifth Third, Kentucky Enterprise or the
holders of shares of Fifth Third or Kentucky Enterprise common stock, be
converted by virtue of the Merger and without further action, into .3823 shares
of Fifth Third Common Stock (the "Exchange Ratio").
(c) All issued and outstanding shares of the Preferred Stock of Kentucky
Enterprise and all options to purchase Kentucky Enterprise Common Stock
outstanding but unexercised shall be cancelled at the time the Merger becomes
effective.
2. At the time the Merger becomes effective, all of the shares of
Kentucky Enterprise Common Stock, whether issued or unissued (including
treasury shares), will be cancelled and extinguished and the holders of
certificates for shares thereof shall cease to have any rights as shareholders
of Kentucky Enterprise, except such rights, if any, as they may be entitled to
under the provisions of Sections 1701.84 and 1701.85 of the Ohio Revised Code
with respect to the rights of Dissenting Shareholders, and, except as
aforesaid, their sole rights as shareholders shall pertain to the Fifth Third
Common Stock and cash in lieu of fractional shares, if any (as described in the
immediately succeeding paragraph), into their Kentucky Enterprise Common Stock
shall have been converted by virtue of the Merger.
3. After the time the Merger becomes effective, each holder of a
certificate or certificates for shares of Kentucky Enterprise Common Stock,
upon surrender or the same duly transmitted to Fifth Third Trust Department, as
Exchange Agent (or in lieu of surrendering such certificates in the case of
lost, stolen, destroyed or mislaid certificates, upon execution of such
documentation as may be reasonably required by Fifth Third), shall be entitled
to receive in exchange therefor a certificate or certificates representing the
number of whole shares of Fifth Third Common Stock into which such holder's
shares of Kentucky Enterprise Common Stock shall have been converted by the
Merger, plus a cash payment for any fraction of a share to which the holder is
entitled, in lieu of such fraction of a share, equal in amount to the product
resulting from multiplying such fraction by the per share closing price of
Fifth Third Common Stock as reported on the NASDAQ National Market System on
the date the Merger becomes effective (the "Applicable Market Value Per Share
of Fifth Third Common Stock"). Within seven business days after the Effective
Time (as defined herein), the Exchange Agent will send a notice and transmittal
form to each Kentucky Enterprise shareholder of record at the Effective Time
whose Kentucky Enterprise stock shall have been converted into Fifth Third
Common Stock advising such shareholder of the effectiveness of the Merger and
the procedure for surrendering to the Exchange Agent outstanding certificates
formally evidencing Kentucky Enterprise Common Stock in exchange for new
certificates for Fifth Third Common Stock. Until so surrendered, each
outstanding certificate that prior to the time the Merger becomes effective
represented shares of Kentucky Enterprise Common Stock shall be deemed for all
corporate purposes to evidence ownership of the number of full shares of Fifth
Third Common Stock into which the same shall have been converted; provided,
however, that dividends or distributions otherwise payable with respect to
shares of Fifth Third Common Stock into which Kentucky Enterprise Common Stock
shall have been so converted shall be paid with respect to such shares only
when the certificate or certificates evidencing shares of Kentucky Enterprise
Common Stock shall have been so surrendered (or in lieu of surrendering such
certificates in the case of lost, stolen, destroyed or mislaid certificates,
upon execution
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of such documentation as may be reasonably required by Fifth Third) and
thereupon any such dividends and distributions shall be paid, without interest,
to the holder entitled thereto subject however to the operation of any
applicable escheat or similar laws relating to unclaimed funds.
4. The exchange ratio referred to in Section 1(b) of this Article VII
shall be adjusted so as to give the Kentucky Enterprise shareholders the
economic benefit of any stock dividends, reclassifications, recapitalizations,
split-ups, exchanges of shares, distributions or combinations or subdivisions
of Fifth Third Common Stock effected between the date of this Agreement and the
time the Merger becomes effective.
ARTICLE VIII
VESTING OF PROPERTIES AND OTHER MATTERS
1. At the time the Merger becomes effective, the effect shall be as
provided by the applicable provisions of the laws of Ohio. Without limiting
the generality of the foregoing, and subject thereto, at the time the Merger
becomes effective: the separate existence of Kentucky Enterprise shall cease;
the Surviving Corporation shall possess all assets and property of every
description, and every interest therein, wherever located, and the rights,
privileges, immunities, powers, franchises and authority, of a public as well
as a private nature, of each of the Constituent Corporations, and all
obligations owing by or due each of the Constituent Corporations, shall be
vested in, and become the obligations of, the Surviving Corporation, without
further act or deed, including, without limitation, any liability to Dissenting
Shareholders under Sections 1701.84 and 1701.85 of the Ohio Revised Code; and
all rights of creditors of each Constituent Corporation shall be preserved
unimpaired, and all liens upon the property of each of the Constituent
Corporations shall be preserved unimpaired, on only the property affected by
such liens immediately prior to the time the Merger becomes effective.
2. From time to time as and when requested by the Surviving Corporation,
or by its successors or assigns, the officers and Directors of Kentucky
Enterprise in office at the time the Merger becomes effective shall execute and
deliver such instruments and shall take or causes to be taken such further or
other action as shall be necessary in order to vest or perfect in the Surviving
Corporation or to confirm of record or otherwise, title to, and possession of,
all the assets, property, interests, rights, privileges, immunities, powers,
franchises and authority of Kentucky Enterprise and otherwise to carry out the
purposes of this Agreement.
ARTICLE IX
REPRESENTATIONS AND AGREEMENTS OF SURVIVING CORPORATION
1. Fifth Third, the Surviving Corporation, agrees that it may be served
with process in Ohio in any proceeding for the enforcement of any obligation of
Kentucky Enterprise, one of the Constituent Corporations, and in any proceeding
for the enforcement of the rights of a dissenting shareholder of Kentucky
Enterprise against the Surviving Corporation.
2. Fifth Third, the Surviving Corporation, irrevocably appoints the
Secretary of State of Ohio as its agent to accept service of process in any
such proceedings referred to in Section 1 of this Article IX. The address of
Fifth Third to which a copy of such process should be mailed by the Secretary
of State of Ohio is set forth in Article VI of this Agreement.
3. Fifth Third, the Surviving Corporation, agrees that it will promptly
pay to any dissenting shareholders of Kentucky Enterprise, one of the
Constituent Corporations, the amount, if any, to which
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they shall be entitled under the provisions of Sections 1701.84 and 1701.85 of
the Ohio Revised Code with respect to the rights of dissenting shareholders.
ARTICLE X
APPROVAL AND ADOPTION BY DIRECTORS AND SHAREHOLDERS;
EFFECTIVE TIME
1. Fifth Third, the Surviving Corporation, represents and warrants that
the Board of Directors of Fifth Third duly has approved this Agreement of
Merger; Division (D) of Section 1701.78 of the Ohio Revised Code does not
require adoption of this Agreement of Merger by the shareholders of Fifth
Third; and pursuant to Division (H) of Section 1701.78 of the Ohio Revised
Code, the approval of this Agreement of Merger by the Directors of Fifth Third
shall constitute adoption by Fifth Third.
2. Kentucky Enterprise, one of the Constituent Corporations, represents
and warrants that the Directors of Kentucky Enterprise have by resolution
adopted by them, approved this Agreement of Merger and directed that this
Agreement of Merger be submitted to a vote of the shareholders entitled to vote
in respect thereof at a meeting of the shareholders held for such purpose.
Notice of such meeting as required by the provisions of the law of the State of
Ohio and the Code of Regulations of Kentucky Enterprise shall be duly given.
3. Kentucky Enterprise, one of the Constituent Corporations, represents
and warrants that this Agreement of Merger is required to be approved and
adopted by the affirmative vote of the holders of two-third (2/3rds) of the
issued and outstanding shares of Kentucky Enterprise entitled to vote in
respect thereof, in accordance with the provisions of the law of the State of
Ohio and the Articles of Incorporation and Code of Regulations of Kentucky
Enterprise.
4. This Agreement shall be filed and recorded along with Articles or a
Certificate of Merger in accordance with the requirements of the laws of the
State of Ohio, and shall become effective (the "Effective Time") at the close
of business on the day this Agreement and other necessary documents are filed
(unless another date is specified in the Articles or Certificate of Merger)
with the Secretary of State of Ohio. This Agreement shall not be filed with
the Secretary of the State of Ohio until, but shall be filed promptly after,
all of the conditions precedent to consummating the Merger as contained in
Section VI of the Affiliate Agreement shall have been fully met or effectively
waived, the filing of this Agreement of Merger being an acknowledgement that
such conditions precedent have been fully met or effectively waived.
ARTICLE XI
AMENDMENT; TERMINATION; ASSIGNMENT
1. At any time prior to the time the Merger becomes effective, the
Constituent Corporations may, from time to time, amend this Agreement of Merger
by mutual agreement authorized by their respective Boards of Directors or
Executive Committees (and whether before or after the shareholders of Kentucky
Enterprise have approved and adopted this Agreement of Merger) to facilitate
the performance thereof, to augment the intention of the parties in carrying
out the transactions provided for herein, to clarify any ambiguities herein or
to comply with any applicable regulation, order or requirement of any
governmental authority; provided, however, that any such amendment shall be
effected under, and strictly in accordance with, the provisions of Section X of
the Affiliation Agreement.
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2. This Agreement of Merger shall be automatically terminated without
further action by the parties hereto prior to the time it becomes effective
upon termination of the Affiliation Agreement.
3. This Agreement of Merger and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns but none of the provisions hereof
shall inure to the benefit of any other person, firm or corporation whomsoever.
Neither this Agreement of Merger nor any of the rights, interests or
obligations hereunder shall be assigned or transferred by operation of law or
otherwise by either of the parties hereto without the prior written consent of
the other party; provided, however, that the merger or consolidation of Fifth
Third shall not be deemed an assignment hereunder if Fifth Third is the
surviving corporation in such merger or consolidation and its Common Stock
shall thereafter continue to be publicly traded and issuable to Kentucky
Enterprise shareholders pursuant to the terms of this Agreement of Merger and
the Affiliation Agreement.
4. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original for all purposes but such counterparts taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
FIFTH THIRD BANCORP
(SEAL) By: /s/ Robert P. Niehaus
--------------------------
Robert P. Niehaus
Senior Vice President
Attest: /s/ Paul L. Reynolds
--------------------------
Paul L. Reynolds
Assistant Secretary
KENTUCKY ENTERPRISE BANCORP, INC.
(SEAL) By: /s/ James T. White
--------------------------
Name: James T. White
Title: President
Attest: /s/ Mentor E. Graves
--------------------------
Name: Mentor E. Graves
Title: Chairman
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ANNEX C
[FORM OF FAIRNESS OPINION]
Board of Directors
Kentucky Enterprise Bancorp, Inc.
800 Monmouth Street
Newport, Kentucky 41071
Gentlemen:
You have requested our opinion as to the fairness, from a financial
point of view, to the holders of shares of common stock (the "Kentucky
Enterprise Common Stock"), of Kentucky Enterprise Bancorp, Inc. ("Kentucky
Enterprise") of the consideration to be received by such stockholders in the
Merger (the "Merger") of Kentucky Enterprise with Fifth Third Bancorp ("Fifth
Third"), pursuant to the Affiliation Agreement and the Merger Agreement both
dated August 28, 1995 (the "Agreements").
As more specifically set forth in the Agreements, and subject to a
number of conditions and procedures described in the Agreements, in the Merger
each of the issued and outstanding shares of Kentucky Enterprise Common Stock
shall be converted into 0.5735 shares (the "Exchange Ratio") of Fifth Third
Common Stock. The Exchange Ratio reflects the three-for-two stock
split of Fifth Third Common Stock effected in the form of a stock dividend
declared December 19, 1995 and payable January 12, 1996. All unexercised
options for the right to purchase shares of Kentucky Enterprise Common
Stock shall be exercised prior to closing and exchanged for Fifth Third Common
Stock using the Exchange Ratio applicable to the holders of Kentucky Enterprise
Common Stock.
Trident Financial Corporation ("Trident") is a financial consulting
and investment banking firm experienced in the valuation of business
enterprises with considerable experience in the valuation of thrift
institutions. Since 1975, Trident has valued in excess of 400 thrift
institutions in connection with mutual-to-stock conversions, mergers and
acquisitions, as well as other transactions. Trident is not affiliated with
Kentucky Enterprise or Fifth Third.
In connection with rendering our opinion, we have reviewed and
analyzed, among other things, the following: (i) the Agreements; (ii) the
Registration Statement on Form S-4 of Fifth Third related to the Merger; (iii)
certain publicly available information concerning Kentucky Enterprise,
including the audited financial statements of Kentucky Enterprise for each of
the years in the three year period ended June 30, 1995 and unaudited financial
statements for each of the three month periods ended September 30, 1994 and
1995; (iv) certain publicly available information concerning Fifth Third,
including the audited financial statements of Fifth Third for each of the years
in the three year period ended December 31, 1994 and unaudited financial
statements for each of the nine month periods ended September 30, 1994 and
1995; (v) certain other internal information, primarily financial in nature,
concerning the business and operations of Kentucky Enterprise and Fifth Third
furnished to us by Kentucky Enterprise and Fifth Third for purposes of our
analysis; (vi) information with respect to the trading market for Kentucky
Enterprise Common Stock; (vii) information with respect to the trading market
for Fifth Third Common Stock; (viii) certain publicly
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available information with respect to other companies that we believe to be
comparable to Kentucky Enterprise and Fifth Third and the trading markets for
such other companies' securities; and (ix) certain publicly available
information concerning the nature and terms of other transactions that we
believe relevant to our inquiry. We have also met with certain officers and
employees of Kentucky Enterprise and Fifth Third to discuss the foregoing as
well as other matters we believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to us or publicly available. We have not
attempted independently to verify any such information. We have not conducted
a physical inspection of the properties or facilities of Kentucky Enterprise or
Fifth Third, nor have we made or obtained any independent evaluations or
appraisals of any of such properties or facilities. We did not specifically
evaluate Kentucky Enterprise's or Fifth Third's loan portfolio or the adequacy
of Kentucky Enterprise's or Fifth Third's reserves for possible loan losses.
In conducting our analysis and arriving at our opinion as expressed
herein, we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial condition and results of operations of
Kentucky Enterprise and Fifth Third, including interest income, interest
expense, net interest income, net interest margin, interest sensitivity,
non-interest expenses, earnings, dividends, book value, return on assets,
return on equity, capitalization, the amount and type of non-performing assets
and the reserve for loan losses; (ii) the business prospects of Kentucky
Enterprise and Fifth Third; (iii) the economies in Kentucky Enterprise's and
Fifth Third's market areas; (iv) the historical and current market for Kentucky
Enterprise Common Stock and Fifth Third Common Stock and for the equity
securities of certain other companies that we believe to be comparable to
Kentucky Enterprise and Fifth Third; and (v) the nature and terms of certain
other acquisition transactions that we believe to be relevant. We have also
taken into account our assessment of general economic, market, financial and
regulatory conditions and trends, as well as our knowledge of the thrift
industry, our experience in connection with similar transactions, and our
knowledge of securities valuation generally. Our opinion necessarily is based
upon conditions as they exist and can be evaluated on the date hereof. Our
opinion is, in any event, limited to the fairness, from a financial point of
view, of the consideration to be received by the holders of Kentucky Enterprise
Common Stock in the Merger and does not address Kentucky Enterprise's
underlying business decision to effect the Merger.
Based upon and subject to the foregoing, we are of the opinion that
the consideration to be received by the holders of Kentucky Enterprise Common
Stock in the Merger is fair, as of the date hereof, from a financial point of
view, to such holders.
This opinion is being delivered to the Board of Directors of Kentucky
Enterprise and is not to be reproduced, disseminated or delivered to any third
party without the express written consent of Trident Financial Corporation,
except as required by law.
Very truly yours,
TRIDENT FINANCIAL CORPORATION
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ANNEX D
GENERAL CORPORATION LAW OF OHIO
SECTION 1701.84 PERSONS ENTITLED TO RELIEF AS DISSENTING SHAREHOLDERS.
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code:
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant to
section 1701.78, 1701.781 [1701.78.1], 1701.79, 1701.791 [1701.79.1], or
1701.801 [1701.80.1] of the Revised Code;
(B) In the case of a merger into a domestic corporation, shareholders
of the surviving corporation who under section 1701.78 of the Revised Code are
entitled to vote on the adoption of an agreement of merger, but only as to the
shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign parent
corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the
shares so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which is
being merged one or more domestic or foreign corporations pursuant to section
1701.801 [1701.80.1] of the Revised Code.
SECTION 1701.85 DISSENTING SHAREHOLDER'S DEMAND FOR FAIR CASH VALUE OF
SHARES.
(A)(1) A shareholder of a domestic corporation is entitled to relief
as a dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of
the shares of the corporation as to which he seeks relief as of the date fixed
for the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall
not have been voted in favor of the proposal. Not later than ten days after
the date on which the vote on the proposal was taken at the meeting of the
shareholders, the dissenting shareholder shall deliver to the corporation a
written demand for payment to him of the fair cash value of the shares as to
which he seeks relief, which demand shall state his address, the number and
class of such shares, and the amount claimed by him as the fair cash value of
the shares.
(3) The dissenting shareholder entitled to relief under division (C)
of section 1701.84 of the Revised Code in the case of a merger pursuant to
section 1701.80 of the Revised Code and a dissenting shareholder entitled to
relief under division (E) of section 1701.84 of the Revised Code in the case of
a merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be
a record holder of the
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shares of the corporation as to which he seeks relief as of the date on which
the agreement of merger was adopted by the directors of that corporation.
Within twenty days after he has been sent the notice provided in section
1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting shareholder
shall deliver to the corporation a written demand for payment with the same
information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the
new entity, whether the demand is served before, on, or after the effective
date of the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing
the shares as to which he seeks relief, the dissenting shareholder, within
fifteen days from the date of the sending of such request, shall deliver to the
corporation the certificates requested so that the corporation may forthwith
endorse on them a legend to the effect that demand for the fair cash value of
such shares has been made. The corporation promptly shall return such endorsed
certificates to the dissenting shareholder. A dissenting shareholder's failure
to deliver such certificates terminates his rights as a dissenting shareholder,
at the option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the fifteen-day
period, unless a court for good cause shown otherwise directs. If shares
represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If
uncertificated shares for which payment has been demanded are to be
transferred, any new certificate issued for the shares shall bear the legend
required for certificated securities as provided in this paragraph. A
transferee of the shares so endorsed, or of uncertificated securities as
provided in this paragraph. A transferee of the shares so endorsed, or of
uncertificated securities where such notation has been made, acquires only such
rights in the corporation as the original dissenting holder of such shares had
immediately after the service of a demand for payment of the fair cash value of
the shares. A request under this paragraph by the corporation is not an
admission by the corporation that the shareholder is entitled to relief under
this section.
(B) Unless the corporation and the dissenting shareholder have come to
an agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of
the county in which the principal office of the corporation that issued the
shares is located or was located when the proposal was adopted by the
shareholders of the corporation, or, if the proposal was not required to be
submitted to the shareholders, was approved by the directors. Other dissenting
shareholders, within that three-month period, may join as plaintiffs or may be
joined as defendants in any such proceeding, and any two or more such
proceedings may be consolidated. The complaint shall contain a brief
statement of the facts, including the vote and the facts entitling the
dissenting shareholder to the relief demanded. No answer to such a complaint
is required. Upon the filing of such a complaint, the court, on motion of the
petitioner, shall enter an order fixing a date for a hearing on the complaint
and requiring that a copy of the complaint and a notice of the filing and of
the date for hearing be given to the respondent or defendant in the manner in
which summons is required to be served or substituted service is required to be
made in other cases. On the day fixed for the hearing on the complaint or any
adjournment of it, the court shall determine from the complaint and from such
evidence as is submitted by either party whether the shareholder is entitled to
be paid the fair cash value of any shares and, if so, the number and class of
such shares. If the court finds that the dissenting shareholder is so
entitled, the court may appoint one or more persons as appraisers to receive
evidence and to recommend a decision on the amount of the fair cash value. The
appraisers have such power and
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authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of
the proceeding including reasonable compensation to the appraisers to be fixed
by the court, shall be assessed or apportioned as the court considers
equitable. The proceeding is a special proceeding and final orders in it may
be vacated, modified, or reversed on appeal pursuant to the Rules of Appellate
Procedure and, to the extent not in conflict with those rules, Chapter 2505. of
the Revised Code. If, during the pendency of any proceeding instituted under
this section, a suit or proceeding is or has been instituted to enjoin or
otherwise to prevent the carrying out of the action as to which the shareholder
has dissented, the proceeding instituted under this section shall be stayed
until the final determination of the other suit or proceeding. Unless any
provision in division (D) of this section is applicable, the fair cash value of
the shares that is agreed upon by the parties or fixed under this section shall
be paid within thirty days after the date of final determination of such value
under this division, the effective date of the amendment to the articles, or
the consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a
holder of uncertificated securities entitled to such payment. In the case of
holders of share represented by certificates, payment shall be made only upon
and simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders
of the corporation, fair cash value as to those shareholders shall be
determined as of the day prior to the day on which the vote by the shareholders
was taken and, in the case of a merger pursuant to section 1701.80 or 1701.801
[1701.80.1] of the Revised Code, fair cash value as to shareholders of a
constituent subsidiary corporation shall be determined as of the day before the
adoption of the agreement of merger by the directors of the particular
subsidiary corporation. The fair cash value of a share for the purposes of
this section is the amount that a willing seller who is under no compulsion to
sell would be willing to accept and that a willing buyer who is under no
compulsion to purchase would be willing to pay, but in no event shall the fair
cash value of a share exceed the amount specified in the demand of the
particular shareholder. In computing such fair cash value, any appreciation or
depreciation in market value resulting from the proposal submitted to the
directors or to the shareholders shall be excluded.
(D) (1) The right and obligation of a dissenting shareholder to
receive such fair cash value and to sell such shares as to which he seeks
relief, and the right and obligation of the corporation to purchase such shares
and to pay the fair cash value of them terminates if any of the following
applies:
(a) The dissenting shareholder has not complied with this
section, unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind their
adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the
consent of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not
come to an agreement as to the fair cash value per share, and neither the
shareholder nor the corporation has filed or joined in a complaint under
division (B) of this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger
or consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
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(E) From the time of the dissenting shareholder's giving of the demand until
either the termination of the rights and obligations arising from it or the
purchase of the shares by the corporation, all other rights accruing from such
shares, including voting and dividend or distribution rights, are suspended.
If during the suspension, any dividend or distribution is paid in money upon
shares of such class or any dividend, distribution, or interest is paid in
money upon any securities issued in extinguishment of or in substitution for
such shares, an amount equal to the dividend, distribution, or interest which,
except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair
cash value of the shares. If the right to receive fair cash value is
terminated other than by the purchase of the shares by the corporation, all
rights of the holder shall be restored and all distributions which, except for
the suspension, would have been made shall be made to the holder of record of
the shares at the time of termination.
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