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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-48033
PROXY STATEMENT FOR
STATE SAVINGS COMPANY
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 18, 1998
------------------------
PROSPECTUS OF FIFTH THIRD BANCORP
20,250,000 SHARES
COMMON STOCK, NO PAR VALUE
------------------------
This Proxy Statement/Prospectus and the accompanying notice and form of
proxy are first being mailed on or about April 14, 1998 to the shareholders of
State Savings Company, an Ohio corporation which is a registered multiple
savings and loan holding company under the Home Owners' Loan Act ("State
Savings"), in connection with the solicitation of proxies by the Board of
Directors of State Savings for use at a Special Meeting of Shareholders to be
held on May 18, 1998 (the "Special Meeting").
At the Special Meeting, holders of common shares of State Savings, $100 par
value ("State Savings Common Shares"), will be asked to approve and adopt the
Affiliation Agreement dated as of January 2, 1998 between Fifth Third Bancorp
("Fifth Third") and State Savings, a copy of which is attached hereto as Annex A
and is incorporated herein by reference (the "Affiliation Agreement"), and the
transactions contemplated thereby. If the Affiliation Agreement is approved and
adopted, and if all other conditions are satisfied or waived, State Savings will
merge into Fifth Third (the "Merger"). Each State Savings Common Share will be
canceled at the time the Merger becomes effective (the "Effective Time") in
consideration and exchange for the right to receive 2,770.89 (the "Exchange
Ratio") shares of Fifth Third common stock, no par value per share ("Fifth Third
Common Stock"). No fractional shares will be issued. Any State Savings
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 at the Effective Time. See "PROPOSAL -- MERGER OF STATE SAVINGS
INTO FIFTH THIRD -- Effects of Merger" and "-- Termination; Fee; Amendment;
Waiver."
In accordance with the Affiliation Agreement, the Exchange Ratio has been
adjusted to reflect the three-for-two stock split to be effected in the form of
a stock dividend declared by Fifth Third on March 17, 1998 and to be distributed
on April 15, 1998 (the "1998 Fifth Third Stock Split"). In the event of any
other stock dividends, reclassifications, recapitalizations, split-ups,
exchanges of shares, distributions or combinations or subdivisions of Fifth
Third Common Stock or any other event or action which has a similar economic
effect before the Effective Time, the Exchange Ratio will be adjusted further so
as to give shareholders of State Savings the economic benefit of such event or
action. In addition, in the event of a substantial decline in the trading price
of Fifth Third Common Stock relative to a group of peer institutions under
certain circumstances as provided in the Affiliation Agreement, the State
Savings Board of Directors may have the right to terminate the Affiliation
Agreement. If such right is exercised, Fifth Third would then have the option to
increase the Exchange Ratio in accordance with the formula set forth in the
Affiliation Agreement in lieu of such termination. See "PROPOSAL -- MERGER OF
STATE SAVINGS INTO FIFTH THIRD -- Termination; Fee; Amendment; Waiver".
The approval and adoption of the Affiliation Agreement by the shareholders
of State Savings at the Special Meeting will authorize the State Savings Board
of Directors to determine in its sole discretion whether to terminate the
Affiliation Agreement in accordance with the terms thereof, including the
termination of the Affiliation Agreement in the event of a substantial decline
in the trading price of Fifth Third Common Stock relative to a group of peer
institutions. Such determination may be made without notice to, or the
resolicitation of proxies from, the shareholders of State Savings.
HOLDERS OF STATE SAVINGS COMMON SHARES MAY BE ENTITLED TO RELIEF AS
DISSENTING SHAREHOLDERS UNDER OHIO REVISED CODE SECTION 1701.85. See
"PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH THIRD -- Dissenters' Rights of
Appraisal."
Under the rules and regulations of the Securities and Exchange Commission
(the "Commission"), the solicitation of State Savings' shareholders to approve
and adopt the Affiliation Agreement and the transactions contemplated thereby,
including 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 (File No. 333-48033) under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to such
offering, and this Proxy Statement/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/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/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/Prospectus is April 7, 1998.
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AVAILABLE INFORMATION
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH,
WITH THE EXCEPTION OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS 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). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY MAY 11,
1998.
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/Prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized by Fifth Third
or State Savings. This Proxy Statement/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/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 is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by Fifth Third
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 files its reports,
proxy statements and other information with the Commission electronically, and
the Commission maintains a website located at http://www.sec.gov containing such
information.
Fifth Third Common Stock is traded on the Nasdaq National Market tier of
the Nasdaq Stock Market (the "Nasdaq National Market") under the symbol "FITB".
Documents filed by Fifth Third 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.
State Savings is not subject to the information requirements or proxy rules
contained in or adopted pursuant to the Exchange Act.
All information contained in this Proxy Statement/Prospectus with respect
to State Savings was supplied by State Savings and all information contained or
incorporated in this Proxy Statement/Prospectus with respect to Fifth Third was
supplied by Fifth Third.
Although neither State Savings 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 State Savings 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 previously filed by Fifth Third with the Commission
(File No. 0-8076) are hereby incorporated into this Proxy Statement/Prospectus
by reference:
(a) Fifth Third's Annual Report on Form 10-K for the year ended
December 31, 1997;
(b) Pages 1 and 13 through 38 of Fifth Third's 1997 Annual Report to
Stockholders (enclosed with this Proxy Statement/Prospectus);
(c) Fifth Third's Proxy Statement dated February 9, 1998; and
(d) Fifth Third's Current Report on Form 8-K filed March 17, 1998.
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 Special Meeting 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/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/Prospectus.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Proxy Statement/Prospectus (including information included or
incorporated by reference herein) contains or may contain forward-looking
statements that involve risks and uncertainties. This Proxy Statement/Prospectus
contains certain forward-looking statements with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of each of Fifth Third and State Savings and of Fifth Third on a pro
forma combined basis following the consummation of the Merger, including
statements preceded by, followed by or that include the words "believes,"
"expects," "anticipates" or similar expressions.
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) expected cost savings from the Merger cannot be
fully realized or realized within the expected time frame; (2) revenues
following the Merger are lower than expected, or deposit attrition, operating
costs or customer loss and business disruption following the Merger are greater
than expected; (3) competitive pressures among depository and other financial
institutions increase significantly; (4) costs or difficulties related to the
integration of the businesses of Fifth Third and State Savings are greater than
expected; (5) changes in the interest rate environment reduce margins; (6)
general economic or business conditions, either nationally or in the states in
which Fifth Third will be doing business, are less favorable than expected
resulting in, among other things, a deterioration in credit quality or a reduced
demand for credit; (7) legislative or regulatory changes adversely affect the
businesses in which Fifth Third will be engaged; and (8) changes in the
securities markets.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION....................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 3
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING
INFORMATION............................................... 3
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................... 6
THE SPECIAL MEETING......................................... 16
Purpose of the Special Meeting............................ 16
Voting and Revocability of Proxies........................ 16
Vote Required............................................. 16
Miscellaneous............................................. 17
PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH THIRD........ 17
General................................................... 17
Background and Reasons for the Merger..................... 17
Opinion of Financial Advisor to State Savings............. 20
Effective Time............................................ 24
Effects of Merger......................................... 24
Exchange of Certificates.................................. 25
Federal Income Tax Consequences........................... 26
Accounting Treatment...................................... 27
Dissenters' Rights of Appraisal........................... 27
Conduct Pending Merger; Representations and Warranties.... 28
Conditions to Closing..................................... 29
Termination; Fee; Amendment; Waiver....................... 30
Effect on State Savings Employees......................... 32
Interests of Certain Persons in the Merger................ 33
Resale of Fifth Third Common Stock by Affiliates.......... 35
FIFTH THIRD BANCORP......................................... 36
Description of Business................................... 36
Recent Developments....................................... 36
Additional Information.................................... 37
STATE SAVINGS COMPANY....................................... 38
General................................................... 38
Lending Activities........................................ 39
Investment Activities..................................... 50
Deposits and Borrowing.................................... 51
Asset/Liability Management................................ 53
Interest Rate Swaps, Caps and Floors...................... 56
Competition............................................... 56
Subsidiary Activities..................................... 57
Taxation.................................................. 57
Personnel................................................. 59
UNAUDITED PRO FORMA FINANCIAL INFORMATION................... 60
SELECTED HISTORICAL FINANCIAL DATA OF FIFTH THIRD........... 66
SELECTED HISTORICAL FINANCIAL DATA OF STATE SAVINGS......... 68
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF STATE SAVINGS................ 70
CERTAIN BENEFICIAL OWNERS OF STATE SAVINGS COMMON STOCK..... 80
STATE SAVINGS MANAGEMENT.................................... 80
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DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE
RIGHTS OF SHAREHOLDERS.................................... 83
Voting Rights............................................. 83
Dividends................................................. 84
Preemptive Rights......................................... 84
Rights Upon Liquidation................................... 85
Indemnification and Personal Liability of Directors and
Officers............................................... 85
Shareholders' Meetings; Quorum............................ 85
Subscription, Conversion, Redemption Rights; Stock
Nonassessable.......................................... 85
Change of Control Provisions.............................. 85
EFFECT OF GOVERNMENTAL POLICIES............................. 87
REGULATION OF FINANCIAL INSTITUTIONS........................ 88
Holding Company Regulation................................ 88
Capital Requirements...................................... 90
Regulation of Banks....................................... 92
Regulation of Savings Banks............................... 92
LEGAL MATTERS............................................... 96
EXPERTS..................................................... 96
INDEX TO FINANCIAL STATEMENTS OF STATE SAVINGS.............. F-1
ANNEXES:
Annex A: Affiliation Agreement dated as of January 2,
1998 between Fifth Third Bancorp and State
Savings Company (excluding exhibits)
Annex B: Form of Shareholder Support Agreement
Annex C: Fairness Opinion of Keefe, Bruyette & Woods,
Inc.
Annex D: Section 1701.85 of the Ohio Revised Code
Annex E: Acquiring Person Statement
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SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/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 should be read in conjunction
with, and is qualified in its entirety by reference to, the more detailed
information contained elsewhere in this Proxy Statement/ Prospectus, including
the Annexes hereto, and the documents incorporated by reference in, and/or
enclosed with, this Proxy Statement/Prospectus.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS GIVES EFFECT TO THE 1998 FIFTH THIRD STOCK SPLIT.
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
nine subsidiary banks operate a general banking
business from 411 offices located throughout Ohio,
Indiana, Kentucky and Florida. At December 31,
1997, on a consolidated basis, Fifth Third had
consolidated assets, deposits and stockholders'
equity of approximately $21.4 billion, $14.9
billion and $2.3 billion, respectively. Fifth Third
Common Stock is traded 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.
STATE SAVINGS: State Savings is a registered multiple savings and
loan holding company incorporated under Ohio law.
State Savings owns all of the stock of State
Savings Bank, a state savings bank which is
incorporated under the laws of the State of Ohio
and which is headquartered in Columbus, Ohio
("SSB"); substantially all of the stock of Century
Bank, a state savings bank which is incorporated
under the laws of the State of Ohio and which is
headquartered in Upper Arlington, Ohio ("Century");
and all of the stock of State Savings Bank, FSB, a
federal savings bank which is incorporated under
federal law and which is headquartered in Phoenix,
Arizona ("FSB"). SSB operates its main office and
36 full service branch offices in Franklin,
Delaware, Fairfield, Licking and Marion Counties in
Ohio; three lending offices in Cuyahoga, Summit and
Lake Counties in Ohio; and one lending office in
Indianapolis, Indiana. Century operates its main
office and two full service branch offices in
Hamilton County, Ohio; two full service offices in
Lucas County, Ohio; one full service office in
Franklin County, Ohio; and one lending office in
Ft. Wright, Kentucky. FSB operates its main office
and ten full service branch offices in Maricopa,
Prima and Yavapai Counties in Arizona. SSB, Century
and FSB are sometimes collectively referred to
herein as the "Thrift Subsidiaries." At December
31, 1997, State Savings, on a consolidated basis,
had total assets, total deposits and shareholders'
equity of approximately $2.8 billion, $2.3 billion
and $267 million, respectively. State Savings'
principal executive offices are located at 20 East
Broad Street, Columbus, Ohio, and its telephone
number is (614) 460-6100.
SPECIAL MEETING OF STATE SAVINGS SHAREHOLDERS:
TIME AND DATE: 5:00 p.m., Eastern Daylight Savings Time, on May
18, 1998
PLACE: The offices of State Savings, 20 East Broad Street,
Columbus, Ohio.
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PURPOSE: To consider and vote upon the proposal to approve
and adopt the Affiliation Agreement and the
transactions contemplated thereby, including the
Merger. Pursuant to the Affiliation Agreement and
as adjusted for the 1998 Fifth Third Stock Split,
State Savings' shareholders will receive 2,770.89
shares of Fifth Third Common Stock in exchange for
each State Savings Common Share and cash in lieu of
any fractional shares of Fifth Third Common Stock.
See "THE SPECIAL MEETING -- Purpose of the Special
Meeting," "PROPOSAL -- MERGER OF STATE SAVINGS INTO
FIFTH THIRD," and "FIFTH THIRD BANCORP -- Recent
Developments."
VOTE REQUIRED: The Affiliation Agreement and the transactions
contemplated thereby, including the Merger, must be
approved and adopted by the affirmative vote of at
least two-thirds of the State Savings Common Shares
outstanding as of the close of business on April 6,
1998 (the "Record Date"). In addition, the control
share acquisition by Fifth Third of more than a
majority of the voting power of State Savings
pursuant to the Affiliation Agreement must be
approved by a majority of the voting power of State
Savings represented in person or by proxy at a
separate special meeting and a majority of the
portion of such voting power, excluding any State
Savings Common Shares owned by any officer of State
Savings or any director of State Savings who is
also an employee of State Savings and excluding
certain other State Savings Common Shares. Such
separate control share acquisition special meeting
will be held immediately before the Special
Meeting. A notice and a proxy for such separate
control share acquisition special meeting will be
mailed to shareholders of State Savings separate
and apart from this Proxy Statement/Prospectus.
The approval and adoption of the Affiliation
Agreement by the shareholders of State Savings at
the Special Meeting will authorize the Board of
Directors of State Savings to determine in its sole
discretion whether to terminate the Affiliation
Agreement in accordance with the terms thereof. An
abstention or failure to vote will have the same
effect as voting against the proposal. Accordingly,
shareholders are urged to sign and return their
proxies. See "THE SPECIAL MEETING -- Vote Required"
and "DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE
RIGHTS OF SHAREHOLDERS -- Change of Control
Provisions -- Ohio Control Share Acquisition Act."
It is expected that substantially all of the
2,262.506 State Savings Common Shares beneficially
owned by directors and executive officers of State
Savings at the Record Date (37.7% of the 6,000
total outstanding State Savings Common Shares at
that date) will be voted for approval and adoption
of the Affiliation Agreement and the transactions
contemplated thereby, including the Merger.
Additionally, in connection with the execution of
the Affiliation Agreement, certain directors of
State Savings (who hold approximately 1,765.765, or
29.4%, of the outstanding State Savings Common
Shares) have executed Shareholder Support
Agreements dated January 2, 1998 with Fifth Third
(the "Shareholder Support Agreements"). The
1,765.765 shares subject to the Shareholder Support
Agreements are included in the 2,262.506 shares
held by the directors and executive officers of
State Savings. A copy of the form of Shareholder
Support Agreement is attached hereto as Annex B,
and is incorporated by reference herein. Pursuant
to the Shareholder Support Agreements, each of
these
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holders have agreed to vote their shares in favor
of the proposal to approve and adopt the
Affiliation Agreement and the transactions
contemplated thereby, including the Merger, and
have waived all rights available to them under the
Ohio Revised Code to demand appraisal of their
State Savings Common Shares. See "THE SPECIAL
MEETING -- Voting and Revocability of Proxies," and
"-- Vote Required."
BENEFICIAL OWNERSHIP BY
OFFICERS AND DIRECTORS: As of the close of business on the Record Date, the
executive officers and directors of State Savings
beneficially owned 2,262.506 State Savings Common
Shares, or approximately 37.7%, of the then
outstanding State Savings Common Shares. See "THE
SPECIAL MEETING -- Vote Required" and "STATE
SAVINGS MANAGEMENT."
PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH THIRD:
BACKGROUND AND REASONS FOR
THE MERGER AND
RECOMMENDATION OF THE
BOARD OF DIRECTORS OF
STATE SAVINGS: On the basis of the various factors and other
considerations described in "PROPOSAL -- MERGER OF
STATE SAVINGS INTO FIFTH THIRD -- Background and
Reasons for the Merger," including the opinion of
Keefe, Bruyette & Woods, Inc. ("Keefe Bruyette"),
that the Exchange Ratio is fair to shareholders of
State Savings from a financial point of view, the
Board of Directors of State Savings concluded that
the Merger is in the best interests of State
Savings and its shareholders and recommends
unanimously that the shareholders of State Savings
approve and adopt the Affiliation Agreement and the
transactions contemplated thereby.
OPINION OF FINANCIAL
ADVISOR: Keefe Bruyette, the financial advisor to State
Savings, has issued its opinion that, as of the
date hereof, the Exchange Ratio is fair from a
financial point of view to the shareholders of
State Savings. The full text of the opinion of
Keefe Bruyette, which sets forth a description of
the procedures followed, assumptions made, matters
considered and limits on the review undertaken, is
attached to this Proxy Statement/Prospectus as
Annex C and is incorporated herein by reference.
Shareholders are urged to read the opinion in its
entirety. See "PROPOSAL -- MERGER OF STATE SAVINGS
INTO FIFTH THIRD -- Opinion of Financial Advisor to
State Savings" and Annex C hereto.
EFFECTIVE TIME: Unless the parties agree otherwise, the Effective
Time will occur on a Friday which is as soon as is
reasonably possible following the date on which all
of the conditions precedent to the consummation of
the Merger, 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 Effective
Time will occur in June 1998. State Savings 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
September 30, 1998, subject to certain conditions.
See "PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Effective Time."
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TERMS OF THE MERGER:
CONVERSION OF STATE
SAVINGS COMMON SHARES;
CONSIDERATION: At the Effective Time, each shareholder of State
Savings will receive, for each State Savings Common
Share canceled and extinguished as a result of the
Merger, the right to receive 2,770.89 shares (as
adjusted to reflect the 1998 Fifth Third Stock
Split) of Fifth Third Common Stock, subject to
adjustment under certain circumstances. Based on
the closing price per share of Fifth Third Common
Stock on the Nasdaq National Market on April 6,
1998, the value of 2,770.89 shares of Fifth Third
Common Stock was $162,097.
In the event of any other stock dividends,
reclassifications, recapitalizations, split-ups,
exchanges of shares, distributions or combinations
or subdivisions of Fifth Third Common Stock or any
other event or action which has a similar economic
effect before the Effective Time, the Exchange
Ratio will be adjusted further so as to give
shareholders of State Savings the economic benefit
of such event or action. In addition, in the event
of a substantial decline in the trading price of
Fifth Third Common Stock relative to a group of
peer institutions under certain circumstances as
provided in the Affiliation Agreement, the State
Savings Board of Directors may have the right to
terminate the Affiliation Agreement. If such right
is exercised, Fifth Third would then have the
option to increase the Exchange Ratio in accordance
with the formula set forth in the Affiliation
Agreement in lieu of such termination. See "SUMMARY
OF THE PROXY STATEMENT/ PROSPECTUS -- Right to
Terminate" and "PROPOSAL -- MERGER OF STATE SAVINGS
INTO FIFTH THIRD -- Effects of Merger -- State
Savings Common Shares" and "-- Termination; Fee;
Amendment; Waiver."
THE VALUE OF THE FIFTH THIRD COMMON STOCK TO BE
RECEIVED BY STATE SAVINGS SHAREHOLDERS WILL DEPEND
ON THE MARKET PRICE OF SHARES OF FIFTH THIRD COMMON
STOCK AT THE EFFECTIVE TIME. THE MARKET PRICE OF
FIFTH THIRD COMMON STOCK IS SUBJECT TO CHANGE AT
ALL TIMES BASED ON THE FUTURE FINANCIAL CONDITION
AND OPERATING RESULTS OF FIFTH THIRD, FUTURE MARKET
CONDITIONS AND OTHER FACTORS, AND THE MARKET PRICE
OF FIFTH THIRD COMMON STOCK AT THE EFFECTIVE TIME
OF THE MERGER MAY BE SUBSTANTIALLY HIGHER OR LOWER
THAN RECENT PRICES.
NO FRACTIONAL SHARES: No fractional shares will be issued in connection
with the Merger. State Savings shareholders will
receive cash in lieu of any fractional shares which
they otherwise would be entitled to receive based
on the applicable per share market value of Fifth
Third Common Stock at the Effective Time. See
"PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Effects of Merger."
PROCEDURE FOR EXCHANGE
OF SHARES: Promptly after the Effective Time, Fifth Third will
mail to each shareholder of State Savings a form of
transmittal letter and instructions for the
surrender of certificates representing State
Savings Common Shares for certificates representing
the shares of Fifth Third Common Stock to which
each such shareholder is entitled. Certificates for
shares of Fifth Third Common Stock will be issued
to shareholders of State Savings only after
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their certificates for State Savings Common Shares
have been surrendered in accordance with such
instructions. See "PROPOSAL -- MERGER OF STATE
SAVINGS INTO FIFTH THIRD -- Exchange of
Certificates."
FEDERAL INCOME TAX
CONSEQUENCES: The Merger is conditioned, in part, upon the
receipt of an opinion of State Savings' counsel to
State Savings with respect to certain tax matters,
including an opinion that the transactions
contemplated by the Affiliation Agreement
constitute a tax free reorganization under Section
368(a) of the Code. See "PROPOSAL -- MERGER OF
STATE SAVINGS 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, FOREIGN AND ANY OTHER APPLICABLE TAX
LAWS.
ACCOUNTING: The Merger is intended to qualify for
pooling-of-interests accounting treatment. The
consummation of the Merger is conditioned, in part,
upon receipt by both Fifth Third and State Savings
of a letter from Deloitte & Touche LLP, independent
public accountants, to the effect that the Merger
will qualify for such treatment. See
"PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Accounting Treatment" and "FIFTH THIRD
BANCORP -- Recent Developments."
DISSENTERS' RIGHTS OF
APPRAISAL: Any shareholder of State Savings who does not vote
in favor of the approval and adoption of the
Affiliation Agreement and who delivers a written
demand for payment of the fair cash value of such
shareholder's State Savings Common Shares not later
than ten days after the Special Meeting and in the
manner provided by Ohio Revised Code Section
1701.85, a copy of which is attached hereto as
Annex D, shall be entitled, if and when the Merger
is consummated and upon strict compliance with
certain procedures set forth in Ohio Revised Code
Section 1701.85, to receive the fair cash value of
such State Savings Common Shares. A shareholder of
State Savings who wishes to submit a written demand
for payment of the fair cash value of State Savings
Common Shares should deliver such demand to Mark K.
Milligan, Secretary, State Savings Company, 20 East
Broad Street, Columbus, Ohio 43215. See
"PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Dissenters' Rights of Appraisal."
CONDITIONS OF CLOSING: The Merger is subject to the satisfaction of
certain conditions, including but not limited to,
the approval of the shareholders of State Savings,
the Board of Governors of the Federal Reserve
System and the Ohio Division of Financial
Institutions. Applications for such regulatory
approvals have been filed. See "PROPOSAL -- MERGER
OF STATE SAVINGS INTO FIFTH THIRD -- Conditions to
Closing."
RIGHT TO TERMINATE: The Affiliation Agreement may be terminated at any
time prior to the Effective Time by written notice
of either Fifth Third or State Savings to the other
upon: the mutual written consent of Fifth Third and
State Savings; a material breach of the Affiliation
Agreement; a material and adverse change in the
business or financial condition of either Fifth
Third or State Savings; the failure to close the
Merger by September 30, 1998; the failure of the
State Savings shareholders to approve and adopt the
Affiliation Agreement; the perfection of the rights
of dissenting sharehold-
10
<PAGE> 11
ers pursuant to Sections 1701.84 and 1701.85 (a
copy of which is attached hereto as Annex D) of the
Ohio Revised Code by the holders of ten percent or
more of the outstanding State Savings Common
Shares; the withdrawal or modification by the Board
of Directors of State Savings of its recommendation
to the shareholders of State Savings; or the
occurrence of any event which renders impossible
the satisfaction of one or more conditions to the
obligations of the other party to effect the Merger
and such conditions are not waived by the
unaffected party. If State Savings terminates the
Affiliation Agreement under certain circumstances,
State Savings may be required to pay Fifth Third a
$28.0 million termination fee. See
"PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Termination; Fee; Amendment; Waiver."
In the event of a substantial decline in the
trading price of Fifth Third Common Stock relative
to a group of peer institutions under certain
circumstances as provided in the Affiliation
Agreement, the State Savings Board of Directors may
have the right to terminate the Affiliation
Agreement. If such right is exercised, Fifth Third
would then have the option to increase the Exchange
Ratio in accordance with the formula set forth in
the Affiliation Agreement in lieu of such
termination. See "PROPOSAL -- MERGER OF STATE
SAVINGS INTO FIFTH THIRD -- Termination; Fee;
Amendment; Waiver."
The approval and adoption of the Affiliation
Agreement by the shareholders of State Savings at
the Special Meeting will authorize the State
Savings Board of Directors to determine in its sole
discretion whether to terminate the Affiliation
Agreement in accordance with the terms thereof,
including the termination of the Affiliation
Agreement in the event of a substantial decline in
the trading price of Fifth Third Common Stock
relative to a group of peer institutions. Such
determination may be made without notice to, or the
resolicitation of proxies from, the shareholders of
State Savings.
EFFECT ON STATE SAVINGS
EMPLOYEES: Fifth Third will use its best efforts to employ at
Fifth Third or other Fifth Third subsidiaries or
affiliates as many of the employees of State
Savings and the Thrift Subsidiaries 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.
The Affiliation Agreement contains provisions for
the treatment of employees of State Savings and its
subsidiaries, including provisions for
participation in benefit and retirement plans as
well as for severance payments in certain
circumstances. See "PROPOSAL -- MERGER OF STATE
SAVINGS INTO FIFTH THIRD -- Effects on State
Savings Employees" and the Affiliation Agreement
for more detailed information concerning the effect
of the Merger on employees of State Savings and its
subsidiaries.
INTERESTS OF CERTAIN
PERSONS IN THE MERGER: State Savings Common Shares held by or for the
benefit of directors and executive officers of
State Savings will be converted into Fifth Third
Common Stock under the Affiliation Agreement on the
same basis as shares held by other shareholders of
State Savings (for additional information, see
"PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Effects of Merger" and the Affiliation
Agreement attached hereto as Annex A). In addition,
certain directors and executive officers of
11
<PAGE> 12
State Savings may be deemed to have interests in
the Merger that are different from, or in addition
to, those of employees or shareholders of State
Savings.
Fifth Third has agreed in the Affiliation Agreement
to enter into employment contracts effective as of
the Effective Time with David Reese, the Chairman
of State Savings; Donald Shackelford, the Vice
Chairman of State Savings; William Robert, the
President of FSB; and Stephen Kambeitz, the
Controller of State Savings (the "Fifth Third
Employment Contracts" and each a "Fifth Third
Employment Contract"). Under their Fifth Third
Employment Contracts, each of Messrs. Reese,
Shackelford, Robert and Kambeitz will receive an
annual base salary of $550,000, $550,000, $250,000
and $190,000, respectively, for three years and a
grant of stock options to acquire 75,000, 75,000,
18,000 and 18,000 shares of Fifth Third Common
Stock, respectively.
Executive officers of State Savings may also be
entitled to certain benefits under State Savings'
retirement plans and 1995 Key Employee Incentive
Compensation Plan (the "Key Employee Plan"). As a
result of the Merger, Fifth Third will provide a
retirement benefit to each of Messrs. Reese,
Shackelford, Robert and Kambeitz of approximately
$5.5 million, $5.5 million, $4.1 million and $1.1
million, respectively. Under the Key Employee Plan,
each of Messrs. Reese, Shackelford, Robert and
Kambeitz will receive approximately $3.7 million,
$3.7 million, $2.5 million and $1.9 million,
respectively. See "PROPOSAL -- MERGER OF STATE
SAVINGS INTO FIFTH THIRD -- Interests of Certain
Persons in the Merger."
The Affiliation Agreement also provides that all
provisions for indemnification and limitation of
liability now existing in favor of the directors or
officers of State Savings and its subsidiaries will
survive the Merger, will be assumed by Fifth Third
and will continue in full force and effect with
respect to acts or omissions occurring on or prior
to the Effective Time. Fifth Third also will
purchase and keep in force for a three-year period,
a policy of directors' and officers' liability
insurance having liability limits and providing
coverage for acts or omissions of the type
currently covered by Fifth Third's existing
directors' and officers' liability insurance for
acts or omissions occurring at or prior to the
Effective Time. Fifth Third has agreed that all
rights to indemnification existing in favor of
officers, directors and employees of Fifth Third
affiliates will be accorded to officers and
directors and employees of State Savings or any of
its subsidiaries 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. See "PROPOSAL -- MERGER OF
STATE SAVINGS INTO FIFTH THIRD -- Interests of
Certain Persons in the Merger" and "DESCRIPTION OF
CAPITAL STOCK AND COMPARATIVE RIGHTS OF
SHAREHOLDERS -- Indemnification and Personal
Liability of Directors and Officers."
MERGER: At the Effective Time, State Savings will merge
with and into Fifth Third and State Savings will
cease to exist as a separate entity. Simultaneously
with the Merger, Fifth Third plans to have SSB
merge with and into The Fifth Third Bank of
Columbus, Century merge with and into The Fifth
Third Bank, and FSB to change its name to "Fifth
Third Bank of the
12
<PAGE> 13
Southwest, FSB." See "PROPOSAL -- MERGER OF STATE
SAVINGS INTO FIFTH THIRD -- Effects of Merger."
SECURITIES INVOLVED: For a comparative analysis of State Savings Common
Shares and Fifth Third Common Stock, see
"DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE
RIGHTS OF SHAREHOLDERS."
RECENT DEVELOPMENTS: In addition to the Affiliation Agreement, Fifth
Third has also recently agreed to acquire, in two
separate transactions, The Ohio Company and CitFed
Bancorp. Such transactions require the payment by
Fifth Third of consideration having an aggregate
value of approximately $844 million. Fifth Third
will pay such consideration by issuing
approximately 1,500,000 shares of Fifth Third
Common Stock to the shareholders of The Ohio
Company and 13,067,825 shares of Fifth Third Common
Stock to the shareholders of CitFed Bancorp. Fifth
Third also plans to issue up to 4.2 million shares
of Fifth Third Common Stock prior to the Effective
Time in order to enable Fifth Third to account for
the Merger as a pooling-of-interests, which may
include shares of Fifth Third Common Stock issued
in The Ohio Company acquisition if it is completed
prior to the Effective Time. In March 1998, Fifth
Third declared the 1998 Fifth Third Stock Split.
See "FIFTH THIRD BANCORP -- Recent Developments"
and "PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Effects of Merger."
UNAUDITED PRO FORMA
FINANCIAL INFORMATION: See "UNAUDITED PRO FORMA FINANCIAL INFORMATION."
HISTORICAL FINANCIAL DATA: See "SELECTED HISTORICAL FINANCIAL DATA OF FIFTH
THIRD," the Consolidated Financial Statements and
the Notes thereto for Fifth Third, incorporated
herein by reference, "SELECTED HISTORICAL FINANCIAL
DATA OF STATE SAVINGS," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF STATE SAVINGS" and the Consolidated
Financial Statements and Notes thereto for State
Savings included herein.
MARKET PRICE AND
DIVIDEND DATA: Fifth Third Common Stock is traded on the Nasdaq
National Market under the symbol "FITB." On January
2, 1998, the business day immediately preceding the
public announcement of the execution of the
Affiliation Agreement setting forth the terms of
the Merger, and on April 6, 1998, the most recent
practicable date prior to the printing of this
Proxy Statement/Prospectus, the market prices of
Fifth Third Common Stock were $54.33 and $58.50,
respectively (as adjusted to reflect the 1998 Fifth
Third Stock Split).
13
<PAGE> 14
The following table sets forth (in per share
amounts), for the quarterly periods indicated, the
high and low sales prices and the dividends
declared during each quarterly period:
FIFTH THIRD COMMON STOCK(1)
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
<S> <C> <C> <C>
1996:
First Calendar Quarter...................................... $26.45 $19.33 $0.116
Second Calendar Quarter..................................... $25.83 $22.00 $0.116
Third Calendar Quarter...................................... $25.95 $22.11 $0.129
Fourth Calendar Quarter..................................... $33.00 $25.55 $0.129
1997:
First Calendar Quarter...................................... $39.78 $27.00 $0.129
Second Calendar Quarter..................................... $38.05 $30.95 $0.147
Third Calendar Quarter...................................... $44.33 $36.33 $0.147
Fourth Calendar Quarter..................................... $55.67 $41.08 $0.147
1998:
First Calendar Quarter...................................... $58.83 $49.50 $0.170
Second Calendar Quarter
(through April 6, 1998)................................... $59.50 $56.17 $ --
</TABLE>
- ---------------
(1) Per share amounts of Fifth Third Common Stock reflect the 1998 Fifth Third
Stock Split.
State Savings Common Shares do not trade in any
established public market. State Savings has
declared quarterly dividends on its State Savings
Common Shares of $60.00, $30.00, $30.00 and $0 in
the first, second, third and fourth calendar
quarters of 1996, respectively, and $160.00,
$30.00, $30.00 and $0 in the first, second, third
and fourth calendar quarters of 1997, respectively.
14
<PAGE> 15
COMPARATIVE PER SHARE DATA: The following table sets forth certain per share
information for both Fifth Third and State Savings
at the dates indicated and for the periods then
ended. The equivalent values of such information
are based on the Exchange Ratio of 2,770.89 shares
of Fifth Third Common Stock for each State Savings
Common Share. Neither State Savings 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
STATE SAVINGS BASIS -
FIFTH THIRD(1) COMPANY 2,770.89 SHARES OF
---------------------------------- ------------------- FIFTH THIRD
HISTORICAL PRO FORMA HISTORICAL COMMON STOCK(1)
--------------- ---------------- ------------------- ----------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
----- ------- ------ ------- --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE
Twelve months ended December 31:
1997...................................... $1.73 $1.69 $ 1.75 $1.72 $5,508.83 $ -- $ 4,793.64 $4,682.80
1996...................................... 1.43 1.41 1.46 1.43 5,353.83 -- 3,962.37 3,906.95
1995...................................... 1.29 1.26 1.32 1.28 4,437.67 -- 3,574.45 3,491.32
DIVIDENDS DECLARED PER SHARE
Twelve months ended December 31:
1997...................................... $.569 -- -- -- $ 220 -- $ 1,576.36 --
1996...................................... .489 -- -- -- 120 -- 1,354.41 --
1995...................................... .427 -- -- -- 90 -- 1,182.34 --
BOOK VALUE PER SHARE
At December 31:
1997...................................... $9.78 -- $11.17 -- $ 44,445 -- $27,099.30 --
</TABLE>
- ---------------
(1) Per share amounts of Fifth Third Common Stock reflect the 1998 Fifth Third
Stock Split.
15
<PAGE> 16
THE SPECIAL MEETING
This Proxy Statement/Prospectus and the accompanying form of proxy are
being furnished to the shareholders of State Savings in connection with the
solicitation by the Board of Directors of State Savings of proxies to be used at
the Special Meeting to be held on May 18, 1998, at 5:00 p.m., Eastern Daylight
Savings Time, at the offices of State Savings, located at 20 East Broad Street,
Columbus, Ohio, and at any adjournments thereof. This Proxy
Statement/Prospectus, the enclosed Fifth Third 1997 Annual Report to
Stockholders and the enclosed form of proxy are first being sent to shareholders
of State Savings on or about April 14, 1998.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, shareholders of State Savings of record at the
Record Date will be asked to approve and adopt the Affiliation Agreement, and
the transactions contemplated thereby, including the merger of State Savings
with and into Fifth Third (the "Merger"). See "PROPOSAL -- MERGER OF STATE
SAVINGS INTO FIFTH THIRD." Holders of State Savings Common Shares also may
consider and vote upon such other matters as are properly brought before the
Special Meeting, including a proposal to adjourn the Special Meeting to permit
further solicitation of proxies by the State Savings Board of Directors in the
event that there are not sufficient votes to approve and adopt the Affiliation
Agreement at the time of the Special Meeting. However, no proxy which is voted
against the Affiliation Agreement will be voted in favor of adjournment to
solicit further proxies for such proposal. As of the date hereof, the State
Savings Board of Directors knows of no business that will be presented for
consideration at the Special Meeting, other than matters described in this Proxy
Statement/Prospectus.
VOTING AND REVOCABILITY OF PROXIES
Shareholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by such proxies will be voted at
the Special Meeting and all adjournments thereof. Proxies may be revoked by
written notice to Mark K. Milligan, Secretary of State Savings, at 20 East Broad
Street, Columbus, Ohio 43215-3416, by filing a later dated proxy prior to a vote
being taken on a particular proposal at the Special Meeting or by attending the
Special Meeting and voting in person.
Proxies solicited by the Board of Directors of State Savings will be voted
in accordance with the directions given therein. WHERE NO INSTRUCTIONS ARE
INDICATED, PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE AFFILIATION
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER. The
proxy confers discretionary authority on the persons named therein to vote State
Savings Common Shares with respect to matters incident to the conduct of the
Special Meeting. If any other business is presented at the Special Meeting,
proxies will be voted by those named therein in accordance with the
determination of a majority of the Board of Directors. Proxies marked as
abstentions will not be counted as votes cast.
VOTE REQUIRED
THE AFFIRMATIVE VOTE OF AT LEAST TWO-THIRDS OF THE STATE SAVINGS COMMON
SHARES OUTSTANDING AS OF THE RECORD DATE IS REQUIRED FOR THE APPROVAL AND
ADOPTION OF THE AFFILIATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Failures to vote and abstentions will not be treated as votes cast and,
therefore, will have the same effect as a vote against the proposal.
In addition, as discussed under "DESCRIPTION OF CAPITAL STOCK AND
COMPARATIVE RIGHTS OF SHAREHOLDERS -- Change of Control Provisions -- Ohio
Control Share Acquisition Act," under Ohio's Control Share Acquisition Act, the
affirmative votes of the holders of a majority of the State Savings Common
Shares represented in person or by proxy at a separate special meeting and a
majority of the portion of such voting power, excluding any State Savings Common
Shares owned by executive officers of State Savings and any director of State
Savings who is also an employee of State Savings and excluding certain other
State Savings Common Shares, are required to approve the control share
acquisition by Fifth Third of more than a majority of the voting power of State
Savings pursuant to the Affiliation Agreement. Such separate control share
acquisition special meeting will be held immediately before the Special Meeting.
A notice and a proxy for such separate
16
<PAGE> 17
control share acquisition special meeting will be mailed to shareholders of
State Savings separate and apart from this Proxy Statement/Prospectus.
It is expected that substantially all of the 2,262.506 State Savings Common
Shares beneficially owned by directors and executive officers of State Savings
at the Record Date (37.7% of the 6,000 total outstanding shares at that date)
will be voted for the approval and adoption of the Affiliation Agreement and the
transactions contemplated thereby. Additionally, in connection with the
execution of the Affiliation Agreement, certain directors of State Savings (who
hold approximately 1,765.765, or 29.4%, of the outstanding State Savings Common
Shares) have executed Shareholder Support Agreements in which such holders have
agreed to vote their shares in favor of the proposal to approve and adopt the
Affiliation Agreement and the transactions contemplated thereby, including the
Merger, and have waived all rights available to them under the Ohio Revised Code
to demand appraisal of their State Savings Common Shares. The 1,765.765 shares
subject to the Shareholder Support Agreements are included in the 2,262.506
shares held by the directors and executive officers of State Savings.
MISCELLANEOUS
The cost of soliciting proxies will be borne by State Savings, except Fifth
Third has agreed to pay all expenses of printing and mailing this Proxy
Statement/Prospectus. State Savings will reimburse brokerage firms and other
custodians, nominees and fiduciaries for reasonable expenses incurred by them in
sending proxy materials to the beneficial owners of common stock. In addition to
solicitations by mail, directors, officers and regular employees of State
Savings may solicit proxies personally or by telegraph or telephone without
additional compensation.
PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH THIRD
GENERAL
The following description contains, among other information, summaries of
certain provisions of the Affiliation Agreement and is qualified in its entirety
by reference to the full text thereof, a copy of which is appended as Annex A to
this Proxy Statement/Prospectus. All shareholders are urged to read the
Affiliation Agreement in its entirety.
Pursuant to the Affiliation Agreement and as adjusted for the 1998 Fifth
Third Stock Split, at the Effective Time, all of the State Savings Common Shares
will be canceled and each shareholder of State Savings will receive for each
State Savings Common Share which such shareholder holds at the effective time of
the Merger (the "Effective Time"), the right to receive 2,770.89 shares of Fifth
Third Common Stock. The Exchange Ratio is subject to adjustment in certain
circumstances. Based on the closing price per share of Fifth Third Common Stock
on the Nasdaq National Market on April 6, 1998, the value of 2,770.89 shares of
Fifth Third Common Stock was $162,097. In accordance with the Affiliation
Agreement, the Exchange Ratio has been adjusted to reflect the 1998 Fifth Third
Stock Split. In the event of any other stock dividends, reclassifications,
recapitalizations, split-ups, exchanges of shares, distributions or combinations
or subdivisions of Fifth Third Common Stock, or any other event or action which
has a similar economic effect before the Effective Time, the Exchange Ratio will
be adjusted further so as to give shareholders of State Savings the economic
benefit of such event or action. See also "PROPOSAL -- MERGER OF STATE SAVINGS
INTO FIFTH THIRD -- Termination; Fee; Amendment; Waiver."
BACKGROUND AND REASONS FOR THE MERGER
For 25 years before June 1997, the executive officers of State Savings
consisted of Donald B. Shackelford, Chairman of the Board of Directors; David E.
Reese, Vice Chairman of the Board of Directors; and Allan B. McFarland,
President. In June 1997, Mr. McFarland retired at age 70 as President and Mr.
Shackelford resigned at age 65 as Chairman of the Board of Directors in order to
allow for the appointment of David E. Reese as Chairman and Chief Executive
Officer. At the same time, Mr. Shackelford was elected Vice Chairman of the
17
<PAGE> 18
Board of Directors. Certain other management changes at State Savings and at
State Savings Bank, Columbus, were also made in June 1997.
Following the management changes, the Board of Directors and senior
officers of State Savings took a fresh look at the ways by which State Savings
could continue to compete effectively with banks and thrifts for loans, deposits
and other banking products and services. Technological changes in the financial
institutions industry, year 2000 computer issues and the cost of maintaining and
introducing a broad line of new banking products and services were all matters
which concerned the Board of Directors and senior officers as State Savings
faced a rapidly changing industry environment. In July 1997, after the
management changes, directors and officers of State Savings began to consider
whether the maintenance of the independence of State Savings was advisable in a
rapidly changing financial environment. During such time, the market value of
both bank and thrift stocks generally continued to appreciate.
As a result of the foregoing, Messrs. Reese and Shackelford began to focus
more sharply in October 1997 on the future of State Savings as an independent
entity. They both began to monitor the terms and conditions of announced mergers
and acquisitions involving thrift holding companies and made general inquiries
of investment banking firms about the nature of retaining such firms to assist
them in an investigation of strategic alternatives for State Savings. In
November 1997, the discussions with one investment banking firm, Keefe, Bruyette
& Woods, Inc. ("Keefe Bruyette"), evolved into negotiations for the retention of
Keefe Bruyette as advisor. While the talks among Messrs. Shackelford, Reese and
representatives of Keefe Bruyette centered primarily on the future of the thrift
industry, a general proposal for the retention of Keefe Bruyette as the
investment banking firm of State Savings was executed in late November 1997.
Such proposal contemplated the investigation of the possibility of pursuing a
merger or acquisition. At its first meeting following such execution, the Board
of Directors of State Savings ratified the retention of Keefe Bruyette.
With the assistance of Keefe Bruyette, State Savings initially identified
bank and thrift holding companies which might logically have an interest in
combining with State Savings. After brief contacts on a confidential basis with
such companies, Keefe Bruyette sent financial information to them following the
receipt of a suitable confidentiality agreement. Subsequently, four entities,
including Fifth Third, expressed an interest in pursuing a possible merger with
State Savings. At a meeting of the Board of Directors on December 15, 1997, the
directors reviewed in detail the indications of interest, each of which proposed
a merger of State Savings into the proponent in a transaction in which the
shares of State Savings would be exchanged for a fixed number of shares of the
proponent. None of the preliminary proposals called for the payment of cash in
exchange for shares of State Savings. The value of the Fifth Third shares
proposed for exchange for the shares of State Savings equaled $800 million.
The directors commenced their analysis of the foregoing proposals by
considering, with the assistance of Keefe Bruyette, the value of State Savings
on the basis of various valuation methodologies, each of which is discussed
below. See "PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH THIRD -- Opinion of
Financial Advisor to State Savings." After analyzing such value, the directors
reviewed the differences between the four proposals from the perspective of the
value of the shares of each of the four proponents. Specifically, the directors
reviewed the multiples of earnings and book value at which each of the
proponents was trading publicly and the financial, market and dividend history
of each, as well as other factors.
Upon the conclusion of such analysis, the directors determined that the
preliminary proposals of Fifth Third and one other company were each very
attractive and decided to invite them to conduct a confidential due diligence
examination of the books and records of State Savings on certain dates and at
certain times. In conjunction with such due diligence, Messrs. Reese,
Shackelford and senior management of State Savings met separately with
representatives of Fifth Third and the other company to conduct the due
diligence of State Savings on each company. In addition, the Board of Directors
reviewed various materials and related information on Fifth Third and the other
company, including their Annual Reports to Stockholders for the year ended
December 31, 1996; their Annual Reports on Form 10-K for the year ended December
31, 1996; their proxy materials for the annual meetings of stockholders in 1997;
and their Quarterly Reports on Form 10-Q for the quarters ended March 31, June
30 and September 30, 1997.
18
<PAGE> 19
Following the completion of the due diligence examinations of, and
subsequent discussions with, Fifth Third and the other company, Fifth Third
increased the value of its proposal, as a result of which State Savings elected
to focus on Fifth Third. The Fifth Third proposal provided for one of the two
following alternatives: (1) a fixed exchange rate whereby Fifth Third would
issue 1,787.59 shares of Fifth Third Common Stock in exchange for each State
Savings Common Share (i.e. a value of $141,666.67 per State Savings Common Share
based on the $79.25 (before the adjustment to reflect the 1998 Fifth Third Stock
Split) per share price of Fifth Third on December 19, 1997 and a total value of
$850,000,000 as of December 19, 1997); or (2) a fixed value whereby Fifth Third
would issue such shares of Fifth Third Common Stock equal in value immediately
before the closing of the merger to $137,500 per share in exchange for all of
the outstanding State Savings Common Shares (i.e. a total value of
$825,000,000).
During a meeting on December 22, 1997, the directors evaluated the
difference between Fifth Third's alternative proposals. The directors recognized
that the selection of the fixed exchange rate alternative could result in the
fluctuation of the per share and aggregate value of the transaction between
December 22, 1997, and the date of the closing of the merger, depending on the
fluctuation in the market value of Fifth Third Common Stock. If the market price
of Fifth Third Common Stock equaled or exceeded $79.25 (before the adjustment to
reflect the 1998 Fifth Third Stock Split) per share on the date of the closing,
then the per share and the aggregate values to shareholders of State Savings
would be equal to or greater than $141,666.67 and $850,000,000, respectively. If
the market price of Fifth Third Common Stock was less than $79.25 per share on
the date of the closing of the merger, then the value to State Savings
shareholders would be less. In view of the inexact period of time between
December 22, 1997, and the date of the closing, fluctuations in value were a
distinct possibility.
The directors understood that the selection of the fixed value alternative
would substantially reduce the possibility of fluctuations in value. However,
the fixed value alternative would lock in a value which was lower than the fixed
exchange rate at the then current Fifth Third market value. As the directors
considered the alternatives, Keefe Bruyette made an extensive presentation on
Fifth Third's financial, market and dividend history, as well as on other Fifth
Third facts and circumstances. In addition, Keefe Bruyette analyzed the
alternative offers from various valuation methodologies, each of which is
summarized below. See "PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Opinion of Financial Advisor to State Savings." The directors also
examined the relative contribution of State Savings to a combined Fifth Third
entity and concluded that State Savings was an extremely attractive acquisition
for Fifth Third because of the significant contribution of State Savings to the
assets, earnings per share and capital of a combined entity. Moreover, the
directors recognized that a combination of the two entities at the $850 million
level would result in a dilution in the book value, earnings and deposits of
State Savings. In view of such contribution and dilution and the high multiples
of earnings and book value at which Fifth Third shares were traded, the Board of
Directors believed that Fifth Third should be asked to increase the value of its
proposal.
In a telephone conversation between Mr. Reese and Fifth Third that occurred
simultaneously while the meeting was in progress, Mr. Reese explained to Fifth
Third the concerns of the directors over the contribution and dilution issues.
Following an analysis of such concerns, Fifth Third increased its offer to
approximately $890 million, but only on a fixed exchange rate basis. The $890
million value represented an increase of $40 million over the first December 22
proposal and of $90 million over the December 15 proposal. As a result of the
increase, the directors concluded that the final Fifth Third proposal was
sufficiently high to accept the possibility of fluctuations in the value of
Fifth Third shares because of a fixed exchange rate.
The Board of Directors then unanimously approved moving forward in
negotiations exclusively with Fifth Third. Based upon the adjusted value of
$53.65 (which has been adjusted to reflect the 1998 Fifth Third Stock Split)
closing price of Fifth Third shares on December 22, 1997, the value of the
2,770.89 Fifth Third shares to be issued in exchange for each share of State
Savings equaled $148,658, for a total aggregate value of $891,949,491.
Commencing immediately after the December 22, 1997, meeting of the Board of
Directors, State Savings and Fifth Third entered into arms-length negotiations
in respect of the terms and conditions of the Affiliation Agreement. A draft of
the Affiliation Agreement was disseminated to the members of the Board of
Directors for their review on December 31, 1997. On January 2, 1998, the Board
of Directors met to consider the terms and conditions of the transaction as
evidenced by the Affiliation Agreement. At such meeting, the Board of Directors
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again reviewed the Fifth Third proposal, including the financial terms and
conditions of the fixed exchange rate, and revisited the financial, market and
dividend history of State Savings. After an extensive consideration of the terms
and conditions of the Affiliation Agreement and other related matters, including
the proposed employment contracts with certain executive officers of State
Savings, the Board of Directors unanimously approved the terms and conditions of
the Affiliation Agreement, at which time the Affiliation Agreement was executed.
THE BOARD OF DIRECTORS OF STATE SAVINGS BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF STATE SAVINGS AND ITS SHAREHOLDERS AND RECOMMENDS UNANIMOUSLY
THAT STATE SAVINGS SHAREHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE
AFFILIATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. For information
regarding interests of directors and executive officers of State Savings in the
Merger, see "PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH THIRD -- Effect on
State Savings Employees" and "-- Interests of Certain Persons in the Merger."
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 State Savings'
service area. Fifth Third's acquisition strategy has generally been to fill in
its markets along the interstate highways in Ohio, Kentucky and Indiana. These
acquisitions are designed to strengthen Fifth Third's ability to compete in
these markets by increasing their presence, consumer access and sales force.
Fifth Third also believes that State Savings' operations in Arizona provide an
attractive opportunity to enter rapidly growing new markets.
OPINION OF FINANCIAL ADVISOR TO STATE SAVINGS
At the January 2, 1998, meeting of the Board of Directors of State Savings,
Keefe Bruyette delivered an oral opinion to the effect that, as of such date,
the Exchange Ratio was fair to the shareholders of State Savings from a
financial point of view. Keefe Bruyette has delivered to State Savings the
updated written opinion dated as of the date of this Proxy Statement/Prospectus
to the effect that, as of such date, the Exchange Ratio is fair, from a
financial point of view, to the shareholders of State Savings. In connection
with its opinion, Keefe Bruyette updated certain analyses performed in
connection with its opinion and reviewed the assumptions on which such analyses
were based and the factors considered in connection therewith.
Keefe Bruyette's opinion is addressed to the Board of Directors of State
Savings and does not constitute a recommendation as to how any shareholder of
State Savings should vote with respect to the Affiliation Agreement. No
limitations were imposed by the Board of Directors of State Savings upon Keefe
Bruyette with respect to the investigations made or procedures followed by Keefe
Bruyette in rendering its opinions.
THE FULL TEXT OF THE OPINION OF KEEFE BRUYETTE, WHICH SETS FORTH A
DESCRIPTION OF THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT/ PROSPECTUS
AS ANNEX C AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO
READ THE OPINION IN ITS ENTIRETY. THE FOLLOWING SUMMARY OF THE OPINION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In rendering its opinion, Keefe Bruyette (i) reviewed, among other things,
the Affiliation Agreement, Audited Financial Statements of State Savings and
Annual Reports to Stockholders and Annual Report on Form 10-K of Fifth Third
Bancorp for the four years ended December 31, 1996, certain interim reports of
State Savings and certain interim reports to stockholders and Quarterly Reports
on Form 10-Q of Fifth Third and certain internal financial analyses and
forecasts for State Savings prepared by management; (ii) held discussions with
members of senior management of State Savings and Fifth Third regarding past and
current business operations, regulatory relationships, financial condition and
future prospects of the respective companies; (iii) compared certain financial
and stock market information for Fifth Third with similar information for
certain other companies the securities of which are publicly traded; (iv)
reviewed the financial terms of certain recent business combinations in the
banking industry; and (v) performed such other studies and analyses as it
considered appropriate.
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In conducting its review and arriving at its opinions, Keefe Bruyette
relied upon and assumed the accuracy and completeness of all of the financial
and other information provided to it or publicly available, and Keefe Bruyette
did not attempt to verify such information independently. Keefe Bruyette relied
upon the management of State Savings as to the reasonableness and achievability
of the financial and operating forecasts and projections (and assumptions and
bases therefor) provided to Keefe Bruyette and assumed that such forecasts and
projections reflected the best available estimates and judgments of such
management and that such forecasts and projections will be realized in the
amounts and in the time periods estimated by such management. Keefe Bruyette
also assumed, without independent verification, that the aggregate allowances
for loan losses for State Savings and Fifth Third were adequate to cover such
losses. In rendering its opinion, Keefe Bruyette did not make or obtain any
evaluations or appraisals of the property of State Savings or Fifth Third, nor
did Keefe Bruyette examine any individual credit files.
The following is a summary of the material financial analyses employed by
Keefe Bruyette in connection with providing its oral opinion of January 2, 1998,
and the written opinion as of the date of this Proxy Statement/ Prospects, and
does not purport to be a complete description of all analyses employed by Keefe
Bruyette.
(a) Analysis of the Fifth Third Offer. Keefe Bruyette calculated multiples
which were based on the assumed per share purchase price of $151,014 (derived by
multiplying the Exchange Ratio of 1,847.26 by $81.75, the last reported sale
price per share for Fifth Third Common Stock on December 31, 1997. The September
30, 1997, stated and tangible book value of State Savings were $43,370 and
$43,320, respectively, and its 1997 and 1998 earnings per share estimates
(provided by State Savings) were $6,087 and $6,718 per share, respectively.
Based on such data, the price to stated and fully diluted tangible book value
multiple was 3.48 times and 3.49 times respectively, and the price to the 1997
and 1998 earnings estimates per share was 24.81 and 22.48 times, respectively.
(b) Analysis of Selected Merger Transactions. Keefe Bruyette reviewed
certain financial data related to fifteen thrift holding company acquisitions in
the Midwest region announced from August 2, 1996, to December 17, 1997 (the
"Midwest Thrift Acquisitions"), and ten such acquisitions in the United States
announced from February 28, 1997, to November 3, 1997 (the "Nationwide Thrift
Transactions"). The Midwest Thrift Acquisitions analyzed were Alliance
Bancorp/Southwest Bancshares, Magna Group, Inc./Charter Financial, Inc.,
Marshall & Ilsley/Advantage Bancorp, Star Banc Corp/Great Financial Corp.,
Commercial Federal/Mid Continent Bancshares, Union Planters Corp/Sho-Me
Financial, Associated Bancorp/First Financial Corp, Charter One
Financial/Haverfield Corp., TCF Financial Corp./Standard Financial, Marshall &
Ilsley/Security Capital Corp, Mercantile Bancorp/Roosevelt Financial, ABN AMRO
Holding/Standard Federal Bank, Pinnacle Financial/Indiana Federal Corp., Mutual
Savings Bank/First Federal Bancshares, and Hinsdale Financial Corp./Liberty
Bancorp acquisitions. The Nationwide Thrift Acquisitions analyzed were Marshall
& Ilsley/Advantage Bancorp, Peoples Heritage Financial Group/CFX Corporation,
North Fork Bancorp/New York Bancorp, HF Ahmanson & Company/Coast Savings
Financial, Star Banc Corp./Great Financial Corp, Charter One Financial/RCSB
Financial, TCF Financial Corp/Standard Financial, Marshall & Ilsley/Security
Capital Corp, Washington Mutual/ Great Western Financial and Summit
Bancorp/Collective Bancorp acquisitions.
For the Midwest Thrift Acquisitions, Keefe Bruyette calculated an average
multiple of price to the targets' earnings (trailing 12 months) as 19.04 times,
compared to a multiple of 24.81 times estimated 1997 earnings per share for the
Merger; an average premium to the targets' stated book value of 185%, compared
to a premium of 348% associated with the Merger; and an average premium to the
targets' tangible book value of 194%, compared to a premium of 349% associated
with the Merger.
For the Nationwide Thrift Transactions, Keefe Bruyette calculated an
average multiple of price to the targets' earnings (trailing 12 months) of 18.74
times, compared to a multiple of 24.81 times associated with the Merger; an
average premium to the targets' stated book value of 239%, compared to a premium
of 348% associated with the Merger; and an average premium to the targets'
tangible book value of 250%, compared to a premium of 349% associated with the
Merger.
No company or transaction used as a comparison in the above analysis is
identical to State Savings, Fifth Third or the Merger. Accordingly, an analysis
of the results of the foregoing is not mathematical. Rather, such analysis
involves complex considerations and judgments concerning differences in
financial and operating
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characteristics of the companies and other factors that could affect the public
trading value of the companies to which they are being compared.
(c) Selected Peer Group Analysis. Keefe Bruyette compared the financial
performance and market performance of Fifth Third based on various financial
measures of earnings performance, operating efficiency, capital adequacy and
asset quality and various measures of market performance, including market/book
values, price to earnings and dividend yields to those of a group of comparable
holding companies. For purposes of such analysis, the financial information used
by Keefe Bruyette was as of and for the quarter ended September 30, 1997, and
the market price information was as of December 31, 1997. The companies in the
peer group were nationwide banks which had total assets ranging from
approximately $9 billion to $36 billion and included Comerica Incorporated,
State Street Corporation, Mercantile Bancorporation, Inc. South Trust
Corporation, Summit Bancorp, BB&T Corporation, Northern Trust Corporation,
Huntington Bancshares, Incorporated, Crestar Financial Corporation, Regions
Financial Corporation, Firstar Corporation, AmSouth Bancorporation, First
Security Corporation, Marshall & Ilsley Corporation, Union Planters Corporation,
First Tennessee National Corporation, Star Banc Corporation, First American
Corporation and Synovus Financial Corp.
Keefe Bruyette's analysis showed the following concerning Fifth Third's
financial performance: that its return on equity on an annualized basis was
20.24%, compared with an average of 18.80% for the peer group; that its return
on assets on an annualized basis was 2.03%, compared with an average of 1.50%
for the group; that its net interest margin on an annualized basis was 4.14%,
compared with an average of 4.15%; that its efficiency ratio on an annualized
basis was 39.72%, compared with an average of 56.34%; that its equity to assets
ratio was 10.24%, compared to an average of 7.89%; that its ratio of
nonperforming assets to total loans and other real estate owned was 0.33%,
compared to an average of 0.54%; and that its ratio of loan loss reserve to
nonperforming loans was 495%, compared to an average of 347%.
Keefe Bruyette's analysis further showed the following concerning Fifth
Third's market performance: that Fifth Third's price to earnings multiple based
on 1997 and 1998 estimated earnings was 32.06 and 27.71 times, respectively,
compared to an average for the group of 22.60 and 20.02 times; that its price to
book value multiple was 5.91 times, compared to a group average of 4.02 times;
and that its dividend yield was 1.08%, compared to an average for the group of
1.71%. For purposes of the above calculations, all earnings estimates were based
upon the published estimates of Keefe Bruyette's equity research department.
(d) Contribution Analysis. Keefe Bruyette analyzed the relative
contribution of each of Fifth Third and State Savings to the pro forma balance
sheet and income statement items of the combined entity, including assets,
common equity, market capitalization, deposits and 1997 estimated net income.
Keefe Bruyette compared the relative contribution of such balance sheet and
income statement items with the estimated pro forma ownership of 6.5% for State
Savings shareholders based on an Exchange Ratio of 1,847.26. The contribution
showed that State Savings would contribute approximately 11.8% of the combined
assets, 10.0% of the combined common equity (assuming the reissuance of shares),
13.4% of the combined deposits and 8.7% of the combined estimated 1998 net
income.
(e) Discounted Cash Flow Analysis. Keefe Bruyette estimated the present
value of future cash flows that would accrue to a holder of a share of State
Savings assuming State Savings were to remain independent and the shareholder
held the stock through the year 2002 and then sold such share at the end of year
2002. The analysis was based on several assumptions, including six million
shares outstanding, versus the actual 6,000 shares outstanding and earnings per
share in 1997 of $6.09 and $6.72 in 1998 and 12% earnings per share growth rate
thereafter. A 10% dividend growth rate was assumed for State Savings through the
year 2002. There were two different scenarios used in determining a terminal
value in 2002. In one case, a market multiple (equivalent of book value per
share) of 7.1 times 2002 earnings per share was assumed and, in another
scenario, an acquisition multiple of 20.0 times 2002 earnings per share was
assumed. The terminal valuation and the estimated dividends were discounted at a
rate of 11%, producing a present value of $41.43 and $114.20, respectively,
based on market and acquisition multiples. Keefe Bruyette also presented a table
showing the foregoing analysis on a stand-alone basis with a range of discount
rates from 10% to 15% and a range of market multiples of 10 times to 20 times
2002 earnings per share, resulting in a range of present values for a share of
State Savings of $46.73 to $120.54. Such values were determined by adding (i)
the present value of the estimated future dividend stream that State
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Savings could generate over the period beginning 1998 and ending in 2002, and
(ii) the present value of the terminal value of the State Savings Common Shares.
Keefe Bruyette also estimated the present value of future cash flows that
would accrue to a holder 1,847.26 shares of Fifth Third Common Stock, assuming
the Merger were to occur and assuming the shareholder held the stock through the
year 2002 and then sold it at the end of 2002. Such analysis was based on
several assumptions, including Fifth Third's 1997 earnings per share of $2.55,
1998 earnings per share of $2.95 and a 15% earnings per share growth rate
thereafter. A 15% dividend growth rate was assumed for Fifth Third's pro forma
through the year 2002. There were two different scenarios used in determining a
terminal value in 2002. In one case, a market multiple of 32 times 2002 earnings
per share was assumed, and in another scenario, an acquisition multiple value of
27 times 2002 earnings per share was assumed. The terminal valuation and the
estimated dividends were discounted at a rate of 11%. The result of this
analysis was a present value of $172.98 and $147.20 (based upon 6 million shares
outstanding versus the actual 6,000 shares outstanding), respectively, based on
market and acquisition multiples. These values were determined by adding (i) the
present value of the estimated future dividend stream from 1,847.26 shares of
Fifth Third beginning 1998 and ending in 2002 and (ii) the present value of the
terminal value of 1,847.26 shares of Fifth Third Bancorp Common Stock.
Keefe Bruyette stated that the discounted cash flow analysis is a
widely-used valuation methodology, but noted that such analysis relies on
numerous assumptions, including asset and earnings growth rates, dividend payout
rates, terminal values and discount rates. The analysis did not purport to be
indicative of the actual values or expected values of State Savings Common
Shares.
(f) Other Analysis. Keefe Bruyette also reviewed Fifth Third's five year
financial highlights, business segment financial information, loan composition,
deposit composition, historical stock price performance relative to the S&P 500
and to an index of bank and thrift stocks, historical price to earnings
multiples relative to the Keefe Bruyette Bank Index and the S&P 500, the
pro-forma deposit market shares in the Columbus metropolitan statistical area
and the State of Ohio and the pro forma earnings per share and book value
projections for 1997 to 1999 pro forma for the merger of State Savings with
Fifth Third.
The summary contained herein provides a description of the material
analyses prepared by Keefe Bruyette in connection with the rendering of its
opinion. The summary set forth above does not purport to be a complete
description of the analyses performed by Keefe Bruyette in connection with the
rendering of its opinion. The preparation of a fairness opinion is not
necessarily susceptible to partial analysis or summary description. Keefe
Bruyette 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 analyses, or selecting part of the above summary, without
considering all factors and analyses, would create an incomplete view of the
processes underlying the analyses set forth in Keefe Bruyette's presentations
and opinion. The ranges of valuations resulting from any particular analysis
described above should not be taken to be Keefe Bruyette's view of the actual
value of State Savings and Fifth Third. The fact that any specific analysis has
been referred to in the summary above is not meant to indicate that such
analysis was given greater weight than any other analyses.
In performing its analyses, Keefe Bruyette made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of State Savings and Fifth
Third. The analyses performed by Keefe Bruyette are not necessarily indicative
of actual values or actual future results which may be significantly more or
less favorable than suggested by such analyses. Such analyses were prepared
solely as part of Keefe Bruyette's analysis of the fairness, from a financial
point of view, of the Exchange Ratio in the Merger. These analyses were provided
to the Board of Directors of State Savings in connection with the delivery of
Keefe Bruyette's opinion. The analyses do not purport to be appraisals or to
reflect the prices at which a company actually might 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, Keefe Bruyette's opinion, along with its
presentation to the Board of Directors of State Savings, was just one of many
factors taken into consideration by the Board of Directors of State Savings in
unanimously approving the Affiliation Agreement.
Keefe Bruyette, as part of its investment banking business, is continually
engaged in the valuation of banking businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations
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for estate, corporate and other purposes. As specialists in the securities of
banking companies, Keefe Bruyette has experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of its business as a
broker-dealer, Keefe Bruyette may, from time to time, purchase securities from,
and sell securities to Fifth Third Bancorp and as a market maker in securities
Keefe Bruyette may from time to time have a long or short position in, and buy
or sell, debt or equity securities of Fifth Third for Keefe Bruyette's own
account and for the accounts of its customers.
State Savings has agreed to pay Keefe Bruyette a base fee ("Cash Fee") of
$500,000, plus an incentive fee of .50% of the market value of the aggregate
consideration offered in the transaction at Closing in excess of 250% of the
book value of State Savings as of December 31, 1997. Assuming that the market
price per share of Fifth Third Common Stock at the Effective Time is $58.50, the
same as the closing price per share of Fifth Third Common Stock on April 6, 1998
(as adjusted to reflect the 1998 Fifth Third Stock Split), such incentive fee
would equal $2.0 million. Pursuant to the Keefe Bruyette engagement agreement,
State Savings also agreed to reimburse, from time to time upon request, Keefe
Bruyette for all reasonable out-of-pocket expenses and disbursements, including
fees and reasonable expenses of counsel, incurred in connection with this
retention and to indemnify against certain liabilities, including liabilities
under the federal securities laws.
EFFECTIVE TIME
Unless the parties agree otherwise, the Effective Time will occur on a
Friday which is as soon as is reasonably possible following the date on which
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 Effective Time will occur in June 1998, although no
assurance can be given in this regard. State Savings 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 September 30, 1998, subject to
certain conditions.
EFFECTS OF MERGER
CORPORATE STRUCTURE AND GOVERNANCE. Upon consummation of the Merger, State
Savings will merge with and into Fifth Third and State Savings will cease to
exist as a separate entity. In related simultaneous transactions, SSB will merge
with and into The Fifth Third Bank of Columbus, Century will merge with and into
The Fifth Third Bank and FSB will change its name to "Fifth Third Bank of the
Southwest, FSB."
The respective Boards of Directors of Fifth Third, The Fifth Third Bank and
The Fifth Third Bank of Columbus 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. In the Affiliation Agreement, Fifth
Third has agreed to appoint David Reese and Donald Shackelford to positions on
the Fifth Third Board of Directors. The officers of Fifth Third, The Fifth Third
Bank of Columbus and The Fifth Third Bank 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. Fifth Third has
agreed to appoint Donald Shackelford as Chairman of The Fifth Third Bank of
Columbus; Stephen Kambeitz as an officer of The Fifth Third Bank of Columbus and
William Robert as an officer of Fifth Third Bank of the Southwest, FSB. See
"PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH THIRD -- Interests of Certain
Persons in the Merger."
STATE SAVINGS COMMON SHARES. Each State Savings Common Share (excluding
treasury shares) that is issued and outstanding immediately prior to the
Effective Time will be canceled and converted, by virtue of the Merger and
without further action, into the right to receive 2,770.89 shares of Fifth Third
Common Stock. In accordance with the Affiliation Agreement, the Exchange Ratio
has been adjusted to reflect the 1998 Fifth Third Stock Split. In the event of
any other stock dividends, reclassifications, recapitalizations, split-ups,
exchanges of shares, distributions or combinations or subdivisions of Fifth
Third Common Stock or any other event or action which has a similar economic
effect before the Effective Time, the Exchange Ratio will be adjusted further so
as to give shareholders of State Savings the economic benefit of such event or
action. In addition, in the event of a substantial decline in the trading price
of Fifth Third Common Stock relative to a group of peer institutions under
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certain circumstances as provided in the Affiliation Agreement, the State
Savings Board of Directors may have the right to terminate the Affiliation
Agreement. If such right is exercised, Fifth Third would then have the option to
increase the Exchange Ratio in accordance with the formula set forth in the
Affiliation Agreement in lieu of such termination. See "PROPOSAL -- MERGER OF
STATE SAVINGS INTO FIFTH THIRD-Termination; Fee; Amendment; Waiver".
THE VALUE OF THE FIFTH THIRD COMMON STOCK TO BE RECEIVED BY STATE SAVINGS
SHAREHOLDERS WILL DEPEND ON THE MARKET PRICE OF SHARES OF FIFTH THIRD COMMON
STOCK AT THE EFFECTIVE TIME OF THE MERGER. THE MARKET PRICE OF FIFTH THIRD
COMMON STOCK IS SUBJECT TO CHANGE AT ALL TIMES BASED ON THE FUTURE FINANCIAL
CONDITION AND OPERATING RESULTS OF FIFTH THIRD, FUTURE MARKET CONDITIONS AND
OTHER FACTORS. ON JANUARY 2, 1998, THE DATE STATE SAVINGS AND FIFTH THIRD
EXECUTED THE AFFILIATION AGREEMENT, FIFTH THIRD'S COMMON STOCK CLOSED AT $54.33
(AS ADJUSTED TO REFLECT THE 1998 FIFTH THIRD STOCK SPLIT). BETWEEN JANUARY 2 AND
APRIL 6, 1998, FIFTH THIRD'S COMMON STOCK (AS ADJUSTED TO REFLECT THE 1998 FIFTH
THIRD STOCK SPLIT) TRADED AS HIGH AS $59.50 AND AS LOW AS $49.50. ON APRIL 6,
1998, FIFTH THIRD'S COMMON STOCK CLOSED AT $58.50 (AS ADJUSTED TO REFLECT THE
1998 FIFTH THIRD STOCK SPLIT). THE MARKET PRICE OF FIFTH THIRD COMMON STOCK AT
THE EFFECTIVE TIME MAY BE SUBSTANTIALLY HIGHER OR LOWER THAN RECENT PRICES.
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
holder of State Savings Common Shares otherwise entitled to a fractional share
of Fifth Third Common Stock will be paid therefor in cash (without interest) in
an amount equal to the amount of such fraction multiplied by the applicable
market value per share of Fifth Third Common Stock at the Effective Time. 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
State Savings Common Shares will cease to have any rights as shareholders of
State Savings, and their sole rights will pertain to the rights to receive
shares of Fifth Third Common Stock and cash in lieu of fractional shares, if
any, into which their State Savings Common Shares will have been converted
pursuant to the Affiliation Agreement. Within seven business days after the
Effective Time, Fifth Third will send to each former State Savings 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 State Savings share certificates) formerly representing State Savings
Common Shares 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 State Savings 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 State Savings Common
Shares. 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 State Savings Common Shares, the Exchange Agent will forward to
State Savings 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). STATE SAVINGS' SHAREHOLDERS ARE REQUESTED NOT TO SUBMIT
SHARE CERTIFICATES UNTIL THEY HAVE RECEIVED WRITTEN INSTRUCTIONS TO DO SO.
At the Effective Time, the stock transfer books of State Savings will be
closed and no transfer of State Savings Common Shares will thereafter be made on
such books. If a certificate formerly representing State Savings Common Shares
is presented to State Savings 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.
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FEDERAL INCOME TAX CONSEQUENCES
State Savings will receive an opinion from its tax counsel, Vorys, Sater,
Seymour and Pease LLP, that for Federal income tax purposes: (i) the Merger will
constitute a reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "Code"), and Fifth Third and
State Savings will each be a party to such reorganization within the meaning of
Section 368(b) of the Code; (ii) no gain or loss will be recognized by State
Savings as a result of the Merger; (iii) no gain or loss will be recognized by
Fifth Third as a result of the Merger; (iv) no gain or loss will be recognized
by a shareholder of State Savings who receives solely Fifth Third Common Stock
in exchange for State Savings Common Shares pursuant to the terms of the
Affiliation Agreement (except to the extent of any cash received for any
fractional share interest in Fifth Third Common Stock to which the shareholder
may be entitled); (v) the aggregate tax basis of the Fifth Third Common Stock
received by a State Savings shareholder who receives solely Fifth Third Common
Stock in exchange for State Savings Common Shares pursuant to the terms of the
Affiliation Agreement will be, in each instance, the same as the aggregate
Federal income tax basis of the State Savings Common Shares surrendered in
exchange therefor (reduced by any amount allocated to a fractional share of
Fifth Third Common Stock with respect to which cash is received); (vi) the
holding period of the Fifth Third Common Stock received (including any
fractional share deemed received) by a State Savings shareholder will include,
in each case, the period during which the State Savings Common Shares
surrendered in exchange therefor was held, provided that the State Savings
Common Shares was held as a capital asset by such shareholder on the date of the
exchange; and (vii) a holder of State Savings Common Shares who receives cash in
lieu of a fractional share of Fifth Third Common Stock will be deemed to have
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.
As to any holder of State Savings Common Shares who perfects dissenters'
rights and receives solely cash in exchange for his or her shares of State
Savings Common Shares, such cash will be treated as having been received by such
shareholder as a distribution in redemption of his or her stock subject to the
provisions of Section 302 of the Code; where, as a result of such distribution,
a shareholder owns no Fifth Third Common Stock, either directly or through the
application of the constructive ownership rules of Section 318(a) of the Code,
the redemption will be a complete termination of interest within the meaning of
Section 302(b)(3) of the Code, and the cash will be treated as a distribution in
full payment in exchange for State Savings Common Shares redeemed as provided in
Section 302(a) and gain or loss will be realized and recognized to such
shareholder in an amount equal to the difference between the redemption price
and the adjusted basis of the State Savings Common Shares surrendered in
exchange therefor.
In rendering its opinion, Vorys, Sater, Seymour and Pease LLP will rely
upon representations contained in letters from Fifth Third and State Savings
delivered for purposes of the opinion, and upon letters from certain
shareholders of State Savings which contain, among other things, representations
that, as of the Effective Time, each such shareholder (i) is not bound by any
agreement, understanding or contract to sell, transfer or otherwise dispose of
the Fifth Third Common Stock to be received by such shareholder pursuant to the
Affiliation Agreement and (ii) has no current plan or intention to sell,
transfer or otherwise dispose of the Fifth Third Common Stock to be received
pursuant to the Affiliation Agreement. The opinion of Vorys, Sater, Seymour and
Pease LLP will also be based on the assumption that the Merger will be
consummated in accordance with the provisions of the Affiliation Agreement, that
the Merger will qualify as a statutory merger under state law and that the
representations made by Fifth Third, State Savings and certain shareholders of
State Savings are accurate.
The foregoing discussion is intended only as a summary of certain Federal
income tax consequences of the Merger and does not purport to be a complete
analysis or description of all potential tax effects of the Merger. The
foregoing discussion, for example, does not address the tax consequences that
may be relevant to particular taxpayers in light of their personal circumstances
(for example, individuals who receive Fifth Third Common Stock in exchange for
State Savings Common Shares acquired as a result of the exercise of employee
stock options or otherwise as compensation) or to taxpayers subject to special
treatment under the Code (for example, insurance companies, financial
institutions, dealers in securities, tax-exempt organizations, foreign
corporations, foreign partnerships, or other foreign entities and individuals
who are not citizens or residents of the United States).
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No information is provided herein with respect to the tax consequences, if
any, of the Merger under applicable state, local, foreign, and other tax laws.
The foregoing discussion is based upon the provisions of the Code, applicable
Treasury regulations thereunder, Internal Revenue Service rulings, and judicial
decisions as in effect as of the date hereof. There can be no assurance that
future legislative, administrative, or judicial changes or interpretations will
not affect the accuracy of the statements or conclusions set forth herein. Any
such change could apply retroactively and could affect the accuracy of such
discussion. No rulings have been or will be sought from the Internal Revenue
Service concerning the tax consequences of the Merger.
EACH SHAREHOLDER OF STATE SAVINGS IS URGED TO CONSULT SUCH SHAREHOLDER'S
OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE
MERGER, INCLUDING THE APPLICATION OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS.
ACCOUNTING TREATMENT
The Merger is intended to qualify for pooling-of-interests accounting
treatment and consummation of the Merger is conditioned, in part, upon receipt
by both Fifth Third and State Savings of a letter from Deloitte & Touche LLP,
independent public accountants, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment. See "UNAUDITED PRO FORMA FINANCIAL
INFORMATION." In order to meet the requirements necessary to account for the
Merger as a pooling-of-interests and to satisfy such condition in the
Affiliation Agreement, Fifth Third intends to take certain actions as described
under "FIFTH THIRD BANCORP -- Recent Developments."
DISSENTERS' RIGHTS OF APPRAISAL
Holders of State Savings Common Shares who so desire are entitled to relief
as dissenting shareholders under Ohio Revised Code Section 1701.85. A
shareholder of State Savings will be entitled to such relief, however, only if
such shareholder complies strictly with all of the procedural and other
requirements of Section 1701.85. The following summary does not purport to be a
complete statement of the method of compliance with, and is qualified in its
entirety by reference to, the copy of Section 1701.85 attached hereto as Annex
D.
A State Savings shareholder who wishes to perfect such shareholder's rights
as a dissenting shareholder in the event the Affiliation Agreement is approved
and adopted:
(a) Must have been a record holder of the State Savings Common Shares
as to which he seeks relief on the Record Date;
(b) Must not have voted his State Savings Common Shares in favor of
approval and adoption of the Affiliation Agreement; and
(c) Must deliver to State Savings, not later than ten days after the
Special Meeting, a written demand for payment of the fair cash value of the
shares as to which he seeks relief. Such written demand must state the name
of the shareholder, his address, the number of shares as to which he seeks
relief and the amount claimed as the fair cash value thereof.
A vote against the approval and adoption of the Affiliation Agreement will
not satisfy the requirements of a written demand for payment. Any written demand
for payment should be mailed or delivered to: Mark K. Milligan, Secretary, State
Savings Company, 20 East Broad Street, Columbus, Ohio 43215. As the written
demand must be delivered to State Savings within the ten-day period following
the Special Meeting, it is recommended, although not required, that a
shareholder using the mails should use certified or registered mail, return
receipt requested, to confirm that he has made a timely delivery.
If State Savings sends the dissenting shareholder, at the address specified
in his demand, a request for the certificate(s) representing his shares, such
dissenting shareholder must deliver the certificate(s) to State Savings within
15 days of the sending of such request. State Savings may endorse the
certificate(s) with a legend to the effect that the shareholder has demanded the
fair cash value of the shares represented by the certificate(s). Failure
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to deliver the certificate(s) within 15 days of the request terminates the
shareholder's rights as a dissenting shareholder. State Savings must notify the
shareholder of its election to terminate his rights as a dissenting shareholder
within 20 days after the lapse of the 15-day period.
Unless the dissenting shareholder and State Savings agree on the fair cash
value per share of the State Savings Common Shares, either may, within three
months after the service of the written demand by the shareholder, file a
petition in the Court of Common Pleas of Franklin County, Ohio. If the court
finds that the shareholder is entitled to be paid the fair cash value of any
shares, the court may appoint one or more appraisers to receive evidence and to
recommend a decision on the amount of the fair cash value.
Fair cash value: (i) will be determined as of the day prior to the Special
Meeting, (ii) will be the amount a willing seller and willing buyer would accept
or pay with neither being under compulsion to sell or buy, (iii) will not exceed
the amount specified in the shareholder's written demand, and (iv) will exclude
any appreciation or depreciation in market value resulting from the Merger. The
court will make a finding as to the fair cash value of a share and render
judgment against State Savings for its payment with interest at such rate and
from such date as the court considers equitable. The costs of proceedings shall
be assessed or apportioned as the court considers equitable.
The rights of any dissenting shareholder will terminate if (a) the
dissenting shareholder has not complied with Section 1701.85, unless State
Savings, by its Board of Directors, waives such failure, (b) State Savings
abandons or is finally enjoined or prevented from carrying out, or the
shareholders of State Savings rescind their adoption of, the Affiliation
Agreement, (c) the dissenting shareholder withdraws his written demand with the
consent of State Savings, by its Board of Directors, or (d) State Savings and
the dissenting shareholder have not agreed upon the fair cash value per share of
the State Savings Common Shares and neither has timely filed or joined in a
petition in an appropriate court for a determination of the fair cash value of
the shares. For a discussion of the tax consequences to a shareholder who
exercises dissenters' rights, see "PROPOSAL -- MERGER OF STATE SAVINGS INTO
FIFTH THIRD -- Federal Income Tax Consequences."
Because a proxy which does not contain voting instructions will be voted
for the approval and adoption of the Affiliation Agreement, a shareholder who
wishes to exercise dissenters' rights must either (i) not sign and return his
proxy or (ii) if he signs and returns his proxy, vote against or abstain from
voting on the approval and adoption of the Affiliation Agreement.
In connection with the execution of the Affiliation Agreement, the
directors of State Savings holding approximately 1,765.765 shares or 29.4% of
the outstanding State Savings Common Shares have executed Shareholder Support
Agreements to vote their shares in favor of the Merger and have waived all
rights available to them under the Ohio Revised Code to demand appraisal of
their State Savings Common Shares.
CONDUCT PENDING MERGER; REPRESENTATIONS AND WARRANTIES
State Savings has agreed, among other things, that prior to the Effective
Time it will carry on its business in the ordinary course. State Savings also
has agreed to give Fifth Third and Fifth Third's representatives reasonable
access during business hours to its facilities and personnel. State Savings
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 State Savings Common Shares or any other equity
securities; issue as borrower any long term debt or convertible or other
securities of any kind, or right to acquire any of its securities; or make any
material changes in its method of business operations. State Savings also has
agreed not to make or become obligated to make any capital expenditures in
excess of $100,000 (except in the ordinary course of business consistent with
past practices), nor make or renew any agreement for services to be provided to
State Savings, any of the Thrift Subsidiaries or any of the other direct or
indirect subsidiaries of State Savings (collectively, the "Other State Savings
Subsidiaries"), or permit the automatic renewal of any such agreement, except
any agreement for services having a term of not more than six months or
requiring the expenditure of not more than $50,000. State Savings additionally
has agreed not to: declare or pay any cash dividends on its stock other than
quarterly or special cash dividends consistent with past practices; pay any
stock dividends or make any other distributions on its stock; provide any
increases in employee salaries or benefits other than in the ordinary course of
business; sell or otherwise dispose of or encumber any portion of its assets,
business or properties including the
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shares of the capital stock of any of the Thrift Subsidiaries or any of the
Other State Savings Subsidiaries which are now owned by State Savings; or
acquire all or any portion of the assets, business or properties of any other
entity which is material to State Savings and its subsidiaries on a consolidated
basis (other than by way of foreclosures or acquisitions of control in a bona
fide fiduciary capacity or in satisfaction of debts previously contracted in
good faith).
In addition, State Savings agreed in the Affiliation Agreement that, except
with the prior approval of Fifth Third, State Savings will not and will use
reasonable efforts to cause the officers, directors, employees or other agents
of State Savings not to, directly or indirectly, (i) take any action to solicit,
initiate or encourage any merger of either State Savings or the Thrift
Subsidiaries 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 State Savings or the Thrift Subsidiaries, other
than the Merger (each, an "Acquisition Transaction") or (ii) subject to the
fiduciary duties of the State Savings Board of Directors under applicable law as
advised by counsel to State Savings, engage in negotiations with, or disclose
any nonpublic information relating to State Savings or the Thrift Subsidiaries
to, or afford access to the properties, books or records of State Savings or the
Thrift Subsidiaries to, any person that may be considering making, or has made,
a proposal to enter into an Acquisition Transaction. However, nothing contained
in the Affiliation Agreement will prevent State Savings or its Board of
Directors from furnishing nonpublic information to, or affording access to the
properties, books or records of State Savings or any subsidiary to, or entering
into discussions or an agreement with, any third party person or recommending an
unsolicited proposal regarding an Acquisition Transaction to the shareholders of
State Savings, if and only to the extent that (i) State Savings' directors
determine in good faith after consultation with outside legal counsel that such
action is necessary to comply with their fiduciary duties to the shareholders of
State Savings under applicable law and (ii) prior to furnishing such nonpublic
information to, or entering into discussions or negotiations with, such third
party, State Savings' directors receive from such third party an executed
confidentiality agreement with customary terms. State Savings also agreed in the
Affiliation Agreement to promptly 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. Under certain circumstances, even if the Affiliation Agreement has been
terminated, if State Savings enters into an Acquisition Transaction, State
Savings may be required to pay a termination fee to Fifth Third. See
"PROPOSAL-MERGER OF STATE SAVINGS INTO FIFTH THIRD -- Termination; Fee;
Amendment; Waiver."
Fifth Third and State Savings 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 State Savings 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 State Savings or Fifth Third will
survive beyond the Effective Time. For more detailed information concerning the
representations and warranties made by Fifth Third and State Savings to each
other, see the Affiliation Agreement attached hereto as Annex A.
CONDITIONS TO CLOSING
The Affiliation Agreement must be approved and adopted by the affirmative
vote of holders of at least two-thirds of the outstanding State Savings Common
Shares entitled to vote and a majority of the State Savings Common Shares
represented in person or by proxy at the Special Meeting (excluding any State
Savings Common Shares owned by any executive officer of State Savings or any
director of State Savings who is also an employee of State Savings). The Merger
also must be approved in writing by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") and the Ohio Division 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.
Fifth Third's and State Savings' 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
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material actions, proceedings or investigations of any kind pending or
threatened with respect to the transactions contemplated by the Affiliation
Agreement and both institutions having performed all of the obligations required
of them under the Affiliation Agreement. Additionally, the obligations of each
of State Savings and Fifth Third to consummate the Merger are subject to the
receipt by each party of a letter from Deloitte & Touche LLP, independent public
accountants, to the effect that the Merger will qualify for the
pooling-of-interests method of accounting. See "PROPOSAL -- MERGER OF STATE
SAVINGS INTO FIFTH THIRD -- Accounting Treatment."
Fifth Third's obligation to consummate the Merger is further subject to
conditions set forth in the Affiliation Agreement, unless waived by Fifth Third,
including, but not limited to, the continuing truth and accuracy in all material
respects of all of the representations and warranties of State Savings; the
delivery by State Savings' counsel of a certain legal opinion addressed to Fifth
Third; the aggregate amount of consolidated shareholders' equity of State
Savings 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, of not less than
that reflected in State Savings' November 30, 1997 financial statements
delivered to Fifth Third; Century having redeemed all of its shares not owned by
State Savings; and the total issued and outstanding State Savings Common Shares
not exceeding 6,000 shares. Certain extraordinary events identified in the
Affiliation Agreement are excluded expressly by the Affiliation Agreement from
affecting these latter calculations.
State Savings' obligation to consummate the Merger is further subject to
conditions set forth in the Affiliation Agreement, unless waived by State
Savings, including, but not limited to, the continuing truth and accuracy in all
material respects of Fifth Third's representations and warranties; the delivery
by counsel employed by Fifth Third of a certain legal opinion addressed to State
Savings; the registration by Fifth Third of the shares of Fifth Third Common
Stock to be issued to State Savings shareholders and the listing of those shares
on the Nasdaq National Market; the receipt by State Savings of an opinion from
Keefe Bruyette to the effect that the transactions contemplated by the
Affiliation Agreement are fair to the shareholders of State Savings from a
financial point of view; the execution by Fifth Third of certain employment
agreements; and the payment of, or provision for, certain severance payments by
Fifth Third. The obligation of State Savings to consummate the Merger also is
subject to receipt of an opinion of counsel to State Savings with respect to
certain tax matters. See "PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Federal Income Tax Consequences."
TERMINATION; FEE; AMENDMENT; WAIVER
The Affiliation Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time by written notice delivered by Fifth Third to
State Savings or by State Savings to Fifth Third in the following instances: (i)
by Fifth Third or State Savings, 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; (ii) by Fifth Third or State Savings if the business or assets or
financial condition of the other party and its subsidiaries on a consolidated
basis have materially and adversely changed from that in existence at September
30, 1997; (iii) by Fifth Third or State Savings, if the Merger has not been
consummated by September 30, 1998, 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; (iv) by the mutual
written consent of Fifth Third and State Savings; (v) automatically if State
Savings' shareholders fail to approve and adopt the Affiliation Agreement; (vi)
by Fifth Third or State Savings, 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; or (vii) by Fifth Third if the holders of ten
percent (10%) or more of the outstanding State Savings Common Shares shall have
perfected their rights as dissenting shareholders pursuant to Section 1701.84
and 1701.85 of the Ohio Revised Code; or (viii) if the Board of Directors of
State Savings withdraws or modifies its recommendation to its shareholders
regarding the Merger as contemplated by the Affiliation Agreement.
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If the Affiliation Agreement is terminated pursuant to clauses (v), (vii)
or (viii) of the preceding paragraph and (i) at or prior to the holding of the
Special Meeting any person or entity (other than Fifth Third or its affiliates)
shall have made a proposal, or disclosed to State Savings or its shareholders
that such person or entity will consider or is considering making a proposal, to
effect an Acquisition Transaction, and (ii) (A) State Savings shall have entered
into a written understanding in principle or a definitive agreement with respect
to such Acquisition Transaction within twelve (12) months after the earlier of
(x) the date the Affiliation Agreement is terminated or (y) September 30, 1998,
or (B) the Board of Directors of State Savings shall have withdrawn its
recommendation to the shareholders of State Savings regarding the Merger as a
result of such proposal to effect such Acquisition Transaction, then (unless at
the time of termination State Savings had the right to terminate the Affiliation
Agreement pursuant to a clause in the preceding paragraph other than (v), (vii)
or (viii)) State Savings will be required, pursuant to the Affiliation
Agreement, to pay Fifth Third a termination fee of $28.0 million, which fee
shall be payable immediately upon entering into such written understanding in
principle or definitive agreement or upon the withdrawal by the Board of
Directors of such recommendation, whichever is earlier. In no event shall more
than one such termination fee be payable.
In addition to the foregoing circumstances under which the Affiliation
Agreement may be terminated, State Savings may also have the right to terminate
the Affiliation Agreement under certain circumstances if there is a substantial
decline in the trading price of Fifth Third Common Stock relative to a group of
peer institutions. See "PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Effects of Merger." The provisions in the Affiliation Agreement
governing such right are complex and are designed to permit either a termination
of the Affiliation Agreement or an adjustment to the Exchange Ratio if, and only
if, the market value of Fifth Third Common Stock has declined substantially from
the $54.33 market value on January 2, 1998 (as adjusted to reflect the 1998
Fifth Third Stock Split) and the market value of Fifth Third Common Stock has
declined substantially more than an index of 19 bank stocks on a comparative
basis.
The right of State Savings to terminate the Affiliation Agreement in
accordance with the foregoing will exist if both the following occur (the
"Termination Conditions"):
(i) For the 20 trading days ending the tenth trading day before the
Effective Time (the "Determination Date"), the average closing price of
Fifth Third Common Stock as reported on the Nasdaq National Market (the
"Average Closing Price") is less than $43.47; and
(ii) (a) the Average Closing Price divided by $54.33 (the closing
price of Fifth Third Common Stock on January 2, 1998 as adjusted for the
1998 Fifth Third Stock Split) is less than (b) the "Index Ratio", which is
defined as (x) the weighted average closing price of the 19 bank holding
companies identified below (the "Index Price") on the Determination Date
divided by $53.99 (the Index Price on January 2, 1998) minus (y) .20.
The 19 bank holding companies are: Northern Trust Corp., Star Banc Corp.,
First Tennessee National Corp., State Street Corp., Marshall & Ilsley Corp.,
BB&T Corporation, Mercantile Bancorp, First American Corp., Summit Bancorp,
South Trust Corp., First Security Corp., Comerica Inc., AmSouth Bancorporation,
Union Planters Corp., Regions Financial Corp., Firstar Corporation, Crestar
Financial Corp., Synovus Financial Corp., and Huntington Bancshares, Inc.
If both of the Termination Conditions exist, then State Savings will have
the right to terminate the Affiliation Agreement. If State Savings exercises
such right, then Fifth Third will have the right to adjust the Exchange Ratio in
lieu of such termination to the lesser of:
(i) (a) the product of $43.47 multiplied by 2,770.89 (the Exchange
Ratio) or the Exchange Ratio as otherwise further adjusted pursuant to the
Affiliation Agreement, divided by (b) the Average Closing Price; and
(ii) (a) the product of the Index Ratio multiplied by 2,770.89 (the
Exchange Ratio) or the Exchange Ratio as otherwise further adjusted
pursuant to the Affiliation Agreement, divided by (b) the Average Closing
Price divided by $54.33 (the "Fifth Third Ratio").
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The adjustment of the Exchange Ratio in accordance with the foregoing
formula is designed to increase the number of shares of Fifth Third Common Stock
to be issued in exchange for each State Savings Common Share if the Termination
Conditions exist.
ILLUSTRATION. For purposes of the following illustration, assume that the
Average Closing Price is $40 and that the Index Price on the Determination Date
is $53.33. Under these assumptions, State Savings would have the right to
terminate the Affiliation Agreement because both Termination Conditions would be
met, as follows:
(i) the Average Closing Price of $40.00 would be less than $43.47; and
(ii) the Average Closing Price of $40.00 divided by $54.33 would equal
.7362 and would be less than the Index Ratio of 1.28.
Fifth Third would then have the right to adjust the Exchange Ratio in lieu
of terminating the Affiliation Agreement to the lesser of the following:
(i) 3,011.26, which is the product of $43.47 multiplied by the
Exchange Ratio of 2,770.89, divided by the Average Closing Price of $40.00;
and
(ii) 4,817.63, which is the Index Ratio of 1.28 multiplied by the
Exchange Ratio of 2,770.89, divided by the Fifth Third Ratio of .7362.
Therefore, Fifth Third could elect to increase the exchange ratio to
3,011.26 and proceed with the Merger. In the event of such election, each State
Savings Common Share would be canceled at the Effective Time in exchange for the
right to receive 3,011.26 shares of Fifth Third Common Stock. Alternatively,
Fifth Third could elect to not increase the Exchange Ratio and the Affiliation
Agreement would then terminate.
The average closing price of Fifth Third Common Stock for the 20 trading
days before April 7, 1998 was $55.68. Based on such price, neither Termination
Condition would be triggered and State Savings would not have had any right to
terminate the Affiliation Agreement.
The determinations of whether the above tests are met, whether to terminate
the Affiliation Agreement and whether to override any such termination are all
subject to market conditions at the Determination Date and accordingly, such
determinations cannot be made until after the date of this Proxy
Statement/Prospectus. If the above tests are met, there can be no assurances
that the State Savings Board of Directors will elect to exercise its right to
terminate the Affiliation Agreement or, in the event of such election, that
Fifth Third will override such termination and increase the Exchange Ratio.
The Affiliation 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 State Savings shareholders, without further approval of State
Savings' shareholders, except that no amendment, modification or supplement may
be effected without State Savings shareholder approval if such amendment,
modification or supplement would change in any manner adverse to such
shareholders the consideration provided pursuant to the Affiliation Agreement.
EFFECT ON STATE SAVINGS 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
State Savings and the Thrift Subsidiaries 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.
The Affiliation Agreement provides for the payment of severance amounts to
employees of State Savings under certain conditions upon termination of
employment or specific other circumstances. Such amounts will equal two weeks
salary for each year of service to State Savings, up to a maximum of $75,000
("Regular Severance Payments").
In addition, the Affiliation Agreement provides for a separate $2.7 million
fund out of which severance payments may be made under certain circumstances to
employees identified by State Savings as Senior
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Managers. For each such Senior Manager, State Savings will determine an
appropriate portion of the fund for payment upon employment termination. A
Senior Manager who receives such a payment may not receive any Regular Severance
Payments.
See the Affiliation Agreement attached hereto as Annex A for more detailed
information concerning the effect of the Merger on employees of State Savings
and its subsidiaries.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
State Savings Common Shares held by or for the benefit of directors and
executive officers of State Savings will be canceled and converted into the
right to receive shares of Fifth Third Common Stock under the Affiliation
Agreement on the same basis as shares held by other shareholders of State
Savings. For additional information, see "PROPOSAL -- MERGER OF STATE SAVINGS
INTO FIFTH THIRD -- Effects of Merger." In addition, directors and executive
officers of State Savings may be deemed to have the following interests in the
Merger that are different from, or in addition to, those of employees or
shareholders of State Savings:
EMPLOYMENT AGREEMENTS. Fifth Third has agreed in the Affiliation Agreement
to enter into employment contracts effective as of the Effective Time with David
Reese, the Chairman of the Board of Directors of State Savings; Donald
Shackelford, the Vice Chairman of State Savings; William Robert, the President
of FSB; and Stephen Kambeitz, the Controller of State Savings (the "Fifth Third
Employment Contracts" and each a "Fifth Third Employment Contract").
Mr. Reese's Fifth Third Employment Contract states that Mr. Reese will be
employed as the Chairman of Fifth Third Savings Bank of the Southwest, FSB and
will be named as a director of Fifth Third. Mr. Reese's Fifth Third Employment
Contract also provides for an initial payment to Mr. Reese of $500,000, a base
salary of $550,000 per year, a grant within 10 days after the Effective Time of
options to acquire 75,000 shares of Fifth Third Common Stock at an exercise
price per share equal to the fair market value of a share of Fifth Third Common
Stock on the date of the grant and a retirement benefit in the form of annuity
payments having a present value equal to $5,485,000.
Mr. Shackelford's Fifth Third Employment Contract states that Mr.
Shackelford will be employed as the Chairman of Fifth Third Bank of Columbus and
will be named as a director of Fifth Third. Mr. Shackelford's Fifth Third
Employment Contract also provides for an initial payment to Mr. Shackelford of
$500,000, a base salary of $550,000 per year, a grant within 10 days after the
Effective Time of options to acquire 75,000 shares of Fifth Third Common Stock
at an exercise price per share equal to the fair market value of a share of
Fifth Third Common Stock on the date of the grant and a retirement benefit in
the form of annuity payments having a present value equal to $5,485,000.
Mr. Robert's Fifth Third Employment Contract states that Mr. Robert will be
employed as an officer of Fifth Third Bank of the Southwest, FSB. Mr. Robert's
Fifth Third Employment Contract also provides for an initial payment to Mr.
Robert of $150,000, a base salary of $250,000 per year, a grant within 10 days
after the Effective Time of options to acquire 18,000 shares of Fifth Third
Common Stock at an exercise price per share equal to the fair market value of a
share of Fifth Third Common Stock on the date of the grant and a retirement
benefit in the form of annuity payments having a present value equal to
$4,146,528.
Mr. Kambeitz's Fifth Third Employment Contract states that Mr. Kambeitz
will be employed as an officer of The Fifth Third Bank of Columbus. Mr.
Kambeitz's Fifth Third Employment Contract also provides for an initial payment
to Mr. Kambeitz of $130,000, a base salary of $190,000 per year, a grant within
10 days after the Effective Time of options to acquire 18,000 shares of Fifth
Third Common Stock at an exercise price per share equal to the fair market value
of a share of Fifth Third Common Stock on the date of the grant and a retirement
benefit in the form of annuity payments having a present value equal to
$1,103,536.
Each of the Fifth Third Employment Contracts is for a period of three years
from and after the Effective Time and contains a non-competition provision which
covers the states of Ohio, Indiana, Kentucky, Florida and Arizona and which
lasts for two years after the termination of employment. Additionally, Fifth
Third has agreed that, in the event of any stock dividends, reclassifications,
recapitalizations, split-ups, exchanges of shares, distributions or combinations
or subdivisions of Fifth Third Common Stock or any other event or action which
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has a similar economic effect before the Effective Time (other than the 1998
Fifth Third Stock Split which has been reflected in the foregoing descriptions
of the Employment Agreements), the options granted pursuant to the Fifth Third
Employment Contracts will be further adjusted in a manner similar to the
adjustment to the Exchange Ratio under the same circumstances.
DEFERRED COMPENSATION AGREEMENTS. Fifth Third has also agreed to honor the
obligations, in effect on the Effective Time, of State Savings under the State
Savings Company 1995 Key Employee Incentive Compensation Plan (the "Key Employee
Plan"). The Key Employee Plan is a cash-based plan of deferred compensation
which is not qualified under Section 401(a) of the Code. Under the provisions of
the Key Employee Plan, each participant has an account to which a specified
number of "units" is credited, the number of which is determined in the
discretion of the Executive Compensation Committee of the Board of Directors
(the "Committee"). At the time such units are initially credited to a
participant's account, they are "valued," based upon a fraction of the then book
value of the State Savings Common Shares . At the time that a participant is
eligible for a distribution from the plan, such participant receives a cash
payment equal to the difference between (1) the value of the units credited to
his or her account, determined by use of a fraction of the book value of the
State Savings Common Shares at time of distribution and (2) the initial value of
such units. Distributable events under the plan are determined, based upon
specific provisions contained in agreements entered into between plan
participants and the Committee. Payments under the Key Employee Plan will be
made by Fifth Third at the Effective Time. The payments under the Key Employee
Plan will not exceed a total of Nineteen Million Seven Hundred Fifty Thousand
Dollars ($19,750,000). See "STATE SAVINGS MANAGEMENT -- Summary Compensation
Table" for benefits under the Key Compensation Plan for Messrs. Reese and
Shackelford.
EMPLOYEE BENEFIT PLANS. Each employee of State Savings and the Thrift
Subsidiaries who becomes an employee of Fifth Third or any of its subsidiaries
or affiliates at or immediately subsequent to the Merger, including the
executive officers of State Savings, 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 of Fifth Third. However, with respect to any such continuing employee
who was covered, as of the Effective Time, under a benefit plan sponsored by
State Savings or the Thrift Subsidiaries for which Fifth Third sponsors an
employee benefit plan which provides the same type of benefit (e.g. life
insurance, disability, etc.), such continuing employee shall participate, as of
the Effective Time, in such Fifth Third Plan. Under each employee benefit plan
sponsored or maintained by Fifth Third, prior service with State Savings and any
of the Thrift Subsidiaries will be taken into account for purposes of
determining eligibility, vesting and, with the exception of any defined benefit
pension plan sponsored by Fifth Third, the accrual of benefits.
The Affiliation Agreement also provides that State Savings will take all
actions necessary to freeze the State Savings Bank Profit Sharing Plan ("Profit
Sharing Plan"), and all non-qualified deferred compensation plans ("Deferred
Compensation Plans") (collectively all of such plans shall be referred to as the
"Retirement Plans") and any other qualified or non-qualified retirement plans,
as of a date at least 60 days preceding the Effective Time such that no further
benefits shall accrue under the Retirement Plans. However, with respect to the
Profit Sharing Plan, participant salary deferral contributions under Section
401(k) of the Code and employer matching contributions under Section 401 (m) of
the Code may continue until such time as the Profit Sharing Plan is either
terminated or merged into a qualified retirement plan maintained by Fifth Third
and State Savings may accrue a profit sharing contribution for the period
between January 1, 1998 and the Effective Time, unless Fifth Third allows former
employees of State Savings or the Thrift Subsidiaries to accrue benefits under
the Fifth Third Profit Sharing Plan as of January 1, 1998. In addition, with
respect to the State Savings Non-Qualified Deferred Compensation Plan, for the
period between January 1, 1998 and the Effective Time, State Savings may credit
participant accounts with earnings equal to ten percent (10%) per annum
(pro-rated monthly). Within sixty (60) days of the Effective Time, Fifth Third
will make a determination either to direct State Savings to terminate the Profit
Sharing Plan as of the day preceding the Effective Time or to merge the Profit
Sharing Plan into a qualified retirement plan sponsored by Fifth Third as of the
Effective Time.
In no event will any of the executive officers of State Savings receive any
payment that would be considered an "Excess Parachute Payment" under Section
280G of the Internal Revenue Code of 1986, as amended.
34
<PAGE> 35
INDEMNIFICATION AND LIABILITY INSURANCE. The Affiliation Agreement
provides that all provisions for indemnification and limitation of liability now
existing in favor of the directors or officers of State Savings and its
subsidiaries, arising under applicable Ohio and federal law and under the State
Savings Amended Articles of Incorporation and Code of Regulations, or under the
Articles, Charter, Constitution, Code of Regulations or Bylaws of its
subsidiaries, 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. Fifth Third must also purchase and
keep in force for a three-year period, a policy of directors' and officers'
liability insurance having liability limits and providing coverage for acts or
omissions of the type currently covered by Fifth Third's existing directors' and
officers' liability insurance for acts or omissions occurring at or prior to the
Effective Time. 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 State
Savings or any of its subsidiaries 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. See also "DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE RIGHTS OF
SHAREHOLDERS -- Indemnification and Personal Liability of Directors and
Officers."
RESALE OF FIFTH THIRD COMMON STOCK BY AFFILIATES
The shares of Fifth Third Common Stock to be issued to shareholders of
State Savings in connection with the Merger will be registered under the
Securities Act and will be freely transferable under the Securities Act, except
for shares issued to any shareholder who may be deemed to be an "affiliate" (as
defined under the Securities Act, but generally including directors, certain
executive officers and 10 percent or more stockholders) of State Savings or
Fifth Third at the time of the Special Meeting.
Rules 144 and 145 promulgated under the Securities Act restrict the sale of
Fifth Third Common Stock received in the Merger by affiliates and certain of
their family members and related interests. Generally speaking, during the one
year following the Effective Time, affiliates of Fifth Third and State Savings
may not resell publicly the Fifth Third Common Stock received by them in
connection with the Merger except in compliance with certain limitations as to
the amount of Fifth Third Common Stock sold in any three-month period and as to
the manner of sale. After the one-year period, such affiliates of State Savings
who are not affiliates of Fifth Third may resell their shares without
restriction. The ability of affiliates to resell shares of Fifth Third Common
Stock received in the Merger under Rule 144 or 145 as summarized herein
generally will be subject to Fifth Third having satisfied its Exchange Act
reporting requirements for specified periods prior to the time of sale.
Affiliates also would be permitted to resell Fifth Third Common Stock received
in the Merger pursuant to an effective registration statement under the
Securities Act covering such shares or an available exemption from the
Securities Act registration requirements. This Proxy Statement/Prospectus does
not cover any resales of Fifth Third Common Stock received by persons who may be
deemed to be affiliates of Fifth Third or State Savings.
The Affiliation Agreement provides that State Savings will use its best
efforts to cause each director, executive officer and other person who is deemed
by State Savings to be an affiliate (for purposes of Rule 145 and for purposes
of qualifying the Merger for pooling-of-interests accounting treatment) of State
Savings to execute and deliver to Fifth Third a written agreement intended to
ensure compliance with the Securities Act and to ensure that the Merger will
qualify as a pooling-of-interests.
Commission guidelines regarding qualifying for pooling-of-interests
accounting treatment also limit sales by affiliates of Fifth Third and State
Savings in the Merger. Commission guidelines indicate that pooling-of-interests
accounting treatment generally will not be challenged on the basis of sales by
affiliates if they do not dispose of any of the shares of either combining
company they owned prior to the consummation of a merger or shares of the
surviving company received in connection with a merger during the period
beginning 30 days before the merger and ending when financial results covering
at least 30 days of post-merger operations of the surviving company have been
published.
35
<PAGE> 36
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
"BHCA"), and subject to regulation by the Federal Reserve Board. Fifth Third,
with its principal office located in Cincinnati, owns all of the outstanding
stock of nine commercial banks with 411 offices in Ohio, Kentucky, Indiana and
Florida. Those banks are: The Fifth Third Bank, The Fifth Third Bank of
Columbus, The Fifth Third Bank of Northwestern Ohio, N.A., The Fifth Third Bank
of Southern Ohio, The Fifth Third Bank of Western Ohio, Fifth Third Bank of
Florida, Fifth Third Bank of Northern Kentucky, Inc., Fifth Third Bank of
Kentucky, Inc., and The Fifth Third Bank of Central Indiana.
At December 31, 1997, Fifth Third, its affiliated banks and other
subsidiaries had consolidated total assets of approximately $21.4 billion,
consolidated total deposits of approximately $14.9 billion and consolidated
total stockholders' equity of approximately $2.3 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, Midwest Payment Systems, Inc. ("MPS"), Fifth Third International
Company and Heartland Capital Management, Inc. 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 Association Insurance Fund ("SAIF").
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."
RECENT DEVELOPMENTS
In addition to entering into the Affiliation Agreement with State Savings
relating to the Merger, Fifth Third has also recently agreed to acquire The Ohio
Company and CitFed Bancorp, Inc. In March 1998, Fifth Third also announced the
1998 Fifth Third Stock Split.
On December 22, 1997, Fifth Third agreed to acquire The Ohio Company, a
company that provides broker/dealer services, investment banking services and
investment advisory services. A newly formed wholly owned acquisition subsidiary
of Fifth Third will merge with and into The Ohio Company such that The Ohio
Company will become a wholly owned Fifth Third subsidiary upon completion of
that merger. In connection with the acquisition of The Ohio Company, Fifth Third
will issue in exchange for all of the outstanding shares of capital stock of The
Ohio Company such number of shares of Fifth Third Common Stock having a fair
market value of $80.0 million. Fifth Third anticipates that approximately
1,500,000 shares of Fifth Third Common Stock would be issued to the shareholders
of The Ohio Company. Fifth Third expects that its acquisition of The Ohio
Company will be completed in mid-1998 prior to the Effective Time and that such
acquisition will be accounted for as a purchase.
36
<PAGE> 37
On January 13, 1998, Fifth Third agreed to acquire CitFed Bancorp, Inc.
("CitFed"), a savings and loan holding company based in Dayton, Ohio which owns
Citizens Federal Bank, F.S.B. and certain related subsidiaries. CitFed will
merge with and into Fifth Third, and the various CitFed subsidiaries will become
wholly owned subsidiaries of Fifth Third. Subject to adjustment as provided in
the affiliation agreement between Fifth Third and CitFed, each share of CitFed
common stock will be converted into the right to receive 1.005 shares of Fifth
Third Common Stock. Based on the 13,002,811 shares of CitFed common stock
outstanding as of January 13, 1998, Fifth Third would issue approximately
13,067,825 shares of Fifth Third Common Stock in that merger. Based on the fair
market value per share of Fifth Third Common Stock as of April 6, 1998, the
value of such shares would have an aggregate value of $764 million. Fifth Third
expects that its acquisition of CitFed will be completed after The Ohio Company
acquisition, but either prior to or after the Effective Time, and that such
acquisition will be accounted for as a pooling-of-interests.
In order to enable Fifth Third to account for both the Merger and/or the
acquisition of CitFed as a pooling-of-interests, Fifth Third will issue and sell
up to 4.2 million shares of Fifth Third Common Stock prior to the consummation
of such mergers. The number of shares issued for this purpose may include shares
issued in connection with Fifth Third's acquisition of The Ohio Company, if
completed prior to the Effective Time. Fifth Third anticipates that some or all
of the shares of Fifth Third Common Stock issued to enable pooling-of-interests
accounting treatment may be offered pursuant to a registration statement to be
filed with the Commission. The exact number of shares of Fifth Third Common
Stock to be offered, the price and the timing of any such offering has not yet
been determined and will only be made pursuant to a separate prospectus. In
addition, in January 1998, Fifth Third rescinded its previously announced open
market share repurchase programs which would otherwise preclude
pooling-of-interests accounting treatment.
The consummation of the Merger is not contingent upon the closing of either
The Ohio Company acquisition or the CitFed merger. There can be no assurances
that either or both transactions will be successfully consummated.
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, 1997,
which is incorporated herein by reference, and to the Fifth Third 1997 Annual
Report to Stockholders which accompanies this Proxy Statement/Prospectus. See
"AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
37
<PAGE> 38
STATE SAVINGS COMPANY
GENERAL
State Savings Company was originally incorporated as a savings and loan
association in 1900 under the name "The Fidelity Building Loan & Savings Co." In
1944, the name of the company was changed to "The State Savings & Loan Co." Upon
the consummation of the merger of The North High Savings & Loan Company into
State Savings in 1954, the name was changed to "State Savings Company."
In 1982, State Savings acquired the outstanding shares of Century Bank,
then an Ohio savings and loan association ("Century"). In 1992, State Savings
formed as a subsidiary a federal savings bank in Arizona under the name State
Savings Bank, FSB ("FSB"). After such formation, FSB acquired certain assets and
liabilities of a Phoenix, Arizona, thrift institution owned by the Resolution
Trust Corporation.
As a result of the foregoing acquisitions, State Savings, then an Ohio
savings and loan association, owned two financial institutions as wholly owned
subsidiaries. Although the ownership of a financial institution by a financial
institution was permissible under law, such ownership was not typical. In order
to realign the corporate structure in a manner similar to most bank and thrift
holding companies, State Savings reorganized in 1995 in accordance with
shareholder approval. In such reorganization: (i) State Savings transferred
substantially all of its thrift related assets and liabilities to a newly
formed, wholly-owned Ohio savings bank subsidiary ("SSB"); and (ii) State
Savings adopted Amended Articles of Incorporation to change State Savings from
an Ohio savings and loan association to a general Ohio corporation.
As a result of the foregoing, State Savings is now a registered multiple
thrift holding company under the Home Owners' Loan Act of 1934 and owns 100% of
the outstanding shares of SSB and FSB and 99.6% of the outstanding shares of
Century. Approximately .4% of Century's outstanding stock are qualifying
directors' shares which will be repurchased by Century in connection with the
Merger. SSB and Century operate primarily in Ohio, with mortgage lending offices
in Kentucky and Indiana, and FSB operates solely in Arizona.
State Savings also owns, directly or indirectly through intermediate
subsidiaries, fourteen non-financial institution subsidiaries. Such subsidiaries
were formed and are operated as a natural incidence of State Savings' principal
businesses. See "STATE SAVINGS COMPANY -- Subsidiary Activities."
Through SSB, FSB and Century, State Savings is principally engaged in the
business of making first mortgage loans to finance the purchase, construction or
improvement of one- to four-family residential real estate or other real
property located in its primary market areas. Loan funds are obtained primarily
from savings deposits, which are insured up to applicable limits by the FDIC,
loan repayments and advances from the Federal Home Loan Bank of Cincinnati (the
"FHLB of Cincinnati"). Interest earned on such loans is the primary source of
revenue of State Savings. In addition to originating loans, State Savings
invests in U.S. Government and agency obligations, interest-bearing deposits in
other financial institutions and mortgage-backed securities.
State Savings conducts its principal business activities through the Thrift
Subsidiaries primarily in Ohio, Indiana, Kentucky and Arizona. SSB operates
thirty-six full service branch offices in central Ohio (Franklin, Delaware,
Fairfield, Licking and Marion Counties); three lending offices in northern Ohio
(Cuyahoga, Summit, and Lake Counties); and one lending office in Indianapolis,
Indiana (Marion County). Century operates two full service branch offices in the
Cincinnati market (Hamilton County); two full service offices in the Toledo
market (Lucas County); one full service office in the Columbus market (Franklin
County); and one lending office in Ft. Wright, Kentucky. FSB operates ten full
service branch offices in Maricopa (metropolitan Phoenix), Pima (Tucson and
Green Valley), and Yavapai (Sedona and Prescott) Counties.
As a savings and loan holding company, State Savings is subject to
regulation, examination, and supervision by the Office of Thrift Supervision of
the United States Department of the Treasury ("OTS") and by the Division of
Financial Institutions of the Ohio Department of Commerce (the "Division"). As
savings banks incorporated under the laws of the State of Ohio, SSB and Century
are subject to regulation, supervision and examination by the FDIC and the
Division and are members of the FHLB of Cincinnati. As a federal savings bank,
FSB is subject to regulation, supervision and examination by the OTS and the
FDIC and is a member of the FHLB of San Francisco. See "REGULATION OF FINANCIAL
INSTITUTIONS."
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<PAGE> 39
The operations of State Savings are limited to owning the outstanding
shares of its subsidiaries and to investing its cash and cash equivalents. SSB,
Century and FSB together contribute 90.9% and 97.4% of the consolidated assets
and revenues, respectively, of State Savings. Accordingly, the following
description of the business activities of State Savings centers primarily on the
consolidated business activities of SSB, Century and FSB.
LENDING ACTIVITIES
GENERAL. The principal lending activity of State Savings is the
origination of conventional fixed-rate and variable-rate mortgage loans for the
acquisition or construction of one- to four-family residences located in the
primary markets of State Savings. State Savings also originates mortgage loans
insured by the Federal Housing Administration and guaranteed by the Veterans
Administration, most of which are sold into the secondary mortgage market. Loans
secured by multi-family properties, including construction and permanent
mortgage loans on condominiums and apartment buildings, and by nonresidential
properties, including retail, office and other types of business facilities, are
also originated by State Savings. In addition to residential, multi-family and
nonresidential real estate lending, State Savings originates consumer loans
(secured and unsecured), including automobile, home improvement, credit card and
home equity line of credit loans, as well as small business loans, including
lines of credit, term loans and business leases. State Savings' portfolio of
loans, loans held for sale and mortgage-backed and related securities totaled
approximately $2.5 billion at December 31, 1997, and represented 89.3% of total
assets.
LOAN PORTFOLIO MATURITY SCHEDULE. The following table sets forth certain
information as of December 31, 1997, regarding the dollar amount of loans
(excluding residential mortgage and consumer loans) maturing in the portfolio of
State Savings based on their contractual terms to maturity, before giving effect
to net items. Demand loans and loans having no stated schedule of repayments or
without stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE AFTER 1
YEAR TO 5 DUE OVER 5
DUE IN 1 YEAR YEARS AFTER YEARS AFTER
OR LESS 12/31/97 12/31/97 TOTALS
------------- --------------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Multifamily and other real estate loans.... $ 43,114 $ 99,905 $176,658 $319,677
Construction loans(1)...................... 135,661 74,767 145,250 355,678
Business loans............................. 16,135 12,629 3,543 32,307
-------- -------- -------- --------
Total loans................................ $194,910 $187,301 $325,451 $707,662
======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes construction loans for which $157 million has been committed to a
permanent mortgage loan.
The following table sets forth at December 31, 1997, the dollar amount of
loans due after one year (excluding residential mortgage and consumer loans),
before net items, which have predetermined interest rates and floating or
adjustable interest rates:
<TABLE>
<CAPTION>
FLOATING OR
PREDETERMINED RATES ADJUSTABLE RATES
------------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Multifamily and other real estate loans...... $23,137 $253,426
Construction loans........................... 18,296 201,721
Business loans............................... 2,256 13,916
------- --------
Total........................................ $43,689 $469,063
======= ========
</TABLE>
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<PAGE> 40
LOAN PORTFOLIO COMPOSITION. The following table sets forth certain
information concerning the composition of the loan portfolio of State Savings at
the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------------------------------------------------------
1997 1996 1995 1994
------------------ ------------------ ------------------ ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT
---------- ----- ---------- ----- ---------- ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Real estate -- one- to
four-family............. $1,373,391 60.5% $1,156,596 56.8% $1,003,020 54.7% $ 746,157
Real estate -- multifamily
and other............... 319,677 14.1 350,831 17.2 350,394 19.1 362,315
Real
estate -- construction... 355,678 15.7 354,356 17.4 349,884 19.1 298,619
Consumer (including equity
lines).................. 187,707 8.3 145,215 7.1 99,455 5.4 81,880
Business.................. 32,307 1.4 30,914 1.5 31,352 1.7 14,466
---------- ----- ---------- ----- ---------- ----- ----------
Total Loans............... 2,268,760 100.0% 2,037,912 100.0% 1,834,105 100.0% 1,503,437
===== ===== =====
LESS:
Undisbursed loans in
process................. (155,539) (142,293) (134,910) (148,399)
Unamortized discounts on
purchased loans......... (216) (252) (297) (295)
Deferred net loan
origination and
commitment fees......... (13,091) (13,452) (13,482) (11,191)
Allowance for loan
losses.................. (34,487) (29,702) (30,416) (30,309)
---------- ---------- ---------- ----------
Loans receivable, net..... $2,065,427 $1,852,213 $1,655,000 $1,313,243
========== ========== ========== ==========
<CAPTION>
AT DECEMBER 31
--------------------------
1994 1993
----- ------------------
% AMOUNT %
----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
TYPE OF LOAN:
Real estate -- one- to
four-family............. 49.6% $ 594,808 49.4%
Real estate -- multifamily
and other............... 24.1 342,186 28.4
Real
estate -- construction... 19.9 174,749 14.5
Consumer (including equity
lines).................. 5.4 75,985 6.3
Business.................. 1.0 16,673 1.4
----- ---------- -----
Total Loans............... 100.0% 1,204,401 100.0%
===== =====
LESS:
Undisbursed loans in
process................. (89,294)
Unamortized discounts on
purchased loans......... (452)
Deferred net loan
origination and
commitment fees......... (8,490)
Allowance for loan
losses.................. (28,415)
----------
Loans receivable, net..... $1,077,750
==========
</TABLE>
The above amounts do not include loans available for sale at the dates
indicated. Loans available for sale totaled approximately $47 million at
December 31, 1997; $24 million at December 31, 1996; $41 million at December 31,
1995; $13 million at December 31, 1994; and $107 million at December 31, 1993.
REAL ESTATE LOANS -- ONE- TO FOUR-FAMILY. The primary lending activity of
State Savings is the origination of conventional loans for the acquisition or
construction of one- to four-family residential properties located within the
primary markets of State Savings. Each of such loans is secured by a mortgage or
deed of trust on the underlying real estate and improvements thereon.
OTS and FDIC regulations and Ohio law limit the amount which State Savings
may lend in relationship to the appraised value of the real estate and
improvements thereon at the time of loan origination. In accordance with such
regulations, State Savings makes loans on single-family residences up to 95% of
the value of the real estate improvements (the "Loan-to-Value Ratio" or "LTV").
While State Savings makes loans in excess of a 95% LTV, most of such loans are
either sold in the secondary mortgage market without recourse or insured by a
third party to reduce exposure to a 90% LTV or less. Generally, State Savings
requires private mortgage insurance and/or charges premium interest rates for
loans over 80% LTV.
State Savings offers fixed-rate loans and adjustable-rate mortgage loans
("ARMs") with initial interest rate adjustment periods generally of one year,
three years or five years. The new rate of interest at each adjustment date is
determined by adding a stated margin to an index identified at the time the loan
is originated. The longer the period before adjustment, the higher the rate of
interest to compensate State Savings for the increased exposure to risk
resulting from interest-rate fluctuations during the fixed-rate period. The
maximum adjustment at each adjustment date for one-year ARMs is usually 2%, with
a maximum adjustment of 6% over the term of the loan. Of the total mortgage
loans originated by State Savings during the year ended December 31, 1997, 66%
were ARMs and 34% had fixed rates of interest.
Residential mortgage loans offered by State Savings are usually for terms
of 10 to 30 years. Due to the general long-term nature of an investment in
mortgage loans, such loans could have an adverse effect upon the earnings spread
of any lender if such loans do not reprice as quickly as the lender's cost of
funds. See "STATE SAVINGS COMPANY -- Deposits and Borrowings." To minimize such
effect, State Savings emphasizes the origination of ARMs. In addition,
experience during recent years demonstrates that, as a result of prepayments in
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<PAGE> 41
connection with refinancing and sales of the underlying properties, residential
loans generally remain outstanding for periods which are substantially shorter
than the stated maturity of such loans.
One- to four-family loans constituted approximately $706 million, or 57.2%
of the $1.2 billion of loans originated in the year ended December 31, 1997. At
such date, the nonperforming one- to four-family loans of State Savings equaled
$16.1 million, or 1.2%, of the total $1.4 billion in one- to four-family loans.
See "Delinquent Loans, Nonperforming Assets and Classified Assets" below.
REAL ESTATE -- MULTIFAMILY AND OTHER. State Savings originates loans
secured by other real estate, including multifamily dwellings, land and lots for
single-family homes, land for commercial uses, and office, retail and other
types of facilities.
For improved properties, loans are made primarily on an adjustable-rate
basis, with loan terms generally up to a maximum of 25 years. Such loans are
typically made at a maximum 80% LTV, although a higher LTV is occasionally
approved for an established borrower or one with minimal credit risk. To enable
State Savings to monitor the loans, State Savings requests rent rolls and
financial statements for credits of significant size.
Loans secured by multifamily dwellings and commercial facilities generally
are considered to involve a higher degree of risk than one- to four-family
lending due to the relatively larger loan amounts and effects of general
economic conditions on the successful operation of income-producing properties.
If the cash flow on the property is reduced, for example, as leases are not
obtained or renewed, the borrower's ability to repay may be impaired. State
Savings has endeavored to reduce such risk by evaluating the credit history and
past performance of the borrower, the location of the real estate, the quality
of the management constructing and operating the property, the debt service
ratio, the quality and characteristics of the income stream generated by the
property and appraisals confirming the property's valuation.
For unimproved property, developed building lot loans are generally made to
customers at a maximum LTV of 75%. For home builders, the rate is generally tied
to the Citibank base lending rate and the term is one to two years. For
consumers, the adjustable-rate index is typically the Federal Cost of Funds with
a term of 10 to 15 years. Raw land loans are limited to a 65% loan to value and
are typically short-term credits.
Loans on unimproved real estate are generally considered to be subject to a
higher degree of risk, because the borrower typically depends on a sale of the
property or the later improvement of the property to cover debt service. The
ability to sell or develop unimproved real estate is affected by economic
conditions, government policies, local zoning approvals, access to road, water
and sewer and other factors beyond the control of the borrower. State Savings
reviews the viability of the unimproved real estate for improvement and sale and
evaluates the credit-worthiness of the borrowers for these loans.
Multifamily and other real estate loans constituted approximately $37
million, or 3%, of the $1.2 billion of loans originated in the year ended
December 31, 1997. At such date, the nonperforming other real estate loans of
State Savings equaled $2.8 million, or .88% of the total $320 million in other
real estate loans. See "Delinquent Loans, Nonperforming Assets and Classified
Assets" below. The largest real estate loan outstanding equaled $6.7 million at
December 31, 1997, was secured by a retirement home and was performing in
accordance with its terms.
Federal regulations limit the amount of nonresidential real estate loans
that an association may make to 400% of its capital. At December 31, 1997, each
of SSB, Century Bank and FSB was in compliance with such regulations.
CONSTRUCTION LOANS. State Savings offers residential construction loans
both to owner-occupants and to homebuilders. State Savings also makes
construction loans to persons constructing properties and buildings for
investment purposes, for development of raw land into single or multifamily
building lots and for multifamily and small commercial construction purposes. At
December 31, 1997, a total of $355.7 million, or approximately 15.7%, of total
loans and 12.7% of total assets, consisted of construction loans.
Construction loans generally involve greater underwriting and default risks
than do loans secured by mortgages on existing properties that have completed
structures on them due to the concentration of principal in a limited number of
loans and borrowers and the effects of general economic conditions on real
estate
41
<PAGE> 42
developments, developers, managers and builders. In addition, such loans are
more difficult to evaluate and monitor. Loan funds are advanced upon the
security of the project under construction, which is more difficult to value
before the completion of construction. Moreover, because of the uncertainties
inherent in estimating construction costs, the accurate evaluation of the LTVs
and the total loan funds required to complete a project is difficult. In the
event a default on a construction loan occurs and foreclosure follows, State
Savings would have to take control of the project and attempt either to arrange
for completion of construction or dispose of the unfinished project. Almost all
of State Savings' construction loans are secured by properties in State Savings'
primary market. The economy of such lending areas has been relatively stable
during the three years ended December 31, 1997.
Generally, construction loans have terms ranging from one to 36 months and
rates at 1% to 2% over the published base lending rate of Citibank, N.A.
Permanent residential construction loans and nonresidential construction loans
automatically convert to permanent fixed- or adjustable-rate loans at the end of
the construction period.
Construction loans constituted $372.2 million, or 30.2% of the $1.2 billion
of loans originated in the year ended December 31, 1997. At such date, the
nonperforming construction loans of State Savings equaled $3.2 million, or .90%
of the total $355.7 million in construction loans. See "Delinquent Loans,
Nonperforming Assets and Classified Assets" below. The largest construction loan
commitment equaled $9.6 million at December 31, 1997, was secured by a
condominium development and was performing in accordance with its terms.
CONSUMER LOANS. State Savings makes various types of consumer loans,
including loans made to depositors secured by their savings deposits, automobile
loans, loans secured by second mortgages, home equity lines of credit, credit
cards and unsecured personal loans. At December 31, 1997, consumer loans
constituted 8.3% of State Savings' total loans and 6.7% of total assets.
Consumer loans are generally made at adjustable rates of interest tied to
the base lending rate of Citibank, N.A., or fixed rates for terms of from 90
days to ten years. Consumer loans, particularly consumer loans that are
unsecured or are secured by rapidly depreciating assets such as automobiles, may
entail greater risk than residential loans. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. For second mortgages, amounts due on prior mortgages
have a prior claim. The risk of default on consumer loans increases during
periods of recession, higher unemployment and other adverse economic conditions
that limit the borrower's ability to repay.
Consumer loans constituted approximately $92.3 million, or 7.5% of the $1.2
billion of loans originated in the year ended December 31, 1997. At December 31,
1997, the nonperforming consumer loans of State Savings equaled $1.4 million, or
.75% of the total $187.7 million in consumer loans. See "Delinquent Loans,
Nonperforming Assets and Classified Assets" below.
BUSINESS LOANS. State Savings offers various business loan products,
including lines of credit, term loans, SBA loans, leases and stock loans to
individuals. Such loans are typically secured by business assets, second
mortgages on the borrower's residence, stock of entities other than State
Savings or other collateral. At December 31, 1997, business loans and leases
constituted $32.3 million, or 1.4%, of State Savings' total loans and 1.2% of
total assets.
Business loans are generally made at adjustable rates of interest tied to
the base lending rate of Citibank, N.A., for terms of 90 days to five years.
Business loans generally are underwritten based upon the cash flow projections
of the business, and personal guarantees are usually required. Typically,
business loans involve greater underwriting and default risk than our mortgage
loan products, because loans that are unsecured or secured by rapidly
depreciating assets such as business equipment may not provide an adequate
source of repayment of the outstanding loan balance. If a second mortgage is
foreclosed upon, the first mortgage has a prior claim. Income and expenses,
prior credit history, debt service coverage and management quality are reviewed,
among other pertinent borrower characteristics, when underwriting a business
borrower.
Business loans constituted $26 million, or 2.1%, of the $1.2 billion of
loans originated in the year ended December 31, 1997. At such date, the
non-performing business loans of State Savings totaled $.9 million, or
42
<PAGE> 43
2.9% of the total $32.3 million in business loans. See "Delinquent Loans,
Nonperforming Assets and Classified Assets."
MORTGAGE-BACKED AND RELATED SECURITIES. In the ordinary course of
business, State Savings purchases or creates mortgage-backed securities.
Mortgage-backed securities generally entitle State Savings to receive the cash
flows from an identified pool of mortgages underlying the securities. Freddie
Mac ("FHLMC"), Ginnie Mae ("GNMA") and Fannie Mae ("FNMA") mortgage-backed
securities of State Savings are each guaranteed or insured by the respective
agencies as to principal and interest.
State Savings has also invested significant amounts in collateralized
mortgage obligations ("CMOs"), securities which are backed by pools of
mortgages, that are, in most instances, insured or guaranteed by FNMA or FHLMC.
State Savings has no ownership interest in the mortgages, except to the extent
they serve as collateral. Payment streams from the mortgages serving as
collateral are reconfigured with varying terms and timing of payment to the CMO
investor. Though they can be used for hedging and investment, CMOs can expose
investors to higher risk of loss than direct investments in mortgage-backed
pass-through securities, particularly with respect to price and average life
sensitivity in such securities. The Federal Financial Institutions Examination
Council ("FFIEC") has developed methods of measuring the suitability of CMOs and
other mortgage derivative products intended for financial institution
portfolios. CMOs that do not meet the standards of the FFIEC test are deemed
"high-risk." None of State Savings' CMOs are in the "high-risk" category.
At December 31, 1997, the amortized cost of mortgage-backed and related
securities of State Savings totaled approximately $386.9 million, or 15.46% of
loans receivable, loans available for sale and mortgage-backed and related
securities. Of the total of such securities at December 31, 1997, $375.7 million
were designated as being available for sale. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, the mortgage-backed and related
securities designated as being available for sale are carried on State Savings'
balance sheet at fair value, with unrealized gains or losses carried as an
adjustment to shareholders' equity, net of applicable taxes. The remaining $11.2
million in mortgage-backed and related securities at December 31, 1997, were
designated as held to maturity and, in accordance with SFAS No. 115, are carried
on the balance sheet of State Savings at amortized cost. The estimated fair
value of the $11.2 million in mortgage backed securities held to maturity
approximates amortized cost.
A portion of State Savings' mortgage-backed securities portfolio consists
of adjustable-rate mortgage-backed securities and CMO's as part of its effort to
reduce its interest rate risk. In a period of declining interest rates, State
Savings is subject to prepayment risk on such adjustable-rate mortgage-backed
securities and CMOs. State Savings attempts to mitigate this prepayment risk by
purchasing mortgage-backed securities at or near par. If interest rates rise in
general, the interest rates on the loans backing the mortgage-backed securities
and CMOs will also adjust upward subject to interest rate caps. However, State
Savings is still subject to interest rate risk on such securities if interest
rates rise faster than the 1% to 2% maximum annual interest rate adjustments on
the underlying loans. See "STATE SAVINGS COMPANY -- Deposits and
Borrowings -- Asset/Liability Management."
43
<PAGE> 44
At December 31, 1997, $200 million, or 51.7%, of State Savings'
mortgage-backed and related securities had adjustable rates. Although
adjustable-rate securities generally have a lower yield at the time of
origination than fixed-rate securities, the interest rate risk associated with
adjustable-rate securities is lower. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Asset/Liability Management."
The following table sets forth certain information regarding State Savings'
mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
------------------------------------------------ ----------------------
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED AMORTIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE COST GAINS
--------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and related
securities held to maturity:
FHLMC participation
certificates.................. $ -- $ -- $ -- $ -- $ -- $ --
FNMA participation
certificates.................. -- -- -- -- -- --
GNMA participation
certificates.................. -- -- -- -- -- --
CMOs............................ 4,996 -- (134) 4,862 4,996 --
Other mortgage-backed
securities.................... 6,166 $ 66 -- 6,232 7,487 $ 82
-------- ------ ------- -------- -------- ------
Subtotal.................. 11,162 66 (134) 11,094 12,483 82
Mortgage-backed and related
securities available for sale:
FHLMC participation
certificates.................. 22,740 56 (153) 22,643 29,090 135
FNMA participation
certificates.................. 30,211 177 (112) 30,276 36,511 83
GNMA participation
certificates.................. 67,164 3,057 -- 70,221 47,378 2,330
CMOs............................ 214,226 1,060 (894) 214,392 171,036 620
Other mortgage-backed
securities.................... 41,386 -- -- 41,386 55,412 --
-------- ------ ------- -------- -------- ------
Subtotal.................. 375,727 4,350 (1,159) 378,918 339,427 3,168
-------- ------ ------- -------- -------- ------
Total......................... $386,889 $4,416 $(1,293) $390,012 $351,910 $3,250
======== ====== ======= ======== ======== ======
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
----------------------- ------------------------------------------------
GROSS GROSS GROSS
UNREALIZED ESTIMATED AMORTIZED UNREALIZED UNREALIZED ESTIMATED
LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
---------- ---------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and related
securities held to maturity:
FHLMC participation
certificates.................. $ -- $ -- $ -- $ -- $ -- $ --
FNMA participation
certificates.................. -- -- -- -- -- --
GNMA participation
certificates.................. -- -- -- -- -- --
CMOs............................ (181) 4,815 4,996 -- (101) 4,895
Other mortgage-backed
securities.................... -- 7,569 8,742 $ 119 -- 8,861
------- -------- -------- ------ ------- --------
Subtotal.................. (181) 12,384 13,738 119 (101) 13,756
Mortgage-backed and related
securities available for sale:
FHLMC participation
certificates.................. (735) 28,490 35,520 293 (88) 35,725
FNMA participation
certificates.................. (944) 35,650 43,605 459 (295) 43,769
GNMA participation
certificates.................. -- 49,708 107,993 5,314 -- 113,307
CMOs............................ (2,742) 168,914 183,214 1,557 (1,292) 183,479
Other mortgage-backed
securities.................... -- 55,412 -- -- -- --
------- -------- -------- ------ ------- --------
Subtotal.................. (4,421) 338,174 370,332 7,623 (1,675) 376,280
------- -------- -------- ------ ------- --------
Total......................... $(4,602) $350,558 $384,070 $7,742 $(1,776) $390,036
======= ======== ======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
------------------------------------------------- ------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and related
securities held to
maturity:
FHLMC participation
certificates........... $ 14,925 $ 69 $ (193) $ 14,801 $ 84,308 $1,069 $ (250) $ 85,127
FNMA participation
certificates........... 24,469 66 (549) 23,986 71,490 1,303 (175) 72,618
GNMA participation
certificates........... 120,133 1,354 (3,448) 118,039 73,372 5,218 78,590
CMOs..................... 193,302 116 (11,790) 181,628 157,315 907 (124) 158,098
Other mortgage-backed
securities............. 9,748 134 9,882 12,728 175 12,903
-------- ------ -------- -------- -------- ------ ------- --------
Subtotal........... 362,577 1,739 (15,980) 348,336 399,213 8,672 (549) 407,336
Mortgage-backed and related
securities available for
sale:
FHLMC participation
certificates........... 27,173 -- (2,935) 24,238 -- -- -- --
FNMA participation
certificates........... 27,217 -- (3,210) 24,007 -- -- -- --
GNMA participation
certificates........... -- -- -- -- -- -- -- --
CMOs..................... 3,908 -- (58) 3,850 -- -- -- --
Other mortgage-backed
securities............. -- -- -- -- -- -- -- --
-------- ------ -------- -------- -------- ------ ------- --------
Subtotal........... 58,298 0 (6,203) 52,095 0 0 0 0
-------- ------ -------- -------- -------- ------ ------- --------
Total.................. $420,875 $1,739 $(22,183) $400,431 $399,213 $8,672 $ (549) $407,336
======== ====== ======== ======== ======== ====== ======= ========
</TABLE>
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at December 31, 1997 and
1996, by contractual terms to maturity are shown below. Actual maturities will
differ from contractual maturities because borrowers generally may prepay
obligations without
44
<PAGE> 45
prepayment penalties. Also, the timing of cash flows will be affected by
management's intent to sell securities designated as available for sale under
certain economic conditions.
<TABLE>
<CAPTION>
AMORTIZED COST AT
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Due within one year......................................... $ 966
Due after one through three years........................... 35,184
Due after three through five years.......................... 1,078
Due after five through ten years............................ 22,621
Due after ten through twenty years.......................... 73,433
Due after twenty years...................................... 253,607
--------
Total:...................................................... $386,889
========
</TABLE>
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including commissioned loan originators, calls to local
realtors, loan brokers, continuing business with depositors, other borrowers and
real estate developers, solicitations by the officers and lending staff of State
Savings and walk-in customers.
Loan applications for permanent mortgage loans are taken by loan personnel.
State Savings generally obtains a credit report, verification of employment and
other documentation concerning the credit worthiness of the borrower. Each
appraisal of the fair market value of the real estate which will be used as
security for the loan is generally prepared by an independent fee appraiser
approved by the Boards of Directors of State Savings. An environmental study is
conducted only if the appraiser or management has reason to believe that an
environmental problem may exist.
For multifamily and nonresidential mortgage loans, a personal guarantee is
generally required, unless other underwriting considerations merit otherwise.
State Savings also obtains information with respect to prior projects completed
by the borrower. Upon the completion of the appraisal and the receipt of
information on the borrower, the application for a loan is submitted either to a
Loan Committee or its designees or the Boards of Directors of State Savings for
approval or denial.
If a mortgage loan application is approved, a title insurance policy or
title report is obtained on the real estate which will secure the mortgage loan.
Borrowers are required to carry fire and casualty insurance and flood insurance,
if applicable, and to name the State Savings affiliate institution as loss
payee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that the building plans, construction
specifications and estimates of construction costs are analyzed. State Savings
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Small business loans are underwritten on the basis of the borrower's
historic income and expenses, projections of future cash flows, ability to repay
the loan and credit history, as well as on the value of the collateral, if any.
Most State Savings loans carry provisions that the entire balance of the
loan is due upon sale of the property securing the loan.
LOAN ORIGINATIONS, PURCHASES AND SALES. State Savings has been actively
originating new 30-year, 20-year and 15-year fixed-rate and adjustable-rate
loans. Virtually all residential fixed-rate loans made by State Savings
(excluding second mortgages) are originated on documentation that will permit a
possible sale of such loans to the FNMA, FHLMC or other secondary mortgage
market participants. When mortgage loans are sold to FNMA, FHLMC or other
secondary mortgage market participants, State Savings either retains the
servicing on such loans by collecting monthly payments of principal and interest
and forwarding such payments to the investor or other secondary mortgage market
participants, net of a servicing fee, or sells both the loan and its servicing
45
<PAGE> 46
into the secondary market. Fixed-rate loans not sold in the secondary market and
generally all of the ARMs originated by State Savings are held in State Savings'
portfolio.
Management sold $273 million of whole loans during 1997, as compared to
sales of $333 million of whole loans in 1996. Management believes secondary
market activities will increase if interest rates decline.
From time to time, State Savings sells participation interests in mortgage
loans originated by State Savings or purchases participation interests in loans
originated by other lenders. During the fiscal years ended December 31, 1997,
1996 and 1995, State Savings sold participations in loans totaling $3.3 million,
$.7 million and $2.6 million, respectively. State Savings held whole loans as
well as participation interests in loans originated by other lenders of
approximately $22.0 million at December 31, 1997; $24.6 million at December 31,
1996; and $27.4 million at December 31, 1995. Loans in which State Savings
purchases participation interests must meet or exceed the underwriting standards
for the loans which State Savings originates.
The following table sets forth certain information in respect of loan
originations, participations and sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
LOANS ORIGINATED: AMOUNT % AMOUNT % AMOUNT %
- ----------------- ---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate -- one- to
four-family................ $ 705,733 57.25% $ 644,001 57.18% $ 685,442 62.23%
Real estate -- multifamily and
other...................... 36,550 2.97 47,930 4.25 53,046 4.82
Real estate -- construction... 372,236 30.19 338,303 30.04 298,485 27.10
Consumer...................... 92,271 7.48 71,894 6.38 42,972 3.90
Business...................... 26,021 2.11 24,198 2.15 21,471 1.95
---------- ------ ---------- ------ ---------- ------
Total loans
originated.......... $1,232,811 100.00% $1,126,326 100.00% $1,101,416 100.00%
---------- ====== ---------- ====== ---------- ======
Loans and mortgage-backed
securities purchased:
Loans......................... 9,445 0 18,463
Mortgage-backed securities.... 131,482 173,744 222,426
---------- ---------- ----------
Total purchases....... 140,927 173,744 240,889
---------- ---------- ----------
Loans and mortgage-backed
securities sold:
Loans......................... (273,038) (332,867) (357,971)
Participations................ (3,300) (700) (2,600)
Mortgage-backed securities.... (35,822) (144,993) (211,067)
---------- ---------- ----------
Total sales........... (312,160) (478,560) (571,638)
---------- ---------- ----------
Principal Repayments:
Loans......................... (712,087) (606,111) (400,720)
Mortgage-backed securities.... (60,681) (60,911) (48,164)
---------- ---------- ----------
Total repayments...... (772,768) (667,022) (448,884)
Increase (decrease) in other
items, net.................... (17,634) (6,594) 11,089
---------- ---------- ----------
Net increase (decrease)......... $ 271,176 $ 147,894 $ 332,872
========== ========== ==========
</TABLE>
FEDERAL LENDING LIMIT. OTS and FDIC regulations impose a lending limit on
the aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based capital
purposes plus any loan reserves not already included in total capital (the
"Lending Limit Capital"). A savings association may lend to one borrower an
additional amount not to exceed 10% of the association's Lending Limit Capital,
if the additional amount is fully secured by certain forms of "readily
marketable
46
<PAGE> 47
collateral." Real estate is not considered "readily marketable collateral." In
applying this limit, the regulations require that loans to certain related or
affiliated borrowers be aggregated.
Based on the 15% limit, each insured institution was subject to the
following lending limits as of December 31, 1997.
SSB........................... $25.4 million
Century....................... $ 3.0 million
FSB........................... $ 5.2 million
None of SSB, Century or FSB had outstanding loans in excess of such limits at
December 31, 1997.
LOAN ORIGINATION AND OTHER FEES. State Savings realizes loan origination
fee and other fee income from its lending activities and also realizes income
from late payment charges, default interest, application fees, and fees for
other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, State Savings attempts to
cause the deficiency to be cured by contacting the borrower. In most cases,
deficiencies are cured promptly.
State Savings attempts to minimize loan delinquencies through the
assessment of late charges and interest rate increases and adherence to its
established collection procedures. After a mortgage loan payment is 15 days
delinquent, a late charge of 5% of the amount of the payment is usually
assessed, and State Savings will contact the borrower by mail or phone to
request payment. In certain limited instances, State Savings may modify the loan
or grant a limited moratorium on loan payments to enable the borrower to
reorganize his or her financial affairs. If the loan continues in a delinquent
status for 90 days or more, State Savings generally will initiate foreclosure
proceedings. If a loan is delinquent for 30 days, the rate of interest is
generally increased by 3% per annum until the delinquency is cured unless the
loan is sold in the secondary market.
Real estate acquired by State Savings as a result of foreclosure or by deed
in lieu of foreclosure is classified as "real estate owned" until it is sold.
When property is so acquired, it is recorded at the lower of the loan's unpaid
principal balance or fair value at the date of foreclosure less estimated
selling expenses. Periodically, real estate owned is reviewed to ensure that
fair value less estimated costs to sell is not less than carrying value, and any
allowance resulting therefrom is charged to earnings as a provision for losses
on real estate acquired through foreclosure. Costs to develop or improve real
estate are capitalized; costs of holding real estate are expensed.
The following table reflects the amount of loans in delinquent status as of
December 31, 1997:
<TABLE>
<CAPTION>
30-59 DAYS 60-89 DAYS 90 DAYS OR MORE
----------------- ----------------------- -----------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------ ------- --------- ---------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family real estate...... 525 $29,505 132 $ 7,361 241 $16,087
Multifamily and other real estate.... 32 8,811 12 10,839 16 2,801
Construction......................... 37 9,795 8 1,770 15 3,152
Consumer............................. 364 2,597 199 929 258 1,441
Business............................. 41 3,083 27 903 36 945
--- ------- --- ------- --- -------
Total...................... 999 $53,791 378 $21,802 566 $24,426
=== ======= === ======= === =======
Percentage of total to total loans... 2.37% .96% 1.08%
======= ======= =======
</TABLE>
All delinquent loans are reviewed on a regular basis and are placed on
nonaccrual status when the loans are 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded
47
<PAGE> 48
as interest income, depending on the assessment of the ultimate collectibility
of the loan. The amount of interest which would have been earned on non-accruing
loans, had such loans been current, for the year ended December 31, 1997, was
approximately $2 million. State Savings received interest income of
approximately $105,000 with respect to such loans during the year ended December
31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual
basis(1)
One- to four-family real estate........ $16,087 $13,282 $12,165 $ 6,247 $ 6,637
Multi family and other real estate..... 2,801 6,338(4) 5,226 1,847 1,502
Construction........................... 3,152 9,324(3) 2,354 4,789 6,716
Consumer............................... 1,441 949 515 175 126
Business............................... 945 909 1,276 178 576
------- ------- ------- ------- -------
Total nonaccrual loans................... $24,426 $30,802 $21,536 $13,236 $15,557
------- ------- ------- ------- -------
Other nonperforming assets (2)........... 3,425 4,344 5,938 6,087 7,947
------- ------- ------- ------- -------
Total nonperforming assets............... $27,851 $35,146 $27,474 $19,323 $23,504
======= ======= ======= ======= =======
Total nonaccrual loans as a percentage of
total loans............................ 1.08% 1.51% 1.17% .88% 1.29%
======= ======= ======= ======= =======
Total nonperforming assets as a
percentage of loans plus REO........... 1.23% 1.72% 1.49% 1.28% 1.94%
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Nonaccrual loans include loans 90 days or more past due or loans 90 days or
more past maturity that may be current on interest payments and loans that
meet nonaccrual criteria as established by FASB and/or regulatory
authorities. Payments received are either applied to the outstanding
principal balance or recorded as interest income, depending upon
management's assessment of the collectibility of the loan.
(2) Consists of real estate acquired through foreclosure which is carried at the
lower of cost or fair value less estimated selling expenses.
(3) The increase in 1996 primarily consists of a multi family affordable housing
loan for $3.2 million and a $1.8 million multi family affordable housing
loan which was past maturity, but current on payments. The amount
outstanding on the $3.2 million credit has been reduced to $2 million, of
which $1.6 million was performing at December 31, 1997. The $1.8 million
credit is now performing and has a balance of $845,000 at December 31, 1997.
(4) Increase in 1996 is due to a $1.2 million hotel loan which was past
maturity, but current on payments. The loan is now performing and the
maturity date has been extended.
At December 31, 1997, State Savings had eight restructured loans with a net
balance of $1.6 million.
Regulations of the OTS, the FDIC and the Division require that each
institution classify its own assets on a regular basis. Problem assets are
classified as "substandard," "doubtful" or "loss." "Substandard" assets have one
or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard" assets,
with the additional characteristics that (1) the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and (2) there is a high possibility of loss. An asset
classified "loss" is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. The regulations
also contain a "special mention" category, consisting of assets which do not
currently expose an institution to a sufficient degree of risk to warrant
classification but which possess credit deficiencies or potential weaknesses
deserving management's close attention.
Generally, State Savings classifies as "substandard" all loans that are
delinquent more than 90 days, real estate owned ("REO"), loans to facilitate
workouts and the sale of REO and other loans where the credit problems of the
borrowers have caused management to have doubts as to the ability of the
borrowers to comply with present loan repayment terms.
48
<PAGE> 49
The aggregate amount of State Savings' classified assets at December 31,
1997, was as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
---------------
(IN THOUSANDS)
<S> <C>
Special mention............................... $36,055
Substandard................................... 40,456
Doubtful...................................... --
Loss.......................................... --
-------
Total classified assets....................... $76,511
=======
</TABLE>
Federal examiners are authorized to classify an association's assets. If an
association does not agree with an examiner's classification of an asset, it may
appeal this determination to the Regional Director of the OTS or FDIC as
appropriate. State Savings had no disagreements with the examiners regarding the
classification of assets at the time of the last examination.
OTS and FDIC regulations require that State Savings establish prudent
general allowances for loan losses. If an asset, or portion thereof, is
classified as loss, the association must either establish specific allowances
for losses in the amount of 100% of the portion of the asset classified loss, or
charge off such amount.
ALLOWANCE FOR LOAN LOSSES. The Boards of Directors of SSB, Century and FSB
review on a quarterly basis the allowances for loan losses as they relate to a
number of relevant factors, including, but not limited to, trends in the level
of nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending areas, past loss experience, possible losses
arising from specific problem assets and loan concentrations by collateral type
and to single borrowers. To a lesser extent, management considers loan
underwriting, off balance sheet items, loan renewals and modifications and
management expertise and collection practices. While the Boards of Directors and
management believe that they use the best information available to determine the
allowances for loan losses, unforeseen market conditions could result in
adjustments, and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. At December 31, 1997, State Savings' allowance for loan losses
totaled $34.5 million.
The following table sets forth an analysis of the allowance for loan losses
of State Savings for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period... $29,702 $30,416 $30,309 $28,415 $22,684
Charge-offs:
One- to four-family real
estate...................... (235) (89) (175) (130) (271)
Multifamily and other real
estate...................... (2,966) (697) (2,343) (968) (5,033)
Construction................... -- (147) (69) -- (44)
Consumer....................... (811) (641) (533) (658) (667)
Business....................... (129) (815) (313) (403) (61)
------- ------- ------- ------- -------
Total.................. (4,141) (2,389) (3,433) (2,159) (6,076)
Total recoveries................. 2,323 157 2,218 1,803 2,712
------- ------- ------- ------- -------
Net charge-offs.................. (1,818) (2,232) (1,215) (356) (3,364)
Provision for loan losses........ 6,603 1,518 1,322 2,250 9,095
------- ------- ------- ------- -------
Balance at end of period......... $34,487 $29,702 $30,416 $30,309 $28,415
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding...... 0.09% 0.13% 0.08% .03% .30%
======= ======= ======= ======= =======
Allowance for loan losses to
total loans.................... 1.52% 1.46% 1.66% 2.02% 2.36%
======= ======= ======= ======= =======
</TABLE>
49
<PAGE> 50
The following table provides an allocation of the allowance for possible
loan losses of State Savings as of each of the following dates:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------- ---------------------- ---------------------- -------
ALLOWANCE ALLOWANCE ALLOWANCE
AS % OF AS % OF AS % OF
AMOUNT LOAN BALANCE AMOUNT LOAN BALANCE AMOUNT LOAN BALANCE AMOUNT
------- ------------ ------- ------------ ------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Specific Allowances:
All real estate.......... $ 2,557 0.12% $ 3,956 0.21% $ 4,008 0.24% $ 4,531
Consumer................. 77 0.04% -- 0.00% 5 0.01% 12
Business................. 51 0.16% 43 0.14% 740 2.36% 543
------- ---- ------- ---- ------- ---- -------
Total specific..... 2,685 0.12% 3,999 0.20% 4,753 0.26% 5,086
General Allowances:
All real estate.......... 29,671 1.45% 23,831 1.28% 24,527 1.44% 24,153
Consumer................. 1,664 0.89% 1,582 1.09% 1,136 1.14% 1,070
Business................. 467 1.45% 290 0.94% -- 0.00% --
------- ---- ------- ---- ------- ---- -------
Total General...... 31,802 1.40% 25,703 1.26% 25,663 1.40% 25,223
------- ---- ------- ---- ------- ---- -------
Total Available
Allowances............... $34,487 1.52% $29,702 1.46% $30,416 1.66% $30,309
======= ==== ======= ==== ======= ==== =======
<CAPTION>
DECEMBER 31
-------------------------------------
1994 1993
------------ ----------------------
ALLOWANCE ALLOWANCE
AS % OF AS % OF
LOAN BALANCE AMOUNT LOAN BALANCE
------------ ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Specific Allowances:
All real estate.......... 0.32% $ 3,993 0.36%
Consumer................. 0.01% 3 0.00%
Business................. 3.75% 158 0.94%
---- ------- ----
Total specific..... 0.34% 4,154 0.35%
General Allowances:
All real estate.......... 1.72% 23,304 2.10%
Consumer................. 1.31% 957 1.26%
Business................. 0.00% -- 0.00%
---- ------- ----
Total General...... 1.68% 24,261 2.01%
---- ------- ----
Total Available
Allowances............... 2.02% $28,415 2.36%
==== ======= ====
</TABLE>
INVESTMENT ACTIVITIES
FDIC and OTS regulations require that SSB, Century and FSB maintain a
minimum amount of liquid assets. Such assets may be invested in U.S. Treasury
obligations, securities of various federal agencies, certificates of deposit at
insured banks, bankers' acceptances and federal funds. State Savings is also
permitted to make investments in certain commercial paper, corporate debt
securities rated in one of the four highest rating categories by one or more
nationally recognized statistical rating organizations, and mutual funds, as
well as other investments permitted by federal regulations. In recent periods,
State Savings has maintained liquid assets on a monthly average basis at a ratio
between 22.4% and 27.2% of total assets. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF STATE
SAVINGS -- Liquidity and Market Risk."
The following table presents the amortized cost and fair values of the
investment securities of State Savings, including securities designated as
available for sale, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
----------------------------------------------- -----------------------------------------------
GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity
Municipals and other
investments.......... $ 195 -- -- $ 195 $ 200 -- -- $ 200
Available for Sale
U.S. Government and
governmental agency
obligations (incl.
SBA's)............... 66,100 $ 228 $(37) 66,291 53,002 $ 59 $(26) 53,035
FHLMC common stock..... 132 5,511 -- 5,643 156 4,242 -- 4,398
------- ------ ---- ------- ------- ------ ---- -------
Total................ 66,232 5,739 (37) 71,934 53,158 4,301 (26) 57,433
------- ------ ---- ------- ------- ------ ---- -------
Total.................... $66,427 $5,739 ($37) $72,129 $53,358 $4,301 ($26) $57,633
======= ====== ==== ======= ======= ====== ==== =======
<CAPTION>
AT DECEMBER 31, 1995
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held to maturity
Municipals and other
investments.......... $ 250 -- $ 250
Available for Sale
U.S. Government and
governmental agency
obligations (incl.
SBA's)............... 104,342 $ 496 -- 104,838
FHLMC common stock..... 160 3,259 -- 3,419
-------- ------ -- --------
Total................ 104,502 3,755 -- 108,257
-------- ------ -- --------
Total.................... $104,752 $3,755 -- $108,507
======== ====== == ========
</TABLE>
50
<PAGE> 51
The following table presents the contractual maturities or terms to
repricing of U.S. Government and agency obligations and municipal bonds at
amortized cost and the weighted-average yields at December 31, 1997. At December
31, 1997, State Savings owned no investment securities with maturities of more
than ten years.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------------------------
MATURING WITHIN MATURING WITHIN ONE MATURING WITHIN FIVE
ONE YEAR TO FIVE YEARS TO TEN YEARS TOTAL
------------------- ------------------- --------------------- -------------------
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST COST
--------- ------- --------- ------- ---------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity............. $ 195 6.40% -- -- -- -- $ 195 6.40%
Available for Sale........... 26,786 6.57 $34,208 6.45% $5,106 6.51% 66,100 6.50
------- ---- ------- ----- ------ ----- ------- ----
Total:....................... $26,981 6.57% $34,208 6.45% $5,106 6.51% $66,295 6.50%
======= ==== ======= ===== ====== ===== ======= ====
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of State
Savings' funds for use in lending and other investment activities. In addition
to deposits, State Savings derives funds from interest payments and principal
repayments on loans and mortgage-backed securities, advances from the FHLB,
reverse repurchase agreements, income on earning assets, service charges and
gains on the sale of assets. Loan payments are a relatively stable source of
funds, while deposit inflows and outflows fluctuate more in response to general
interest rates and money market conditions. FHLB advances and reverse repurchase
agreements are used on a short-term basis to compensate for reductions in the
availability of funds from other sources. FHLB advances are also used on a
longer term basis for general business purposes.
DEPOSITS. Historically, deposits have been attracted principally from
within State Savings' primary market areas through the offering of a broad
selection of deposit instruments, including negotiable order of withdrawal
("NOW") accounts, regular passbook savings accounts, term certificate accounts
and individual retirement accounts.
Interest rates paid, maturity terms, service fees and withdrawal penalties
for the various types of accounts are established periodically by management of
State Savings based on State Savings' liquidity requirements, growth goals and
interest rates paid by competitors. In a rising interest rate environment, State
Savings attempts to manage its interest rate risk by lengthening the term to
maturity or repricing of more of its deposit liabilities.
51
<PAGE> 52
At December 31, 1997, State Savings' certificates of deposit totaled $1.3
billion, or 57.5% of total deposits. Of such amount, approximately $847.5
million in certificates of deposit mature within one year. Based on past
experience and State Savings' prevailing pricing strategies, management believes
that a substantial percentage of such certificates will renew with State Savings
at maturity. If there is a significant deviation from historical experience,
State Savings can use borrowings from the FHLB as an alternative to this source
of funds. The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by State Savings at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
DESCRIPTION RATE AMOUNT PERCENT RATE AMOUNT PERCENT RATE AMOUNT PERCENT
- ----------- ------- ---------- ------- ------- ---------- ------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook/Statement.... 3.08% $ 153,506 6.6% 3.11% $ 185,562 8.8% 3.26% $ 213,564 10.9%
NOW and Demand........ 1.20 220,816 9.5 1.24 189,283 9.0 1.38 160,591 8.2
Market Access......... 4.82 614,753 26.4 4.70 537,470 25.6 4.66 485,047 24.8
---- ---------- ----- ---- ---------- ----- ---- ---------- -----
3.74 989,075 42.5 3.66 912,315 43.4 3.70 859,202 43.9
---- ---------- ----- ---- ---------- ----- ---- ---------- -----
Certificates of
Deposit
1 year or less........ 5.62 429,115 18.4 5.34 366,056 17.4 5.65 353,762 18.1
1 to 3 1/2............ 5.98 495,102 21.2 5.97 449,464 21.3 6.18 444,373 22.7
4 or more years....... 6.24 144,188 6.2 6.42 127,825 6.1 6.38 119,595 6.1
Negotiated............ 5.18 38,919 1.6 4.36 26,768 1.3 4.54 17,930 0.9
IRA (1-10 years)...... 6.25 236,519 10.1 6.19 220,245 10.5 6.56 161,082 8.3
---- ---------- ----- ---- ---------- ----- ---- ---------- -----
5.92 1,343,843 57.5 5.83 1,190,358 56.6 6.06 1,096,742 56.1
---- ---------- ----- ---- ---------- ----- ---- ---------- -----
5.00% $2,332,918 100.0% 4.89% $2,102,673 100.0% 5.02% $1,955,944 100.0%
==== ========== ===== ==== ========== ===== ==== ========== =====
</TABLE>
The following table sets forth rate and maturity information for State
Savings' certificates of deposit as of December 31, 1997.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Less than 1 year............................... $ 847,536
1 to 2 years................................... 249,372
2 to 3 years................................... 138,955
3 to 4 years................................... 41,092
4 to 5 years................................... 47,377
Thereafter..................................... 19,511
----------
$1,343,843
==========
</TABLE>
The following table presents the amount of State Savings' time deposits of
$100,000 or more, by the time remaining until maturity at December 31, 1997:
<TABLE>
<CAPTION>
AT DECEMBER 31,
MATURITY 1997
- -------- ---------------
(IN THOUSANDS)
<S> <C>
Three months or less.......................... $ 50,714
Over 3 months to 6 months..................... 39,734
Over 6 months to 12 months.................... 57,020
Over 12 months................................ 73,070
--------
Total......................................... $220,538
========
</TABLE>
52
<PAGE> 53
BORROWINGS. At December 31, 1997, State Savings' only borrowings were FHLB
advances. The following table sets forth the maximum amount of State Savings'
FHLB advances outstanding at any month end, during the periods shown, and the
average aggregate balances of FHLB advances for such periods.
<TABLE>
<CAPTION>
DURING THE YEAR ENDING
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount of FHLB advances............................ $246,762 $248,903 $249,557
Average amount of FHLB advances outstanding during
period................................................... 200,169 216,368 228,957
Weighted average interest cost of FHLB advances during
period based on month-end balances....................... 6.14% 6.44% 6.31%
</TABLE>
The following table sets forth certain information as to State Savings'
FHLB advances at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances.............................. $146,821 $199,732 $249,557
</TABLE>
ASSET/LIABILITY MANAGEMENT
State Savings' earnings depend primarily upon its net interest income,
which is the difference between its interest income on its interest-earning
assets, such as mortgage loans, investment securities and mortgage-backed and
related securities, and its interest expense paid on its interest-bearing
liabilities, consisting of deposits and borrowings. As market interest rates
change, asset yields and liability costs do not change simultaneously. Due to
maturity, repricing and timing differences of interest-earning assets and
interest-bearing liabilities, earnings will be affected differently under
various interest rate scenarios. State Savings has sought to limit these net
earnings fluctuations and manage interest rate risk by originating
adjustable-rate loans and purchasing relatively short-term and variable-rate
investments and securities.
The following table sets forth certain information relating to State
Saving's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the years indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years presented. Average
balances are derived from month-end balances, which include non-accruing loans
in the loan portfolio, net of the allowance for loan losses, deferred loan fees,
loan discounts and loans in process. Management does not believe that the use of
month-end balances instead of daily balances has caused any material differences
in the information presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable......... $1,989,257 $176,227 8.86% $1,785,257 $156,196 8.75% $1,551,145 $135,552 8.74%
Available for sale
securities............. 430,437 28,695 6.67 459,763 31,580 6.87 119,885 8,161 6.81
Held to maturity
securities............. 158,624 9,984 6.29 127,200 9,747 7.66 529,382 35,976 6.80
Other.................... 17,303 1,213 7.01 15,969 1,105 6.92 13,427 872 6.49
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest-earning
assets................... $2,595,621 $216,119 8.33% $2,388,189 $198,628 8.32% $2,213,839 $180,561 8.16%
========== ======== ===== ========== ======== ===== ========== ======== =====
</TABLE>
(continued
on next page)
53
<PAGE> 54
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 - (CONTINUED)
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS) -- (CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
liabilities:
Passbook/statement
accounts............... $ 168,438 $ 4,549 2.70% $ 200,546 $ 5,306 2.65% $ 263,437 $ 8,872 3.37%
Demand deposit
accounts............... 98,942 -- -- 75,300 -- -- 64,037 -- --
NOW accounts............. 99,168 2,823 2.85 94,187 2,783 2.95 86,181 2,013 2.34
Market access accounts... 575,667 27,735 4.82 519,664 24,060 4.63 342,685 16,125 4.71
Certificates of
deposit................ 1,256,155 74,120 5.90 1,124,387 66,209 5.89 1,086,760 65,940 6.07
FHLB advances............ 200,169 12,281 6.14 216,368 13,926 6.44 228,957 14,440 6.31
Other borrowings......... 740 43 5.81 1,129 67 5.93 2,735 116 4.24
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest-bearing
liabilities.............. $2,399,279 $121,551 5.07% $2,231,581 $112,351 5.03% $2,074,792 $107,506 5.18%
========== ======== ===== ========== ======== ===== ========== ======== =====
Net interest
income/Interest rate
spread................. $ 94,568 3.26% $ 86,277 3.29% $ 73,055 2.98%
======== ===== ======== ===== ======== =====
Net interest margin (net
interest income as a
percent of average
interest-earning
assets)................ 3.64% 3.61% 3.30%
===== ===== =====
Interest-bearing
liabilities to interest
earning assets........... 92.44% 93.44% 93.72%
===== ===== =====
</TABLE>
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected State Savings' interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, are shown in the column titled "Mix."
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------------------- ------------------------------------------
VOLUME YIELD/RATE MIX TOTAL VOLUME YIELD/RATE MIX TOTAL
------- ---------- ----- ------- -------- ---------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans receivable......................... $17,850 $ 1,964 $ 217 $20,031 $ 20,461 $ 155 $ 28 $ 20,644
Available for sale securities............ (2,015) (920) 50 (2,885) 23,146 72 201 23,419
Held to maturity securities.............. 2,407 (1,743) (427) 237 (27,348) 4,553 (3,434) (26,229)
Other.................................... 92 14 2 108 165 58 10 233
------- ------- ----- ------- -------- ------- ------- --------
Total Interest Income Change............. 18,334 (685) (158) 17,491 16,424 4,838 (3,195) 18,067
------- ------- ----- ------- -------- ------- ------- --------
Increase (decrease) in Interest Expense:
Passbook/Statement accounts.............. (851) 100 (6) (757) (2,119) (1,897) 450 (3,566)
NOW accounts............................. 147 (94) (13) 40 187 526 57 770
Market access accounts................... 2,593 987 95 3,675 8,336 (274) (127) 7,935
Certificates of deposit.................. 7,761 112 38 7,911 2,284 (1,956) (59) 269
FHLB advances............................ (1,043) (649) 47 (1,645) (794) 298 (18) (514)
Other borrowings......................... (23) (1) 0 (24) (68) 46 (27) (49)
------- ------- ----- ------- -------- ------- ------- --------
Total interest expense change............ 8,584 455 161 9,200 7,826 (3,257) 276 4,845
------- ------- ----- ------- -------- ------- ------- --------
Increase (decrease) in net interest
income................................. $ 9,750 $(1,140) $(319) $ 8,291 $ 8,598 $ 8,095 $(3,471) $ 13,222
======= ======= ===== ======= ======== ======= ======= ========
</TABLE>
State Savings' interest rate spread is the principal determinant of income.
The interest rate spread and, therefore, net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term or cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. The
management and Boards of Directors of SSB, FSB and Century attempt to manage the
exposure to interest rate
54
<PAGE> 55
risk in a manner to maintain the projected annual percentage change in net
interest income and the projected change in the market value of portfolio equity
(the "MVPE") within the limits established by the respective Boards of
Directors, assuming a permanent and instantaneous parallel shift in interest
rates.
To monitor its interest rate risk, State Savings reviews reports produced
by Bear Stearns & Co. Inc. from data provided by State Savings. These reports
outline the projected change in MVPE and net interest income given various rate
shock scenarios. Though not currently subject to any interest rate risk
regulation of the FDIC, State Savings believes the interest rate risk analysis
provided by Bear Stearns is a key element in developing an appropriate interest
rate risk strategy for the institution.
The MVPE should be viewed as the discounted present value of the difference
between incoming cash flows on interest-earning and other assets and outgoing
cash flows on interest-bearing liabilities. The discounted cash flow model used
by Bear Stearns attempts to quantify interest rate risk as the change in the
MVPE which would result from an instantaneous and parallel 100, 200 and 300
basis point (100 basis points equals 1%) change in market interest rates.
The following table shows the State Savings' estimated MVPE sensitivity
profile as of December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
RATE SHOCK BOARD LIMIT % OF CHANGE $ CHANGE IN MVPE % CHANGE IN MVPE
---------- ----------------------- ---------------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+300................. -40.00% $(68,199) -25.13%
+200................. -20.00 (40,639) -14.98
+100................. -15.00 (23,174) -8.54
0
- -100................. -15.00 4,001 1.47
- -200................. -20.00 12,665 4.67
- -300................. -40.00 29,642 10.92
</TABLE>
As illustrated in the table, MVPE is more sensitive to rising rates than
declining rates. Such differences in sensitivity occur principally because of a
mismatch in repricing opportunities of the assets and liabilities. The
adjustable-rate assets (loans) have reset dates in most cases that are one year
or longer and are often indexed to a lagging indicator, whereas 42.5% of the
liabilities (deposits) have the ability to be repriced immediately.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the MVPE approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
In the event that interest rates rise, the net interest income of State
Savings would be negatively impacted in year one; however, year two would show a
marked improvement as the lagging assets began to reprice upwards.
The following table sets forth at the dates indicated the weighted average
yields on State Savings' interest-earning assets, the weighted average interest
rates on interest-bearing liabilities, the interest rate spread and the net
interest margin on the interest-earning assets.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted average yield on loan portfolio.................... 9.01% 8.84% 9.08%
Weighted average yield on available for sale securities..... 6.85 6.63 6.54
Weighted average yield on held to maturity securities....... 7.10 6.66 6.35
Weighted average yield on other interest-earning assets..... 5.68 5.37 5.93
Weighted average yield on all interest-earning assets....... 8.45 8.28 8.45
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted average interest rate paid on passbook/statement
accounts.................................................. 3.08% 3.11% 3.26%
Weighted average interest rate paid on NOW and demand
accounts.................................................. 1.20 1.24 1.38
Weighted average interest rate paid on Market Access
accounts.................................................. 4.82 4.70 4.66
Weighted average interest rate paid on certificate of
deposit accounts.......................................... 5.92 5.83 6.06
Weighted average interest rate paid on borrowings........... 6.23 6.18 6.35
Weighted average interest rate paid on all interest-bearing
liabilities............................................... 5.04 4.99 5.20
Interest rate spread (spread between weighted average
interest rate on all interest-earning assets and all
interest-bearing liabilities)............................. 3.41 3.29 3.25
Net interest margin......................................... 3.74 3.56 3.52
</TABLE>
INTEREST RATE SWAPS, CAPS AND FLOORS
State Savings uses interest rate floors, caps and, to a lesser extent,
swaps to hedge its interest rate exposure. At December 31, 1997, State Savings
had one swap outstanding with a notional amount of $10 million which requires
the payment of interest at the prime rate less 255 basis points. State Savings
receives interest on such swaps at a rate equal to the three-month London
Interbank Banking Rate (the "LIBOR"). This swap matures in June 1998.
To protect against interest rate declines on certain assets, State Savings
has purchased interest rate floor positions. The interest rate floors have
strikes based on the three-month LIBOR. If the LIBOR declines below the strike
rate, State Savings receives the difference between the LIBOR and the strike
price on the notional principal amount. As rates decline, the interest received
on the floors serves to offset the decline in the interest received on hedged
assets and the interest paid on long term deposits.
Interest rate caps serve to hedge State Savings' variable rate deposits.
The interest rate caps have strikes based on the three-month LIBOR. When the
LIBOR increases above the strike rate, State Savings receives interest on the
difference between the LIBOR and the strike rate on the notional principal
amount. Deposit interest expense is reduced by the interest received on the
interest rate caps.
The following table summarizes State Savings interest rate caps and floors
for the periods presented:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
UNREALIZED -----------------
NOTIONAL GAINS STRIKE LIFE
AMOUNT (LOSSES) RATE (YEARS)
-------- ---------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997
Interest Rate Floors Outstanding............ $ 45,000 $ 21 4.50% 1.7
Interest Rate Caps Outstanding.............. 80,000 (368) 6.06 1.0
December 31, 1996
Interest Rate Floors Outstanding............ 45,000 2 4.28 1.5
Interest Rate Caps Outstanding.............. 105,000 (481) 6.05 1.7
</TABLE>
Counterparties to the above financial instruments expose State Savings to
credit-related losses in the event of non-performance. However, State Savings
deals only with primary dealers and does not anticipate nonperformance by the
counterparty.
COMPETITION
State Savings competes for deposits with other savings associations,
commercial banks and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are terms, interest rates and convenience of
office location. In making loans, State Savings competes with other savings
associations, commercial banks, consumer finance companies, credit unions,
leasing companies, mortgage brokers and other lenders. State Savings competes
for loan originations primarily through the interest rates and loan fees it
charges and through the efficiency and quality of
56
<PAGE> 57
services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable.
SUBSIDIARY ACTIVITIES
SSB, Century and FSB are the principal subsidiaries of State Savings.
Together, SSB, Century and FSB contribute 90.9% and 97.4% of the consolidated
assets and revenue, respectively, of State Savings. In addition to SSB, Century
and FSB, State Savings also owns, directly or indirectly through intermediate
subsidiaries, fourteen other subsidiaries. Such subsidiaries were formed and
operated to serve the principal businesses of SSB, Century and FSB.
The following table sets forth the name of each subsidiary, the state of
incorporation and a description of its activities and/or holdings:
SUBSIDIARIES DIRECTLY OWNED BY STATE SAVINGS
<TABLE>
<CAPTION>
NAME STATE ACTIVITY/HOLDINGS
---- ----- -----------------
<S> <C> <C>
Calvin Hotel Corp......................... Arizona Manages and liquidates real estate
owned through foreclosure, real
estate development lending
Calvin Investments, Inc. ................. Ohio Inactive
First Interstate Savings Company.......... Ohio Inactive
Residential Properties, Inc. ............. Ohio Owns partnership interests
Sawmill Quadrant Properties, Inc. ........ Ohio Inactive
Sincuidados Development Co. .............. Arizona Land development
Sincuidados Realty Co. ................... Arizona Real estate sales
State Savings Mortgage Company ("SSMC")... Ohio Managing and liquidating real estate
owned through foreclosure and real
estate development lending
</TABLE>
SUBSIDIARIES INDIRECTLY OWNED BY STATE SAVINGS
<TABLE>
<CAPTION>
100%
NAME STATE OWNER ACTIVITY/HOLDINGS
---- ----- ----- -----------------
<S> <C> <C> <C>
American Home Foundation............. Ohio SSB Owns Orange Road (Delaware County)
office buildings
Fidelity Calvin Corporation.......... Ohio SSB Managing and liquidating real estate
owned through foreclosure; partnership
interests
Homeowners Financial Services,
Inc. .............................. Ohio SSB Mortgage lending for credit unions (now
inactive)
State Savings Lease & Finance Co. ... Ohio SSB Commercial leasing
Calvin Securities, Inc. ............. Arizona FSB Sale of annuities
Interstate Savings Company........... Ohio SSMC Owns equity participation and limited
partnership interests in real estate
</TABLE>
TAXATION
FEDERAL TAXATION. State Savings and its subsidiaries are each subject to
the federal tax laws and regulations which apply to corporations generally. In
addition to the regular income tax, State Savings and its subsidiaries may be
subject to the alternative minimum tax which is imposed at a minimum tax rate of
20% on "alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to this preference
item and prior to reduction by net operating losses, is included in alternative
minimum taxable income. Net operating losses can offset no more than 90% of
alternative minimum taxable income. The alternative minimum
57
<PAGE> 58
tax is imposed to the extent it exceeds the corporation's regular income tax.
Payments of alternative minimum tax may be used as credits against regular tax
liabilities in future years. However, the Taxpayer Relief Act of 1997 repealed
the alternative minimum tax for certain "small corporations" for tax years
beginning after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5,000,000 or less for the three
tax years ending with its first tax year beginning after December 31, 1996. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
State Savings' average gross receipts for the three most recent years of
filed returns (through tax year ended November 30, 1996) is approximately $195
million and, as a result, State Savings does not qualify as a small corporation
exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as SSB, Century and FSB, were allowed deductions for bad
debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions could compute deductions for bad debts using
either the specific charge-off method of Section 166 of the Code or one of two
reserve methods of Section 593 of the Code. The reserve methods under Section
593 of the Code permitted a thrift institution annually to elect to deduct bad
debts under either (i) the "percentage of taxable income" method applicable only
to thrift institutions, or (ii) the "experience" method that also was available
to small banks. Under the "percentage of taxable income" method, a thrift
institution generally was allowed a deduction for an addition to its bad debt
reserve equal to 8% of its taxable income (determined without regard to this
deduction and with additional adjustments). Under the "experience" method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995, 1994 and
1993, State Savings used the percentage of taxable income method and was subject
to certain limitations based on aggregate loans and savings account balances at
the end of the calendar year.
The Act eliminated the percentage of taxable income method of accounting
for bad debts by thrift institutions, effective for taxable years beginning
after 1995. Thrift institutions that are treated as small banks are allowed to
utilize the experience method applicable to such institutions, while thrift
institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the Secretary
of the Treasury. Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to be recaptured
will be determined solely with respect to the "applicable excess reserves" of
the taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that is treated as a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves").
For taxable years that begin after December 31, 1995, and before January 1,
1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal amounts of
58
<PAGE> 59
the residential loans made by the thrift during the six most recent tax years
beginning before January 1, 1996. A residential loan is a loan as described in
Section 7701(a)(19)(C)(v) (generally a loan secured by residential or church
property and certain mobile homes), but only to the extent that the loan is made
to the owner of the property. State Savings has provided deferred taxes of
approximately $4.4 million and will be permitted to amortize the recapture of
the bad debt reserve over a six year period commencing in fiscal 1999.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by SSB, Century or FSB to State Savings is deemed
paid out of its pre-1988 reserves under these rules, the pre-1988 reserves would
be reduced and the gross income of State Savings for tax purposes would be
increased by the amount which, when reduced by the income tax, if any,
attributable to the inclusion of such amount in its gross income, equals the
amount deemed paid out of the pre-1988 reserves. As of December 31, 1997, the
pre-1988 reserves of SSB, Century and FSB for tax purposes totaled approximately
$44.2 million in the aggregate. No representation can be made as to whether SSB,
Century and FSB will have current or accumulated earnings and profits in
subsequent years.
The tax returns of State Savings have been audited or closed without audit
through the tax year ending November 30, 1993. In the opinion of management, any
examination of open returns would not result in a deficiency which could have a
material adverse effect on the financial condition of SSB, Century or FSB.
OHIO TAXATION. State Savings is subject to the Ohio corporation franchise
tax, which, as applied to State Savings, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.9% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.582% times taxable net worth. For tax years
beginning after December 31, 1998, the rate of tax is the greater of (i) 5.1% on
the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio
taxable income in excess of $50,000 or (ii) .400% times taxable net worth.
A special litter tax is also applicable to all corporations, including
State Savings, subject to the Ohio corporation franchise tax other than
"financial institutions." If the franchise tax is paid on the net income basis,
the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable
income and .22% of computed Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to .014%
times taxable net worth.
SSB and Century are "financial institutions" for State of Ohio tax
purposes. As such, they are subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of book
net worth as determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. As "financial
institutions," SSB and Century are not subject to any tax based upon net income
or net profits imposed by the State of Ohio.
ARIZONA TAXATION. FSB is subject to Arizona corporate income tax. Such tax
imposes a 9.3% tax rate on computed Arizona net taxable income annually. FSB
files a consolidated tax return for Arizona purposes with State Savings Mortgage
Company, Calvin Securities, Inc., and Interstate Savings Company.
PERSONNEL
As of December 31, 1997 State Savings had 855.5 full-time equivalent
employees. State Savings believes that relations with its employees are good.
State Savings offers health, disability, life, dependent care benefits and
qualified retirement program among other benefits. None of the employees of
State Savings is represented by a collective bargaining unit.
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<PAGE> 60
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information (the "Pro Forma
Financial Information") is based on the historical financial statements of Fifth
Third (as adjusted to reflect the 1998 Fifth Third Stock Split) and State
Savings and has been prepared to illustrate the effects of the acquisitions
described below and the related financing transactions.
The unaudited pro forma balance sheets as of December 31, 1997 assumes the
following transactions were consummated on December 31, 1997: (i) the Merger,
accounted for as a pooling-of-interests, (ii) Fifth Third's acquisition of The
Ohio Company, accounted for as a purchase, (iii) Fifth Third's acquisition of
CitFed Bancorp, accounted for as a pooling-of-interests, and (iv) Fifth Third's
issuance of additional shares of Fifth Third Common Stock.
The unaudited pro forma consolidated statements of income for the years
ended December 31, 1997, 1996 and 1995, give effect to each of the following
transactions as if such transactions had been effective during the periods
shown, except as noted: (i) the Merger, accounted for as pooling-of-interests
(ii) Fifth Third's acquisition of The Ohio Company, accounted for as a purchase
as of January 1, 1997, (iii) Fifth Third's acquisition of CitFed Bancorp,
accounted for as a pooling-of-interests, and (iv) Fifth Third's issuance of
additional shares of Fifth Third Common Stock. For the year ended December 31,
1997, the unaudited pro forma consolidated statements of income reflect the
results of operations for CitFed Bancorp for the nine month period ended
December 31, 1997 because its fiscal year will not end until March 31, 1998.
The unaudited Pro Forma Financial Information should be read in conjunction
with Fifth Third's Consolidated Financial Statements and notes thereto
incorporated by reference in this Proxy Statement/ Prospectus and State Savings'
Consolidated Financial Statements and notes thereto included herein.
60
<PAGE> 61
FIFTH THIRD BANCORP AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1997
($000'S)
<TABLE>
<CAPTION>
ADJUSTED
FIFTH THIRD FIFTH THIRD
BANCORP THE OHIO PURCHASE BANCORP
AND COMPANY AND ACCOUNTING AND EQUITY
SUBSIDIARIES SUBSIDIARIES(2) ADJUSTMENTS(2) SUBSIDIARIES OFFERING(3)
------------ --------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks.................... $ 720,133 $ 2,955 $ $ 723,088 $
Securities Available for Sale.............. 6,397,077 28,413 (4,310) 6,421,180 146,600
Securities Held to Maturity................ 72,236 72,236
Other Short-Term Investments............... 29,424 29,424
Loans and Leases........................... 13,438,717 13,438,717
Reserve for Credit Losses.................. (200,931) (200,931)
----------- ------- ------- ----------- --------
Net Loans and Leases................... 13,237,786 -- -- 13,237,786 --
Bank Premises and Equipment................ 251,898 8,035 259,933
Accrued Income Receivable.................. 178,803 178,803
Goodwill(1)................................ 61,753 58,251 120,004
Premium on Purchased Deposits(1)........... 244,117 244,117
Other Assets............................... 181,827 53,565 235,392
----------- ------- ------- ----------- --------
Total Assets................................. $21,375,054 $92,968 $53,941 $21,521,963 $146,600
=========== ======= ======= =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Deposits............................. $14,914,132 $ $ $14,914,132 $
Federal Funds Borrowed..................... 1,253,553 1,253,553
Short-Term Bank Notes...................... 555,000 555,000
Other Short-Term Borrowings................ 1,252,378 11,177 1,263,555
Accrued Taxes, Interest and Expenses....... 505,048 505,048
Other Liabilities.......................... 159,654 42,594 13,138 215,386
Long-Term Debt............................. 457,878 457,878
----------- ------- ------- ----------- --------
Total Liabilities............................ 19,097,643 53,771 13,138 19,164,552 --
STOCKHOLDERS' EQUITY
Common Stock............................... 516,898 3,810 (480) 346,819 6,102
Capital Surplus............................ 483,054 483,054 28,709
Retained Earnings.......................... 1,376,152 35,387 (36,497) 1,548,451
Net Unrealized Gains (Losses) on Securities
Available for Sale....................... 90,876 90,876
Treasury Stock............................. (189,569) 77,780 (111,789) 111,789
----------- ------- ------- ----------- --------
Total Stockholders' Equity................... 2,277,411 39,197 40,803 2,357,411 146,600
----------- ------- ------- ----------- --------
Total Liabilities and Stockholders' Equity... $21,375,054 $92,968 $53,941 $21,521,963 $146,600
=========== ======= ======= =========== ========
</TABLE>
61
<PAGE> 62
FIFTH THIRD BANCORP AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET -- (CONTINUED)
<TABLE>
<CAPTION>
STATE SAVINGS CITFED
COMPANY AND BANCORP AND PRO FORMA
SUBSIDIARIES(4) ADJUSTMENTS(4) SUBSIDIARIES(5) ADJUSTMENTS(5) COMBINED
--------------- -------------- --------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks............... $ 32,487 $ $ 65,089 $ $ 820,664
Securities Available for Sale......... 450,852 1,140,299 8,158,931
Securities Held to Maturity........... 11,357 245,418 329,011
Other Short-Term Investments.......... 114,900 144,324
Loans and Leases...................... 2,146,612 1,808,802 17,394,131
Reserve for Credit Losses............. (34,487) (18,182) (253,600)
---------- -------- ---------- -------- -----------
Net Loans and Leases.............. 2,112,125 -- 1,790,620 -- 17,140,531
Bank Premises and Equipment........... 28,854 20,867 309,654
Accrued Income Receivable............. 13,198 19,080 211,081
Goodwill(1)........................... 18,144 138,148
Premium on Purchased Deposits(1)...... 244,117
Other Assets.......................... 38,430 160,780 434,602
---------- -------- ---------- -------- -----------
Total Assets............................ $2,802,203 $ -- $3,460,297 $ -- $27,931,063
========== ======== ========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Deposits........................ $2,332,918 $ $1,852,344 $ $19,099,394
Federal Funds Borrowed................ 297,165 1,550,718
Short-Term Bank Notes................. 555,000
Other Short-Term Borrowings........... 40,000 303,000 1,606,555
Accrued Taxes, Interest and
Expenses............................ 13,890 41,879 560,817
Other Liabilities..................... 41,903 257,289
Long-Term Debt........................ 106,821 756,044 1,320,743
---------- -------- ---------- -------- -----------
Total Liabilities....................... 2,535,532 -- 3,250,432 -- 24,950,516
STOCKHOLDERS' EQUITY
Common Stock.......................... 600 36,308 130 28,881 592,249
Capital Surplus....................... (36,308) 57,056 (28,881) 503,630
Retained Earnings..................... 260,433 154,939 1,790,414
Net Unrealized Gains (Losses) on
Securities Available for Sale....... 5,638 (2,260) 94,254
Treasury Stock........................ --
---------- -------- ---------- -------- -----------
Total Stockholders' Equity.............. 266,671 -- 209,865 -- 2,980,547
---------- -------- ---------- -------- -----------
Total Liabilities and Stockholders'
Equity................................ $2,802,203 $ -- $3,460,297 $ -- $27,931,063
========== ======== ========== ======== ===========
</TABLE>
- ---------------
(1) Goodwill and premium on purchased deposits are generally amortized over
periods of up to 25 years.
(2) To record the sale of excluded assets by The Ohio Company prior to the
proposed merger date and to record the purchase of The Ohio Company by Fifth
Third Bancorp, effected through the issuance of approximately 1,500,000
shares of Fifth Third Bancorp Common Stock, $2.22 stated value (assuming a
closing price of $53.33).
(3) To record the issuance of up to 2,748,780 shares of Fifth Third Bancorp
Common Stock, $2.22 stated value, (assuming consideration of $53.33 per
share) prior to the Effective Time and the subsequent investment of the
proceeds into securities.
(4) To record the issuance of 16,625,340 shares of Fifth Third Common Stock,
$2.22 stated value, to effect the merger of State Savings Company into Fifth
Third Bancorp accounted for as a pooling-of-interests.
(5) To record the issuance of 13,067,825 shares of Fifth Third Common Stock,
$2.22 stated value, to effect the merger of CitFed Bancorp into Fifth Third
Bancorp accounted for as a pooling-of-interests.
62
<PAGE> 63
FIFTH THIRD BANCORP AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
($000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIFTH THIRD STATE SAVINGS CITFED THE OHIO
BANCORP COMPANY BANCORP COMPANY PRO FORMA
YEAR ENDED YEAR ENDED 9 MOS. ENDED YEAR ENDED ADJUSTMENTS PRO FORMA
12/31/97 12/31/97 12/31/97 12/31/97(2),(7) (1),(8),(9) 1997
----------- ------------- ------------ ----------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income(1)............ $1,478,388 $216,119 $165,482 $ $10,115 $1,870,104
Interest Expense.............. 733,426 121,551 112,081 967,058
---------- -------- -------- ------ ------- ----------
Net Interest Income........... 744,962 94,568 53,401 -- 10,115 903,046
Provision for Credit Losses... 80,342 6,603 2,700 89,645
---------- -------- -------- ------ ------- ----------
Net Interest Differential..... 664,620 87,965 50,701 -- 10,115 813,401
Other Operating Income:
Service Charges on
Deposits................. 94,474 4,550 10,517 109,541
Other Operating Income...... 350,987 18,541 15,138 68,776 453,442
---------- -------- -------- ------ ------- ----------
Total Other Income............ 445,461 23,091 25,655 68,776 -- 562,983
Operating Expenses:
Salaries, Wages and
Benefits................. 236,584 30,521 20,102 37,098 324,305
Equipment and Occupancy
Expenses................. 58,557 5,029 10,535 5,814 79,935
Other Operating
Expenses(2).............. 211,017 23,562 15,104 16,309 2,330 268,322
---------- -------- -------- ------ ------- ----------
Total Operating Expenses...... 506,158 59,112 45,741 59,221 2,330 672,562
---------- -------- -------- ------ ------- ----------
Earnings Before Taxes......... 603,923 51,944 30,615 9,555 7,785 703,822
Applicable Income Taxes....... 202,686 18,891 9,510 3,194 3,540 237,821
---------- -------- -------- ------ ------- ----------
Net Income.................... $ 401,237 $ 33,053 $ 21,105 $6,361 $ 4,245 $ 466,001
========== ======== ======== ====== ======= ==========
Average shares
outstanding(3),(4),(5),(6).. 232,655 33,942 266,597
Average diluted shares
outstanding(3),(4),(5),(6).. 236,526 33,942 270,468
Earnings per share............ $ 1.73 $ 1.75
Diluted earnings per share.... $ 1.69 $ 1.72
</TABLE>
63
<PAGE> 64
FIFTH THIRD BANCORP AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
FIFTH THIRD STATE SAVINGS CITFED
BANCORP COMPANY BANCORP PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED ADJUSTMENTS PRO FORMA
12/31/96 12/31/96 3/31/97 (1),(8),(9) 1996
----------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest Income(1).................... $1,385,113 $198,628 $190,286 $9,910 $1,783,937
Interest Expense...................... 695,869 112,351 123,367 931,587
---------- -------- -------- ------ ----------
Net Interest Income................... 689,244 86,277 66,919 9,910 852,350
Provision for Credit Losses........... 64,014 1,518 2,850 68,382
---------- -------- -------- ------ ----------
Net Interest Differential............. 625,230 84,759 64,069 9,910 783,968
Other Operating Income:
Service Charges on Deposits......... 83,590 3,755 10,692 98,037
Other Operating Income.............. 284,825 15,593 17,583 318,001
---------- -------- -------- ------ ----------
Total Other Income.................... 368,415 19,348 28,275 -- 416,038
Operating Expenses:
Salaries, Wages and Benefits........ 230,475 24,430 26,249 281,154
Equipment and Occupancy Expenses.... 55,602 4,166 13,283 73,051
Other Operating Expenses(2)......... 207,253 28,233 30,501 265,987
---------- -------- -------- ------ ----------
Total Operating Expenses.............. 493,330 56,829 70,033 -- 620,192
---------- -------- -------- ------ ----------
Earnings Before Taxes................. 500,315 47,278 22,311 9,910 579,814
Applicable Income Taxes............... 165,256 15,155 7,149 3,469 191,029
---------- -------- -------- ------ ----------
Net Income............................ $ 335,059 $ 32,123 $ 15,162 $6,442 $ 388,786
========== ======== ======== ====== ==========
Average shares
outstanding(3),(4),(5),(6).......... 233,987 32,442 266,429
Average diluted shares
outstanding(3),(4),(5),(6).......... 239,405 32,442 271,847
Earnings per share.................... $ 1.43 $ 1.46
Diluted earnings per share............ $ 1.41 $ 1.43
</TABLE>
64
<PAGE> 65
FIFTH THIRD BANCORP AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
FIFTH THIRD STATE SAVINGS CITFED
BANCORP COMPANY BANCORP PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED ADJUSTMENTS PRO FORMA
12/31/95 12/31/95 3/31/96 (1),(8),(9) 1995
----------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest Income(1).................... $1,173,165 $180,561 $165,728 $ 9,646 $1,529,100
Interest Expense...................... 609,733 107,506 107,983 825,222
---------- -------- -------- ------- ----------
Net Interest Income................... 563,432 73,055 57,745 9,646 703,878
Provision for Credit Losses........... 42,962 1,322 1,650 45,934
---------- -------- -------- ------- ----------
Net Interest Differential............. 520,470 71,733 56,095 9,646 657,944
Other Operating Income:
Service Charges on Deposits......... 66,344 2,863 7,612 76,819
Other Operating Income.............. 239,371 10,531 17,676 267,578
---------- -------- -------- ------- ----------
Total Other Income.................... 305,715 13,394 25,288 -- 344,397
Operating Expenses:
Salaries, Wages and Benefits........ 195,193 22,683 23,735 241,611
Equipment and Occupancy Expenses.... 45,176 3,957 13,025 62,158
Other Operating Expenses(2)......... 155,248 19,483 21,085 195,816
---------- -------- -------- ------- ----------
Total Operating Expenses.............. 395,617 46,123 57,845 -- 499,585
---------- -------- -------- ------- ----------
Earnings Before Taxes................. 430,568 39,004 23,538 9,646 502,756
Applicable Income Taxes............... 142,883 12,378 7,402 3,376 166,039
---------- -------- -------- ------- ----------
Net Income............................ $ 287,685 $ 26,626 $ 16,136 $ 6,270 $ 336,717
========== ======== ======== ======= ==========
Average shares
outstanding(3),(4),(5),(6).......... 222,479 32,442 254,921
Average diluted shares
outstanding(3),(4),(5),(6).......... 230,945 32,442 263,387
Earnings per share.................... $ 1.29 $ 1.32
Diluted earnings per share............ $ 1.26 $ 1.28
</TABLE>
- ---------------
ASSUMPTIONS
(1) The proceeds from the equity offering were invested at an estimated
after-tax yield of 4.48%, 4.39%, and 4.28% in 1997, 1996, and 1995,
respectively.
(2) Goodwill recognized in The Ohio Company purchase will be amortized over 25
years.
(3) The approximate 1,500,000 shares issued in The Ohio Company transaction,
accounted for as a purchase, were issued January 1, 1997.
(4) The approximate 2,748,780 shares issued in the proposed equity offering were
issued as of January 1, 1995.
(5) The 16,625,340 shares issued in the State Savings Company transaction,
accounted for as a pooling-of-interests, were issued as of January 1, 1995.
(6) The 13,067,825 shares issued in the CitFed Bancorp transaction, accounted
for as a pooling-of-interests, were issued as of January 1, 1995.
(7) Does not give effect to the 1997 discontinued operations of The Ohio
Company.
(8) Does not give effect to non-recurring merger related charges which will be
expensed prior to consummation of the business combinations.
(9) Does not give effect to any cost savings which may be achieved after
consummation of the business combinations.
65
<PAGE> 66
SELECTED HISTORICAL FINANCIAL DATA OF FIFTH THIRD
The following table sets forth certain historical financial data concerning
Fifth Third for the five years ended December 31, 1997. All information is based
on information contained in Fifth Third's 1997 Annual Report to Stockholders.
The Fifth Third Annual Report accompanies this Proxy Statement/Prospectus, and
all such financial information is incorporated herein by reference and should be
read in conjunction therewith. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net interest income......................... $744,962 689,244 563,432 516,753 473,515
Provision for credit losses................. 80,342 64,014 42,962 35,780 48,037
-------- -------- -------- -------- --------
Net interest income after provision for
credit losses............................. 664,620 625,230 520,470 480,973 425,478
Other operating income...................... 445,461 368,415 305,715 255,908 231,150
Operating expenses(1)....................... 506,158 493,330 395,617 371,545 352,720
-------- -------- -------- -------- --------
Income before income taxes.................. 603,923 500,315 430,568 365,336 303,908
Applicable income taxes..................... 202,686 165,256 142,883 120,877 97,673
-------- -------- -------- -------- --------
Net income.................................. $401,237 335,059 287,685 244,459 206,235
======== ======== ======== ======== ========
COMMON SHARE DATA:(2)
Earnings per share.......................... $ 1.73 1.43 1.29 1.13 .97
Diluted earnings per share.................. 1.69 1.41 1.26 1.10 .95
Cash dividends declared per share........... .569 .489 .427 .356 .302
Book value at period end.................... 9.78 9.00 7.63 6.40 5.91
Average shares outstanding (000's):......... 232,655 233,987 222,479 217,305 211,440
Average diluted shares outstanding
(000's):.................................. 236,526 239,405 230,945 225,873 220,517
</TABLE>
- ---------------
(1) Operating expenses for 1996 include the impact of the special SAIF
assessment of $16.6 million pretax ($10.8 million after tax or $.04 per
share).
(2) Per share amounts and shares outstanding reflect the 1998 Fifth Third Stock
Split.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION AT PERIOD END:
Securities.......................... $ 6,469,313 6,400,685 4,338,269 3,637,035 2,674,468
Loans and leases.................... 13,438,717 12,514,792 11,690,643 10,286,457 9,566,898
Assets.............................. 21,375,054 20,548,998 17,052,883 14,957,009 13,128,544
Deposits............................ 14,914,132 14,374,656 12,485,780 10,630,878 9,477,306
Short-term borrowings............... 3,060,931 3,265,432 2,005,495 2,452,218 1,691,744
Long-term debt and convertible
subordinated notes................ 457,878 277,661 425,396 178,713 407,864
Stockholders' equity................ 2,277,411 2,144,125 1,724,575 1,398,774 1,277,660
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RATIOS:
PROFITABILITY RATIOS:
Return on average assets(1)......... 1.96% 1.72 1.78 1.77 1.71
Return on average stockholders'
equity(1)......................... 19.6% 17.2 18.1 18.6 17.8
Net interest margin................. 4.11% 3.99 3.90 4.16 4.39
Overhead ratio(1)(2)................ 41.0% 45.0 43.9 46.6 48.6
Other operating income to total
income(3)......................... 37.1% 34.6 34.8 33.1 32.2
CAPITAL RATIOS:
Average stockholders' equity to
average assets.................... 10.03% 9.99 9.82 9.50 9.61
Tier 1 risk-adjusted capital........ 12.09% 11.37 11.03 11.26 11.50
Total risk adjusted capital......... 14.70% 14.06 14.33 13.21 13.85
Tier 1 leverage..................... 10.16% 9.22 9.47 9.62 9.59
RATIO OF EARNINGS TO FIXED
CHARGES(4)
Including deposit interest.......... 1.82x 1.71 1.70 1.89 1.89
Excluding deposit interest.......... 3.92x 3.93 3.49 4.75 5.77
CREDIT QUALITY RATIOS:
Reserve for credit losses to
nonperforming assets.............. 516.84% 531.48 436.06 570.50 362.84
Reserve for credit losses to loans
and leases outstanding............ 1.50% 1.50 1.52 1.52 1.51
Net charge-offs to average loans and
leases outstanding................ .54% .49 .27 .18 .31
Nonperforming assets to loans,
leases and other real estate
owned............................. .29% .28 .35 .27 .42
</TABLE>
- ---------------
(1) Operating expenses for 1996 include the impact of the special SAIF
assessment of $16.6 million pretax ($10.8 million after tax or $.04 per
share). For comparability, excluding the impact of this assessment, return
on average assets, return on average equity and the overhead ratio would
have been 1.78%, 17.8% and 43.5%, respectively.
(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) Earnings represent income before income taxes plus fixed charges. Fixed
charges include interest expense and the proportion deemed representative of
the interest factor of rental expense.
67
<PAGE> 68
SELECTED HISTORICAL FINANCIAL DATA OF STATE SAVINGS
The following table sets forth certain historical financial data concerning
State Savings. This information is based on information contained in the State
Savings' audited Financial Statements at December 31, 1997, which are included
in this Proxy Statement/Prospectus and should be read in conjunction therewith.
See "INDEX TO FINANCIAL STATEMENTS OF STATE SAVINGS."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net interest income................... $94,568 $86,277 $73,055 $69,179 $70,806
Provision for loan losses............. 6,603 1,518 1,322 2,250 9,095
------- ------- ------- ------- -------
Net interest income after provision
for loan losses..................... 87,965 84,759 71,733 66,929 61,711
Non-interest income................... 23,091 19,348 13,394 11,416 19,919
Non-interest expenses................. 59,112 56,829(1) 46,123 41,802 43,062
------- ------- ------- ------- -------
Income before income taxes,
extraordinary item and cumulative
effect of a change in accounting
policy.............................. 51,944 47,278 39,004 36,543 38,568
Income tax provision.................. 18,891 15,155 12,378 14,180 16,652
------- ------- ------- ------- -------
Income before extraordinary item and
cumulative effect of a change in
accounting policy................... 33,053 32,123 26,626 22,363 21,916
Extraordinary item.................... -- -- -- -- (994)(2)
Cumulative effect of a change in
accounting method................... -- -- -- -- 5,621(3)
------- ------- ------- ------- -------
Net income............................ $33,053 $32,123 $26,626 $22,363 $26,543
======= ======= ======= ======= =======
Book value per share at period end.... $44,445 $38,537 $34,009 $28,121 $25,553
</TABLE>
- ---------------
(1) During September 1996, legislation was enacted providing for a one-time
assessment imposed on the March 31, 1995 deposits of SAIF insured
institutions. This one time assessment increased the deposit insurance
premium by $11 million in 1996.
(2) Prepayment penalty on early retirement of Federal Home Loan Bank advances,
net of income taxes of $536.
(3) Cumulative effect of a change in accounting principle to adopt SFAS No. 109
"Accounting for Income Taxes."
68
<PAGE> 69
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION AT PERIOD END:
Securities........................... $ 462,209 408,290 498,525 598,411 462,435
Loans receivable..................... $2,112,125 1,875,928 1,695,874 1,326,197 1,184,661
Total assets......................... $2,802,203 2,590,330 2,459,931 2,149,042 1,911,659
Deposits............................. $2,332,918 2,102,673 1,955,944 1,725,220 1,572,735
Total borrowings..................... $ 146,821 204,326 249,581 208,615 140,751
Shareholders' equity................. $ 266,671 231,223 204,054 168,725 153,318
RATIOS:
PROFITABILITY RATIOS:
Return on average assets............. 1.22% 1.28%(1) 1.16% 1.14% 1.45%
Return on average shareholders'
equity............................. 13.12% 14.91%(1) 14.52% 13.75% 18.71%
Net interest margin.................. 3.64% 3.61% 3.30% 3.68% 4.04%
Overhead ratio....................... 50.24% 53.80%(1) 53.35% 51.87% 47.46%
Other non-interest income to total
income............................. 19.63% 18.32% 15.49% 14.16% 21.96%
CAPITAL RATIOS:
Average shareholders' equity to
average assets..................... 9.28% 8.58% 7.95% 8.32% 7.76%
Tier 1 risk-adjusted capital......... 11.75% 13.24% 12.74% 13.90% 13.90%
Total risk-adjusted capital.......... 13.00% 14.41% 14.08% 15.10% 15.10%
Tier 1 leverage...................... 7.21% 8.05% 7.55% 10.02% 9.75%
RATIO OF EARNINGS TO FIXED CHARGES:
Including deposit interest expense... 1.43% 1.42% 1.36% 1.52% 1.63%
Excluding deposit interest expense... 5.03% 4.26% 3.59% 4.98% 5.44%
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
CREDIT QUALITY RATIOS:
Allowance for loan losses to nonperforming
assets...................................... 123.83% 84.51% 110.71% 135.84% 91.87%
Allowance for loan losses to loans
outstanding................................. 1.52% 1.46% 1.66% 2.01% 2.36%
Net charge-offs to average loans
outstanding................................. 0.09% 0.13% 0.08% 0.03% 0.30%
Nonperforming assets to loans and real estate
owned....................................... 1.23% 1.72% 1.49% 1.48% 2.62%
</TABLE>
- ---------------
(1) Operating expenses for 1996 include the impact of the special SAIF
assessment of $11 million pretax ($7.0 million after tax) as well as a
refund and reduction of accrued franchise taxes of $4.1 million due to the
resolution of state franchise tax contingencies in 1996. For comparability,
excluding the impact of these two items, return on average assets, return on
average equity and the overhead ratio would have been 1.46%, 16.99% and
47.29%, respectively.
69
<PAGE> 70
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF STATE SAVINGS
FORWARD-LOOKING STATEMENTS
State Savings has made and will make certain forward-looking statements in
the following Management's Discussion and Analysis of Financial Condition and
Results of Operations and in other contexts relating to present or future trends
or factors affecting the banking industry and specifically the operations,
markets and products of State Savings. Actual results could differ materially
from those set forth in forward-looking statements due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which State Savings operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory capital requirements, changes in prevailing interest rates,
asset/liability and credit risk management, the financial and securities markets
and the availability of and costs associated with sources of liquidity.
RESULTS OF OPERATIONS SUMMARY
In 1997, State Savings' net income increased 2.9%, from $32.1 million to
$33.1 million. In 1996, State Savings' net income increased 20.6%, from $26.6
million to $32.1 million. Selected financial data from State Savings' operations
during 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Income.................................... $33,053 $32,123 $26,626
Return on Assets(a)........................... 1.22% 1.46% 1.16%
Return on Equity(a)........................... 13.12% 16.99% 14.52%
Average equity to average assets.............. 9.28% 8.58% 7.95%
Dividend Payout Ratio......................... 3.99% 2.24% 2.03%
</TABLE>
- ---------------
(a) For comparability purposes, certain 1996 financial ratios exclude the impact
of the special SAIF assessment of $11 million pretax ($7.2 million after
tax) and the pre-tax $4.1 million ($2.7 million after tax) of state
franchise tax contingencies which were favorably resolved in 1996 resulting
in a refund of state taxes and reduction in accrued franchise taxes.
NET INTEREST INCOME
The largest source of the State Savings' revenue is net interest income.
Net interest income is the spread between interest income on interest-earning
assets, such as loans and securities, and the interest expense on liabilities
used to fund those assets, such as interest-bearing deposits and borrowings. Net
interest income is affected by both changes in the level of interest rates and
changes in the amount and composition of interest-earning assets and
interest-bearing liabilities. Changes in net interest income are frequently
measured by two statistics -- net interest margin and net interest rate spread.
Net interest margin is expressed as net interest income divided by average
interest-earning assets. Net interest rate spread is the difference between the
average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities. Net interest margin is greater than net interest
spread due to the interest income earned on interest-earning assets funded by
non-interest bearing, or free funding, sources, primarily demand deposits and
shareholders' equity.
The following table sets forth the net interest income, net interest margin
and net interest rate spread for the three years 1995 through 1997, comparing
interest revenue and average interest-earning assets outstanding with interest
cost and average interest-bearing liabilities outstanding. Nonaccrual loans have
been included in the average loan balances. Average outstanding securities
balances are based on amortized cost excluding unrealized gains or losses on
securities available for sale. Weighted-averages were derived using month end
balances.
70
<PAGE> 71
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
(DOLLARS IN THOUSANDS)
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning
Assets:
Loans receivable..... $1,989,257 $176,227 8.86% $1,785,257 $156,196 8.75% $1,551,145 $135,552 8.74%
Available for sale
securities......... 430,437 28,695 6.67% 459,763 31,580 6.87% 119,885 8,161 6.81%
Held to maturity
securities......... 158,624 9,984 6.29% 127,200 9,747 7.66% 529,382 35,976 6.80%
Other................ 17,303 1,213 7.01% 15,969 1,105 6.92% 13,427 872 6.49%
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total Interest-Earning
Assets............... $2,595,621 $216,119 8.33% $2,388,189 $198,628 8.32% $2,213,839 $180,561 8.16%
========== ======== ====== ========== ======== ====== ========== ======== ======
Interest-Bearing
Liabilities:
Passbook/Statement
accounts........... $ 168,438 $ 4,549 2.70% $ 200,546 $ 5,306 2.65% $ 263,437 $ 8,872 3.37%
Demand deposit
accounts........... 98,942 0 0.00% 75,300 0 0.00% 64,037 0 0.00%
NOW accounts......... 99,168 2,823 2.85% 94,187 2,783 2.95% 86,181 2,013 2.34%
Market access
accounts........... 575,667 27,735 4.82% 519,664 24,060 4.63% 342,685 16,125 4.71%
Certificates of
deposit............ 1,256,155 74,120 5.90% 1,124,387 66,209 5.89% 1,086,760 65,940 6.07%
FHLB advances........ 200,169 12,281 6.14% 216,368 13,926 6.44% 228,957 14,440 6.31%
Other borrowings..... 740 43 5.81% 1,129 67 5.93% 2,735 116 4.24%
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total Interest-Bearing
Liabilities.......... $2,399,279 $121,551 5.07% $2,231,581 $112,351 5.03% $2,074,792 $107,506 5.18%
========== ======== ====== ========== ======== ====== ========== ======== ======
Net Interest
Income/Interest Rate
Spread............... $ 94,568 3.26% $ 86,277 3.29% $ 73,055 2.98%
======== ====== ======== ====== ======== ======
Net Interest Margin.... 3.64% 3.61% 3.30%
====== ====== ======
Interest-Bearing
Liabilities to
Interest-Earning
Assets............... 92.44% 93.44% 93.72%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------------------- ------------------------------------------
VOLUME YIELD/RATE MIX TOTAL VOLUME YIELD/RATE MIX TOTAL
------- ---------- ----- ------- -------- ---------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Loans receivable......................... $17,850 $ 1,964 $ 217 $20,031 $ 20,461 $ 155 $ 28 $ 20,644
Available for sale securities............ (2,015) (920) 50 (2,885) 23,146 72 201 23,419
Held to maturity securities.............. 2,407 (1,743) (427) 237 (27,348) 4,553 (3,434) (26,229)
Other.................................... 92 14 2 108 165 58 10 233
------- ------- ----- ------- -------- ------- ------- --------
Total Interest Income Change............. 18,334 (685) (158) 17,491 16,424 4,838 (3,195) 18,067
------- ------- ----- ------- -------- ------- ------- --------
Increase (decrease) in Interest Expense:
Passbook/Statement accounts.............. (851) 100 (6) (757) (2,119) (1,897) 450 (3,566)
NOW accounts............................. 147 (94) (13) 40 187 526 57 770
Market access accounts................... 2,593 987 95 3,675 8,336 (274) (127) 7,935
Certificates of deposit.................. 7,761 112 38 7,911 2,284 (1,956) (59) 269
FHLB advances............................ (1,043) (649) 47 (1,645) (794) 298 (18) (514)
Other borrowings......................... (23) (1) 0 (24) (68) 46 (27) (49)
------- ------- ----- ------- -------- ------- ------- --------
Total interest expense change............ 8,584 455 161 9,200 7,826 (3,257) 276 4,845
------- ------- ----- ------- -------- ------- ------- --------
Increase (decrease) in net interest
income................................. $ 9,750 $(1,140) $(319) $ 8,291 $ 8,598 $ 8,095 $(3,471) $ 13,222
======= ======= ===== ======= ======== ======= ======= ========
</TABLE>
Net interest income rose 9.6% to $94.6 million in 1997 from $86.3 million
in 1996 which increased 18.1% from $73.1 million in 1995. The improvement in
1997's net interest income was primarily attributable to a higher-level of
average interest-earning assets. The net interest margin improved three basis
points (1%=100 basis
71
<PAGE> 72
points) to 3.64% in 1997 from 3.61% in 1996. The 1996 net interest margin
increased 31 basis points from 1995's net interest margin of 3.30%.
Total interest income was $216.1 million in 1997, $198.6 million in 1996
and $180.6 million in 1995. The increase of $17.5 million in 1997, or 8.8%, was
primarily due to an increase of $207.4 million in average interest-earning
assets as the yield on interest-earning assets in 1997 was consistent with 1996.
Strong loan volume, particularly one-to-four family residential real estate and
consumer loans, was the principal factor in the increase in average
interest-earning assets. During 1997, management emphasized, and continues to
promote, growth in consumer loans with the automobile and home equity portfolios
increasing in excess of 30%.
At December 31, 1997, one-to four-family residential real estate loans
increased by approximately $217 million. FSB accounted for $43 million of the
increase in one-to four-family residential real estate loans, with the remainder
occurring primarily in Ohio. Recently, the Arizona economy has been very strong,
as a result of which FSB has significantly increased its balance of one-to
four-family residential real estate loans in Arizona. At December 31, 1997 and
1996, 24% of State Savings' one-to four-family residential real estate loans
were collateralized by property located in Arizona. The increase of $18 million
in total interest income in 1996, or 10%, was principally due to an increase in
interest-earning assets of $174.4 and an increase in the yield on
interest-earning assets of 16 basis points. State Savings grew its one-to
four-family residential loan portfolio by $153.6, which accounted for the
majority of the increase in the average loans receivable balance of $234.1
during 1996. The average balance of securities decreased by $62.3 million during
1996. Management redeployed the funds generated from securities sales and
repayments to originate loans. The interest-earning assets yield increased by 16
basis points due to securities yields increasing as management reinvested in
slightly longer term securities with higher yields.
Total interest expense was $121.6 million in 1997, $112.4 million in 1996
and $107.5 million in 1995. The increase of $9.2 million in 1997, or 8.2%, was
primarily due to an increase of $167.7 million in the average interest-bearing
liabilities and an increase of four basis points in the rate on such
liabilities. An expanded retail banking network and emphasis on increasing
deposit market share resulted in a $184.3 million increase in the average
deposits in 1997 compared to 1996. In 1996, total interest expense increased by
$4.9 million, or 4.6%, over 1995. The average interest-bearing liabilities were
$2.2 billion in 1996 compared to $2.1 billion in 1995, an increase of $156.8
million. The average balance of deposits increased $171 million in 1996;
however, this increase was partially offset by a $12.6 million decrease in the
average FHLB advances. The decrease in the FHLB advances resulted from
management obtaining operating funds from its retail banking operation instead
of borrowing from external sources. In recent years, management has focused
efforts on increasing its deposit market share and its strategies have resulted
in deposit growth since December 31, 1995. The decrease in the rate on
interest-bearing liabilities was consistent with market trends as interest rates
increased during 1995 then fell gradually throughout 1996. During 1996,
certificate of deposits were issued with lower interest rates resulting in a
reduction in the cost of funds.
PROVISION FOR LOAN LOSSES
State Savings provides as an expense an amount for expected loan losses.
This provision considers the growth of the loan portfolio, recent loss
experience and other factors. At December 31, 1997, total delinquent loans of 30
days or more as a percentage of total loans were 4.41%. Bankruptcies
significantly increased during 1997 and management believes that bankruptcy
levels are likely to remain high. The allowance for possible loan losses is an
amount that management believes will be adequate to absorb potential losses
currently in the loan portfolio. General allowances for loan losses inherent in
the portfolio are based upon an analysis of historical trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending areas, past loss experience, possible losses
arising from specific problem assets and loan concentration by collateral type.
72
<PAGE> 73
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................. $29,702 $30,416 $30,309
Charge-offs:
One- to four-family residential real estate............... (235) (89) (175)
Multi family and other real estate........................ (2,966) (697) (2,343)
Real estate construction.................................. 0 (147) (69)
Consumer.................................................. (811) (641) (533)
Business.................................................. (129) (815) (313)
------- ------- -------
Total Charge-offs.................................. (4,141) (2,389) (3,433)
Total Recoveries............................................ 2,323 157 2,218
------- ------- -------
Net Charge-offs............................................. (1,818) (2,232) (1,215)
Provision for Loan Losses................................... 6,603 1,518 1,322
------- ------- -------
Balance at End of Period.................................... $34,487 $29,702 $30,416
======= ======= =======
Ratio of net charge-offs to average loans outstanding....... 0.09% 0.13% 0.08%
======= ======= =======
Allowance for loan losses to total loans.................... 1.52% 1.46% 1.66%
======= ======= =======
</TABLE>
State Savings' provision for loan losses was $6.6 million in 1997 as
compared to $1.5 million for 1996 and $1.3 million for 1995. The increase in the
provision for loan losses in 1997 was primarily a result of provisions recorded
in connection with the $212 million increase in loans held for investment and
consideration of delinquency and bankruptcy trends during 1997. Additionally,
management periodically reviews its loan portfolio and increases the provision
based on its analysis of certain higher risk credits as well as the overall risk
inherent in the loan portfolio based on current economic factors. Net
charge-offs as a percentage of average loans outstanding were 0.09%, 0.13% and
0.08% for 1997, 1996 and 1995, respectively. The allowance for loan losses as a
percentage of total loans was 1.52%, 1.46% and 1.66% at December 31, 1997, 1996
and 1995, respectively.
NON-INTEREST INCOME
Non-interest income for 1997, 1996 and 1995 totaled $23.1 million, $19.3
million and $13.4 million, respectively. Total non-interest income increased
19.3% in 1997 and 44% in 1996. The increase in non-interest income was primarily
a result of gains on the sale of assets as well as increases in fees from
pricing enhancements regarding the retail banking business.
Gain (loss) on sales of loans, servicing and mortgage-backed securities
decreased $2.3 million, or 40.5%, in 1997 as compared to 1996. In 1996, State
Savings sold rights to service $105 million of mortgages that resulted in a net
gain of $1.6 million; no such sales occurred in 1997. Additionally, State
Savings adopted Statement of Financial Accounting Standard No. 122 on January 1,
1996 which resulted in income from the sale of loans increasing by $400,000 in
1996. During 1997 and 1996, State Savings predominantly sold loans with
servicing released and recorded income based on the difference between the cash
received and the costs incurred to originate the loan. The gain (loss) on sales
of loans, servicing and mortgage-backed securities increased by $6.6 million in
1996 to $5.6 million from a loss of nearly $1.0 million. In 1995, State Savings
primarily securitized one-to-four family residential real estate loans and
concurrently entered into transactions to sell the related mortgage-backed
securities with servicing retained. These sales of mortgage-backed securities
resulted in losses of $3.3 million in 1995. Also, during 1995, State Savings
sold rights to service mortgage loans resulting in gains of $900,000. As
previously mentioned, management determined in early 1996 that State Savings
would principally sell loans with servicing released which resulted in gains of
$3.1 million whereas gains from such sales in 1995 were only $1.1 million.
Loan servicing fees were $3.2 million in 1997, $3.5 million in 1996 and
$3.9 million in 1995. The unpaid principal balances of loans serviced for others
were $690 million, $792 million and $898 million in 1997, 1996 and 1995,
respectively. In a declining interest rate market, capitalized mortgage
servicing rights are susceptible to
73
<PAGE> 74
accelerated amortization or impairment due to loan prepayments and payoffs.
Management has decreased the amount of loans sold with servicing retained to
reduce State Savings' exposure to fluctuations in interest rates.
Gains on sales of other assets were $3.6 million in 1997, $653,000 in 1996
and $1.7 million in 1995. The increase of $3 million in 1997 primarily resulted
from a gain on the sale of land and from recognition of $800,000 of previously
deferred gains. A parcel of land was sold in 1997 for $4 million which had a
carrying amount of $1.5 million resulting in a $2.5 million gain. Prior to 1997,
a purchaser borrowed a substantial portion of the purchase price to acquire a
property from State Savings; thus, the purchaser's initial and continuing
investment in the property was not sufficient for gain recognition. The gain was
deferred and recognized ratably as loan payments were made. In 1995, gains from
the sale of developed lots (most of the lots in this project were developed and
sold in 1995) accounted for the majority of the $1.7 million gain.
Loan fees and charges increased substantially in 1997 to $4.6 million from
$3.0 million in 1996. Loan fee and charges income was consistent between 1996
and 1995. The 1997 increase in loan fees resulted from an increase in the
origination of fixed-rate loans due to lower interest rates and increases in the
underwriting fees charged on fixed-rate residential real estate loans. Other
non-interest income increased to $7.7 million in 1997 from $6.1 million in 1996.
There was an increase in checking account fees of $800,000 principally from
pricing enhancements and an increase in the number of transaction accounts
during 1997. Similar pricing enhancements and increases in transaction accounts
occurred during 1996 resulting in an increase in checking fees of $1.1 million
over the 1995 checking fee income.
NON-INTEREST EXPENSE
Operating expense levels are often measured using an overhead ratio
(non-interest expenses divided by the sum of net interest income and
non-interest income). State Savings's overhead ratio was 50.2%, 47.3% and 53.4%
in 1997, 1996 and 1995, respectively. The 1996 overhead ratio was calculated
excluding the impact of the SAIF assessment which increased non-interest
expenses by $11 million in 1996 and excluding income of $4.1 million regarding
the resolution of state franchise tax contingencies. Non-interest expense for
1997 totaled $59.1 million, an increase of $2.3 million, or 4%, over the $56.8
million of non-interest expenses in 1996. Excluding the SAIF assessment,
non-interest expenses increased by $13.3 million in 1997.
Compensation and benefits increased $6.1 million, or 24.9%, to $30.5
million in 1997 from $24.4 million in 1996. The increase in compensation and
benefits resulted from a number of factors including annual merit increases
which averaged approximately 5%, an increase in loan production employees and an
increase in incentive compensation. The number of full-time equivalent ("FTE")
employees was 801, 731 and 644 during 1997, 1996 and 1995, respectively. New
retail banking and loan production offices accounted for an increase of 28 FTEs
with the remainder incurred as a result of State Savings' growth and expansion
of loan production staff levels to support the new loan production offices. The
increase in compensation and benefits of $1.7 million to $24.4 million in 1996
compared to $22.7 million in 1995 was primarily a result of an increase in FTEs
and the continued expansion of the retail banking operation.
Federal deposit insurance premium expenses decreased $12.8 million in 1997
to $1.2 million from $14.0 million in 1996. The 1996 federal deposit insurance
expense included the $11 million SAIF assessment. Excluding the SAIF assessment,
federal deposit insurance expenses decreased by $1.8 million or 59.2%. Deposit
insurance premiums in 1997 were 6.48 cents per $100 of deposits which was a
significant reduction in insurance premium rates compared to 1996 rates of 23
cents per $100 of deposits. The 1996 insurance premium (excluding the SAIF
assessment) was $3.0 million, a decrease of $800,000, from the $3.8 million in
1995 since there was no fourth quarter premium assessed in 1996.
In 1997, state franchise taxes were $3.8 million compared to income of
$521,000 in 1996. During 1996, State Savings received a refund of state
franchise taxes of approximately $1 million, including interest. There was no
receivable recorded for the refund claim. As a result of the favorable
resolution of this tax issue, State Savings reduced its accrual for franchise
taxes by $3.1 million in 1996. Excluding the impact of the aforementioned
credits, the franchise tax expense would have been $3.6 million in 1996. The
increase in the actual franchise tax expense since 1995 has been consistent with
the State Savings' growth and profitability.
74
<PAGE> 75
Other non-interest expenses increased $4.2 million or 23.7%, from $17.5
million in 1996 to $21.7 million in 1997. The increase resulted primarily from
the addition of eight retail and loan production offices during 1997 which
increased occupancy and related costs. Additionally, depreciation and
amortization expense increased $1.3 million resulting from assets purchased in
connection with the expanding retail and loan production offices as well as
higher depreciation arising from additional computer equipment purchased in 1996
during State Savings' conversion to a new computer system. During 1996, State
Savings installed a new computer system and upgraded its telephone and voice
mail systems resulting in an increase in other non-interest expense when
compared to 1995.
INCOME TAX PROVISION
State Savings' income tax provision was $18.9 million, $15.2 million and
$12.4 million in 1997, 1996 and 1995, respectively. The effective tax rate was
36.4%, 32.1% and 31.7% in 1997, 1996 and 1995, respectively. In 1996, State
Savings' lower effective tax rate resulted from reduction of its accrual for
federal income taxes due to the resolution of certain tax contingencies. The
1995 effective tax rate was lower than the statutory rate as a result of a
refund of federal income taxes.
FINANCIAL CONDITION
SECURITIES. The investment portfolio consists largely of fixed and
variable rate mortgage related securities, predominately underwritten to the
standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA
and GNMA. These securities differ from traditional debt securities primarily in
that they have uncertain maturity dates and cash flows and are priced based on
estimated prepayment rates on the underlying mortgages.
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO AT DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities Available for Sale:
U.S. Government and agency obligations.................... $ 66,291 $ 53,035 $104,838
FHLMC common stock........................................ 5,643 4,398 3,419
-------- -------- --------
Total investment securities available for sale......... 71,934 57,433 108,257
-------- -------- --------
Agency mortgage-backed securities......................... 123,140 113,848 192,801
Collateralized mortgage obligations....................... 214,392 168,914 183,479
Other mortgage-backed securities.......................... 41,386 55,412 0
-------- -------- --------
Total mortgage-backed securities available for sale.... 378,918 338,174 376,280
-------- -------- --------
Total securities available for sale.................... $450,852 $395,607 $484,537
======== ======== ========
Securities Held to Maturity:
Municipal securities...................................... $ 195 $ 200 $ 250
-------- -------- --------
Total investment securities held to maturity........... 195 200 250
-------- -------- --------
Collateralized mortgage obligations....................... 4,996 4,996 4,996
Other mortgage-backed securities.......................... 6,166 7,487 8,742
-------- -------- --------
Total mortgage-backed securities held to maturity...... 11,162 12,483 13,738
-------- -------- --------
Total securities held to maturity...................... $ 11,357 $ 12,683 $ 13,988
======== ======== ========
</TABLE>
Securities available for sale are carried at estimated fair value, while
securities held to maturity are carried at amortized cost.
LOANS. The following table shows the composition of the loan portfolio,
prior to deductions for undisbursed loans in process, unamortized discounts on
purchased loans, deferred loan origination and commitment fees and allowance for
loan losses, by major category at December 31 for the periods presented.
75
<PAGE> 76
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate - one-to
four-family................. $1,373,391 60.5% $1,156,596 56.8% $1,003,020 54.7%
Real estate - multi family and
other....................... 319,677 14.1% 350,831 17.2% 350,394 19.1%
Real estate - construction.... 355,678 15.7% 354,356 17.4% 349,884 19.1%
---------- ------ ---------- ------ ---------- ------
Total mortgage
loans............. 2,048,746 90.3% 1,861,783 91.4% 1,703,298 92.9%
Consumer...................... 187,707 8.3% 145,215 7.1% 99,455 5.4%
Business...................... 32,307 1.4% 30,914 1.5% 31,352 1.7%
---------- ------ ---------- ------ ---------- ------
Total loans......... $2,268,760 100.0% $2,037,912 100.0% $1,834,105 100.0%
========== ====== ========== ====== ========== ======
</TABLE>
Total loan balances increased 11.3% and 11.1% in 1997 and 1996,
respectively. State Savings increased its one-to-four family loans by
aggressively marketing its residential loan products through its retail banking
network and competitively pricing both its adjustable and fixed rate loan
products. Such loans grew 18.7% in 1997 and 15.3% in 1996, and represent 60.5%
and 56.8% of total loans at December 31, 1997 and 1996, respectively. In recent
years, State Savings increased its variable-rate loan originations most of which
are maintained in the permanent loan portfolio. The total loan production was
$1.2 billion in 1997 and $1.1 billion in 1996 of which fixed-rate originations
represented $401.2 million and $283.1 million in 1997 and 1996, respectively. As
interest rates declined during 1997, the demand for fixed rate loans increased.
State Savings aggressively marketed its fixed rate loan products resulting in a
significant increase in originations. As part of its asset/liability management
program, fixed rate loans are typically sold in the secondary market, primarily
to FNMA and FHLMC, to reduce State Savings' exposure to fluctuations in interest
rates. Consumer and other loans increased 24.9% in 1997 and 34.6% in 1996.
During 1997 and 1996, management emphasized, and continues to promote, growth in
consumer loans focusing on the automobile and home equity product types in an
effort to diversify the loan portfolio and improve net interest income.
NON-PERFORMING ASSETS. Non-performing assets consist of (1) nonaccrual
loans on which the ultimate collectibility of the full amount of interest and
principal is uncertain and (2) real estate owned. A summary of nonperforming
assets at December 31 follows:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
-----------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis(1)
One- to four-family residential real estate............... $16,087 $13,282 $12,165
Multi family and other real estate........................ 2,801 6,338 5,226
Real estate construction.................................. 3,152 9,324 2,354
Consumer.................................................. 1,441 949 515
Business.................................................. 945 909 1,276
------- ------- -------
Total non-accrual loans..................................... $24,426 $30,802 $21,536
Other nonperforming assets(2)............................... 3,425 4,344 5,938
------- ------- -------
Total nonperforming assets.................................. $27,851 $35,146 $27,474
======= ======= =======
Percentage of non-accrual loans to total loans.............. 1.08% 1.51% 1.17%
======= ======= =======
</TABLE>
- ---------------
(1) Non-accrual loans include loans 90 days or more past due or loans 90 days or
more past maturity that may be current on interest payments and loans that
meet non-accrual criteria as established by FASB and/or regulatory
authorities. Payments received are either applied to the outstanding
principal balance or recorded as interest income, depending upon
management's assessment of the collectibility of the loan.
(2) Consists of real estate acquired through foreclosure which is carried at the
lower of cost or fair value less estimated selling expenses.
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<PAGE> 77
Nonperforming assets as a percentage of total loans and real estate owned
was 1.23% at December 31, 1997, an improvement over the 1.72% at December 31,
1996. There was an increase of $2.8 million in non-accrual one-to-four family
residential real estate loans which is primarily a result of the $217 million
increase in such loans during the year ended December 31, 1997. Real estate
construction nonperforming loans decreased by $6.2 million during 1997. This
decrease resulted primarily from two loans which had nonperforming balances of
$5 million in 1996; however, only $400,000 of such loans were nonperforming at
December 31, 1997. Multi-family and other real estate nonperforming loans
decreased by $3.5 million principally resulting from loan payoffs and one loan
with a $1.2 million balance at December 31, 1996 becoming current during 1997.
The increase in nonperforming assets at December 31, 1996 principally resulted
from an increase in real estate construction loans principally related to the
two loans with outstanding balances of $5 million previously discussed.
DEPOSITS. Interest-earning assets are principally funded by core deposits.
State Savings has increased deposit balances by offering competitive rates,
expanding into new markets and engaging in promotional campaigns to increase
market share. Deposits increased 11.0% in 1997 and 7.5% in 1996. There were four
retail banking branches (two in Arizona and two in Ohio) opened during 1997
which increased deposits by over $30 million. Additionally, over the last three
years, the retail banking branches have increased market share through
promotional campaigns generating growth in certificates of deposit and
transaction accounts.
The following table depicts the relative composition of State Savings'
deposits at December 31 for each period presented.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Passbook/statement...................................... 6.6% 8.8% 10.9%
NOW and demand.......................................... 9.5% 9.0% 8.2%
Market access........................................... 26.4% 25.6% 24.8%
Certificates of deposit................................. 57.5% 56.6% 56.1%
------ ------ ------
Total................................................... 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
CAPITAL RESOURCES. At December 31, 1997, shareholders' equity was $266.7
million compared to $231.2 million at December 31, 1996, an increase on $35.5
million or 15.3%. This increase in capital resulted primarily from the retention
of earnings and upward market adjustments on available for sale securities
offset in part by dividends paid. State Savings' (specifically subsidiaries of
State Savings subject to regulatory capital requirements) total risk-weighted
capital (minimum required level for capital adequacy is 8%) was 13.0%, 14.4%,
and 14.1% at December 31, 1997, 1996 and 1995, respectively. State Savings'
regulated subsidiaries meet all the capital adequacy requirements to which they
are subject and each regulated subsidiary was classified as well-capitalized
under the regulatory framework for prompt corrective action. See footnote 12 to
the State Savings Company Consolidated Financial Statements and Notes thereto,
included herein, for an analysis of the regulatory capital of each of the Thrift
Subsidiaries.
LIQUIDITY AND MARKET RISK
The objective of State Savings' Asset/Liability Management ("ALCO")
function is to maintain consistent growth in net interest income within State
Savings' policy guidelines. This objective is accomplished through State
Savings' management of its liquidity and interest rate risk exposures due to
changes in economic conditions, interest rate levels and customer preferences.
The goal of liquidity management is to provide adequate funds to meet
changes in loan demand or any potential unexpected deposit withdrawals. This
goal is accomplished primarily by maintaining sufficient liquid assets in the
form of federal funds sold, securities purchased under resale agreements and
available for sale securities, along with consistent core deposit growth, and
the availability of unused capacity to borrow funds from the FHLB of Cincinnati.
At December 31, 1997, State Savings had the ability to generate liquid assets
from the following sources: federal funds sold and securities purchased under
resale agreements of $114.9 million, available-for-sale securities of $450.9
million, and has substantial borrowing capacity from the FHLB of Cincinnati.
State Savings believes that because it has a stable core deposit base and
substantial liquid assets, no significant borrowings would be necessary to
manage balance sheet changes in the near term.
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<PAGE> 78
Management considers interest rate risk to be State Savings' most
significant market risk. Interest rate risk is the exposure to adverse changes
in the net interest income of State Savings as a result of changes in interest
rates. Consistency in State Savings' earnings is largely dependent on the
effective management of interest rate risk.
State Savings employs a variety of measurement techniques to identify and
manage its exposure to changing interest rates. State Savings uses an earnings
simulation model to analyze net interest income sensitivity and the impact on
market value of portfolio equity ("MVPE") to movements in interest rates. The
model is based on actual cash flows and repricing characteristics for on and off
balance sheet instruments and incorporates market-based assumptions regarding
the impact of changing interest rates on the prepayment rate of certain assets
and liabilities. Assumptions based on the historical behavior of deposit rates
are also incorporated into the model. These assumptions are inherently uncertain
and, as a result, the model cannot precisely measure net interest income or
precisely predict the impact of fluctuations in interest rates on net interest
income or MVPE. Actual results will differ from simulated results due to timing,
magnitude, and frequency of interest rate changes as well as changes in market
conditions and management strategies. See "STATE SAVINGS COMPANY -- Investment
Activities -- Asset/Liability Management."
Given an immediate, sustained 200 basis point upward shock to the yield
curve used in the simulation model, it is estimated that MVPE for State Savings
would decrease by 15% over one year. A 200 basis point immediate, sustained
downward shock in the yield curve would increase MVPE by an estimated 4.7% over
one year. All of these estimated changes in MVPE are within policy guidelines
established by the Board of Directors.
As a primary means of funding interest-earning assets, State Savings
maintains core transaction deposits which generally are more resistant to
interest rate changes than other funding options. State Savings focuses its
efforts on net interest margin growth and management of its retail banking
operation. State Savings does not currently engage in trading activities.
State Savings continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that generally hedging instruments currently available are not cost
effective for State Savings and, therefore, minimizes the use of derivatives.
However, to a limited extent, State Savings has purchased interest rate floors
and caps to mitigate the impact of movements in interest rates. The following
table summarizes State Savings' interest rate caps and floors as of December 31,
1997 and 1996.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
UNREALIZED -----------------
NOTIONAL GAINS STRIKE LIFE
AMOUNT (LOSSES) RATE (YEARS)
-------- ---------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997:
Interest rate floors purchased...................... $ 45,000 $ 21 4.50% 1.7
Interest rate caps purchased........................ 80,000 (368) 6.06% 1.0
December 31, 1996:
Interest rate floors purchased...................... 45,000 2 4.28% 1.5
Interest rate caps purchased........................ 105,000 (481) 6.05% 1.7
</TABLE>
State Savings is exposed to credit-related losses in the event of
nonperformance by counterparties to the above financial instruments. However,
the Company deals only with primary dealers and does not anticipate
nonperformance by the counterparty.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. The statement requires additional reporting
of items that affect comprehensive income but not net income. An example
relevant to State Savings is unrealized gains and losses on securities available
for sale. This statement will result in additional financial statement
disclosures.
78
<PAGE> 79
YEAR 2000
As with many other companies, some of State Savings' computer programs were
originally designed to recognize calendar years by their last two digits.
Calculations performed using these truncated fields will not work properly with
dates from the year 2000 and beyond. A comprehensive review to identify the
systems affected by this issue was completed. Many of State Savings' systems are
vendor-supplied, and vendors have been requested to provide State Savings with
year 2000 certification or a delivery commitment letter. The implementation plan
was developed and was in the process of execution, when in January 1998, State
Savings signed the Affiliation Agreement with Fifth Third. Upon consummation of
the Merger, State Savings and Fifth Third personnel would review State Savings'
computer systems and evaluate the future utility of such computer programs.
Management believes that many of State Savings' existing computer programs may
be eliminated and State Savings would convert to Fifth Third's systems.
79
<PAGE> 80
CERTAIN BENEFICIAL OWNERS OF STATE SAVINGS COMMON SHARES
The following table sets forth certain information in respect of the only
persons known to State Savings to own beneficially more than 5% of the State
Savings Common Shares as of December 31, 1997, other than directors of State
Savings, whose ownership is reported under "STATE SAVINGS MANAGEMENT":
<TABLE>
<CAPTION>
AMOUNT & NATURE OF
OWNERSHIP
NAME AND ADDRESS ------------------- PERCENT
OF BENEFICIAL OWNER SOLE SHARED OF CLASS
- ------------------- -------- ------- --------
<S> <C> <C> <C>
J. Gilbert Reese........................................ 344.000 26.000 6.17%
P.O. Box 919
Newark, Ohio 43058
Thekla R. Shackelford................................... 629.518 -- 10.49%
6020 Havens Road
Gahanna, Ohio 43230
</TABLE>
STATE SAVINGS MANAGEMENT
The following table presents the names and ages of the directors and
certain executive officers of State Savings, their current positions and offices
held with State Savings, their business experience during the past five years
and certain other information, together with their beneficial ownership of State
Savings Common Shares at December 31, 1997:
<TABLE>
<CAPTION>
SHARES OF STATE SAVINGS COMMON STOCK
BENEFICIALLY OWNED AT DECEMBER 31,
1997
--------------------------------------
NUMBER OF SHARES
DIRECTOR OF OWNED
STATE SAVINGS --------------------- PERCENT OF
DIRECTORS AND EXECUTIVE OFFICERS SINCE SOLE SHARED CLASS
- -------------------------------- ------------- ---------- ------- -----------
<S> <C> <C> <C> <C>
David E. Reese, age 57, Chairman of the Board of
Directors of State Savings since July 1, 1997.
Formerly, Vice Chairman of the Board of
Directors of State Savings from 1972 to June
30, 1997...................................... 1970 867.000 24.750(2) 14.86%
Donald B. Shackelford, age 65, Vice Chairman of
State Savings since July 1, 1997. Formerly,
Chairman of the Board of Directors of State
Savings from 1972 to June 30, 1997. Director
of The Limited, Inc., The Progressive
Corporation, Worthington Foods, Inc., Intimate
Brands, Inc., and Abercrombie & Fitch Co...... 1967 117.006 24.750(1)(2) 2.36
Stanford Ackley................................. 1993 -- -- --
Ralph W. Anderson............................... 1972 5.000 -- 0.08
Leslie A. Bostic................................ 1974 1.000 -- 0.02
A. Grant Bowen.................................. 1980 3.000 -- 0.05
Tanny Crane..................................... 1993 5.000 -- 0.08
Robert H. Jeffery............................... 1969 5.000 -- 0.08
Phoebe R. Lewis................................. 1995 753.000 -- 12.55
Allan B. McFarland.............................. 1968 181.000 212.50(2) 6.56
All directors and executive officers as a group
(13 persons).................................. 2,050.006 212.50(2) 37.71
</TABLE>
- ---------------
(1) Does not include 629.518 shares owned by Mr. Shackelford's wife, Thekla R.
Shackelford.
(2) Includes 24.750 shares owned jointly by Messrs. Reese, Shackelford and
McFarland and reflected in each of their number of shares owned.
80
<PAGE> 81
The following table presents certain information regarding the compensation
received by David E. Reese and Donald B. Shackelford, the Chairman and Vice
Chairman of the Board of Directors of State Savings. This information is being
presented because both Mr. Reese and Mr. Shackelford will be appointed to
positions on the Board of Directors of Fifth Third. Information regarding the
compensation of the officers of Fifth Third is incorporated herein by reference
to Fifth Third's Proxy Statement dated February 9, 1998. See "AVAILABLE
INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS ($) COMPENSATION(2)(3)
--------------------------- ---- ------------ --------- ------------------
<S> <C> <C> <C> <C>
David E. Reese 1997 $296,400 $225,000 $45,408(2)(3)
Chairman
Donald B. Shackelford 1997 $296,400 $225,000 $45,408(2)(3)
Vice Chairman
</TABLE>
- ---------------
(1) Does not include amounts attributable to other miscellaneous benefits
received by executive officers. The cost to State Savings of providing such
benefits to each of Mr. Reese and Mr. Shackelford was less than 10% of his
cash compensation.
(2) As to each of Mr. Reese and Mr. Shackelford, includes contributions by State
Savings of $18,375 under the State Savings Bank Profit Sharing Plan, a
retirement plan qualified under Section 401(a) of the Code (the "Qualified
Plan"). Under the provisions of the Qualified Plan, a participant is
eligible (1) to make salary deferral contributions pursuant to Section
401(k) of the Code; (2) to receive employer matching contributions on a
portion of such salary deferral contributions and (3) to receive an employer
profit sharing contribution based on a percentage of his or her compensation
received from State Savings for the calendar year.
(3) As to each of Mr. Reese and Mr. Shackelford, includes contributions by State
Savings of $27,033, under the State Savings Bank Nonqualified Profit Sharing
Plan, a plan of deferred compensation which is not qualified under the
applicable provisions of the Code (the "Nonqualified Plan"). Pursuant to the
provisions of the Nonqualified Plan, each calendar year a participant is
eligible to receive an annual credit to his or her vested account, the
amount of which credit is determined in the discretion of the Executive
Compensation Committee of the Board of Directors (the "Committee"). In
addition, each year, participant accounts are credited with an "earnings"
factor determined by the Committee. Upon retirement, death, disability or
other termination of employment, a participant is eligible to receive a
distribution of the amount then credited to his or her account. Pursuant to
applicable law, all benefits under the Plan are, at all times, considered
assets of State Savings and subject to its general creditors.
Each of Mr. Reese and Mr. Shackelford received awards pursuant to the State
Savings Company 1995 Key Employee Incentive Compensation Plan (the "Key Plan").
The Key Plan is a plan of deferred compensation which is not qualified under
Section 401 of the Code. Under the provisions of the Key Plan, each participant
has an account to which a specified number of "units" is credited, the number of
which is determined in the discretion of the Committee. At the time such units
are initially credited to a participant's account, they are "valued," based upon
a fraction of the then book value of the State Savings Common Shares. At the
time that a participant is eligible for a distribution from the Key Plan, such
participant receives a cash payment equal to the difference between (1) the
value of the units credited to his or her account, determined by use of a
fraction of the book value of the State Savings Common Shares at time of
distribution and (2) the initial value of such units. Distributable events under
the Key Plan are determined based upon specific provisions contained in
agreements entered into between Key Plan participants and the Committee.
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<PAGE> 82
The following table sets forth certain information with respect to the
awards held by Mr. Reese and Mr. Shackelford pursuant to the Key Plan:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT 12/31/97 AT 12/31/97
SHARES ACQUIRED VALUE EXERCISEABLE/ EXERCISEABLE/
NAME ON EXERCISE REALIZED UNEXERCISEABLE UNEXERCISEABLE
---- --------------- -------- -------------- --------------
<S> <C> <C> <C> <C>
David E. Reese....................... N/A N/A 30,000/-0- $3,672,951(1)
Donald B. Shackelford................ N/A N/A 30,000/-0- 3,672,951(1)
</TABLE>
- ---------------
(1) Amount reflects the difference between the value of the units based upon the
closing price of Fifth Third Common Stock on January 2, 1998 and the initial
value of such units. All participants in the Key Plan agreed on January 2,
1998 to fix the value of the units based upon such closing price.
Mr. Reese and Mr. Shackelford have also executed Fifth Third Employment
Contracts. See "PROPOSAL -- MERGER OF STATE SAVINGS INTO FIFTH
THIRD -- Interests of Certain Persons in the Merger."
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<PAGE> 83
DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE
RIGHTS OF SHAREHOLDERS
Fifth Third and State Savings are both corporations organized under the
laws of the State of Ohio.
Fifth Third is authorized to issue 300,000,000 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 December 31, 1997, Fifth Third had outstanding
232,836,842 shares of Fifth Third Common Stock and no shares of Fifth Third
Preferred Stock. 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 stockholders, (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.
State Savings is authorized to issue 600,000 State Savings Common Shares.
As of the Record Date, State Savings had outstanding 6,000 State Savings Common
Shares.
Set forth below is a description of Fifth Third Common Stock and State
Savings Common Shares. This description and analysis are brief summaries of
relevant provisions of the Second Amended Articles of Incorporation, as amended,
and Code of Regulations of Fifth Third and of the Amended Articles of
Incorporation and Code of Regulations of State Savings and are qualified in
their entirety by reference to such documents.
VOTING RIGHTS
Holders of both Fifth Third Common Stock and State Savings Common Shares
are entitled to one vote per share on all matters submitted to a vote of
stockholders.
The Code of Regulations of both Fifth Third and State Savings 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 the Boards of Fifth Third and State Savings may make it more
difficult for a shareholder to acquire immediate control of Fifth Third or State
Savings and remove management by means of a hostile takeover. Since the terms of
approximately one-third of the incumbent directors expire each year, at least
two annual elections are necessary for the shareholders to replace a majority of
directors, whereas a majority of the directors of a non-classified board of
directors may be replaced in one annual meeting.
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 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 stockholder 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
stockholder 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,
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<PAGE> 84
as each stockholder sees fit. The availability of cumulative voting rights
enhances the ability of minority stockholders to obtain representation on the
Board of Directors.
Pursuant to State Savings' Amended Articles of Incorporation and Code of
Regulations, the shareholders of State Savings do not have the right to vote
cumulatively in the election of directors.
DIVIDENDS
Holders of Fifth Third Common Stock and State Savings Common Shares 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 State Savings 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 State Savings 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, like SSB and Century, 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 generally authorized to pay dividends during a calendar year
up to the greater of 100% of their net income during the calendar year plus the
amount that would reduce by one-half their surplus capital or 75% of net income
during the most recent four quarters (minus dividends previously paid over that
period).
The affiliates of Fifth Third include both state and nationally chartered
banks. Under the applicable regulatory limitations, during the year 1998, the
affiliates of Fifth Third could declare aggregate dividends limited to their
1998 eligible net profits, as defined, and their retained 1997 and 1996 net
income, without the approval of their respective regulators. The Comptroller of
the Currency, banking authorities of the States of Ohio, Indiana, Kentucky and
Florida, 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 State Savings 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. 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 State Savings, and their respective affiliates, may pay.
PREEMPTIVE RIGHTS
Holders of State Savings Common Shares are entitled to preemptive rights
with respect to any State Savings Common Shares that may be issued. Stockholders
of Fifth Third do not have such preemptive rights.
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<PAGE> 85
RIGHTS UPON LIQUIDATION
In the event of any liquidation, dissolution or winding up of State
Savings, the holders of State Savings Common Shares would be entitled to
receive, after payment or provision for payment of all debts and liabilities of
State Savings (including the payment of all fees, taxes and other expenses
incidental thereto), the remaining assets of State Savings available for
distribution. With respect to Fifth Third, Fifth Third's stockholders 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. State Savings' Code of Regulations also provides for the
indemnification of each director and officer of the corporation to the fullest
extent permitted by Ohio law. Fifth Third and State Savings do not have any
additional indemnification agreements with their directors or executive
officers.
If the Merger is consummated, Fifth Third will assume all such obligations
of State Savings for the indemnification of its officers and directors.
SHAREHOLDERS' MEETINGS; QUORUM
Special meetings of Fifth Third's stockholders may be called at any time by
the Board of Directors or by the stockholders 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 State Savings' shareholders may be called at any time by the
Chairman of the Board of Directors, the Vice Chairman, the President, the Vice
President authorized to exercise the authority of the President (in the case of
the President's absence, death or disability), the Secretary, the Board of
Directors or by the shareholders of State Savings upon the written application
of the holders of at least 25% of all State Savings Common Shares outstanding
and entitled to vote on the matters to be considered at the meeting. Such
applications must set forth the purposes of the meeting.
The presence in person or by proxy of the holders of a majority of the
shares of stock entitled to vote at a meeting on every matter that is to be
voted on constitutes a quorum under the Code of Regulations of Fifth Third. The
Code of Regulations of State Savings provide that the shareholders present in
person or by proxy shall constitute a quorum for a meeting.
SUBSCRIPTION, CONVERSION, REDEMPTION RIGHTS; STOCK NONASSESSABLE
Neither Fifth Third Common Stock nor State Savings Common Shares has
subscription or conversion rights, and there are no mandatory redemption
provisions applicable thereto. Shares of Fifth Third Common Stock issued to
shareholders of State Savings pursuant to the Affiliation 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 Articles of Incorporation and Code of Regulations of Fifth Third
contain various provisions which could make more difficult a change in control
of Fifth Third or discourage a tender offer or other plan to restructure Fifth
Third. The ability of Fifth Third to issue shares of Fifth Third Common Stock
may have the effect of delaying, deferring or preventing a change in control of
Fifth Third. Additionally, Ohio law contains several provisions which would also
make more difficult a change in control of each corporation or discourage a
tender offer or other plan to restructure each corporation. The following
discussion of some of these provisions is qualified in its entirety by reference
to those particular statutory and regulatory provisions.
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<PAGE> 86
OHIO CONTROL SHARE ACQUISITION ACT. Section 1701.831 of the Ohio Revised
Code, the Ohio Control Share Acquisition Act (the "Control Share Act"), provides
that any "control share acquisition" of an Ohio issuing public corporation shall
be made only with the prior authorization of the shareholders of the issuing
public corporation in accordance with the provisions of the Control Share Act. A
"control share acquisition" is defined under the Control Share Act to mean the
acquisition, directly or indirectly, by any person of shares of an issuing
public corporation that, when added to all other shares of the issuing public
corporation such person owns, would entitle such person, directly or indirectly,
to exercise voting power in the election of directors within the following
ranges: more than 20%, more than 33 1/3%, and a majority. Fifth Third and State
Savings are proceeding on the assumption that the proposed acquisition by Fifth
Third of State Savings Common Shares through the Merger may be deemed to be a
"control share acquisition" under the Control Share Act.
The Control Share Act also requires that the acquiring person must deliver
an acquiring person statement to the Ohio issuing public corporation. The Ohio
issuing public corporation must then call a special meeting of its shareholders
to vote upon the proposed acquisition within 50 days after receipt of such
acquiring person statement, unless the acquiring person agrees to a later date.
State Savings received an acquiring person statement from Fifth Third on April
6, 1998, a copy of which is attached hereto as Annex D, and State Savings'
shareholders will have the opportunity to vote upon Fifth Third's proposed
acquisition at a separate special meeting. Such separate control share
acquisition special meeting will be held immediately before the Special Meeting.
A notice and proxy for such separate control share acquisition special meeting
will be mailed to Shareholders of State Savings separate and apart from this
Proxy Statement/Prospectus.
The Control Share Act further specifies that the shareholders of the Ohio
issuing public corporation must approve the proposed control share acquisition
by certain percentages at a special meeting of shareholders at which a quorum is
present. Accordingly, in order to comply with the Control Share Act, Fifth Third
may only acquire State Savings Common Shares through the Merger upon the
affirmative vote of (i) a majority of the voting power of State Savings Common
Shares that is represented in person or by proxy at the separate special
meeting, and (ii) a majority of the voting power of State Savings Common Shares
that is represented in person or by proxy at the Special Meeting excluding those
State Savings Common Shares deemed to be "interested shares" for purposes of the
Control Share Act.
"Interested shares" are defined under the Control Share Act to mean shares
in respect of which the voting power is controlled by any of the following
persons: (1) an acquiring person (in this case, Fifth Third); (2) any officer of
State Savings; and (3) any director of State Savings who is also an employee of
State Savings. "Interested shares" also include State Savings Common Shares that
are acquired by any person after the date of the first public disclosure of the
proposed Merger (in this case, January 5, 1998) and the date of the Special
Meeting, if either (i) the aggregate consideration paid by such person, and any
person acting in concert with him, for such State Savings Common Shares exceeds
$250,000, or (ii) the number of shares acquired by such person, and any person
acting in concert with him, exceeds one-half of one percent of the outstanding
State Savings Common Shares. In order to determine whether any shares acquired
after January 5, 1998 constitute "interested shares" pursuant to the preceding
sentence, State Savings will examine its stock records as of January 5, 1998, as
of the Record Date and as of the last business day preceding the Special
Meeting. If any record holder (other than a broker, bank or other nominee) has
increased his ownership interest by more than one-half of one percent of the
outstanding State Savings Common Shares, or by a number of shares in excess of
$250,000 divided by the book value of a State Savings Common Share during the
period from January 5, 1998 through the Record Date, such additional shares held
by such holder will be deemed "interested shares" upon receipt by State Savings
of a validly executed proxy card from such a record holder. A record holder may
rebut a presumption that shares are "interested shares" by providing State
Savings with documentation satisfactory to State Savings' legal counsel
establishing that such shares are not "interested shares" within the definition
of Section 1701.01(CC)(2) of the Ohio Revised Code.
As of the Record Date, 1,121.75 of the State Savings Common Shares held by
employee directors and officers of State Savings would be "interested shares"
under the Control Share Act. Except as set forth in the preceding paragraph, all
other shares will be presumed to be disinterested shares unless State Savings
acquires actual knowledge of facts that evidence such shares must be deemed
"interested shares."
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<PAGE> 87
OHIO MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
prohibits an "Issuing Public Corporation" from engaging in a "Chapter 1704
Transaction" with an "Interested Shareholder" for a period of three years
following the date on which the person become an Interested Shareholder unless,
prior to such date, the directors of the Issuing Public Corporation approve
either the Chapter 1704 Transaction or the acquisition of shares pursuant to
which such person became an Interested Shareholder. Fifth Third is an Issuing
Public Corporation for purposes of the statute. Chapter 1704 is not applicable
to State Savings because it does not have a class of voting shares registered or
traded on a national securities exchange or registered under section 12(g) of
the Exchange Act and was not required to file periodic reports and information
pursuant to section 15(d) of the Exchange Act. An Interested Shareholder is any
person who is the beneficial owner of a sufficient number of shares to allow
such person, directly or indirectly, alone or with others, including affiliates
and associates, to exercise or direct the exercise of 10% of the voting power of
the Issuing Public Corporation in the election of directors.
A Chapter 1704 Transaction includes any merger, consolidation, combination,
or majority share acquisition between or involving an Issuing Public Corporation
and an Interested Shareholder or an affiliate or associate of an Interested
Shareholder. A Chapter 1704 Transaction also includes certain transfers of
property, dividends, and issuance or transfers of shares, from or by an Issuing
Public Corporation or a subsidiary of an Issuing Public Corporation to, with, or
for the benefit of an Interested Shareholder or an affiliate or associate of an
Interested Shareholder unless such transaction is in the ordinary course of
business of the Issuing Public Corporation on terms no more favorable to the
Interested Shareholder than those acceptable to third parties as demonstrated by
contemporaneous transactions. Finally, Chapter 1704 Transactions include certain
transactions which (a) increase the proportionate share ownership of an
Interested Shareholder, (b) result in the adoption of a plan or proposal for the
dissolution, winding up of the affairs, or liquidation of the Issuing Public
Corporation if such plan is proposed by or on behalf of the Interested
Shareholder, or (c) pledge or extend the credit or financial resources of the
Issuing Public Corporation to or for the benefit of the Interested Shareholder.
After the initial three-year moratorium has expired, an Issuing Public
Corporation may engage in a Chapter 1704 Transaction if (a) the acquisition of
shares pursuant to which the person became an Interested Shareholder received
the prior approval of the board of directors of the Issuing Public corporation,
(b) the Chapter 1704 Transaction is approved by the affirmative vote of the
holders of shares representing at least two-thirds of the voting power of the
Issuing Public Corporation and by the holders of shares representing at least a
majority of voting shares which are not beneficially owned by an Interested
Shareholder or an affiliate or associate of an Interested Shareholder, or (c)
the Chapter 1704 Transaction meets certain statutory tests designed to ensure
that it be economically fair to all shareholders.
OHIO TENDER OFFER PROCEDURES. Ohio law also provides that an offeror may
not make a tender offer or request or invitation for tenders that would result
in the offeror beneficially owning more than ten percent of any class of the
target company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and provides
such information to the target company and the offerees within Ohio. The
Securities Division may suspend the continuation of the control bid if the
Securities Division determines that the offeror's filed information does not
provide full disclosure to the offerees of all material information concerning
the control bid. The statute also provides that an offeror may not acquire any
equity security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan or bank holding company and the proposed
transaction requires federal regulatory approval. Accordingly, this provision
does not apply to the Merger.
EFFECT OF GOVERNMENTAL POLICIES
The earnings of both State Savings and Fifth Third and their 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
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<PAGE> 88
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 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 State Savings or Fifth Third and its
subsidiaries.
REGULATION OF FINANCIAL INSTITUTIONS
The following is a discussion of some of the regulatory requirements
applicable to bank holding companies, banks, savings and loan holding companies
and savings banks. 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. In addition to
being governed by federal and state laws specifically governing bank holding
companies, banks, savings and loan holding companies and savings banks, Fifth
Third, State Savings and each of their respective subsidiaries are also governed
by the corporate law of their state of incorporation to the extent such law does
not conflict with the laws specifically governing bank holding companies, banks,
savings and loan holding companies and savings banks.
HOLDING COMPANY REGULATION
BANK HOLDING COMPANIES IN GENERAL. 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 BHCA.
The Federal Reserve Board also may make examinations of a holding company
and each of its subsidiaries. The BHCA 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 BHCA 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.
SAVINGS AND LOAN HOLDING COMPANIES IN GENERAL. State Savings is a multiple
savings and loan holding company subject to the regulatory oversight,
examination and enforcement authority of the OTS. Though SSB and Century are not
savings associations, they have elected to be treated as such for holding
company purposes so that State Savings is not regulated as a bank holding
company. State Savings is required to register and file periodic reports with
the OTS. If the OTS determines that the continuation of a particular activity by
a savings and loan holding company constitutes a serious threat to the financial
condition of its subsidiary institutions, the OTS may impose restrictions on the
holding company. Such restrictions may include limiting the payment of
dividends, transactions with affiliates or any other activities deemed to pose a
serious threat to the subsidiary institutions.
Generally, no savings and loan holding company may (i) acquire or retain
control of a savings association or another savings and loan holding company or
control the assets thereof or (ii) acquire or retain more than 5% of the voting
shares of a savings association or holding company thereof, which is not a
subsidiary, without the prior written approval of the Director of the OTS.
Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise
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more than 25% of such company's stock may also acquire control of any savings
institution, other than a subsidiary institution, or any other savings and loan
holding company.
The Director of the OTS may approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
associations in more than one state, if (i) the multiple savings and loan
holding company involved controls a savings association which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987, (ii) if the laws of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions), or (iii) in the case of certain emergency
thrift acquisitions.
As a multiple savings and loan holding company, the activities of State
Savings and those of any of its subsidiaries (other than SSB, Century and FSB)
are subject to certain restrictions. Generally, no multiple savings and loan
holding company or subsidiary thereof that is not a savings association may
engage in any business activity other than (i) furnishing or performing
management services for a subsidiary savings association, (ii) conducting an
insurance agency or an escrow business, (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings association, (iv) holding
or managing properties used or occupied by a subsidiary savings association, (v)
acting as trustee under deeds of trust, (vi) engaging in those activities
previously directly authorized by federal regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) furnishing or performing such
other services or engaging in those activities authorized by the Federal Reserve
Board as permissible for bank holding companies, unless the director of the OTS
by regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the Director of the OTS prior to being engaged in by a multiple holding company.
Federal law provides that an insured institution shall be liable for any
loss incurred by the FDIC in connection with the default or potential default
of, or federal assistance provided to, an insured institution which is
controlled by the same holding company. Such loss would be apportioned among all
of the insured institutions controlled by the holding company.
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS, as a
result of which FSB may be regulated under federal law as a bank or be required
to change its charter. Such change in regulation or charter would likely change
the range of activities in which State Savings may engage and would probably
subject FSB to more regulation by the FDIC.
In addition, State Savings might become subject to different holding
company regulations which may limit the activities in which State Savings may
engage and may subject State Savings to other additional regulatory
requirements, including separate capital requirements. State Savings cannot now
predict when or whether Congress may actually pass legislation regarding the
regulatory requirements or charter of State Savings or FSB. Although such
legislation may change the activities in which State Savings or FSB are
authorized to engage, it is not anticipated that the current activities of State
Savings or FSB will be materially affected by those activity limits.
ACQUISITIONS OF SAVINGS ASSOCIATIONS BY HOLDING COMPANIES. Section 4 of
the BHCA 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 BHCA to establish a new notice procedure
for obtaining Federal Reserve Board approval under Section 4(a)(2) and 4(c)(8)
of the BHCA. 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
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Section 4(c)(8) of the BHCA 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.
CAPITAL REQUIREMENTS
CAPITAL REQUIREMENTS FOR FIFTH THIRD. The federal banking regulators have
issued regulations to implement certain capital requirements on commercial banks
and large bank holding companies, such as Fifth Third. Under these regulations,
commercial banks are required to maintain a minimum Tier 1 capital ratio to
adjusted total assets of 4%. Tier 1 capital generally consists of common
stockholders' equity, retained income and certain non-cumulative perpetual
preferred stock and related income, except that no intangibles and certain
purchased mortgage servicing rights and purchased credit card relationships may
be included in capital.
Additionally, commercial banks are required to maintain "total capital"
equal to at least 8% of total risk-weighted assets. For purposes of the risk
based capital requirement, "total capital" means Tier 1 capital (as described
above) plus "Tier 2 capital," provided that the amount of Tier 2 capital may not
exceed the amount of Tier 1 capital, less certain assets. The components of Tier
2 capital include certain permanent and maturing capital instruments that do not
qualify as Tier 1 capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. The Federal Reserve Board has
established capital requirements for bank holding companies that generally
parallel the capital requirements for commercial banks.
Fifth Third, and each of its subsidiary banks, is in compliance with the
current capital requirements. As of December 31, 1997, Fifth Third had a
leverage ratio of 10.16%, its Tier 1 risk-based capital ratio was 12.09% and its
total risk-based capital ratio was 14.70%.
CAPITAL REQUIREMENTS FOR STATE SAVINGS. SSB, Century and FSB are required
by applicable law and regulations to meet certain minimum capital requirements.
The capital standards include a leverage limit, or core capital requirement, a
tangible capital requirement applicable to FSB, and a risk-based capital
requirement.
For FSB, the leverage limit requires "core capital" of at least 3% of total
assets. "Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in consolidated subsidiaries, certain nonwithdrawable
accounts and pledged deposits of mutual associations.
The tangible capital requirement provides that FSB must maintain "tangible
capital" of not less than 1.5% of its adjusted total assets. "Tangible capital"
is defined as core capital minus any "intangible assets".
For SSB and Century, the leverage capital requirement is a minimum level of
Tier 1 capital to average total consolidated assets of 3%, if they have the
highest regulatory examination rating, well diversified risk and minimal
anticipated growth or expansion, and between 4% and 5% of average total
consolidated assets if they do not meet those criteria. "Tier 1" capital
includes common stockholders equity, noncumulative perpetual preferred stock and
minority interest in the equity accounts of consolidated subsidiaries, less all
intangibles, other than includable purchased mortgage servicing rights and
credit card relationships, and less certain identified losses and investments in
subsidiaries' securities.
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Pursuant to the risk-based capital requirement, each of SSB, Century and
FSB must maintain "risk-based capital" in an amount equal to not less than 8% of
risk-weighted assets. Risk-based capital is defined as core capital plus certain
additional items of capital. There are certain differences between the risk
weightings applicable to SSB and those applicable to State Savings and Century.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. Pending implementation of the interest rate risk component,
the OTS has the authority to impose a higher individualized capital requirement
on any savings association it deems to have excess interest rate risk. The OTS
also may adjust the risk-based capital requirement on an individual basis for
any association to take into account risks due to concentrations of credit and
non-traditional activities.
The FDIC has adopted a new interest rate risk component to the capital
requirements applicable to Non-member Banks. It includes a final rule to allow
for an increase in a Non-member Bank's risk-based capital requirements on an
individualized basis to address the bank's exposure to a decline in the economic
value of its capital due to a change in interest rates. It also includes a
proposed policy to provide for measurement of such decline in economic value by
determining the amount of change in the present value of an institution's
assets, liabilities and off-balance sheet items as a result of a 200 basis point
change in interest rates, and taking into account an institution's management of
its interest rate risk and the overall risk exposure of the institution. There
is a proposed exemption from the policy for small, well-managed institutions
with moderate interest rate risk exposure based on asset maturities or repricing
schedules. Such institutions must still measure and assess interest rate risk.
The FDIC has added a market risk component to the capital requirements of
Non-member Banks. Such component requires additional capital for general or
specific market risk of trading portfolios of debt and equity securities and
other investments or assets. The policy applies to an institution only if its
trading portfolio exceeds certain thresholds. State Savings and Century cannot
predict in what form this market risk component will be adopted, if at all. At
December 31, 1997, State Savings and Century did not have a trading portfolio.
The FDIC may also require additional capital to address concentrations of credit
and non-traditional activities on a case-by-case basis.
The OTS and FDIC have adopted regulations governing prompt corrective
action to resolve the problems of capital deficient and otherwise troubled
savings associations and Non-member Banks. At each successively lower defined
capital category, an institution is subject to more restrictive and numerous
mandatory or discretionary regulatory actions or limits, and the applicable
agency has less flexibility in determining how to resolve the problems of the
institution. The agencies have defined these capital levels as follows: (1)
well-capitalized institutions must have total risk-based capital of at least
10%, core or Tier 1 risk-based capital (consisting only of items that qualify
for inclusion in core or Tier 1 capital) of at least 6% and core or Tier 1
capital of at least 5%; (2) adequately capitalized institutions are those that
meet the regulatory minimum of total risk-based capital of at least 8%, core or
Tier 1 risk-based capital (consisting only of items that qualify for inclusion
in core or Tier 1 capital) of at least 4% and core or Tier 1 capital of at least
4% (except for institutions receiving the highest examination rating and with an
acceptable level of risk, in which case the core or Tier 1 capital level is at
least 3%); (3) undercapitalized institutions are those that do not meet
regulatory limits, but that are not significantly undercapitalized; (4)
significantly undercapitalized institutions have total risk-based capital of
less than 6%, core or Tier 1 risk-based capital (consisting only of items that
qualify for inclusion in core or Tier 1 capital) of less than 3% and core or
Tier 1 capital of less than 3%; and (5) critically undercapitalized institutions
are those with core or Tier 1 capital of less than 2% of total assets. In
addition, the agency generally can downgrade an institution's capital category,
notwithstanding its capital level, if, after notice and opportunity for hearing,
the institution is deemed to be engaging in an unsafe or unsound practice,
because it has not corrected deficiencies that resulted in it receiving a less
than satisfactory examination rating on matters other than capital or it is
deemed to be in an unsafe or unsound condition.
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An undercapitalized institution must submit a capital restoration plan to
the applicable agency within 45 days after it becomes undercapitalized. Such
institution will be subject to increased monitoring and asset growth
restrictions and will be required to obtain prior approval for acquisitions,
branching and engaging in new lines of business. Furthermore, critically
undercapitalized institutions must be placed in conservatorship or receivership
within 90 days of reaching that capitalization level, except under limited
circumstances. Each of the capital levels of SSB, Century and FSB at December
31, 1997, met the standards for well-capitalized institutions.
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
restoration plan until the institution has been adequately capitalized on an
average during each of the four preceding calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time it became undercapitalized or (b) the
amount necessary to bring the institution into compliance with all capital
standards applicable to such institution at the time the institution fails to
comply with its capital restoration plan.
REGULATION OF BANKS
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 and examination of the Office
of the Comptroller of the Currency. In addition, national banks must be members
of the Federal Reserve System and their deposits are insured by the FDIC. As
such, national banks are subject to certain regulations issued by the FDIC and
Federal Reserve Board. 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 Financial Institutions
(the "Division"), 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.
REGULATION OF SAVINGS BANKS
SUPERVISION AND EXAMINATION. The FDIC is responsible for the regulation
and supervision of all commercial banks and state savings banks that are not
members of the Federal Reserve System ("Non-member Banks"), including SSB and
Century. The OTS is responsible for the regulation and supervision of all
savings associations, including FSB.
The FDIC issues regulations governing the operations of Non-member Banks,
examines such institutions and may initiate enforcement actions against such
institutions and certain persons affiliated with them for violations of laws and
regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the FDIC may appoint a conservator or a receiver for a
Non-member Bank.
The OTS issues regulations governing the operations of savings
associations, regularly examines such institutions and imposes assessments on
savings associations based on their asset size to cover the costs of this
supervision and examination. It also promulgates regulations that prescribe
permissible activities for federally chartered associations, including the types
of lending that such associations may engage in and the investments in real
estate, subsidiaries and securities they may make. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Non-member Banks and savings associations are also subject to regulatory
oversight under various consumer protection and fair lending laws. These laws
govern, among other things, truth-in-lending disclosure,
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equal credit opportunity, fair credit reporting and community reinvestment.
Failure to abide by federal laws and regulations governing community
reinvestment could limit the ability of an institution to open a new branch or
engage in a merger transaction.
LIQUIDITY. OTS regulations require that a savings association maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, and specified United States Government, state or federal agency
obligations) equal to a monthly average of not less than 4% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet liquidity
requirements. The average eligible liquidity of FSB at December 31, 1997, was
approximately $26.4 million, or 6.14%, and exceeded the applicable 4% liquidity
requirement by approximately $9.2 million.
SSB and Century are not required to maintain a specific level of liquidity;
however, the FDIC expects them to maintain adequate liquidity to protect the
safety and soundness of their institutions.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally related
to domestic residential real estate and manufactured housing and include credit
card, student and small business loans, and stock issued by any FHLB, the FHLMC
or the FNMA. Under this test 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct business
and 20% of liquid assets) must consist of QTI on a monthly average basis in 9
out of every 12 months. Congress created a second QTL test, effective September
30, 1996, pursuant to which a savings association will qualify as a QTL thrift
if at least 60% of the institution's assets (on a tax basis) consist of
specified assets (generally loans secured by residential real estate or
deposits, educational loans, cash and certain governmental obligations). The OTS
may grant exceptions to the QTL test under certain circumstances. If a savings
association fails to meet the QTL test, the association and its holding company
become subject to certain operating and regulatory restrictions. A savings
association that fails to meet the QTL test will not be eligible for new FHLB
advances. At December 31, 1997, each of SSB, Century and FSB met the QTL test.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions,
including dividend payments. OTS regulations also establish a three-tier system
limiting capital distributions according to ratings of associations based on
their capital level and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year equal to
the greater of 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, or the amount authorized for a
Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. FSB meets the requirements for a Tier 1 association and has not
been notified of any need for more than normal supervision.
Tier 2 consists of associations that before and after the proposed
distribution meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions of up
to 75% of net income over the most recent four-quarter period. Tier 3
associations do not meet current minimum capital requirements and must obtain
OTS approval of any capital distribution. Tier 2 associations that propose to
make a capital distribution in excess of the noted safe harbor level must also
obtain OTS approval. Tier 2 associations proposing to make a capital
distribution within the safe harbor provisions and Tier 1 associations proposing
to make any capital distribution need only submit written notice to the OTS 30
days prior to such distribution. The OTS may object to the distribution during
that 30-day period based on safety and soundness concerns.
As a subsidiary of State Savings, FSB is required to give the OTS 30-days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during that 30-day period.
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FDIC regulations provide that an insured depository institution shall make
no capital distribution if after making the distribution, the institution would
be undercapitalized.
LENDING LIMITS. OTS and FDIC regulations generally limit the aggregate
amount that SSB, Century and FSB can lend to one borrower to an amount equal to
15% of the association's Lending Limit Capital. A savings association may lend
to one borrower an additional amount not to exceed 10% of the association's
unimpaired capital and surplus, if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." Certain types of loans are not subject to these
limits. Notwithstanding the specified limits, an association may lend to one
borrower up to $500,000 for any purpose. In applying these limits, the
regulations require that loans to certain related borrowers be aggregated. At
December 31, 1997, SSB, Century and FSB were in compliance with these lending
limits.
As Non-member Banks organized under Ohio law, Century and SSB must follow
the FDIC and Ohio law regarding limits on lending. See "Ohio Savings Regulation"
below.
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and thrifts and safeguards the safety and soundness of
the banking and thrift industries. The FDIC administers two separate insurance
funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings
banks and the SAIF for savings associations. The FDIC has examination authority
over all insured depository institutions, including SSB, Century and FSB, and
has authority to initiate enforcement actions against federally insured savings
associations, if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Prior to October 1, 1996, the reserves of the SAIF were below the level
required by law, because a significant portion of the assessments paid into the
fund have been and are being used to pay the cost of prior thrift failures,
while the reserves of the BIF met the level required by law in May 1995. Because
of the differing reserve levels of the funds, deposit insurance assessments paid
by healthy associations were reduced significantly below the level paid by
healthy savings associations effective in mid-1995. Assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per 100 in deposits in late 1995. Such excess equaled
approximately $.23 per $100 in deposits beginning in 1996.
Federal legislation, which was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $.657 per
$100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves
to the level required by law. Certain banks holding SAIF-insured deposits were
required to pay the same special assessment on 80% of deposits at March 31,
1995. In addition, part of the cost of prior thrift failures, which had
previously been paid only by SAIF members, will be paid by BIF members. As a
result, BIF assessments for healthy banks in 1997 was $.013 per $100 in deposits
and SAIF assessments for healthy institutions in 1997 was $.064 per $100 in
deposits.
Collectively, SSB, Century and FSB had $1.65 billion in deposits at March
31, 1995, and paid a special assessment of $11 million in November 1996, which
was accounted for and recorded as of September 30, 1996. This assessment was
tax-deductible, but reduced earnings for the year ended December 31, 1996.
Century is a member of the BIF and was not required to pay any special
assessments.
TRANSACTIONS WITH AFFILIATES AND INSIDERS. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association with any "interested"
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director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers are
subject to additional limitations. Each of SSB, Century and FSB was in
compliance with such restrictions at December 31, 1997.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate is any company or entity which controls, is controlled by or is under
common control with the financial institution. In a holding company context, the
parent holding company of a savings association and any companies that are
controlled by such parent holding company are affiliates of the institution.
Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a
financial institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus for any one affiliate and 20% of such capital stock and
surplus for the aggregate of such transactions with all affiliates, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or the subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to limits in Sections 23A and 23B, SSB may not make any loan or
other extension of credit to an affiliate unless the affiliate is engaged only
in activities permissible for a bank holding company and may not purchase or
invest in securities of any affiliate, except shares of a subsidiary. Exemptions
from Sections 23A or 23B of the FRA may be granted only by the Federal Reserve
Board. Each of SSB, Century and FSB was in compliance with these requirements at
December 31, 1997.
FEDERAL RESERVE REQUIREMENTS. Federal Reserve Board regulations currently
require savings associations to maintain reserves of 3% of net transaction
accounts (primarily NOW accounts) up to $47.8 million (subject to an exemption
of up to $4.7 million), and of 10% of net transaction accounts in excess of
$47.8 million. At December 31, 1997, each of SSB, Century and FSB were in
compliance with its reserve requirements.
FEDERAL HOME LOAN BANK SYSTEM. The FHLBs provide credit to their members
in the form of advances. As members of the FHLB System, SSB, Century and FSB are
each required to hold a minimum stock balance equal to the greater of 1.0% of
its mortgage related assets, or 0.3% of its total assets. State Savings is in
compliance with this requirement with an aggregate investment by SSB, Century
and FSB in FHLB stock of $17.9 million at December 31, 1997.
FHLB advances to member institutions who meet the QTL Test are generally
limited to 50% of the member's assets, less other advances. At December 31,
1997, the maximum limit on advances to SSB, Century and FSB was approximately
$359 million, in the aggregate. The granting of advances is also subject to the
FHLB's collateral and credit underwriting guidelines.
Upon the origination or renewal of a loan or advance, FHLBs required to
obtain and to maintain a security interest in collateral in one or more of the
following categories: fully disbursed, whole first mortgage loans on improved
residential property or securities representing a whole interest in such loans;
securities issued, insured or guaranteed by the United States Government or an
agency thereof; deposits in any FHLB; or other real estate related collateral
(up to 30% of the member's capital) acceptable to the applicable FHLB, if such
collateral has a readily ascertainable value and the FHLB can perfect its
security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers.
OHIO SAVINGS REGULATION. As savings banks incorporated under Ohio law, SSB
and Century are subject to regulation by the Division. Such regulation affects
the internal organization of SSB and Century, as well as their savings, mortgage
lending and other investment activities. Ohio law requires that SSB and Century
each maintain at least 60% of their assets in housing-related and other
specified investments. At December 31, 1997, SSB and Century had at least 60% of
their respective assets in such investments. The ability of Ohio savings banks
to engage in certain state-authorized investments is subject to oversight and
approval by the FDIC.
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Ohio law generally limits the aggregate amount that a savings bank can lend
to one borrower to an amount equal to 15% of the institution's unimpaired
capital and surplus. Based on such limit, SSB and Century were able to lend
approximately $25.4 million and $3 million, respectively, to one borrower at
December 31, 1997. A savings bank may lend to one borrower an additional amount
not to exceed 10% of the institution's unimpaired capital and surplus, if the
additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral."
The Division is responsible for the regulation and supervision of Ohio
savings banks in accordance with the laws of the State of Ohio. Periodic
examinations by the Division are usually conducted on a joint basis with the
federal examiners. Ohio law requires that SSB and Century maintain federal
deposit insurance as a condition of doing business.
Any mergers involving, or acquisitions of control of, Ohio savings banks
must be approved by the Division. The Division may initiate certain supervisory
measures or formal enforcement actions against Ohio savings banks. Ultimately,
if the grounds provided by law exist, the Division may place an Ohio savings
bank in conservatorship or receivership.
LEGAL MATTERS
Certain legal matters will be passed upon for State Savings by Vorys,
Sater, Seymour and Pease LLP, Columbus, Ohio. 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 State Savings in connection with the Merger
have been duly authorized and, if issued pursuant to the Affiliation Agreement,
will be validly issued, fully paid and non-assessable under the current laws of
the State of Ohio. Vorys, Sater, Seymour and Pease LLP, Cincinnati, Ohio, will
render its opinion to State Savings with respect to certain federal income tax
consequences of the Merger.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from Fifth Third Bancorp's Annual Report on Form 10-K for the year
ended December 31, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements of State Savings as of December 31,
1997 and 1996 and the consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997, included in this Proxy Statement/Prospectus have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report included herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
96
<PAGE> 97
INDEX TO FINANCIAL STATEMENTS OF STATE SAVINGS
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Statements of Financial Condition at December
31, 1997 and 1996......................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 98
INDEPENDENT AUDITORS' REPORT
The Board of Directors
State Savings Company
Columbus, Ohio
We have audited the accompanying consolidated statements of financial condition
of State Savings Company and its subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of State Savings Company and its
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
February 10, 1998
Columbus, Ohio
F-2
<PAGE> 99
STATE SAVINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT COMMON STOCK PAR VALUE AMOUNT AND SHARES)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash on hand and in financial institutions................ $ 32,487 $ 37,152
Federal funds sold and securities purchased under resale
agreements.............................................. 114,900 189,500
AVAILABLE FOR SALE SECURITIES:
Investment securities (amortized cost of $66,232 and
$53,158 at December 31, 1997 and 1996, respectively).... 71,934 57,433
Mortgage-backed securities (amortized cost of $375,727 and
$339,427 at December 31, 1997 and 1996, respectively)... 378,918 338,174
HELD TO MATURITY SECURITIES:
Investment securities (fair value of $195 and $200 at
December 31, 1997 and 1996, respectively)............... 195 200
Mortgage-backed securities (fair value of $11,094 and
$12,384 at December 31, 1997 and 1996, respectively).... 11,162 12,483
LOANS HELD FOR SALE......................................... 46,698 23,715
LOANS RECEIVABLE (net of allowance for loan losses of
$34,487 and $29,702 in 1997 and 1996, respectively........ 2,065,427 1,852,213
PREMISES AND EQUIPMENT--Net................................. 28,854 21,428
ACCRUED INTEREST RECEIVABLE:
Interest-bearing deposits, federal funds sold and
investment securities................................... 976 995
Loans and mortgage-backed securities...................... 12,222 10,735
FEDERAL HOME LOAN BANK STOCK--At cost....................... 17,938 16,722
OTHER ASSETS:
Real estate owned......................................... 3,425 4,344
Property held for future development or sale.............. 517 1,706
Prepaid expenses and other assets......................... 3,912 5,775
Deferred income taxes..................................... 12,638 17,755
---------- ----------
Total other assets...................................... 20,492 29,580
---------- ----------
Total................................................ $2,802,203 $2,590,330
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS.................................................... $2,332,918 $2,102,673
ADVANCES FROM FEDERAL HOME LOAN BANK........................ 146,821 199,732
ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES................. 26,881 25,327
ACCRUED INTEREST PAYABLE.................................... 2,920 2,356
OTHER BORROWINGS............................................ -- 4,594
TAXES AND INSURANCE PREPAID BY BORROWERS.................... 10,970 9,226
FEDERAL INCOME TAXES........................................ 15,022 15,199
---------- ----------
Total liabilities....................................... 2,535,532 2,359,107
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 17)
SHAREHOLDERS' EQUITY:
Capital stock--$100 par value; authorized 60,000 shares,
outstanding 6,000 shares................................ 600 600
Net unrealized gains on securities available for sale..... 5,638 1,923
Retained earnings--partially restricted................... 260,433 228,700
---------- ----------
Total shareholders' equity.............................. 266,671 231,223
---------- ----------
Total................................................ $2,802,203 $2,590,330
========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 100
STATE SAVINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Loans.................................................... $176,227 $156,196 $135,552
Available for sale securities............................ 28,695 31,580 8,161
Held to maturity securities.............................. 9,984 9,747 35,976
Other.................................................... 1,213 1,105 872
-------- -------- --------
Total............................................... 216,119 198,628 180,561
-------- -------- --------
INTEREST EXPENSE:
Deposits................................................. 109,227 98,358 92,950
Federal Home Loan Bank advances.......................... 12,281 13,926 14,440
Other borrowings......................................... 43 67 116
-------- -------- --------
Total............................................... 121,551 112,351 107,506
-------- -------- --------
NET INTEREST INCOME........................................ 94,568 86,277 73,055
PROVISION FOR LOAN LOSSES.................................. 6,603 1,518 1,322
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........ 87,965 84,759 71,733
-------- -------- --------
NON-INTEREST INCOME:
Mortgage banking operations:
Net gain (loss) on sales of loans, servicing and
mortgage-backed securities.......................... 3,313 5,572 (989)
Loan service fees..................................... 3,163 3,496 3,917
Gain on sales of:
Available for sale securities......................... 111 527 796
Real estate owned, net................................ 597 92 69
Other assets.......................................... 3,625 653 1,755
Loan fees and charges.................................... 4,610 2,956 2,701
Other.................................................... 7,672 6,052 5,145
-------- -------- --------
Total............................................... 23,091 19,348 13,394
-------- -------- --------
NON-INTEREST EXPENSES:
Compensation and benefits................................ 30,521 24,430 22,683
Federal deposit insurance premium........................ 1,238 3,032 3,843
SAIF Assessment.......................................... -- 10,962 --
State franchise taxes.................................... 3,778 (521) 2,873
Advertising.............................................. 1,940 1,436 1,006
Other.................................................... 21,635 17,490 15,718
-------- -------- --------
Total............................................... 59,112 56,829 46,123
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES......................... 51,944 47,278 39,004
FEDERAL INCOME TAXES....................................... 18,891 15,155 12,378
-------- -------- --------
NET INCOME................................................. $ 33,053 $ 32,123 $ 26,626
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 101
STATE SAVINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAINS (LOSSES) RETAINED
ON SECURITIES EARNINGS--
COMMON AVAILABLE PARTIALLY
STOCK FOR SALE RESTRICTED TOTAL
----- -------- ---------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994..................... 600 $(3,086) $171,211 $168,725
Net income..................................... -- -- 26,626 26,626
Dividends paid ($90 per share)................. -- -- (540) (540)
Net change in unrealized gains (losses) on
securities available......................... -- 9,243 -- 9,243
--- ------- -------- --------
BALANCE, DECEMBER 31, 1995..................... 600 6,157 197,297 204,054
Net income................................... -- -- 32,123 32,123
Dividends paid ($120 per share).............. -- -- (720) (720)
Net change in unrealized gains (losses) on
securities available for sale............. -- (4,234) -- (4,234)
--- ------- -------- --------
BALANCE, DECEMBER 31, 1996..................... 600 1,923 228,700 231,223
Net income................................... -- -- 33,053 33,053
Dividends paid ($220 per share).............. -- -- (1,320) (1,320)
Net change in unrealized gains (losses) on
securities available for sale............. -- 3,715 -- 3,715
--- ------- -------- --------
BALANCE, DECEMBER 31, 1997..................... 600 $ 5,638 $260,433 $266,671
=== ======= ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 102
STATE SAVINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................. $ 33,053 $ 32,123 $ 26,626
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Provision for loan losses........................... 6,603 1,518 1,322
Reduction in allowance for loss on financial
instruments....................................... -- (1,100) --
Increase (decrease) in deferred loan fees........... (467) 106 2,291
Gain on sales of available for sale securities...... (111) (527) (796)
Gain on sale of other assets........................ (3,625) (653) (1,755)
(Gain) loss on sales of loans, servicing and
mortgage-backed securities........................ (3,313) (5,572) 989
Depreciation and amortization....................... 3,357 2,069 1,670
Deferred federal income tax provision (credit)...... 2,961 (2) 375
Gain on sales of real estate owned.................. (597) (92) (69)
Net originations of loans held for sale............. (22,983) (47,532) (207,749)
Decrease (increase) in accrued interest
receivable........................................ (1,468) 392 (4,020)
Increase in other liabilities....................... 1,941 1,687 5,309
Decrease (increase) in other assets................. 647 (5,246) (4,049)
--------- --------- ---------
Net cash (used in) provided by operating
activities..................................... 15,998 (22,829) (179,856)
--------- --------- ---------
INVESTING ACTIVITIES:
Net increase in loans.................................. (218,602) (200,474) (346,231)
Proceeds from maturities on:
Available for sale securities....................... 107,836 124,900 106,524
Held to maturity securities......................... 1,326 6,005 92,442
Proceeds from sale of:
Available for sale securities....................... 65,811 155,943 218,088
Real estate owned................................... 4,081 3,368 1,077
Property held for future development or sale........ 4,814 756 2,633
Purchase of:
Available for sale securities....................... (222,910) (132,549) (107,858)
Held to maturity securities......................... (15,268)
Premises and equipment.............................. (10,783) (5,177) (4,884)
--------- --------- ---------
Net cash used in investing activities............. (268,427) (47,228) (53,477)
========= ========= =========
</TABLE>
(Continued)
See notes to consolidated financial statements
F-6
<PAGE> 103
STATE SAVINGS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits............................... $ 230,245 $ 146,729 $ 230,724
Federal Home Loan Bank advances:
Borrowings.......................................... 259,940 116,230 78,626
Repayments.......................................... (312,851) (166,055) (20,164)
Net increase (decrease) in other borrowings............ (4,594) 4,570 (17,496)
Payment of cash dividends.............................. (1,320) (720) (3,870)
Increase in taxes and insurance prepaid by borrowers... 1,744 89 1,891
--------- --------- ---------
Net cash provided by financing activities........... 173,164 100,843 269,711
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (79,265) 30,786 36,378
CASH AND CASH EQUIVALENTS--Beginning of year............. 226,652 195,866 159,488
--------- --------- ---------
CASH AND CASH EQUIVALENTS--End of year................... $ 147,387 $ 226,652 $ 195,866
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid (including interest credited to deposits,
1997--$79,147; 1996--$72,581; 1995--$66,757)........ $ 120,905 $ 112,096 $ 106,880
========= ========= =========
Federal income taxes paid.............................. $ 14,100 $ 12,430 $ 13,940
========= ========= =========
NON-CASH TRANSACTIONS:
Securitization of mortgage loans into
mortgage-backed securities.......................... $ -- $ 70,263 $ 178,840
========= ========= =========
Transfer of loan balances on foreclosed property to
real estate owned................................... $ 2,565 $ 1,682 $ 859
========= ========= =========
</TABLE>
(Concluded)
See notes to consolidated financial statements
F-7
<PAGE> 104
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of State Savings Company and its subsidiaries (collectively the
"Company") all of which are wholly-owned. The principal subsidiaries are State
Savings Bank ("State"), Century Bank ("Century") and State Savings Bank, FSB
("FSB"). All significant intercompany balances and transactions have been
eliminated.
Nature of Operations--The Company's primary business consists of attracting
deposits from the general public and originating or purchasing loans, primarily
residential and commercial real estate loans, principally in Ohio and Arizona.
The Company may service loans it has sold to investors. The Company's
consolidated results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and the interest expense
incurred on interest-bearing liabilities, such as deposits and other borrowings.
To a lesser extent, the operating results are also affected by the origination,
purchase, sale and servicing of residential mortgage loans. Non-interest income
from these activities includes servicing fee income and net gains or losses on
sales of mortgage loans and mortgage-backed securities.
The Company's operating expenses consist primarily of employee
compensation, occupancy expenses, federal deposit insurance premiums and other
general and administrative expenses. The Company's results of operations are
significantly affected by its provisions for loan losses and by general economic
and competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory agencies.
The Company serves as a financial intermediary by gathering funds from a
variety of sources and investing such funds in loans and other investments with
the objective of maximizing the interest differential received within acceptable
risk parameters. These loans and investments carry with them inherent risks that
differ from investments made by other commercial, industrial and service
enterprises. The risks and uncertainties facing savings institutions and other
financial intermediaries are substantial and, in many instances, beyond the
control of the institution or intermediary.
Estimates and Assumptions--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The financial condition of a savings institution, and to some extent its
operating performance, is dependent to a significant degree upon estimates and
appraisals of value, evaluations of creditworthiness and assumptions about
future events and economic conditions. History has demonstrated that these
estimates, appraisals, evaluations and assumptions are subject to rapid change
and that such changes can materially affect the reported financial condition and
performance of a savings institution.
Cash Equivalents--Cash equivalents include amounts in financial
institutions, federal funds sold, and interest bearing deposits, all of which
have purchased maturities of three months or less. The Company enters into
agreements to purchase securities (generally mortgage-backed securities) under
agreements to resell substantially identical securities. The amounts advanced
under these agreements represent short-term investments and are classified as
cash equivalents in the statement of financial condition. The securities are
held by the Company. At December 31, 1997 and 1996, these agreements matured
within 90 days. Securities purchased under agreements to resell averaged
approximately $53 million in 1997 and $35 million in 1996; the maximum amount
outstanding at any month-end was $75 million in 1997 and $75 million in 1996.
F-8
<PAGE> 105
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ACCOUNTING POLICIES (CONTINUED)
Securities Held to Maturity and Available for Sale--The Company records
investment and mortgage-backed securities at cost on the settlement date.
Discounts and premiums are amortized using a method which approximates the
interest method over the estimated lives of the assets.
Securities classified as held to maturity are stated at amortized cost
because the Company has the ability and positive intent to hold these securities
to maturity.
Securities classified as available for sale are stated at fair value with
unrealized holding gains and losses reported net of related income taxes, as a
separate component of shareholders' equity until realized. A decline in the fair
value of any available for sale or held to maturity security below cost that is
deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security.
Dividend and interest income are recognized when earned. Realized gains and
losses from the sale of securities are included in earnings and are derived
using the specific identification method for determining the cost of securities
sold. The fair value of securities held to maturity and available for sale are
based on quoted market prices.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
"A Guide to Implementation of Statement 115 on Accounting for Certain
Investments In Debt and Equity Securities." This guide deals with various
implementation issues regarding Statement of Financial Accounting Standards
(SFAS) No. 115. A provision of the guide permitted a one-time reassessment of
the Company's classification of all securities. Under this provision, a
reclassification from the held to maturity category to another category does not
call into question the Company's intent to hold other debt securities to
maturity. The Company reclassified held to maturity securities with a carrying
value of $336,153,000 to available for sale. For such securities, an
unrecognized gain of $4,226,000, net of $2,276,000 in deferred taxes, was
recorded in shareholders' equity.
Loans Receivable--The Company originates and purchases mortgage loans for
its portfolio or for sale in the secondary market.
Mortgage loans held for investment are carried at the unpaid principal
balance, less allowance for losses and net deferred origination fees and
discounts. Mortgage loans held for sale are carried at the lower of aggregate
cost or fair value.
Loans are placed on non-accrual status when payments of principal or
interest become 90 days or more past due or earlier when an analysis of a
borrower's creditworthiness indicates payment in full is not probable. When a
loan is placed on non-accrual status, all previously accrued and unpaid interest
is charged against income. Interest accruals are resumed on such loans only when
they are brought current with respect to interest and principal and when, in the
opinion of management, the loans are estimated to be fully collectible.
Management believes that non-residential real estate loans possess unique
risk characteristics and such loans are individually reviewed for impairment. If
a borrower's cash flow is insufficient to meet contractual payments as they
become due, the loan is deemed impaired. The Company recognizes interest income
on an impaired loan when earned, unless the loan is on non-accrual status, in
which case interest income is recognized when received or when the loan is
repaid.
Loss Allowances--Allowances have been established for possible loan and
real estate owned ("REO") losses. The provisions for losses charged to
operations are based on management's judgment of current economic conditions,
credit risks of the loan portfolio and fair value estimates of REO and impaired
collateral dependent loans. Management believes that these allowances are
adequate. While management uses available information to estimate losses on
loans and REO, future additions to the allowances may be necessary based on
changes in economic conditions, thereby causing these estimates to be
particularly susceptible to changes that could result in
F-9
<PAGE> 106
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ACCOUNTING POLICIES (CONTINUED)
a material adjustment to results of operations. In addition, various regulatory
agencies, as an integral part of their examination processes, periodically
review these allowances and may require the Company to recognize additions to
the allowances based on their judgment about information available to them at
the time of their examination.
Premises and Equipment--Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
ASSET DESCRIPTION LIFE IN YEARS
----------------- -------------
<S> <C>
Buildings............................................ 20 - 40
Building improvements................................ 10 - 20
Furniture, fixtures, and equipment................... 2 - 10
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995,
was $3,357,000, $2,069,000 and $1,670,000, respectively. Expenditures for
betterments and major renovations are capitalized; ordinary repairs and
maintenance are charged to operations as incurred.
Long-Lived Assets--Management reviews long-lived assets for possible
impairment if there is a significant event which indicates an impairment may
have occurred. If an asset is determined to be impaired, such impairment is
measured using estimates of the discounted future earnings potential of the
assets.
Real Estate Owned--Real estate owned and other repossessed assets are
recorded at the lower of cost or fair value less estimated cost to sell. Costs
to develop or improve the property are capitalized; costs of holding the
property are charged to expense. The specific-identification method is used to
determine gain or loss on the sale of this real estate. The Company periodically
evaluates real estate owned to ascertain that it is properly recorded at the
lower of cost or fair value, and valuation allowances for additional estimated
losses on real estate owned are provided when any decline in carrying value is
deemed to have occurred subsequent to the date of foreclosure.
At December 31, 1997 and 1996, approximately $1,626,000 and $1,967,000,
respectively, of the real estate owned represented operating properties. The
operating results of such properties did not have a significant impact on the
Company's operations. The remaining balance of real estate owned at December 31,
1997 was primarily undeveloped land. At December 31, 1997 and 1996, the
properties included in the real estate owned balance are located as follows: 47%
in Ohio, 48% in Arizona, and 5% in other states (49%, 39% and 12%, respectively,
at December 31, 1996).
Property Held for Future Development or Sale--Property held for future
development or sale is carried at the lower of cost or estimated fair value less
estimated cost to sell. The properties are parcels of land which have been or
are being developed for sale.
Federal Income Taxes--The Company files a consolidated Federal income tax
return. Income taxes are provided for all taxable items included in the income
statement, regardless of when such items are reported for tax purposes, adjusted
for permanent differences. Deferred tax assets and liabilities are recognized
for the 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 expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. When
new tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Loan Origination Fees--Nonrefundable loan origination and commitment fees,
net of direct origination costs, are deferred and recognized as a yield
adjustment, using the interest method, over the life of the underlying
F-10
<PAGE> 107
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ACCOUNTING POLICIES (CONTINUED)
loan or until the loan is repaid or sold. Only direct loan origination costs
relating to successful loan originations, not idle time or over capacity, are
deferred.
Forward Commitments and Other Hedging Instruments--The Company utilizes
interest rate caps, floors and swaps to hedge its exposure to interest rate
risk. The cost of acquiring caps and floors is capitalized and amortized over
the term of the agreements. Interest rate swaps are linked through designation
with certain assets or liabilities of the Company. The Company uses settlement
accounting for swaps wherein periodic net cash settlements are recognized as
they accrue. (Note 6 provides further information regarding swaps, caps and
floors).
The Company uses forward commitments to hedge interest rate risk associated
with loans held for sale and/or, commitments to fund loans. Gains and losses on
these transactions are included in the net gain or loss when the asset is sold.
Reverse Repurchase Agreements--Securities sold under agreements to
repurchase ("reverse repurchase agreements") are reported as financings. The
obligation to repurchase the securities is reflected as a liability; the
securities underlying the agreements remain in the asset accounts. The Company's
policy is to enter into reverse repurchase agreements only with major brokerage
firms who are primary dealers in government securities. The securities
underlying the agreements are delivered to the dealers who arranged the
transactions.
Stock Compensation--In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which was effective January 1, 1996.
Pursuant to SFAS 123, companies are encouraged, but not required, to adopt the
fair value method of accounting for employee stock-based transactions. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. Companies are also permitted to continue using
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees" for such transactions. Under APB 25, compensation is
recognized based on the difference, if any, between the market value of the
stock and the amount an employee must pay. The Company policy is to account for
stock-based compensation using APB 25.
Self-Insurance--The Company is self-insured with respect to health
insurance benefits, reserves for which have been included in accrued
liabilities. The Company has stop-loss insurance policies which limit its
potential liability on any one claim or in a single year.
Advertising Costs--Advertising costs are expensed as incurred.
Other--SFAS No. 130, "Reporting Comprehensive Income" was issued in June
1997 and is effective for fiscal years beginning after December 15, 1997. The
statement requires additional reporting of items that affect comprehensive
income but not net income. An example relevant to the Company is unrealized
gains and losses on securities available for sale. This statement will result in
additional financial statement disclosures.
Reclassifications--Certain 1996 and 1995 amounts have been reclassified to
conform to the 1997 presentation.
F-11
<PAGE> 108
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. AVAILABLE FOR SALE SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair
values of available for sale securities are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
U. S. government and agency obligations........... $ 66,100 $ 228 $ (37) $ 66,291
Federal Home Loan Mortgage Corporation
common stock................................... 132 5,511 -- 5,643
-------- ------ ------- --------
Total.......................................... $ 66,232 $5,739 $ (37) $ 71,934
======== ====== ======= ========
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation
Certificates................................... $ 22,740 $ 56 $ (153) $ 22,643
Federal National Mortgage Association
Certificates................................... 30,211 177 (112) 30,276
Government National Mortgage Association
Certificates................................... 67,164 3,057 -- 70,221
Collateralized mortgage obligations............... 214,226 1,060 (894) 214,392
Other mortgage-backed securities.................. 41,386 -- -- 41,386
-------- ------ ------- --------
Total.......................................... $375,727 $4,350 $(1,159) $378,918
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
U. S. government and agency obligations........... $ 53,002 $ 59 $ (26) $ 53,035
Federal Home Loan Mortgage Corporation
common stock................................... 156 4,242 -- 4,398
-------- ------ ------- --------
Total.......................................... $ 53,158 $4,301 $ (26) $ 57,433
======== ====== ======= ========
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation
Certificates................................... $ 29,090 $ 135 $ (735) $ 28,490
Federal National Mortgage Association
Certificates................................... 36,511 83 (944) 35,650
Government National Mortgage Association
Certificates................................... 47,378 2,330 -- 49,708
Collateralized mortgage obligations............... 171,036 620 (2,742) 168,914
Other mortgage-backed securities.................. 55,412 -- -- 55,412
-------- ------ ------- --------
Total.......................................... $339,427 $3,168 $(4,421) $338,174
======== ====== ======= ========
</TABLE>
F-12
<PAGE> 109
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. AVAILABLE FOR SALE SECURITIES (CONTINUED)
At December 31, 1997, the amortized cost and estimated fair value of
investments in debt securities, by contractual maturity, are shown below
(dollars in thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
<S> <C> <C>
Due in:
One year or less................................... $10,010 $10,025
One year through five years........................ 39,186 39,363
Five years through ten years....................... 5,106 5,141
After ten years.................................... 11,798 11,762
------- -------
Total........................................... $66,100 $66,291
======= =======
</TABLE>
Gross gains and gross losses realized on the sales of available for sale
securities are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Year Ended December 31:
Gross gains.................................. $1,086 $1,175 $1,043
Gross losses................................. (975) (648) (247)
------ ------ ------
Gain, net...................................... $ 111 $ 527 $ 796
====== ====== ======
</TABLE>
At December 31, 1997, certain available for sale securities with a carrying
value of $32,963,000 were pledged as collateral for public funds and commercial
deposits (see Note 8) and obligations under interest rate swap agreements (see
Note 6).
Total amortized cost of mortgage backed securities with adjustable-rates
totaled $200 million and $232 million at December 31, 1997 and 1996,
respectively.
F-13
<PAGE> 110
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
3. HELD TO MATURITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of held to maturity securities are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities--municipal and other
investments........................................ $ 195 $ -- $ -- $ 195
------- ----- ------- -------
Mortgage-backed securities:
Collateralized mortgage obligations................ $ 4,996 $ -- $ (134) $ 4,862
Other mortgage-backed securities................... 6,166 66 -- 6,232
------- ----- ------- -------
Total........................................... $11,162 $ 66 $ (134) $11,094
======= ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities--municipal and other
investments........................................ $ 200 $ -- $ -- $ 200
------- ----- ------- -------
Mortgage-backed securities:
Collateralized mortgage obligations................ $ 4,996 $ -- $ (181) $ 4,815
Other mortgage-backed securities................... 7,487 82 -- 7,569
------- ----- ------- -------
Total........................................... $12,483 $ 82 $ (181) $12,384
======= ===== ======= =======
</TABLE>
At December 31, 1997, the amortized cost and estimated fair value of
investments in debt securities by contractual maturity, are shown below (dollars
in thousands). Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
Due in one year or less.............................. $195 $195
==== ====
</TABLE>
F-14
<PAGE> 111
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. LOANS RECEIVABLE
Loans receivable are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1997 1996
---- ----
<S> <C> <C>
One-to-four family loans (including participation interests
purchased, 1997--$19,635; 1996--$24,609).................. $1,373,391 $1,156,596
Multi-family loans.......................................... 119,329 121,319
Real estate construction loans.............................. 355,678 354,356
Non-residential real estate loans........................... 200,348 229,512
---------- ----------
Total mortgage loans................................... 2,048,746 1,861,783
Consumer and other loans.................................... 215,627 171,757
Collateral loans............................................ 4,387 4,372
---------- ----------
Total loans............................................ 2,268,760 2,037,912
Undisbursed loans in process................................ (155,539) (142,293)
Unamortized discounts on purchased loans.................... (216) (252)
Deferred net loan origination and commitment fees........... (13,091) (13,452)
Allowance for possible loan losses.......................... (34,487) (29,702)
---------- ----------
Loans receivable, net.................................. $2,065,427 $1,852,213
========== ==========
</TABLE>
The Company originates both adjustable and fixed interest rate loans. At
December 31, 1997, the composition of these loans was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
FIXED RATE
- -----------------------------------------------
TERM TO NET
MATURITY BOOK VALUE
-------- ----------
<S> <C> <C>
1 mo. - 1 yr....................... $ 26,856
1 yr. - 3 yr....................... 35,452
3 yr. - 5 yr....................... 46,318
5 yr. - 10 yr...................... 86,257
10 yr. - 20 yr..................... 57,674
Over 20 years...................... 77,521
----------
Total............................ $ 330,078
==========
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE RATE
- -----------------------------------------------
TERM TO NET
REPRICING BOOK VALUE
--------- ----------
<S> <C> <C>
1 mo. - 1 yr....................... $1,253,587
1 yr. - 3 yr....................... 593,505
3 yr. - 5 yr....................... 91,590
----------
Total............................ $1,938,682
==========
</TABLE>
The adjustable rate loans have interest rate adjustment limitations and are
generally indexed to one of the following: the prime rate, the one-year U.S.
Treasury bill rate, or the 11th District Federal Home Loan Bank cost of funds.
Future market factors may affect the correlation of the interest rate adjustment
with the rates the Company pays on the short-term deposits that have been
primarily utilized to fund these loans.
F-15
<PAGE> 112
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. LOANS RECEIVABLE (CONTINUED)
The following information pertains to impaired loans (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
As of December 31:
Gross impaired loans which have allowances................ $ 5,414 $ 9,356
Less: related allowances for loan losses.................. (3,862) (7,255)
------- -------
Net impaired loans with related allowances................ 1,552 2,101
Impaired loans with no related allowances................. 4,786 5,382
------- -------
Total.................................................. $ 6,338 $ 7,483
======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
For the year ended December 31:
Average impaired loans outstanding, net................ $5,168 $5,154 $4,371
Interest income recognized............................. 802 557 362
Interest income received............................... 1,050 738 557
</TABLE>
Changes in the allowance for loan losses were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
For the year ended December 31:
Balance at beginning of year........................ $29,702 $30,416 $30,309
Provision charged to operations..................... 6,603 1,518 1,322
Loans charged off................................... (4,141) (2,389) (3,433)
Recoveries.......................................... 2,323 157 2,218
------- ------- -------
Balance at end of year.............................. $34,487 $29,702 $30,416
======= ======= =======
</TABLE>
The Company originates residential real estate, commercial real estate, and
consumer and other loans to customers primarily located in the states of Ohio
and Arizona. Although the loan portfolio is diversified, it is subject to a
certain degree of credit risk. Because commercial real estate loans are often
dependent on income production or future development of real estate to meet the
terms of the loans, they are subject to a greater risk of collectibility than
single-family real estate loans. Also, adverse economic conditions in the
Company's primary lending areas could affect collectibility. A summary of the
Company's loans by type and geographical area is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
NON- NON-
RESIDENTIAL RESIDENTIAL RESIDENTIAL RESIDENTIAL
PROPERTY LOCATIONS REAL ESTATE REAL ESTATE OTHER REAL ESTATE REAL ESTATE OTHER
------------------ ----------- ----------- ----- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Ohio............................... 72% 86% 77% 72% 82% 96%
Arizona............................ 24 3 4 24 5 2
Other.............................. 4 11 19 4 13 2
--- --- --- --- --- ---
Total......................... 100% 100% 100% 100% 100% 100%
=== === === === === ===
Percent of total loans........ 87% 9% 4% 85% 11% 4%
=== === === === === ===
</TABLE>
At December 31, 1997 and 1996, certain first mortgage loans collateralize
Federal Home Loan Bank advances (see Note 9).
F-16
<PAGE> 113
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. MORTGAGE BANKING OPERATIONS
The Company services certain mortgage loans which it originates or
purchases and sells to investors in the secondary market. Such loans are
commonly securitized into Federal National Mortgage Association (FNMA) or
Federal Home Loan Mortgage Corporation (FHLMC) mortgage-backed securities.
Servicing loans for investors generally consists of collecting payments, holding
advance payments by borrowers for taxes and insurance, making inspections as
required of the mortgage premises, collecting amounts due from delinquent
mortgagors, supervising foreclosures in the event of unremedied defaults and
generally administering the loans for the investors to whom they have been sold.
The servicing portfolio is subject to reduction by reason of normal amortization
and prepayment of outstanding mortgage loans. Fees earned for servicing loans
owned by investors are reported as income when the related mortgage loan
payments are collected. Loan servicing costs are charged to expense as incurred.
Forward commitments to sell loans and mortgage-backed securities reduce the
market risk associated with originating loans for sale. In order to fulfill a
forward commitment, the Company typically exchanges its current production of
loans for mortgage-backed securities through FNMA or FHLMC which are then
delivered to a national securities firm at a future date, at prices or yields
specified by the contracts. These forward commitments primarily relate to
fixed-rate loan pools with settlement dates ranging from 30 to 90 days. The
risks associated with such contracts arise from the possible inability of
counterparties to meet the terms of their contracts or the Company's inability
to acquire loans to fulfill these contracts. If such factors as fluctuations in
interest rates affect the Company's ability to originate loans, the Company
would normally fulfill its commitment by purchasing securities in the open
market.
Mortgage loans serviced for entities other than the Company are not
included in the accompanying consolidated statements of financial condition. The
unpaid principal balances of loans serviced for others at December 31, 1997 and
1996 were (in millions) $690 and $792, respectively. The mortgage servicing
portfolio is primarily covered by servicing agreements pursuant to the
mortgage-backed securities programs of the FNMA and the FHLMC. Under these
agreements, the Company may be required to advance funds temporarily to make
scheduled payments of principal, interest, taxes or insurance if the borrower
fails to make such payments. Although the Company cannot charge any interest on
such advance funds, it typically recovers the advances within a reasonable
number of days upon receipt of the borrower's payment; or, in the absence of
such payments, advances are recovered through FHA insurance or VA guarantees or
FNMA or FHLMC reimbursement provisions in connection with loan foreclosures. The
amount of funds advanced by the Company pursuant to servicing agreements is not
material.
Custodial escrow balances maintained in connection with loans serviced for
entities other than the Company approximated $6.2 million and $7.1 million at
December 31, 1997 and 1996, respectively. Substantially all of these balances
are held by the Company and are included in deposits in the accompanying
consolidated statements of financial condition.
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
122, "Accounting for Mortgage Servicing Rights an amendment to FASB Statement
No. 65." SFAS No. 122 required that a mortgage banking enterprise recognize as
separate assets, rights to service mortgage loans for others that have been
acquired through either the purchase or origination of a loan. A mortgage
banking enterprise that sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights ("MSR") and the loans based on their relative values. The FASB
issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" during June 1996. SFAS No. 125, among other
things, applies a "financial-components approach" that focuses on control,
whereby an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. While SFAS No. 125
supersedes SFAS No. 122, its accounting guidance is consistent, in most
respects, with
F-17
<PAGE> 114
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. MORTGAGE BANKING OPERATIONS (CONTINUED)
SFAS No. 122 concerning residential mortgage servicing rights. SFAS No. 125
requires that MSR be periodically analyzed for impairment by stratifying
servicing assets based on one or more predominant risk characteristics and
recognizing impairment through a valuation allowance on a disaggregate basis.
The adoption of SFAS No. 122 and 125 did not have a material impact on financial
condition or results of operations. Beginning in 1996, the Company principally
sells loans with servicing released; therefore, the balance of MSRs recorded is
not material.
6. INTEREST RATE SWAPS, CAPS AND FLOORS
The Company utilizes interest rate floors, caps and, to a lesser extent,
swaps to hedge its interest rate exposure.
At December 31, 1997 and 1996, the Company has one swap with a notional
amount of $10 million which requires payment of interest at prime, less 255
basis points; the Company receives three month LIBOR. This swap matures in June
1998. At December 31, 1997, a U.S. government agency Note with a carrying amount
of $100,000 was pledged as collateral under the swap agreement. Swap with a
notional amount of $30 million matured in September 1996. For the years ended
December 31, 1997, 1996 and 1995, the net interest expense related to swaps was
$6,000, $1,036,000 and $1,806,000, respectively.
To protect against interest rate declines on certain assets, the Company
has purchased interest rate floor positions. The interest rate floors have
payments based on three month LIBOR. If LIBOR declines below the strike rate,
the Company receives the difference between LIBOR and the strike price on the
notional principal amount. As rates decline, the interest received on the floors
serves to offset the decline in the interest received on the variable-rate
assets. The unamortized cost of floors, which is included in prepaid expenses
and other assets, was approximately $88,000 and $27,000 at December 31, 1997 and
1996, respectively.
Interest rate caps serve to hedge the Company's variable-rate deposits. The
interest rate caps have payments based on three-month LIBOR. When LIBOR
increases above the strike rate, the Company receives interest on the difference
between LIBOR and the strike rate on the notional principal amount. The deposits
interest expense is reduced by the interest received on the interest rate caps.
The unamortized costs of caps, which is classified with prepaid expenses and
other assets, was $527,000 and $1,078,000 at December 31, 1997 and 1996,
respectively. Interest received on caps less amortization of the premium
resulted in net interest expense of $460,000 in 1997, $367,000 in 1996 and
$156,000 in 1995.
The following table summarizes the Company's interest rate caps and floors
for the periods presented:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
UNREALIZED -----------------
NOTIONAL GAINS STRIKE LIFE
AMOUNT (LOSSES) RATE (YEARS)
-------- ---------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997:
Interest rate floors purchased................... $ 45,000 $ 21 4.50% 1.7
Interest rate caps purchased..................... 80,000 (368) 6.06% 1.0
December 31, 1996:
Interest rate floors purchased................... 45,000 2 4.28% 1.5
Interest rate caps purchased..................... 105,000 (481) 6.05% 1.7
</TABLE>
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to the above financial instruments. However,
the Company deals only with primary dealers and does not anticipate
nonperformance by the counterparty.
F-18
<PAGE> 115
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
------- -------
<S> <C> <C>
Land........................................................ $ 8,089 $ 5,624
Buildings and building improvements......................... 24,290 17,295
Furniture, fixtures, and equipment.......................... 11,593 10,267
------- -------
Total..................................................... 43,972 33,186
Less accumulated depreciation............................... 15,118 11,758
------- -------
Premises and equipment--net................................. $28,854 $21,428
======= =======
</TABLE>
8. DEPOSITS
Deposit balances by interest rate (average effective rate) are summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
AVERAGE AVERAGE
DESCRIPTION RATE AMOUNT PERCENT RATE AMOUNT PERCENT
----------- ------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Passbook/statement.............. 3.08% $ 153,506 6.6% 3.11% $ 185,562 8.8%
NOW and demand.................. 1.20 220,816 9.5 1.24 189,283 9.0
Market access................... 4.82 614,753 26.4 4.70 537,470 25.6
---------- ----- ---------- -----
989,075 42.5 912,315 43.4
========== ===== ========== =====
Certificates of deposit:
1 year or less................ 5.62 429,115 18.4 5.34 366,056 17.4
1 to 3 1/2 years.............. 5.98 495,102 21.2 5.97 449,464 21.3
4 or more years............... 6.24 144,188 6.2 6.42 127,825 6.1
Negotiated.................... 5.18 38,919 1.6 4.36 26,768 1.3
IRA (1-10 years).............. 6.25 236,519 10.1 6.19 220,245 10.5
---------- ----- ---------- -----
1,343,843 57.5 1,190,358 56.6
---------- ----- ---------- -----
Total...................... 5.00% $2,332,918 100.0% 4.89% $2,102,673 100.0%
==== ========== ===== ==== ========== =====
</TABLE>
Certificate accounts at December 31, 1997 mature as follows (dollars in
thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE AMOUNT
------------ ----------
<S> <C> <C>
Year ending December 31:
1998..................................................... 5.68% $ 847,536
1999..................................................... 6.11 249,372
2000..................................................... 6.54 138,955
2001..................................................... 6.52 41,092
2002..................................................... 6.63 47,377
Thereafter............................................... 6.72 19,511
---- ----------
Total................................................. 5.92% $1,343,843
==== ==========
</TABLE>
F-19
<PAGE> 116
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. DEPOSITS (CONTINUED)
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
For the year ended December 31:
Passbook/statement................................. $ 4,549 $ 5,306 $ 8,872
NOW and demand..................................... 2,823 2,783 2,013
Market access...................................... 27,735 24,060 16,125
Certificates of deposit............................ 74,120 66,209 65,940
-------- ------- -------
$109,227 $98,358 $92,950
======== ======= =======
</TABLE>
United States Government obligations with carrying value of $10,000,000 and
mortgage-backed securities with carrying value of approximately $22,963,000
collateralize public funds and commercial deposits at December 31, 1997.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The maturities and weighted average interest rate of advances from the
Federal Home Loan Bank are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE
AT DECEMBER 31,
1997 1997 1996
--------------- -------- --------
<S> <C> <C> <C>
Due as of December 31:
Within 1 year................................ 6.17% $ 40,000 $ 90,500
Over 1 year to 2 years....................... 6.32 5,000 30,000
Over 2 years to 3 years...................... 5.83 15,000 8,613
Over 3 years to 4 years...................... 6.69 45,500 25,000
Over 4 years to 5 years...................... 6.13 10,562 3,000
Thereafter................................... 6.08 30,759 42,619
-------- --------
Total.......................................... $146,821 $199,732
======== ========
</TABLE>
The Company has pledged certain mortgage loans and its Federal Home Loan
Bank stock as collateral for the above advances. It is required to maintain
eligible first mortgage loans in an amount equal to 150% of such advances as
collateral.
10. OTHER BORROWINGS
Securities Sold Under Repurchase Agreements
Reverse repurchase agreements consist of securities (generally
mortgage-backed securities) sold to major brokerage firms under agreements to
repurchase, generally within 90 days. The obligation to repurchase the
F-20
<PAGE> 117
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. OTHER BORROWINGS (CONTINUED)
securities is recorded as a financing; the securities underlying the agreements
remain in the asset accounts. A summary of reverse repurchase agreements is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
As of December 31:
Balance................................................ N/A $4,594 N/A
Weighted average interest rate......................... N/A 5.44% N/A
For the year ended December 31:
Maximum amount at any month end........................ $4,525 $4,594 $8,934
Average amount outstanding............................. 2,959 3,239 7,799
</TABLE>
11. LEASE COMMITMENTS
The Company occupies premises under noncancellable operating leases with
unexpired terms up to twelve years. Rent expense was approximately $880,000,
$785,000 and $750,000 in 1997, 1996 and 1995, respectively. At December 31,
1997, the minimum future rental commitments under all such leases with initial
or remaining terms of more than one year are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998....................................................... $ 684
1999....................................................... 515
2000....................................................... 396
2001....................................................... 288
2002....................................................... 206
Thereafter................................................. 375
------
Total.................................................... $2,464
======
</TABLE>
12. REGULATORY CAPITAL AND RETAINED EARNINGS
State, Century and FSB (the "Banks") are subject to various regulatory
capital requirements administered by federal and state banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory--and
possibly discretionary--actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific capital guidelines that involve quantitative
measures of the Banks' assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Banks' capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
and to be classified as "well capitalized" require the Banks to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk weighted assets (as defined), Tier I
capital (as defined) to average assets (as defined), and of Tangible Capital (as
defined) to total assets. In their evaluation of capital adequacy, the
regulators also assess exposure to declines in the economic value of the
Company's capital due to changes in interest rates. As of December 31, 1997 and
1996, based on the most recent notification from the Federal Deposit Insurance
Corporation (the primary federal regulator of State and Century) and the Office
of Thrift Supervision (the primary federal regulator of FSB), the Banks were
each classified as well capitalized under the regulatory framework for prompt
corrective action. Management believes, as of December 31, 1997, that the Banks
meet all capital adequacy requirements to which they are subject and there are
no conditions or events that have changed the institutions' prompt corrective
action categories.
F-21
<PAGE> 118
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. REGULATORY CAPITAL AND RETAINED EARNINGS (CONTINUED)
The Banks' capital and ratios and the requirements for capital adequacy and
to be categorized as well capitalized for prompt corrective action are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
FOR CAPITAL TO BE CATEGORIZED
ACTUAL ADEQUACY AS WELL CAPITALIZED
---------------- ---------------- --------------------
AS OF DECEMBER 31, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------- -------- ----- -------- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk weighted
assets):
State............................. $162,194 13.0% $100,038 8.0% $125,074 10.0%
Century........................... 19,027 12.6% 12,122 8.0% 15,153 10.0%
FSB............................... 34,717 13.2% 21,108 8.0% 26,385 10.0%
Tier 1 Capital (to risk weighted
assets):
State............................. 146,470 11.7% 50,019 4.0% 75,028 6.0%
Century........................... 17,120 11.3% 6,061 4.0% 9,092 6.0%
FSB............................... 32,311 12.2% N/A N/A 15,831 6.0%
Tier 1 Capital (to average assets):
State............................. 146,470 7.1% 61,479 3.0% 102,465 5.0%
Century........................... 17,120 7.8% 6,588 3.0% 10,980 5.0%
Tier 1 Capital (to total assets):
FSB............................... 32,311 6.7% 14,432 3.0% 24,053 5.0%
Tangible Capital (to total assets):
State............................. N/A N/A N/A N/A N/A N/A
Century........................... N/A N/A N/A N/A N/A N/A
FSB............................... 32,311 6.7% 7,216 1.5% N/A N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk weighted
assets):
State............................. $175,764 14.8% $ 94,745 8.0% $118,431 10.0%
Century........................... 16,087 12.9% 9,936 8.0% 12,420 10.0%
FSB............................... 28,788 12.9% 17,890 8.0% 22,362 10.0%
Tier 1 Capital (to risk weighted
assets):
State............................. 160,878 13.6% 47,372 4.0% 71,059 6.0%
Century........................... 14,523 11.7% 4,963 4.0% 7,452 6.0%
FSB............................... 26,628 11.9% N/A N/A 13,417 6.0%
Tier 1 Capital (to average assets):
State............................. 160,878 8.3% 58,229 3.0% 97,047 5.0%
Century........................... 14,523 7.3% 5,941 3.0% 9,901 5.0%
Tier 1 Capital (to total assets):
FSB............................... 26,628 6.6% 12,093 3.0% 20,154 5.0%
Tangible Capital (to total assets):
State............................. N/A N/A N/A N/A N/A N/A
Century........................... N/A N/A N/A N/A N/A N/A
FSB............................... 26,628 6.6% 6,046 1.5% N/A N/A
</TABLE>
F-22
<PAGE> 119
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. REGULATORY CAPITAL AND RETAINED EARNINGS (CONTINUED)
Consolidated shareholders' equity at December 31, 1997 of $266,671 is the
sum of $65,132 applicable to State Savings Company and its non-regulated
subsidiaries and $201,539 applicable to the Banks. A reconciliation of the
Banks' shareholders' equity to regulatory capital measures is as follows:
<TABLE>
<CAPTION>
STATE CENTURY FSB
-------- ------- -------
<S> <C> <C> <C>
Shareholders' equity--GAAP........................... $151,945 $17,130 $32,464
Less unrealized gains on available for sale
securities......................................... 5,475 10 153
-------- ------- -------
Total tangible and Tier I regulatory capital......... 146,470 17,120 32,311
Allowable portion of general allowance for loan
losses............................................. 15,724 1,907 2,406
-------- ------- -------
Total capital...................................... $162,194 $19,027 $34,717
======== ======= =======
</TABLE>
Management believes that the Banks will continue to meet minimum regulatory
capital requirements, as described above, in the foreseeable future. However,
events beyond the control of the Banks, such as increased interest rates or a
downturn in the economy in areas where the Banks have most of their loans, may
affect future earnings and the ability of the Banks to meet future minimum
capital requirements.
To remain adequately capitalized and/or to meet regulatory requirements,
certain dividend restrictions apply to the Banks. At December 31, 1997, retained
earnings available for dividend declaration without prior regulatory approval
were as follows:
<TABLE>
<S> <C>
State.............................................. $55,943
Century............................................ 5,447
FSB................................................ 8,919
</TABLE>
13. FEDERAL INCOME TAXES
Effective for its tax year beginning in 1996, the tax bad debt deduction
rules were modified. Previously, qualifying thrifts (State and FSB) were
permitted a deduction of either actual bad debts under the tax experience method
or an annual addition to a reserve for bad debts based upon a percentage of
taxable income (8%), subject to certain limitations. Bad debt deductions under
the percentage of taxable income method for years prior to 1988 (the "base
year") are included in taxable income of later years only if the bad debt
reserve is used subsequently for purposes other than to absorb bad debt losses.
Because State and FSB do not intend to use the reserve for purposes other than
to absorb losses, no deferred income taxes have been provided for bad debt
reserves arising before December 1, 1988. Retained earnings at December 31,
1997, includes approximately $44,242,000 representing such bad debt deductions
for which no deferred income taxes have been provided.
For years beginning after the base year, a deferred tax liability is
recorded if the addition to the tax bad debt reserve causes the reserve to
exceed the base year amount. In August 1996, legislation was passed by Congress
that (1) repealed the percentage of taxable income bad debt deduction and (2)
required thrift institutions to recapture the excess of their bad debt reserves
over the base year reserves. Deferred taxes have been recorded for this
difference; thus, the recapture will not have a significant effect on the
Company's future operations. However, the recapture provision will require an
additional tax payment of $4,646,000, generally payable over four years,
starting in 1999. Effective with its tax year beginning in 1996, the Company
will no longer be entitled to a tax bad debt deduction under the percentage of
taxable income method and instead will generally be limited to a deduction equal
to its actual experience losses.
F-23
<PAGE> 120
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
13. FEDERAL INCOME TAXES (CONTINUED)
The income tax provision is composed of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current............................................... $15,930 $15,157 $12,003
Deferred.............................................. 2,961 (2) 375
------- ------- -------
Total............................................... $18,891 $15,155 $12,378
======= ======= =======
</TABLE>
A reconciliation of the amount of expected income tax expense using the
Federal corporate statutory rate and the actual income tax expense follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Provision computed at statutory rate...... $18,180 35.0% $16,547 35.0% $13,651 35.0%
Refund of prior years taxes............... (1,656) (4.2)
Other..................................... 711 1.4 (1,392) (2.9) 383 0.9
------- ---- ------- ---- ------- ----
Total................................... $18,891 36.4% $15,155 32.1% $12,378 31.7%
======= ==== ======= ==== ======= ====
</TABLE>
Significant components of deferred tax assets and liabilities are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax asset:
Bad debt reserves......................................... $16,408 $14,944
Accrued profit sharing/bonus.............................. 4,623 4,410
Premium on loan sales..................................... 1,489 2,254
Loan fees................................................. 4,646 5,336
Other..................................................... 2,376 3,407
------- -------
Total.................................................. 29,542 30,351
------- -------
Deferred tax liability:
Bad debt reserve greater than base year................... 4,398 4,646
Unrealized gain on securities available for sale.......... 3,255 1,099
FHLB dividends............................................ 2,334 1,961
Interest income........................................... 5,943 3,707
Other..................................................... 974 1,183
------- -------
Total.................................................. 16,904 12,596
------- -------
Net deferred tax asset...................................... $12,638 $17,755
======= =======
</TABLE>
14. BENEFIT PLANS
Qualified Plan
A qualified profit sharing plan, along with a 401(k) provision, covers
substantially all employees. Employees can contribute a portion of their salary
according to the 401(k) provision and the Company will make a matching
contribution subject to certain limitations. Employee contributions and the
Company match are fully vested. The profit sharing contribution is at the
discretion of the Board of Directors. Total plan expense was $1,495,000 in 1997
and $1,349,000 in 1996.
F-24
<PAGE> 121
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
14. BENEFIT PLANS (CONTINUED)
Nonqualified Plans
Effective December 31, 1990, the Company discontinued its nonqualified
profit sharing plan (old plan). Certain participants in the old plan are
receiving payments of their accrued benefits over seven years. Other
participants in the old plan had their accrued benefits transferred to a new
nonqualified plan (new plan). For both plans, interest is credited on the
accrued benefit liability at a rate equal to the return on shareholders' equity
earned by the Company for the year.
The Company also has a nonqualified employee incentive compensation plan
(stock appreciation rights) in which units awarded to employees increase in
value based on changes in the Company's shareholders' equity compared to a base
year. There were 140 stock appreciation rights (SARs) shares granted in 1995,
five shares granted in 1996 and 15 shares granted in 1997. The SARs vest over a
five-year period. There are certain changes in control features which accelerate
the SARs vesting. Contributions to the nonqualified plans are at the sole
discretion of the Executive Compensation Committee of the Board of Directors.
Nonqualified plan expense was $2,062,000 in 1997 and $1,715,000 in 1996.
The unfunded liability for the nonqualified plans of $11,231,000 and $8,726,000
at December 31, 1997 and 1996, respectively, is classified with accounts payable
and other liabilities.
Stock Option Plan
In 1994, a stock option plan was adopted. Under this plan, awards may be granted
to acquire 180 shares of the Company's common stock. No options have been
granted as of December 31, 1997.
15. NON-INTEREST INCOME AND EXPENSES
Other non-interest income and expenses consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Other income:
VISA account charges and fees............................. $ 1,483 $ 1,346 $ 1,148
NOW account charges and fees.............................. 4,452 3,607 2,550
Rental and other.......................................... 1,737 1,099 1,447
------- ------- -------
Total.................................................. $ 7,672 $ 6,052 $ 5,145
======= ======= =======
Other expenses:
Data processing........................................... $ 3,581 $ 3,811 $ 2,929
Supplies, telephone, and other office..................... 4,647 4,033 3,313
Occupancy................................................. 2,970 2,730 2,717
Real estate owned......................................... 798 521 866
NOW and other savings accounts............................ 1,537 1,717 1,226
Dues, fees, insurance, and other.......................... 2,669 1,909 1,488
Depreciation and amortization............................. 3,357 2,069 1,670
Professional services..................................... 1,049 688 907
Other..................................................... 1,027 12 602
------- ------- -------
Total.................................................. $21,635 $17,490 $15,718
======= ======= =======
</TABLE>
F-25
<PAGE> 122
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
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 and Cash Equivalents and Accrued Interest Receivable and Payable--For
such items, the carrying amount is a reasonable estimate of fair value.
Investment Securities and Mortgage-Backed Securities--For such securities,
fair value is based on quoted market prices or dealer quotes. If quoted market
prices are not available, fair value is estimated using quoted market prices for
similar securities.
Loans Held for Sale--The fair value of loans held for sale is estimated
based on outstanding commitments from investors or current investor yield
requirements.
Mortgage Servicing Rights--The fair value of mortgage servicing rights is
determined based on estimated discounted cash flows to be received less the
estimated costs of servicing.
Loan Receivables--The fair value 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.
Federal Home Loan Bank Stock--All Federal Home Loan Bank stock transactions
are executed at par; thus, par value is used as fair value.
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.
Advances From Federal Home Loan Bank--The fair value of these advances is
estimated using the rates currently offered for similar advances with similar
remaining maturities or, when available, quoted market prices.
Interest Rate Swaps--The fair value of interest rate swaps is the estimated
amount that the Company would pay to terminate the swap agreements at the
reporting date, taking into account current interest rates and the current
creditworthiness of the swap counterparties.
Interest Rate Floors and Caps--The fair value of interest rate floors and
caps is determined by reference to quoted market prices.
F-26
<PAGE> 123
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of the Company's financial instruments are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996
----------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............... $ 147,387 $ 147,387 $ 226,652 $ 226,652
Available for sale securities........... 450,852 450,852 395,607 395,607
Held to maturity securities............. 11,357 11,289 12,683 12,384
Loans held for sale..................... 46,698 47,298 23,715 23,715
Loans receivable........................ 2,065,427 2,063,694 1,852,213 1,873,731
Accrued interest receivable............. 13,198 13,198 11,730 11,730
Mortgage servicing rights............... 320 320 400 400
Federal Home Loan Bank stock............ 17,938 17,938 16,722 16,722
Financial liabilities:
Deposits................................ 2,332,918 2,332,593 2,102,673 2,106,522
Accrued interest payable................ 2,920 2,920 2,356 2,356
Securities sold under agreements to
repurchase and other borrowings...... 4,594 4,594
Advances from Federal Home Loan Bank.... 146,821 147,036 199,732 199,124
Off balance sheet assets (liabilities):
Interest rate swap agreement............ (5) 12
Interest rate floor positions........... 88 109 27 29
Interest rate cap positions............. 527 159 1,078 597
Commitments to originate real estate
loans................................ (30) (7)
Commitments to sell loans............... (71) (29)
</TABLE>
A summary of the notional amounts of the Company's financial instruments
with off balance sheet risk at December 31, 1997 and 1996 is as follows (amounts
in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest rate swaps......................................... $10,000 $ 10,000
Interest rate floor positions............................... 45,000 45,000
Interest rate cap positions................................. 80,000 105,000
Commitments to originate real estate loans.................. 41,112 65,857
Commitments to sell loans................................... 70,349 69,875
Letters of credit........................................... 3,254 7,682
</TABLE>
17. COMMITMENTS AND CONTINGENT LIABILITIES
Financial Instruments with Off-Balance Sheet Risk--The Company is a party
to financial instruments with off-balance sheet risk of loss as part of its
normal business operations to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, interest rate swap
arrangements and forward commitments. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
F-27
<PAGE> 124
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
17. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Financial instruments with off-balance sheet credit risk at December 31,
1997, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL
AMOUNT
------
<S> <C>
Financial instruments whose contract amounts represent
credit risk:
Real estate loan commitments:
Fixed-rate loans....................................... $ 19,942
Variable-rate loans.................................... 21,170
Undisbursed lines of credit (1)........................... 218,105
Letters of credit......................................... 3,254
Financial instruments whose credit risk is less than the
notional or contract amounts:
Mandatory forward fixed-rate commitments to sell
loans................................................. 70,349
Interest rate swaps.................................... 10,000
</TABLE>
- ---------------
(1) A significant portion normally remains undrawn (e.g., Visa and home
equity loans)
Commitments to extend credit are agreements to lend to a customer provided
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. Some commitments will expire without a loan
disbursement; thus, the total commitment does not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness 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 borrower. The collateral consists predominantly of residential family
units, commercial real estate and personal property.
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 contract or notional amount of those instruments. The Company uses the same
credit policies in making commitments as it does for on-balance sheet
instruments. Unless noted otherwise, the Company does not require collateral or
other security to support financial instruments with credit risk.
The loan commitments, which are disbursed subject to certain limitations,
extend over periods of time ranging from one month for residential loans to one
year for certain construction loans.
Forward commitments to sell loans and mortgage-backed securities reduce the
market risk associated with originating loans for sale. In order to fulfill a
forward commitment, the Company typically exchanges its current production of
loans for mortgage-backed securities through FNMA or FHLMC which are then
delivered to a national securities firm at a future date, at prices or yields
specified by the contracts. These forward commitments primarily relate to
fixed-rate loan pools with settlement dates ranging from 30 to 90 days. The
risks associated with such contracts arise from the possible inability of
counterparties to meet the terms of their contracts or the Company's inability
to acquire loans to fulfill these contracts. If such factors as fluctuations in
interest rates affect the Company's ability to originate loans, the Company
would normally fulfill the commitments by purchasing securities in the open
market.
At December 31, 1997, the Company and its subsidiaries had commitments to
sell loans to the FNMA of $100,000,000 and to Residential Funding Corporation
(RFC) of $25,000,000, both with a required delivery date of March 31, 1998. The
Bank had delivered loans approximating $43,000,000 to FNMA and $22,000,000 to
RFC under these commitments through December 31, 1997. The Bank believes that
they will meet these commitments or will be able to obtain time extensions if
necessary.
F-28
<PAGE> 125
STATE SAVINGS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
17. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
As part of its normal lending activities, the Company issues various
letters of credit. At December 31, 1997, the Company had open letters of credit
outstanding of approximately $3,254,000, substantially all of which were
collateralized by real estate.
Additional information regarding the fair value of these financial
instruments is included in Note 16.
Litigation--The Company and its subsidiaries are parties to routine
litigation arising in the normal course of their respective businesses. In the
opinion of management, after consultation with counsel, liabilities arising from
these proceedings, if any, are not expected to be material to the Company's
consolidated financial position or future results of operations.
18. DEPOSIT INSURANCE FUNDS ACT OF 1996
Deposits of savings associations are insured by the Savings Association
Insurance Fund (the "SAIF"). During September 1996, legislation was enacted
providing for a one-time assessment imposed on the March 31, 1995 deposits of
SAIF insured institutions. This one-time assessment increased the deposit
insurance premium by $11 million in 1996. In 1997, the Company's deposit
insurance premiums were reduced because of this assessment.
19. STATE FRANCHISE TAXES
In 1996, the Company received approximately $986,000, including interest,
applicable to a refund claim for franchise taxes paid in prior years to the
State of Ohio. As a result, the Company also reduced its accrual for franchise
taxes by approximately $3.1 million.
20. SUBSEQUENT EVENT
In January 1998, the Company announced a definitive agreement to merge with
Fifth Third Bancorp. ("Fifth Third"). Fifth Third will exchange 1,847.26 shares
of common stock for each share of the Company's common stock outstanding. The
transaction is subject to regulatory and shareholder approval.
F-29
<PAGE> 126
ANNEX A
AFFILIATION AGREEMENT
This Affiliation Agreement ("Affiliation Agreement") dated as of January 2,
1998 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 the City of Cincinnati, Hamilton County, Ohio ("Fifth Third"),
and STATE SAVINGS COMPANY, a corporation organized and existing under the
corporation laws of the State of Ohio, with its principal office located in the
City of Columbus, Franklin County, Ohio ("State Savings Co.").
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 State Savings Co. is a multiple
savings and loan holding company under Section 10 of the Home Owners Loan Act,
as amended ("HOLA"), and Fifth Third and State Savings Co. 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) State Savings Co. will be merged into Fifth Third, with Fifth Third to be
and become the surviving corporation (the "Merger");
WHEREAS, State Savings Co. owns all of the outstanding stock of State
Savings Bank, a state savings bank ("Columbus Thrift Subsidiary") which, at the
Effective Time, will be merged with and into Fifth Third's wholly-owned
subsidiary The Fifth Third Bank of Columbus, an Ohio banking corporation ("Fifth
Third, Columbus") with Fifth Third, Columbus to become the surviving corporation
(the "Columbus Subsidiary Merger"); and,
WHEREAS, State Savings Co. owns all of the outstanding stock of Century
Bank, a state savings bank ("Cincinnati Thrift Subsidiary") which, at the
Effective Time, will be merged with and into Fifth Third's wholly-owned
subsidiary The Fifth Third Bank, an Ohio banking corporation ("Fifth Third,
Cincinnati") with Fifth Third Cincinnati to become the surviving corporation
(the "Cincinnati Subsidiary Merger"); and,
WHEREAS, State Savings Co. owns all of the outstanding stock of State
Savings Bank, FSB, a federal savings bank ("Arizona Thrift Subsidiary") which,
at the Effective Time, will remain a separate subsidiary of Fifth Third and
shall be renamed Fifth Third Bank of Arizona, FSB (the Columbus Thrift
Subsidiary, the Cincinnati Thrift Subsidiary and the Arizona Thrift Subsidiary
will be collectively referred to as the "Thrift Subsidiaries"); and
WHEREAS, as a condition and inducement to Fifth Third's willingness to
enter into this Agreement, simultaneously with the execution of this Agreement
holders of at least 16% of the outstanding shares of State Savings Co. Common
Stock entitled to vote for approval of this Agreement and the Merger are
entering into Support Agreements substantially in the form of Appendix A hereto;
and
WHEREAS, under the terms of this Agreement each of the issued and
outstanding shares of the Common Stock, $100 par value per share, of State
Savings Co. which are issued and outstanding (excluding any treasury shares)
immediately prior to the Effective Time will at the Effective Time be canceled
and extinguished and in substitution therefor such State Savings Co. shares
will, at the Effective Time, be converted into the right to receive shares of
the Common Stock, without par value, of Fifth Third ("Fifth Third Common
Stock"), all as more fully provided in this Agreement; and
WHEREAS, the parties to this Agreement intend that the Merger qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code") and for pooling-of-interests accounting
treatment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
Fifth Third and State Savings Co., agree together as follows:
A-1
<PAGE> 127
I. MODE OF EFFECTUATING CONVERSION OF SHARES
A. At the Effective Time (as defined in Article IX), all of the shares of
Fifth Third Common Stock that are issued and outstanding or held by Fifth Third
as treasury shares immediately prior to the Effective Time will remain unchanged
and will remain outstanding or as treasury shares(or will be issued to the State
Savings Co. shareholders pursuant to the terms of this Agreement), as the case
may be, of the Surviving Corporation (as defined in Article I, Section F). Any
stock options, subscription rights, warrants or other securities outstanding
immediately prior to the Effective Time, entitling the holders to subscribe for
purchase of 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, 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, $100 par value per share, of
State Savings Co. ("State Savings Co. Common Stock") that is issued and
outstanding immediately prior to the Effective Time will, when the Merger
becomes effective, be converted by virtue of the Merger and without further
action, into the right to receive 1,847.26 shares of Fifth Third Common Stock
(the "Exchange Ratio"), subject to adjustment as provided in Section I.E. and
VIII.A.8. and subject to the rights of dissenting shareholders as provided in
Section I.C.
C. At the Effective Time, all of the shares of State Savings Co. Common
Stock, whether issued or unissued (including treasury shares), will be canceled
and extinguished and the holders of certificates for shares thereof shall cease
to have any rights as shareholders of State Savings Co., except such rights, if
any, as they may be entitled to under the provisions of Section 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 which their
State Savings Co. Common Stock shall have been converted by virtue of the
Merger.
D. After the Effective Time, each holder of a certificate or certificates
for shares of State Savings Co. Common Stock, upon surrender of 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 State Savings Co. 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 (7) business
days after the Effective Time, the Exchange Agent will send a notice and
transmittal form to each State Savings Co. shareholder of record at the
Effective Time advising such shareholder of the effectiveness of the Merger and
the procedures for surrendering to the Exchange Agent outstanding certificates
formerly evidencing State Savings Co. Common Stock in exchange for new
certificates of Fifth Third Common Stock. Until so surrendered, each outstanding
certificate that prior to the Effective Time represented shares of State Savings
Co. Common Stock shall be deemed for all corporate purposes to represent the
right to receive the number of full shares of Fifth Third Common Stock and cash
in lieu of fractional share interests 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 State Savings Co.
Common Stock shall have been so converted shall be paid with respect to such
shares only when the certificate or certificates evidencing shares of State
Savings Co. 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 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.
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E. The Exchange Ratio referred to in Paragraph B of this Article I shall be
adjusted so as to give the State Savings Co. 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 or any other event or action which has a similar economic
effect, effected between the date of this Agreement and the Effective Time. In
the event between the date of this Agreement and the Effective Time, Fifth Third
has engaged in either the distribution of any of its assets (other than a cash
dividend), or caused the distribution of capital stock in a company which holds
any asset(s) previously held by Fifth Third or in any affiliate thereof, to the
Fifth Third shareholders, then the Exchange Ratio shall be increased in such
amount so that the equivalent fair market value of such transaction shall also
be distributed to the State Savings Co. shareholders, as of the Effective Time.
Fifth Third shall provide written notice of any such adjustment (including a
reasonably detailed calculation thereof) to State Savings Co. Any such
adjustment shall be subject to the consent of State Savings Co. which consent
shall not be unreasonably delayed, conditioned or withheld. Notwithstanding the
provisions of this Section E, no adjustment to the Exchange Ratio will be
required in the event Fifth Third issues shares of Fifth Third Common Stock in
another merger or acquisition transaction prior to the Effective Date or is
required to divest any of its assets as a condition to obtaining any regulatory
approval required to consummate the Merger.
F. When all necessary documents have been filed and recorded in accordance
with the laws of the State of Ohio, and the Merger becomes effective, the
separate existence of State Savings Co. shall cease and State Savings Co. 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."
G. The Second Amended Articles of Incorporation, as amended, of Fifth Third
of record with the Secretary of State of Ohio as of the Effective Time shall be
the Articles of Incorporation of the Surviving Corporation, until further
amended as provided by law.
H. The Directors of Fifth Third who are in office at the Effective Time
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 and 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
Code of Regulations of the Surviving Corporation and in accordance with law.
I. The Code of Regulations of Fifth Third at the Effective Time shall be
the Code of Regulations of the Surviving Corporation, until amended as provided
therein and in accordance with law.
J. At the Effective Time, the effect of the Merger shall be as provided by
the applicable provisions of the laws of Ohio, including, without limitation,
the effects set forth in Section 1701.82 of the Ohio Revised Code. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time: the separate existence of State Savings Co. shall cease; Fifth Third 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
Fifth Third and State Savings Co., and all obligations owing by or due each of
Fifth Third and State Savings Co. shall be vested in, and become the obligations
of, Fifth Third, 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 Fifth Third and State
Savings Co. shall be preserved unimpaired, and all liens upon the property of
each of Fifth Third and State Savings Co. shall be preserved unimpaired, on only
the property affected by such liens immediately prior to the Effective Time.
K. From time to time as and when requested by the Surviving Corporation, or
by its successors or assigns, the officers and Directors of State Savings Co. in
office at the Effective Time shall execute and deliver such instruments and
shall take or cause to be taken such further or other action as shall be
reasonably 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 State Savings Co. and otherwise to carry out the purposes of this
Agreement.
L. This Agreement shall be filed (only if necessary) and recorded along
with a Certificate of Merger in accordance with the requirements of the laws of
the States of Ohio. This Agreement (if necessary) along with a
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Certificate of Merger 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 Article VI of this Agreement shall have
been fully met or effectively waived.
M. The Merger is intended to be a reorganization within the meaning of
Section 368(a) of the Code, and this Agreement is intended to be a "plan of
reorganization" within the meaning of the regulations promulgated under the Code
and for the purposes of Sections 354 and 361 of the Code.
II. REPRESENTATIONS AND WARRANTIES OF STATE SAVINGS CO.
State Savings Co. 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 State Savings Co. to Fifth Third
prior to the execution of this Agreement by Fifth Third:
A. State Savings Co. (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 multi savings and loan holding company under the HOLA; (ii) is duly
authorized to conduct the business in which it is engaged; (iii) has 600,000
shares, $100 par value per share, of State Savings Co. Common Stock authorized
pursuant to its Amended Articles of Incorporation, which are the total number of
shares State Savings Co. 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 State Savings
Co. of any kind, other than 6,000 shares of State Savings Co. Common Stock,
which presently are authorized, duly issued and outstanding and fully paid and
non-assessable; (v) owns of record and beneficially free and clear of all liens
and encumbrances, all of the 6,000 outstanding shares of the capital stock of
the Columbus Thrift Subsidiary, $100 par value per share; (vi) owns of record
and beneficially free and clear of all liens and encumbrances, 59,763.725
outstanding shares of the capital stock of the Cincinnati Thrift Subsidiary,
$10.581 par value per share; and (vii) owns of record and beneficially free and
clear of all liens and encumbrances, all of the 16,000 outstanding shares of the
capital stock of the Arizona Thrift Subsidiary, $1.00 par value per share. State
Savings Co. has no direct or indirect subsidiaries other than the subsidiaries
listed on Schedule 1, which sets forth the name, jurisdiction of organization
and percentage ownership by State Savings Co. (or a subsidiary for any indirect
subsidiary) of each such subsidiary (collectively the "Other State Savings Co.
Subsidiaries" and each an "Other State Savings Co. Subsidiary"), the Columbus
Thrift Subsidiary, the Cincinnati Thrift Subsidiary, and the Arizona Thrift
Subsidiary. Other than as set forth herein or in Schedule 1, State Savings Co.
does not own (other than in a bona fide fiduciary capacity or in satisfaction of
or to secure a debt previously contracted) beneficially, directly or indirectly
any shares of any equity securities or capital interests of any person or any
equity or capital interest in a partnership or joint venture.
B. (i) The Columbus Thrift Subsidiary is duly incorporated, validly
existing and in good standing as a state savings bank under the laws of the
State of Ohio, and has all the requisite power and authority to conduct the
business as now conducted by it; and the Columbus 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
the Columbus Thrift Subsidiary of any kind, other than 6,000 shares of the
capital stock, $100 par value per share, of the Columbus Thrift Subsidiary all
of which are owned of record and beneficially by State Savings Co.;
(ii) The Cincinnati Thrift Subsidiary is duly incorporated, validly
existing and in good standing as a state savings bank under the laws of the
State of Ohio, and has all the requisite power and authority to conduct the
business as now conducted by it; and the Cincinnati 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
the Cincinnati Thrift Subsidiary of any kind, other than 59,763.725 shares of
capital stock, $10.581 par value per share, of the Cincinnati Thrift Subsidiary
which are owned of record and beneficially by State Savings Co. and 236.275 of
such shares which are owned by the directors of Cincinnati Thrift Subsidiary as
directors' qualifying shares; and
(iii) The Arizona 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 business as
now conducted by it; and the Arizona 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
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of the Arizona Thrift Subsidiary of any kind, other than 16,000 shares of the
capital stock, $1.00 par value per share, of the Arizona Thrift Subsidiary all
of which are owned of record and beneficially by State Savings Co.
C. State Savings Co. has previously furnished to Fifth Third its audited,
consolidated balance sheets, statements of operations, statements of
stockholders' equity and cash flows as at December 31, 1996, and for the year
then ended, together with the opinions of its independent certified public
accountants associated therewith. State Savings Co. also has previously
furnished to Fifth Third the Call Reports as filed with the Federal Deposit
Insurance Corporation ("FDIC") of the Thrift Subsidiaries as at December 31,
1996, 1995 and 1994. State Savings Co. also has furnished to Fifth Third (i) its
unaudited, consolidated financial statements as at September 30, 1997, and for
the nine months then ended, and (ii) the Call Reports as filed with the FDIC of
the Thrift Subsidiaries for the quarters ended March 31, 1997, June 30, 1997,
and September 30, 1997. Such audited and unaudited consolidated financial
statements of State Savings Co. fairly present the consolidated financial
condition of State Savings Co. as of the date thereof, and for the years or
periods covered thereby, in conformity with generally accepted accounting
principles, consistently applied (except as stated therein and 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
State Savings Co., any Other State Savings Co. Subsidiary, or the Thrift
Subsidiaries required to be disclosed in the financial statements so furnished
other than the liabilities, obligations or indebtedness disclosed in such
financial statements (including footnotes). State Savings Co. shall furnish
Fifth Third with unaudited, consolidated financial statements as at December 31,
1997, 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. In the event that
the Closing Date does not occur before the next fiscal year end of State Savings
Co., State Savings Co. shall furnish Fifth Third with its audited, consolidated
financial statements for the year then ended as soon as they are reasonably
available.
D. State Savings Co., the Other State Savings Subsidiaries, and the Thrift
Subsidiaries have good and marketable title to all of the material properties
and assets which are reflected in their respective separate statements of
financial condition as at September 30, 1997, 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,
encumbrances, defects or irregularities 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 September 30, 1997, to the date
hereof there have been no material adverse changes in the financial condition,
operations or business of State Savings Co., the Other State Savings Co.
Subsidiaries, and the Thrift Subsidiaries on a consolidated (or in the case of
State Savings Co. and the Thrift Subsidiaries, a separate) basis; (ii) State
Savings Co. is not aware of any events which have occurred since September 30,
1997, 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
State Savings Co., the Other State Savings Co. Subsidiaries, and the Thrift
Subsidiaries on a consolidated (or in the case of State Savings Co. or the
Thrift Subsidiaries, a separate) basis, excluding in each instance 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 September 30, 1997, to the date
hereof there have been no material changes in the methods of business operations
of State Savings Co., the Other State Savings Co. Subsidiaries, or any of the
Thrift Subsidiaries.
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 State Savings Co., threatened against State Savings Co., the Other
State Savings Co. Subsidiaries, or the Thrift Subsidiaries which reasonably can
be expected to result in any material adverse change in the financial condition,
operations or business of State Savings Co., the Other State Savings Co.
Subsidiaries, and the Thrift Subsidiaries on a consolidated (or in the case of
State Savings Co. and the Thrift Subsidiaries, a separate) basis.
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G. Except as disclosed in Schedule 1, since September 30, 1997 to the date
hereof State Savings Co. and the Thrift Subsidiaries 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 1, since September 30, 1997, to the date hereof State Savings Co. has
not declared or paid any dividends nor made any distributions of any other kind
to its shareholders.
H. Except as disclosed in Schedule 1, State Savings Co., the Other State
Savings Co. Subsidiaries, and the Thrift Subsidiaries (i) 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 State Savings Co., the Other State
Savings Co. Subsidiaries, or the Thrift Subsidiaries through the date hereof
constitute complete and accurate representations in all material respects of the
tax liabilities of State Savings Co., the Other State Savings Co. Subsidiaries,
and the Thrift Subsidiaries for such years and accurately set forth in all
material respects 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; and (ii) have no reason to believe that any
condition exists with respect to the business or operation of State Savings Co.
that might prevent or impede the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code or for pooling-of-interests
accounting treatment.
I. Except as disclosed in Schedule 1, neither State Savings Co., any Other
State Savings Co. Subsidiaries, nor any of the Thrift Subsidiaries 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 any
individual contract, lease or agreement which does not have a term extending
beyond six months from the date of this Agreement or any individual contract,
lease or agreement (excluding a contract, lease or agreement pursuant to which
credit has been extended by any of the Thrift Subsidiaries) which does not
require the annual expenditure of more than $50,000.00 thereunder.
J. Except as disclosed in Schedule 1, since September 30, 1997, to the date
hereof the Thrift Subsidiaries have not incurred any unusual or extraordinary
loan losses which are material to State Savings Co. and its subsidiaries on a
consolidated basis; to the best knowledge of State Savings Co. in light of each
of the Thrift Subsidiaries' historical loan loss experience and its management's
analysis of the quality and performance of its loan portfolio, as of September
30, 1997, its reserve for loan losses was adequate to absorb all known and
reasonably anticipated losses as of such date.
K. Except as disclosed in Schedule 1 and except for dealings with and
obligations to Keefe, Bruyette & Woods, Inc., neither State Savings Co. nor any
of the Thrift Subsidiaries has, directly or indirectly, dealt with any broker or
finder in connection with this transaction and none of them 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.
L. 1. The Directors of State Savings Co., 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 have
directed that this Agreement be submitted to a vote of State Savings Co.'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 Amended Articles of Incorporation and Code of Regulations of
State Savings Co.
2. State Savings Co. has the corporate power and authority to enter into
this Agreement and to carry out its obligations hereunder subject to certain
required regulatory and shareholder approvals. This Agreement, when executed and
delivered, will have been duly authorized and, subject to the receipt of the
requisite regulatory approvals and the approval of State Savings Co.'s
shareholders, will constitute the valid and binding obligation of State Savings
Co., enforceable against State Savings Co. in accordance with its respective
terms, except to the extent that: (i) enforceability hereof 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 or the rights of creditors of savings and loan
holding companies, the accounts of whose
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subsidiaries are insured by the FDIC; and (ii) the availability of certain
remedies may be precluded by general principles of equity.
3. Except as disclosed in Schedule 1, neither the execution of this
Agreement, nor the consummation of the transactions contemplated hereby: (i)
conflicts with, results in a breach of, violates or constitutes a default under,
State Savings Co.'s Amended Articles of Incorporation or Code of Regulations or,
to the best knowledge of State Savings Co., any federal, state or local law,
statute, ordinance, rule, regulation or court or administrative order, or any
material agreement, arrangement, or commitment, to which State Savings Co. or
any of the Thrift Subsidiaries is subject or bound; (ii) 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 State Savings Co., any Other State Savings Co. Subsidiaries, or any
of the Thrift Subsidiaries; (iii) terminates or gives any person the right to
terminate, amend, abandon, or refuse to perform any material agreement,
arrangement or commitment to which State Savings Co., any Other State Savings
Co. Subsidiaries, or any of the Thrift Subsidiaries is a party or by which State
Savings Co.'s, any Other State Savings Co. Subsidiaries, or any of the Thrift
Subsidiaries' rights, properties or assets are subject or bound; or (iv) to the
best knowledge of State Savings Co., accelerates or modifies, or gives any party
thereto the right to accelerate or modify, the time within which, or the terms
according to which, State Savings Co., any Other State Savings Co. Subsidiaries,
or any of the Thrift Subsidiaries is to perform any duties or obligations or
receive any rights or benefits under any material agreements, arrangements or
commitments. For purposes of this paragraph L.3., a material agreement,
arrangement or commitment excludes any individual agreement, arrangement or
commitment which has a term expiring less than six months from the date of this
Agreement or which does not require the expenditure of more than $50,000 (but
shall include any agreement, arrangement or commitment pursuant to which credit
has been extended by the Thrift Subsidiaries).
M. Complete and accurate copies of the (i) Amended Articles of
Incorporation and Code of Regulations of State Savings Co., (ii) the Articles of
Incorporation and Constitutions of the Columbus Thrift Subsidiary and the
Cincinnati Thrift Subsidiary, and (iii) the Charter and Bylaws of the Arizona
Thrift Subsidiary in force as of the date hereof have been delivered to Fifth
Third.
N. Except as disclosed in Schedule 1, neither State Savings Co., any Other
State Savings Co. Subsidiaries, nor any of the Thrift Subsidiaries 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 State Savings Co. and its subsidiaries on a consolidated (and in
the case of State Savings Co. and the Thrift Subsidiaries, on a separate) basis.
To the best knowledge of State Savings Co. and except as disclosed in Schedule
1, each of the Thrift Subsidiaries possesses all licenses, franchises, permits
and other governmental authorizations necessary for the continued conduct of its
business without material interference or interruption.
O. Except as disclosed in Schedule 1, neither this Agreement nor any
certificate furnished by State Savings Co. or the Thrift Subsidiaries to Fifth
Third or its agents in connection with this Agreement or any of the transactions
contemplated hereby (including, without limitation, any written information
which has been or shall be supplied with respect to their business operations
and financial condition specifically 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 State Savings Co. is held to consider the
adoption of this Agreement) 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. Except as disclosed in Schedule 1, there are no actions, proceedings or
to the knowledge of State Savings Co. investigations pending before any
environmental regulatory body, with respect to or threatened against or
affecting State Savings Co., any Other State Savings Co. Subsidiary, or any of
the Thrift Subsidiaries (as an "owner or operator" or otherwise) with respect to
any "facility" owned, leased or operated by any of them (but excluding any
"facility" as to which sole interest of State Savings Co. or any of the Thrift
Subsidiaries is that of a lienholder or mortgagee, 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, would have a material adverse effect on State Savings Co.
and its subsidiaries on a consolidated (and in the case of State Savings Co. and
the Thrift Subsidiaries, on a separate) basis, nor, to the best knowledge of
State Savings Co. after reasonable inquiry, 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 State Savings Co., any Other State Savings Co.
Subsidiary, or any of the Thrift Subsidiaries is a plaintiff or complainant.
Except as disclosed in Schedule I neither State Savings Co., any Other State
Savings Co. Subsidiaries, nor any of the Thrift Subsidiaries is liable in any
material respect under any applicable law for any release by any of them or, to
the knowledge of State Savings Co., 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 State Savings Co., any Other State Savings Co.
Subsidiary, or any of the Thrift Subsidiaries liable for any material costs (as
a result of the acts or omissions of State Savings Co., any Other State Savings
Co. Subsidiary, or any of the Thrift Subsidiaries or, to the best knowledge of
State Savings Co., 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 State Savings Co., any Other State Savings Co.
Subsidiary or any of the Thrift Subsidiaries to prevent or minimize any actual
or threatened release by State Savings Co., any Other State Savings Co.
Subsidiary, or any of the Thrift Subsidiaries 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.
Except as disclosed in Schedule 1, to the best knowledge of State Savings
Co. each "facility" owned, leased or operated by State Savings Co., any Other
State Savings Co. Subsidiary, or any of the Thrift Subsidiaries (but excluding
any "facility" as to which the sole interest of State Savings Co. or any of the
Thrift Subsidiaries is that of a lienholder or mortgagee, but including any
"facility" to which title has been taken pursuant to mortgage foreclosure or
similar proceedings) 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
State Savings Co. and its subsidiaries on a consolidated (and in the case of
State Savings Co. and the Thrift Subsidiaries, on a separate) basis.
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 State Savings Co., any
Other State Savings Co. Subsidiary, or any of the Thrift Subsidiaries for the
benefit of employees, former employees or Directors of State Savings Co., any
Other State Savings Co. Subsidiary or any of the Thrift Subsidiaries and 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)
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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, State Savings Co. and each of the Thrift Subsidiaries 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) which is intended to be qualified under section 401 of 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, as amended by all of
the laws referred to in Section 1 of Revenue Procedure 93-39, such determination
letter has not been revoked or threatened to be revoked by the IRS, and the
scope of such determination letter is complete and does not exclude
consideration of any of the requirements or matters referred to in sections 4.02
through 4.04 of Revenue Procedure 93-39; (b) to the best knowledge of State
Savings Co., 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 State Savings Co., such Qualified Benefit Plan is in substantial
compliance with all notice, reporting and disclosure requirements of ERISA and
the Code; (d) no Qualified Benefit Plan is an ESOP as defined in Section
4975(e)(7) of the Code; and (e) no Qualified Benefit Plan has been terminated
within the ten (10) period ending on the date hereof.
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 State Savings Co., in compliance with
applicable Code provisions; (b) such Welfare Benefit Plan has been, to the best
knowledge of State Savings Co., 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 State Savings Co., operated in substantial compliance with such
COBRA requirements.
5. Prohibited Transactions. To the best knowledge of State Savings Co.,
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.
6. Lawsuits or Claims. No material actions, suits or claims (other than
routine claims of benefits) are pending or, to the best knowledge of State
Savings Co., threatened against any Benefit Plan or against State Savings Co. or
any of the Thrift Subsidiaries 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 State Savings Co. and each of the Thrift
Subsidiaries 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 State Savings Co.
or any of the Thrift Subsidiaries and for which State Savings Co. or any of the
Thrift Subsidiaries is liable under applicable law, (e) any authorized but
unpaid
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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. Within the five (5) year
period ending on the date hereof, neither State Savings Co. nor any of the
Thrift Subsidiaries has sponsored, maintained or been obligated to contribute
to, any Benefit Plan subject to Title IV of ERISA. Neither State Savings Co.,
nor any of the Thrift Subsidiaries nor any controlled group member of State
Savings Co. or any of the Thrift Subsidiaries 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. Neither State Savings Co. nor any of the Thrift
Subsidiaries (a) have incurred any asserted or, to the best knowledge of State
Savings Co., 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 State Savings Co. or the Thrift Subsidiaries, (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. Retiree Benefits. Except as listed on Schedule 1 and identified as
"Retiree Liability", neither State Savings Co. nor any of the Thrift
Subsidiaries have any obligation to provide medical benefits, or life insurance
benefits to or with respect to retirees, former employees or any of their
relatives, except for any continuation coverage required to be provided by
COBRA.
11. Right to Amend and Terminate. Except as listed on Schedule 1, each of
State Savings Co. and each of the Thrift Subsidiaries has all power and
authority necessary to amend or terminate each Benefit Plan without incurring
any penalty or liability provided that, in the case of an employee pension
benefit plan (as defined in section 3(2) of ERISA), benefits accrued as of the
date of amendment or termination are not reduced.
12. Material. For purposes of this Paragraph Q as a whole, the term
"material" in connection with a liability shall mean a liability, loss, tax,
penalty, interest and related legal fees in the amount of $50,000 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.
R. Except as disclosed in Schedule 1, the investment portfolios of State
Savings Co., the Other State Savings Co. Subsidiaries, and each of the Thrift
Subsidiaries consist of securities in marketable form. Except as disclosed in
Schedule 1, since September 30, 1997, to the date hereof neither State Savings
Co., the Other State Savings Co. Subsidiaries, nor any of the Thrift
Subsidiaries 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, State Savings Co. 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 State
Savings Co.'s, any Other State Savings Co. Subsidiary, or any of the Thrift
Subsidiaries' 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 State Savings Co., threatened against any of the Directors or
officers of State Savings Co., any Other State Savings Co. Subsidiary, or any of
the Thrift Subsidiaries in their capacities as such, and no Director or officer
of State Savings Co. or any of the Thrift Subsidiaries currently is being
indemnified or seeking to be indemnified by State Savings Co., any Other State
Savings Co. Subsidiary, or any of the Thrift Subsidiaries pursuant to applicable
law or State Savings Co.'s Amended Articles of Incorporation or Code of
Regulations, any Articles, Bylaws or Code of Regulations of any Other State
Savings Co. Subsidiary, or any of the Thrift Subsidiaries' Articles, Charter,
Constitution or Bylaws.
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T. Except for the Ohio Control Share Acquisition Statute, Section 1701.831
of the Ohio Revised Code, there is no "business combination," "moratorium,"
"control share," or other state anti-takeover statute or regulation or any
agreement to which State Savings Co. is a party which (i) prohibits or restricts
State Savings Co.'s ability to perform its obligations under this Agreement, or
its ability to consummate the transactions contemplated hereby, (ii) would have
the effect of invalidating or voiding this Agreement, or any provisions hereof,
or (iii) would subject Fifth Third to any impediment or condition in connection
with the exercise of any if its rights under this Agreement.
U. All interest rate swaps, caps, floors and option agreements and other
interest rate risk management arrangements, whether entered into for State
Savings Co.'s own account, or for the account of one or more of its subsidiaries
or their customers, were entered into (i) in accordance with prudent banking
practices and all material applicable laws, rules, regulations and regulatory
policies and (ii) with counterparties reasonably believed to be financially
responsible at the time; and each of them constitutes the valid and legally
binding obligation of it or one of its subsidiaries, enforceable in accordance
with its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors' rights
or by general equity principles), and are in full force and effect (except to
the extent that they have been fully performed or terminated) in all respects
material to State Savings Co. Neither State Savings Co. nor its subsidiaries,
nor to its knowledge any other party thereto is, in any respect material to
State Savings Co. on a consolidated basis, in breach of any of its obligations
under any such agreement or arrangement.
V. Schedule 1 sets forth, among other things, exceptions to State Savings
Co.'s representations and warranties in this Section II. While State Savings Co.
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 State Savings Co. that such exception
represents a material fact, event or circumstances or would result in a material
adverse effect to State Savings Co. or to any of its subsidiaries. Neither the
specification of any dollar amount in the representations and warranties of the
parties contained herein nor the inclusion of any items on Schedule 1 to this
Agreement will be deemed to constitute an admission by any party, or to
otherwise imply, that any such amounts or the items so included are material for
the purpose of this Agreement. All documents or information disclosed in any
part of Schedule 1 are intended to be disclosed for all purposes under this
Agreement and will also be deemed to be incorporated by reference in each of the
other parts of Schedule 1 to this Agreement to which, and to the extent, they
may be applicable.
III. REPRESENTATIONS AND WARRANTIES OF FIFTH THIRD
Fifth Third represents and warrants to State Savings Co. 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.
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 300,500,000 of which 300,000,000 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
November 30, 1997, 155,163,554 shares of Fifth Third Common Stock were issued
and outstanding and 3,677,597 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. At November 30, 1997,
7,059,640 shares of Fifth Third Common Stock were reserved for issuance in
connection with outstanding options granted under it stock option plans and
2,116,683 shares were reserved for issuance under options to be granted in the
future.
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C. All shares of Fifth Third Common Stock to be received by the
shareholders of State Savings Co. 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 State Savings Co. its consolidated
financial statements as at December 31, 1994, December 31, 1995, December 31,
1996 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 will furnish to State Savings Co.
its consolidated financial statements at December 31, 1997 and for the year then
ended together with the opinions of its independent public accountants
associated therewith as soon as such statements are publicly available. Fifth
Third has also furnished to State Savings Co. its unaudited consolidated
financial statements as at September 30, 1997 and for the nine (9) months then
ended, and shall continue to furnish information for subsequent calendar quarter
periods to State Savings Co. as soon as such becomes publicly available until
the Closing Date.
E. Except for events relating to the business environment in general: (i)
since September 30, 1997, 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 September 30, 1997,
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
September 30, 1997, 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, including reserving for issuance to State Savings Co. shareholders in
accordance with this Agreement, a sufficient number of shares of Fifth Third
Common Stock. Approval and adoption of this Agreement 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 the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder subject to certain required
regulatory approvals. This Agreement, when executed and delivered, will have
been duly authorized and, subject to the receipt of the requisite regulatory
approvals, will constitute the valid and binding obligation of Fifth Third,
enforceable in accordance with its 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.
3. Neither the execution of this Agreement 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 Fifth Third, 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 or any of its
subsidiaries is subject or bound; (ii) to the best knowledge 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 State Savings Co. 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 or any of its
subsidiaries is a party or by which Fifth Third's or any of its subsidiary's
rights, properties or assets
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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 or any of its subsidiaries 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 State Savings Co.
H. 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
(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 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 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. Neither this Agreement nor any report, statement, list, certificate
or other information furnished or to be furnished by Fifth Third to State
Savings Co. 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 State Savings Co. is held to consider the adoption of this
Agreement) 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.
2. Fifth Third has furnished to State Savings Co. 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, 1996;
b. any Current Report on Form 8-K with respect to any event occurring
after December 31, 1996 and prior to the date of this Agreement;
c. any Quarterly Report on Form 10Q for the quarters ended March, 31,
June 30, and September 30, 1997;
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 or to be held subsequent to December 31, 1996.
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, 1996
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 State Savings
Co. Fifth Third timely shall furnish State Savings Co. with 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
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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 September 30, 1997 to the date hereof, none of Fifth Third's
banking 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 Fifth Third, and in the light of such banking
subsidiaries' historical loan loss experience and their managements' analysis of
the quality and performance of their respective loan portfolios, as of September
30, 1997, 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. Except for dealings with Salomon Brothers Inc and Smith Barney, Inc.
(collectively doing business as "Salomon Smith Barney") 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.
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 State Savings Co. 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 September 30, 1997,
to the date hereof Fifth Third and its subsidiaries, 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 subsidiaries on a consolidated basis.
P. As of the date hereof, Fifth Third (i) 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; and (ii) has no reason to believe that
any condition exists with respect to the business or operation of Fifth Third
that might prevent or impede the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code or (other than the reissuance
of shares of Fifth Third Common Stock held as treasury shares) for
pooling-of-interests accounting treatment.
IV. OBLIGATIONS OF STATE SAVINGS CO. BETWEEN THE DATE OF THIS AGREEMENT AND THE
EFFECTIVE TIME
A. State Savings Co., 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 the shares of Fifth Third Common Stock to be issued in the Merger
has been declared effective by the SEC and under all applicable state securities
laws for the purpose of approving and adopting this Agreement and any other
documents or actions necessary to the consummation of the Merger provided for
herein pursuant to law. The Board of Directors of State Savings Co. intends to
inform the shareholders of State Savings Co. in the proxy materials relating to
the annual or special meeting that all Directors of State Savings Co. intend as
of the date of the preparation of such materials to vote all shares of State
Savings Co. Common Stock which they own of record in favor of approving this
Agreement and any such other necessary documents or actions, and, subject to the
provisions of section VII G., all Directors will recommend approval of this
Agreement to the other shareholders of State Savings Co. State Savings Co. shall
cooperate with Fifth Third in the preparation of such proxy materials which
shall be included and filed with, and as part of, Fifth Third's registration
statement on Form S-4 (or any such other appropriate form) filed with the SEC
for registration of the shares of Fifth Third Common Stock to be issued to the
State Savings Co. shareholders pursuant to the transactions contemplated by this
Agreement.
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B. The Merger is intended to be structured to qualify for treatment under
present accounting rules as a pooling of interests and State Savings Co. agrees
to take no action which would disqualify the Merger for such treatment under
generally accepted accounting principles. Consistent with generally accepted
accounting principles, State Savings Co. agrees that on or before the Effective
Time based on a review of each of the Thrift Subsidiaries' loan losses, current
classified assets and commercial, multi-family and residential mortgage loans
and investment portfolio, State Savings Co. will work with Fifth Third with the
goal of establishing collection procedures, internal valuation reviews, credit
policies and practices and 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 State Savings Co. 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 from the date of this Agreement until the
Effective Time, State Savings Co., the Other State Savings Co. Subsidiaries, and
the Thrift Subsidiaries each will be operated in the ordinary course of
business, and none of them will, without the prior written consent of Fifth
Third, which consent shall not be unreasonably withheld: make any changes in its
Amended Articles of Incorporation and Code of Regulations (in the case of State
Savings Co.) or its Articles, Charter, Constitution, or Bylaws (in the case of
its subsidiaries) capital or corporate structures; issue any additional shares
of its Common Stock or any other equity securities; 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 $100,000 (except in the ordinary
course of business consistent with past practices); make, enter into or renew
any agreement for services to be provided to State Savings Co., the Other State
Savings Co. Subsidiaries, or any of the Thrift Subsidiaries or permit the
automatic renewal of any such agreement, except any agreement for services
having a term of not more than six months or requiring the expenditure of not
more than $50,000 (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); except as set forth in Schedule 1, 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
quarterly or special cash dividends consistent with past practices and provided
this covenant shall only apply to State Savings Co.; make, declare, pay or set
aside for payment any stock dividends or make any other distributions on its
stock; change or otherwise amend any Benefit Plans other than as required by law
or as contemplated herein; and provide any increases in employee salaries or
benefits other than in the ordinary course of business, and consistent with past
practice, or as described in Schedule 1. State Savings Co. agrees that it will
not sell or otherwise dispose of or encumber any portion of its assets, business
or properties including the shares of the capital stock of any of the Thrift
Subsidiaries or the Other State Savings Co. Subsidiaries which are now owned by
it or acquire (other than by way of foreclosures or acquisitions of control in a
bona fide fiduciary capacity or in satisfaction of debts previously contracted
in good faith) all or any portion of, the assets, business or properties of any
other entity which is material to State Savings Co. and its subsidiaries on a
consolidated basis.
C. Not later that the 15th day prior to the mailing of State Savings Co.'s
proxy statement with respect to the Merger, State Savings Co. shall deliver to
Fifth Third a list of each person that, to the best of its knowledge, is or is
reasonably likely to be, as of the date of the annual or special meeting called
to approve the Merger, deemed an "affiliate" of it as that term is used in Rule
145 under the Securities Act of 1933, as amended, or SEC Accounting Series
Releases 130 and 135 (the "State Affiliates"). State Savings Co. shall use its
best efforts to cause each State Affiliate to execute and deliver to Fifth Third
on or before the mailing of such proxy statement an agreement in the form of
Appendix J hereto.
V. COOPERATION AND OTHER OBLIGATIONS AND OTHER COVENANTS
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 Ohio Division of
Banks, the Arizona 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
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consummation of the transactions provided for in this Agreement, 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 State Savings Co. in the Merger (the expenses thereof, other
than accounting, legal, investment banking, financial consulting and associated
expenses of State Savings Co. and its affiliates, to be paid by Fifth Third),
and any other laws applicable to the transactions provided for in this
Agreement. Fifth Third shall use all reasonable efforts to file all such
applications within ninety (90) days of the date of this Agreement and to secure
all such approvals. State Savings Co. agrees that it will, as promptly as
practicable after request and at its own expense, provide Fifth Third with all
information and documents concerning State Savings Co. and the Thrift
Subsidiaries, as shall be required in connection with preparing such
applications, registration statements and other documents and in connection with
securing such approvals. Prior to filing any such applications or other
documents with the applicable governmental agencies, Fifth Third shall provide,
copies thereof to State Savings Co. State Savings Co. 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 State
Savings Co. 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 State Savings Co. and in connection with approvals
required to be obtained by State Savings Co. hereunder. Prior to filing any such
applications, statements or other documents with the applicable governmental
agency, State Savings Co. shall provide, copies thereof to Fifth Third.
B. Each of the parties hereto agrees to use its best efforts, to take all
reasonably necessary action, and to cooperate with the other party in all
reasonable respects in order to assure that the Merger qualifies for
pooling-of-interests accounting treatment, and to carry out and consummate the
transactions contemplated by this Agreement 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.
C. State Savings Co. agrees to permit Fifth Third, its officers, employees,
accountants, agents and attorneys, and Fifth Third agrees to permit State
Savings Co., 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 Subsidiaries, 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 State Savings Co., the Other State Savings Co.
Subsidiaries, and the Thrift Subsidiaries or Fifth Third, Fifth Third Columbus
or Fifth Third Cincinnati, 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); provided, however, that any such
examination by Fifth Third or State Savings Co. shall not relieve Fifth Third or
State Savings Co. 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.
D. State Savings Co. shall:
(i) take all actions necessary to freeze the State Savings Bank Profit
Sharing Plan ("Profit Sharing Plan"), and all non-qualified deferred
compensation plans ("Deferred Compensation Plans") (collectively all of such
plans shall be referred to as the "Retirement Plans") and any other qualified or
non-qualified retirement plans, as of a date at least 60 days preceding the
Effective Time such that no further benefits shall accrue under the Retirement
Plans; provided, that, with respect to the Profit Sharing Plan, participant
salary deferral contributions under Section 401(k) of the Code and employer
matching contributions under Section 401 (m) of the Code may continue until such
time as the Profit Sharing Plan is either terminated or merged into a qualified
retirement plan maintained by Fifth Third and State Savings Co. may accrue a
profit sharing contribution for the period between January 1, 1998 and the
Effective Time, unless Fifth Third allows former employees of State Savings Co.
or the Thrift Subsidiaries to accrue benefits under the Fifth Third Profit
Sharing Plan as of January 1, 1998. In addition, with respect to the State
Savings Non-Qualified Deferred Compensation Plan, for the period between January
1,
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1998 and the Effective Time, State Savings Co. may credit participant accounts
with earnings equal to ten percent (10%) per annum (pro-rated monthly);
(ii) not, without the advance written consent of Fifth Third:
a. make any contributions to the Retirement Plans after the date of
this Agreement, except such contributions required to be made under the
provisions of such Retirement Plans or under applicable law;
b. adopt any amendments to the Retirement Plans after the date of this
Agreement; and
c. make any distributions from the Retirement Plans after the date of
this Agreement, except in the ordinary course in compliance with the
provisions of the Retirement Plans and consistent with past practice.
(iii) at the direction of Fifth Third, prior to, or as of, the Effective
Time, take all actions as of immediately prior to the Effective Time to
terminate the Profit Sharing Plan, or, as of the Effective Time, merge the
Profit Sharing Plan into a qualified retirement plan sponsored by Fifth Third;
(iv) if Fifth Third has requested, develop a plan and timetable for
terminating and funding any of the Retirement Plans (including the Profit
Sharing Plan), and with the advance written approval of Fifth Third, proceeded
with the implementation of said termination plan and timetable;
(v) if Fifth Third has requested, seek to obtain (or if already obtained
provide copies to Fifth Third) from the Internal Revenue Service (and furnish to
Fifth Third), favorable determination letters in which the Internal Revenue
Service has determined that the Profit Sharing Plan satisfies all qualification
requirements (without caveat or qualification), including all amendments to the
Code. Said IRS determination letters shall cover all amendments to such Plans;
(vi) provide to Fifth Third, at least 60 days prior to the Effective Time,
any and all documentation Fifth Third shall reasonably request to determine
whether the requirements of Sections 401(k), 401(m), 404, 412 and 416 of the
Code have been satisfied with respect to the Profit Sharing Plan.
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 is subject to the fulfillment on or prior to the Effective
Time of each of the following conditions:
1. The shareholders of State Savings Co. shall have duly approved and
adopted this Agreement and the Merger in accordance with and as required by law
and in accordance with its Amended Articles of Incorporation and Code of
Regulations. Simultaneously with the execution of this Agreement, shareholders
holding 16% of the outstanding shares of the State Savings Co. Common Stock
entitled to vote for approval of this Agreement shall have executed and
delivered an instrument to Fifth Third (in substantially the form of Appendix A)
whereby each such shareholder thereby agrees to vote his or her respective
shares of State Savings Co. Common Stock in favor of the Merger (the "Support
Agreement") and waives all rights available to him or her under the Ohio Revised
Code to demand appraisal of his or her shares of Ohio Savings Co. Common Stock.
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 Ohio Division of Banks, the Arizona Department of
Financial Institutions, the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation to the extent required.
3. 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 governmental 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
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the Effective Time without material adverse effect to Fifth Third or State
Savings Co. and other than regularly-scheduled regulatory examinations.
4. 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 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 State Savings Co. which specifically refers to the condition or conditions
being waived:
1. All of the representations and warranties of State Savings Co. 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 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,
individually or in the aggregate, a material adverse effect on the business or
operations of State Savings Co. and its subsidiaries on a consolidated (and in
the case of the Columbus Thrift Subsidiary, on a separate) basis.
2. State Savings Co. shall have performed all of the obligations required
of it under the terms of this Agreement 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
State Savings Co. and its subsidiaries on a consolidated (and in the case of the
Columbus Thrift Subsidiary, on a separate) basis.
3. Vorys, Sater, Seymour and Pease, LLP, counsel for State Savings Co. and
the Thrift Subsidiaries, shall have delivered an opinion addressed to Fifth
Third in substantially the form appended hereto as Appendix B.
4. The aggregate amount of consolidated shareholders' equity (including
Common Stock, Additional Paid-In Capital and Retained Earnings and excluding
Treasury Stock) of State Savings Co. 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 such consolidated shareholder's equity as reflected in
State Savings Co.'s November 30, 1997 financial statements delivered to Fifth
Third. For purposes of this paragraph VI.B.4., any expenses or accruals after
the date hereof relating to (i) the adjustments contemplated by paragraph IV.B.
of this Agreement, (ii) expenses associated with this Agreement or the Merger;
or (iii) expenses or losses associated with the valuing of State Savings Co. or
its Subsidiaries' investments at current market value as required by generally
accepted accounting principles (including without limitation the requirements of
accounting rule SFAS 115) shall be excluded for purposes of calculation of State
Savings Co.'s shareholders' equity as contemplated herein.
5. State Saving Co.'s independent certified public accountants shall have
reviewed the unaudited consolidated financial statements of State Savings Co. as
at the end of the month immediately preceding the Effective Time, as well as the
unaudited separate financial statements of the Other State Savings Co.
Subsidiaries and the Thrift Subsidiaries 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 which should be
made to such financial statements in order to conform to GAAP consistently
applied and which would have a material adverse effect on the financial
condition of State Savings Co. and its subsidiaries on a consolidated (and with
respect to the Columbus Thrift Subsidiary, on a separate) basis.
6. The receipt of a certificate from State Savings Co. and each of the
Thrift Subsidiaries, 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 and applicable to their respective company 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
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adverse effect on the business or operations of State Savings Co. and its
subsidiaries on a consolidated (and in the case of the Columbus Thrift
Subsidiary, on a separate) basis; 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, 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 State Savings Co. and its subsidiaries on a
consolidated (and in the case of the Columbus Thrift Subsidiary, on a separate)
basis.
7. The total issued and outstanding shares of State Savings Co. Common
Stock shall not exceed 6,000 shares and any options to purchase State Savings
Co. Common Stock shall have been canceled and any agreement for the issuance of
shares of State Savings Co. stock terminated prior to the Closing Date.
8. Fifth Third shall have received a letter from Deloitte and Touche LLP,
as Fifth Third's independent public accountant, and State Savings Co. shall have
received a letter from Deloitte & Touche LLP, as State Savings Co.'s independent
public accountant to the effect that the Merger will qualify for "pooling of
interests" accounting treatment.
9. Cincinnati Thrift Subsidiary shall have redeemed all of the outstanding
shares held by directors as director qualifying shares.
C. Conditions to the Obligations of State Savings Co.:
The obligation of State Savings Co. 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
State Savings Co. in a writing delivered to Fifth Third which specifically
refers to the condition or conditions being waived:
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 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 State Savings Co. in substantially the form appended hereto
as Appendix C.
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 State Savings Co. 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 State Savings
Co.
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shareholders 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. State Savings Co. shall have received from Keefe, Bruyette and Woods an
opinion dated a date which is reasonably proximate to the date on which proxy
materials are first disseminated to State Savings Co. shareholders in connection
with the meeting contemplated in Section IV.A. of this Agreement, in a form
reasonably satisfactory to State Savings Co. that the transactions contemplated
hereby are fair to the shareholders of State Savings Co. from a financial point
of view.
7. State Savings Co. shall have received the opinion of Vorys, Sater,
Seymour and Pease, LLP substantially in the form of Appendix K hereto, to the
effect that the transactions contemplated hereby constitute a tax free
reorganization under section 368(a) of the Code.
8. Fifth Third shall have executed and delivered the Fifth Third Employment
Contracts (as defined in Section VII.B.5 below) and provide, or make provision
for payment of the Severance Payments described in Section VII.B.2 below and the
Key Employee Agreement payments provided in Section VII.B.4 below.
VII. ADDITIONAL COVENANTS
A. The Columbus Thrift Subsidiary shall be merged with and into Fifth Third
Bank, Columbus, to be effective the Effective Time pursuant to a Plan and
Agreement of Merger substantially in the form attached hereto Appendix D. The
Cincinnati Thrift Subsidiary shall be merged with and into Fifth Third Bank,
Cincinnati, to be effective the Effective Time, pursuant to a Plan and Agreement
of Merger substantially in the form attached hereto as Appendix E the parties
hereto agree to cooperate with one another to effect such mergers. Upon
consummation of the mergers of the Columbus Thrift Subsidiary and the Cincinnati
Thrift Subsidiary, the separate corporate existence of the Columbus Thrift
Subsidiary and the Cincinnati Thrift Subsidiary, respectively, shall cease by
operation of law.
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 State Savings Co.
and the Thrift Subsidiaries 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 preexisting conditions that were covered under the
State Savings Co. or the Thrift Subsidiaries' medical plans immediately prior to
the Effective Time or any waiting period relating to coverage under Fifth
Third's medical plan. Each employee of State Savings Co. and the Thrift
Subsidiaries 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; provided, that, with respect to any such continuing employee
who was covered, as of the Effective Time, under a Benefit Plan sponsored by
State Savings Co. or the Thrift Subsidiaries for which Fifth Third sponsors an
employee benefit plan which provides the same type of benefit (e.g. life
insurance; disability, etc.), such continuing employee shall participate, as of
the Effective Time, in such Fifth Third plan. Under each employee benefit plan
sponsored or maintained by Fifth Third, prior service with State Savings Co. and
any of the Thrift Subsidiaries shall be taken into account for purposes of
determining eligibility, vesting and, with the exception of any defined benefit
pension plan sponsored by Fifth Third, the accrual of benefits. In addition,
with respect to any payroll practice (such as accrued vacation) where service is
utilized to determine the amount of benefit under such practice, prior service
with State Savings Co. and any of the Thrift Subsidiaries shall be taken into
account. With respect to any employee of State Savings Co. or the Thrift
Subsidiaries who is not employed by Fifth Third as of the Effective Time, Fifth
Third shall be responsible for providing continuation coverage to such employee
(and his or her dependents), as required by COBRA. Further, with respect to any
former employee of State Savings Co. or the Thrift Subsidiaries (or their
dependents) who is receiving continuation coverage under COBRA as of the
Effective Time, Fifth Third shall be responsible to maintain such continuation
coverage in compliance with COBRA.
2. Fifth Third agrees to provide those employees who are not included as
Senior Managers (as defined below) and who are terminated or who voluntarily
resign after being notified that, as a condition of employment, such employee
must work at a location more than forty-five (45) miles from such employee's
former location of
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employment or that such employee's salary will be decreased, in any case and in
both cases, before the Effective Time or within ninety (90) days after the
Effective Time, and who sign and deliver a termination and release agreement in
the form acceptable to Fifth Third, with severance pay and benefits equal to two
weeks pay for each year of service up to a maximum payment for any one employee
of $75,000. Fifth Third also agrees to provide those senior management employees
identified by State Savings Co. (the "Senior Managers") and who would otherwise
qualify for the severance payments above with, in lieu of the payments described
above, such severance payments identified by State Savings Co., provided,
however, that the payments provided under this Section VII.B.2. to Senior
Managers will not exceed Two Million Seven Hundred Thousand Dollars
($2,700,000). Prior to the Effective Time, Fifth Third and State Savings Co.
shall negotiate in good faith and mutually determine how to allocate severance
payments among the Senior Managers. Severance payments shall be made using such
procedures determined by Fifth Third and State Savings Co., which procedures and
times need not be identical to those provided for in existing severance plans or
procedures of either Fifth Third or State Savings Co. Within sixty (60) days of
the Effective Time, all severance plans maintained by State Savings Co. or the
Thrift Subsidiaries shall be terminated, or, in the alternative, amended to
exclude from coverage any employee who is entitled to receive severance payments
under this Paragraph VII.B.2. Fifth Third shall provide sufficient notification
to State Savings Co. of those employees it will not be hiring in order that such
employees terminated by State Savings Co. can be given appropriate notice of
termination in advance of the effectiveness thereof. 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 State Savings Co. or any of the Thrift Subsidiaries who
has an employment or severance agreement with State Savings Co. or any of the
Thrift Subsidiaries (each a "Contract Officer") shall receive as of the
Effective Time, in lieu of payments under such existing contracts, the salary
and benefits provided in their respective contracts described in Section VII.B.5
below with Fifth Third ("Fifth Third Contract Payments"). As a condition to
receiving their Fifth Third Contract Payments each Contract Officer shall sign
and deliver a termination agreement relating to their existing contracts with
State Savings Co. The Fifth Third Contract Payments shall not exceed a total of
Twenty Three Million Seven Hundred Thousand Dollars ($23,700,000). For the
purposes of the preceding sentence, such Fifth Third Contract Payments for
retirement benefits and options shall equal the present value of such benefits.
4. Fifth Third agrees to honor the obligations, in effect on the Effective
Time, of State Savings Co. under the Key Employee Incentive Compensation Plan
Agreement (the "Key Employee Agreement"). Payments under the Key Employee
Agreement will be made by Fifth Third at the Effective Time. The payments under
the Key Employee Agreement will not exceed a total of Nineteen Million Seven
Hundred Fifty Thousand Dollars ($19,750,000). Within sixty (60) days of the
Effective Time, Fifth Third shall make a determination either to direct State
Savings Co. to terminate the Profit Sharing Plan as of the day preceding the
Effective Time; or, as of the Effective Time, to merge the Profit Sharing Plan
into a qualified retirement plan sponsored by Fifth Third.
5. Fifth Third agrees to enter into employment contracts effective as of
the Effective Time with David Reese, Donald Shackelford, William Robert and
Stephen Kambeitz in the form of Appendices F, G, H, & I respectively, providing
for the payments described therein (the "Fifth Third Employment Contract" and
each a "Fifth Third Employment Contract"). Fifth Third further agrees to appoint
two members of the State Savings Co. board of directors to positions on the
Fifth Third board of directors.
6. It is the express understanding and intention of Fifth Third and State
Savings Co. that no employee of State Savings Co. or Fifth Third or other person
shall be deemed to be a third party beneficiary, or have or acquire any right to
enforce the provisions of this Section VII.B, except as otherwise provided in
this Agreement, and that nothing in this Agreement shall constitute a Benefit
Plan or Amendment to a Benefit Plan.
C. (i) From and after the Effective Time, Fifth Third shall assume the
obligations of State Savings Co. and its 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 State Savings Co. Amended Articles of
Incorporation and Code of Regulations or the Articles, Charter, Constitution,
Code of Regulations or Bylaws of its subsidiaries 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 State Savings Co. or its
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subsidiaries (the "Indemnified Parties") against losses, claims, damages, costs,
expenses (including reasonable attorneys' fees), liabilities or judgments 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 State Savings Co. or its 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), regardless of whether such Claim is asserted or
claimed prior to, at or after the Effective Time. 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 respect 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 State Savings Co. or any of 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.
(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 for the benefit of the directors and
officers of State Savings Co. and its subsidiaries and keep in force for a three
year period, a policy of directors' and officers' liability insurance having
liability limits and providing coverage for acts or omissions of the type
currently covered by Fifth Third's existing directors' and officers' liability
insurance. Such policy shall cover acts or omission occurring on or prior to the
Effective Time.
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 State Savings Co.
concerning State Savings Co. or the Thrift Subsidiaries or any Other State
Savings Co. Subsidiaries. State Savings Co. 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 State Savings Co. or Fifth Third, as the
case may be, and shall not be used by Fifth Third or State Savings Co., as the
case may be, in any way detrimental to State Savings Co. or Fifth Third.
E. All notices under this Agreement or under the Agreement of Merger shall
be in writing 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 State Savings Co. to Mr. David Reese, Chairman of the Board,
State Savings Co., 20 East Broad Street, Columbus, Ohio 43215, with a copy to:
Robert Werth, Esq., Vorys, Sater, Seymour and Pease, LLP, 52 East Gay Street,
Columbus, Ohio 43215; 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., Senior
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, together with the written instruments specifically
referred to herein and such other written agreements delivered by Fifth Third or
State Savings Co. to each other pursuant hereto constitute the
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entire agreement between the parties with regard to the transactions
contemplated herein and supersede any prior agreements, whether oral or in
writing, including that certain letter from Fifth Third to State Savings Co.,
dated December 21, 1997. This Agreement 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 earlier of the
Effective Time or the termination hereof, except with the prior approval of
Fifth Third, State Savings Co. shall not and shall use reasonable efforts to
cause the officers, directors, employees or other agents of State Savings Co.
not to, directly or indirectly, (i) take any action to solicit, initiate or
encourage any Acquisition Transaction or (ii) subject to the fiduciary duties of
the State Savings Co. Board of Directors under applicable law as advised by
counsel to State Savings Co., engage in negotiations with, or disclose any
nonpublic information relating to State Savings Co. or the Thrift Subsidiaries
or afford access to the properties, books or records of State Savings Co. or the
Thrift Subsidiaries to, any person that may be considering making, or has made,
a proposal to enter into an Acquisition Transaction; provided, however, that
nothing contained in this Agreement shall prevent State Savings Co. or its Board
of Directors from furnishing nonpublic information to, or affording access to
the properties, books or records of State Savings Co. or any subsidiary to, or
entering into discussions or an agreement with, any third party person or
recommending an unsolicited proposal regarding an Acquisition Transaction to the
shareholders of State Savings Co., if and only to the extent that (i) State
Savings Co.'s directors determine in good faith after consultation with outside
legal counsel that such action is necessary to comply with their fiduciary
duties to the shareholders of State Savings Co. under applicable law and (ii)
prior to furnishing such nonpublic information to, or entering into discussions
or negotiations with, such third party, State Savings Co.'s directors receive
from such third party an executed confidentiality agreement with customary
terms. State Savings Co. 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. For purposes of this Agreement, "Acquisition Transaction" means any
merger of either State Savings Co. or the Thrift Subsidiaries 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
State Savings Co. or the Thrift Subsidiaries, other than the transactions
contemplated by this Agreement.
H. Fifth Third and State Savings Co. 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 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. Upon the request of Fifth Third and at the sole option of Fifth Third,
State Savings Co. and the Thrift Subsidiaries shall execute and deliver to
Midwest Payment Systems, Inc. ("MPS") an agreement to convert all electronic
funds transfer ("EFT") related services to MPS and the Jeanie(R) system. Such
Agreement shall provide that MPS will be the exclusive provider of such services
to State Savings Co. and the Thrift Subsidiaries for a period of five (5) years
from the date such agreements are executed. Fifth Third agrees that the cost of
the conversion of State Savings Co. and the Thrift Subsidiaries to EFT provided
by MPS and conversion to the Jeanie(R) system (including, without limitation,
the cost of all card reissue, signage and penalties relating to terminating its
current EFT relationships) will be paid by Fifth Third. Fifth Third further
agrees that the costs and fees to State Savings Co. and the Thrift Subsidiaries
for the Jeanie(R) service shall not exceed those charged by the current EFT
service provider of State Savings Co. and the Thrift Subsidiaries, subject to
any increases in such costs and fees which would otherwise be permitted under
their current EFT processing agreements. In the event this Agreement is
terminated pursuant to Section VIII hereof for any reason except a material
breach or default by State Savings Co., and if, in such instance, State Savings
Co. desires to convert to another provider of EFT services, Fifth Third shall
pay all costs and expenses associated with such conversion. In no event shall
State Savings Co. or the Thrift Subsidiaries be required to take any actions
pursuant to this Paragraph I or otherwise under this Agreement or the Agreement
of merger that are contrary to any applicable law, regulation, rule or
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order or which constitute a breach of the fiduciary duties of the directors of
State Savings Co. or the Thrift Subsidiaries.
J. State Savings Co. and the Thrift Subsidiaries shall deliver an agreement
with Fifth Third or an affiliate of Fifth Third which will provide the transfer
to any such entity of the performance of any and all data processing services
including, without limitation, item processing and application processing. After
the date hereof, at Fifth Third's discretion, State Savings Co. shall notify any
and all vendors currently providing such services of such transfer. State
Savings Co. shall fully cooperate with Fifth Third in the preparation for such
transfer. In the event that Fifth Third determines that a third party should
provide such services to State Savings Co., State Savings Co. agrees to have
such services provided after the Effective Time by the third party recommended
for such purposes by Fifth Third. In the event this Agreement is terminated
pursuant to Section VIII hereof for any reason except a material breach or
default by State Savings Co., and if, in such instance, State Savings Co.
desires to convert to another provider of data processing services, including,
without limitation, item processing and application processing, Fifth Third
shall pay all costs and expenses associated with such conversion.
K. Fifth Third and State Savings Co. shall agree with each other as to the
form and substance of any press release related to this Agreement 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,
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, State Savings Co. 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 State Savings Co. and its subsidiaries, taken as a whole;
provided that no such disclosure shall be deemed an exception to any
representation or warranty contained herein.
2. Between the date hereof and the Closing Date, Fifth Third shall promptly
advise State Savings Co. 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 Fifth Third and its subsidiaries, taken as a whole; provided
that no such disclosure shall be deemed an exception to any representation or
warranty contained herein.
N. If this Agreement is terminated pursuant to Section VIII.A.7. or
pursuant to Section VIII.B. and (i) at or prior to the holding of the
shareholder meeting contemplated thereby any person or entity (other than Fifth
Third or its affiliates) shall have made a proposal, or disclosed to State
Savings Co. or its shareholders that such person or entity will consider or is
considering making a proposal, to effect an Acquisition Transaction, and (ii)
(A) State Savings Co. shall have entered into a written understanding in
principle or a definitive agreement with respect to such Acquisition Transaction
within twelve (12) months after the earlier of (x) the date this Agreement is
terminated or (y) September 30, 1998, or (B) the Board of Directors of State
Savings Co. shall have withdrawn its recommendation to the shareholders of State
Savings Co. regarding the Merger (as contemplated by Section IV.A. of this
Agreement) as a result of such proposal to effect such Acquisition Transaction,
then (unless at the time of termination State Savings Co. had the right to
terminate this Agreement pursuant to Section VIII.A. other than pursuant to
Section VIII.A.7.) State Savings Co. shall pay Fifth Third a termination fee of
$28 million, which fee shall be payable immediately upon entering into such
written understanding in principle or definitive agreement or upon the
withdrawal by the Board of Directors of such recommendation, whichever is
earlier. In no event shall more than one termination fee be payable pursuant to
this Section VIII.N. Nothing in this section
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VIII.N. shall relieve any party to this Agreement of liability for breach of
this Agreement for any matter for which the fee contemplated by this section
VIII.N. is not payable.
VIII. TERMINATION
A. This Agreement may be terminated at any time prior to the Effective Time
by written notice delivered by Fifth Third to State Savings Co. or by State
Savings Co. to Fifth Third in the following instances:
1. By Fifth Third or State Savings Co., if there has been to the extent
contemplated in Section VI.B.1 and 2 and Section VI.C.1 and 2 herein, 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 have 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 State Savings Co., if the business or assets or
financial condition of the other party and its subsidiaries on a consolidated
basis shall have materially and adversely changed from that in existence at
September 30, 1997, 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 State Savings Co., if the merger transaction
contemplated herein has not been consummated by September 30, 1998, 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 State Savings Co.
5. By Fifth Third if any event occurs (other than events wholly within the
control of Fifth Third) 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 noncompliance is
not waived by Fifth Third.
6. By State Savings Co. if any event occurs (other than events wholly
within the control of State Savings Co.) which renders impossible of
satisfaction in any material respect one or more of the conditions of the
obligations of State Savings Co. to effect the Merger as set forth in Sections
VI.A and C herein and non-compliance is not waived by State Savings Co.
7. By Fifth Third if the holders of ten percent (10%) or more of the
outstanding shares of State Savings Co. Common Stock shall have perfected their
rights as dissenting shareholders pursuant to Section 1701.84 and 1701.85 of the
Ohio Revised Code or if the Board of Directors of State Savings Co. withdraws or
modifies its recommendation to the Shareholders regarding the Merger as
contemplated by Section IV.A. of this Agreement.
8. By State Savings Co. if it determines by a vote of the majority of the
members of its Board of Directors, and notifies Fifth Third, at any time during
the five (5) day period commencing two (2) business days after the Determination
Date and if both of the following conditions are satisfied:
(i) the Average Closing Price of Fifth Third Common Stock is less than
$65.20 (adjusted as set forth in the last sentence of this paragraph
VIII.A.8.); and
(ii) (x) the number obtained by dividing the Average Closing Price on
the Determination Date by the Starting Price (such number being referred to
herein as the "Fifth Third Ratio") shall be less than (y) the number
obtained by dividing the Index Price on the Determination Date by the Index
Price on the Starting Date and subtracting 0.20 from the quotient in this
clause (ii)(y) (such number being referred to herein as the "Index Ratio");
If State Savings Co. elects to terminate this Agreement pursuant to this
Section VIII.A.8., it shall give notice to Fifth Third within the aforementioned
five (5) day period, provided such notice may be withdrawn at any time. During
the five (5) day period commencing with its receipt of such notice, Fifth Third
shall have the option of
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adjusting the Exchange Ratio to equal the lesser of (i) a number equal to a
quotient (rounded to the nearest one-thousandth), the numerator of which is the
product of $65.20 multiplied by the Exchange Ratio (as then in effect) and the
denominator of which is the Average Closing Price, and (ii) a number equal to a
quotient (rounded to the nearest one-thousandth), the numerator of which is the
Index Ratio multiplied by the Exchange Ratio (as then in effect) and the
denominator of which is the Fifth Third Ratio. If Fifth Third makes an election
contemplated by the preceding sentence, within such five-day period, it shall
give prompt written notice to State Savings Co. of such election and the revised
Exchange Ratio, whereupon no termination shall have occurred pursuant to this
Section VIII.A.8 and this Agreement shall remain in effect in accordance with
its terms (except as the Exchange Ratio shall have been so modified), and any
references in this Agreement to "Exchange Ratio" shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this Section VIII.A.8.
For purposes of this Paragraph VIII.A.8, the following terms shall have the
meaning indicated:
"Average Closing Price" shall mean the average of the per share closing
prices of the Fifth Third Common Stock as reported on the NASDAQ
National Market System for the 20 consecutive trading days ending on the
Determination Date as reported by The Wall Street Journal, expressed in
decimal figures carried to five figures.
"Determination Date" means the tenth (10th) trading day prior to the
Closing Date or September 30, 1998, whichever is earlier.
"Index Group" means the nineteen (19) bank holding companies listed
below, the common stock of all of which shall be publicly traded and as
to which there shall not have been a publicly announced proposal since
the Starting Date and before the Determination Date for any such company
to be acquired or for such company to acquire another company or
companies in transactions with a value exceeding 25% of the acquiror's
market capitalization. In the event that any such company is removed
from the Index Group, the weights (which shall be determined based upon
the number of outstanding shares of common stock) shall be redistributed
proportionately for purposes of determining the Index Price. The
nineteen (19) bank holding companies and the weights attributed to them
are as follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING WEIGHTED
BANK HOLDING COMPANY AS OF 9/30/97 FACTOR
-------------------- ------------------ --------
<S> <C> <C>
Northern Trust Corp.................................... 109,139.3 4.89
Star Banc Corp......................................... 85,296.2 3.82
First Tennessee National Corp.......................... 64,059.8 2.87
State Street Corp...................................... 160,808.0 7.20
Marshall & Ilsley Corp................................. 88,872.4 3.98
BB&T Corporation....................................... 134,308.5 6.02
Mercantile Bancorp..................................... 130,289.0 5.83
First American Corp.................................... 58,379.1 2.61
Summit Bancorp......................................... 175,735.2 7.87
South Trust Corp....................................... 99,793.6 4.47
First Security Corp.................................... 115,838.0 5.19
Comerica Inc........................................... 105,239.7 4.71
AmSouth Bancorporation................................. 80,706.2 3.61
Union Planters Corp.................................... 67,211.6 3.01
Regions Financial Corp................................. 136,320.5 6.11
Firstar Corporation.................................... 144,655.2 6.48
Crestar Financial Corp................................. 110,188.1 4.93
Synovus Financial Corp................................. 174,984.1 7.84
Huntington Bancshares, Inc............................. 191,133.7 8.56
------
100.00%
</TABLE>
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<PAGE> 152
"Index Price," on a given date, means the weighted average (weighted in
accordance with the Weighing Factors above, which were calculated with reference
to the outstanding shares listed above) of the closing prices on such date of
the common stock of the companies comprising the Index Group.
"Starting Date" means January 2, 1998.
"Starting Price" means $81.50 per share.
If Fifth Third or any company belonging to the Index Group declares or
effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares or similar transaction between the Starting Date
and the Determination Date, the prices for the common stock of such company
shall be appropriately adjusted for the purposes of applying this Paragraph
VIII.A.8.
B. If State Savings Co. shareholders, acting at a meeting held for the
purpose of voting upon this Agreement, fail to approve such agreements in the
manner required by law, then this Agreement shall be deemed to be automatically
terminated.
C. Upon termination as provided in this Section, this Agreement, except for
the provisions of Paragraphs D, H, I, J, 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 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
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 State Savings Co. and Fifth Third) with the
Secretary of the State of Ohio in accordance with law and this Agreement, the
Merger provided for herein 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 State Savings Co. and Fifth Third upon the authorization of each
company's respective Board of Directors at any time before or after approval of
the Merger and this Agreement by the shareholders of State Savings Co., but
after any such approval by the shareholders of State Savings Co. 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 specifically set forth herein or as contemplated in Sections V.D, VII.B.2,
VII.B.3, VII.B.4, VII.B.5 and VII.C. none of the provisions hereof shall be
binding upon and inure to the benefit of any other person, firm or corporation
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<PAGE> 153
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 hereto; 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 State Savings Co.
shareholders pursuant to the terms of this Agreement.
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.
IN WITNESS WHEREOF, the parties hereto have executed this Affiliation
Agreement as of the date hereinabove set forth.
FIFTH THIRD BANCORP
(SEAL) By: /s/ P. MICHAEL BRUMM
------------------------------------
P. Michael Brumm
Executive Vice President
Attest: /s/ PAUL L. REYNOLDS
----------------------------------
Paul L. Reynolds
Assistant Secretary
STATE SAVINGS CO.
(SEAL) By: /s/ DAVID E. REESE
------------------------------------
Name: David E. Reese
Title: Chairman
Attest: /s/ DONALD B. SHACKELFORD
----------------------------------
Name: Donald B. Shackelford
Title: Vice Chairman
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<PAGE> 154
ANNEX B
FIFTH THIRD BANCORP
38 FOUNTAIN SQUARE PLAZA
CINCINNATI, OHIO 45263
January 2, 1998
Dear :
As you know, Fifth Third Bancorp, an Ohio corporation ("Fifth Third"), and
State Savings Company, an Ohio corporation ("State Savings Co."), are
concurrently entering into an Affiliation Agreement (the "Affiliation
Agreement") pursuant to which State Savings Co., will merge (the "Merger") with
and into Fifth Third with Fifth Third as the surviving corporation in the
Merger.
As a shareholder, you believe it is in the best interests of State Savings
Co. and all State Savings Co. shareholders for the Merger to be consummated on
the terms set forth in the Affiliation Agreement. As a condition and inducement
to Fifth Third's willingness to enter in the Affiliation Agreement:
1. You represent that you have sole voting and dispositive power over
shares of common stock, par value $100 per share, of State Savings Co.
(the "State Savings Co. Common Stock") and that you beneficially own
such shares free and clear of all liens, charges and encumbrances,
agreements and commitments of every kind.
2. You agree that any additional shares of State Savings Co. Common Stock
acquired by you shall be subject to the provisions of this Agreement.
3. At such time as State Savings Co. conducts a meeting of or otherwise
seeks a vote of its shareholders for the purpose of approving and
adopting the Affiliation Agreement and the Merger (the "State Savings
Co. Meeting"), you agree to vote all State Savings Co. Common Stock then
held or controlled by you in favor of the Affiliation Agreement and the
Merger.
4. You will use all reasonable efforts to cooperate with Fifth Third in
connection with the Merger, promptly take such actions as are necessary
or appropriate to consummate the Merger, and provide any information
reasonably requested by Fifth Third for any registration of the shares
of Fifth Third issued in the Merger, any regulatory application or
filing made or approval sought for the transactions contemplated by the
Affiliation Agreement.
5. You hereby waive all rights available to you under the General
Corporation Law as contained in the Ohio Revised Code to demand
appraisal with respect to your State Savings Co. Common Stock.
6. From the date hereof until the Effective Time or earlier termination of
this Agreement as provided in Paragraph 10 (the "Voting Term") you agree
not to sell your State Savings Co. Common Stock or otherwise transfer
your voting rights with respect thereto (exclusive of your right to
designate a proxy to vote your shares).
7. You agree that during the Voting Term, you will not, and you will not
permit affiliates (as that term is defined in Rule 405 of the Securities
Act of 1933 (the "Securities Act")), to:
(i) acquire, offer to acquire or agree to acquire (directly or
indirectly, beneficially or of record, by purchase or otherwise, alone or
in concert with others) a majority of State Savings Co. outstanding common
stock;
B-1
<PAGE> 155
(ii) undertake any merger, consolidation, asset acquisition or
disposition or tender offer or other takeover action involving State
Savings Co. or any of its affiliates or any of its assets, except as
expressly permitted by the Affiliation Agreement;
(iii) other than as a director of State Savings Co., make, or in any
way participate, directly or indirectly, in any "solicitation" of "proxies"
(as a such terms are used in the proxy rules of the Securities and Exchange
Commission) or seek to advise or influence any person or entity with
respect to the voting or acquisition of any securities of State Savings
Co.;
(iv) other than as a director of State Savings Co., directly or
indirectly, whether through any employees, agents, affiliates or otherwise,
encourage, initiate, solicit or participate in, any inquiries or proposals
or engage in any discussions or negotiations, concerning any of the
foregoing; or
(v) agree to do any of the foregoing.
8. The voting obligations set forth in this Agreement only extend to the
matters set forth herein and do not extend to the voting on other
matters and questions on which you have the right to vote under the
articles of incorporation of State Savings Co., its regulations or the
Ohio Revised Code.
9. You are an "accredited investor" as such term is defined in Rule 501
under the Securities Act. You are purchasing the shares of Fifth Third
Common Stock for investment for your own account and not with any
present view toward resale or other distribution thereof. You have such
knowledge and experience in factual and business matters that you are
capable of evaluating the merits and risks of the investment in the
shares of Fifth Third Common Stock and are able to bear the economic
risk of investment in the shares of Fifth Third Common Stock. You
acknowledge that Fifth Third has made available to you prior to the date
hereof and prior to the purchase of any of the shares of Fifth Third
Common Stock, the opportunity to ask questions of, and receive answers
from, the representatives of Fifth Third concerning Fifth Third and the
terms and conditions of the Merger.
10. This Agreement shall terminate upon the termination of the Affiliation
Agreement in accordance with its terms.
11. This Agreement shall not affect your obligations, to the extent you serve
in such capacity, as a director of State Savings Co.
12. This Agreement shall bind and benefit the successors, assigns, executors,
trustees and heirs of the parties hereto. You agree that damages are
inadequate for breach by you of any term of this Agreement and that Fifth
Third shall be entitled to preliminary and permanent injunctive relief
and specific performance to enforce this Agreement. This Agreement shall
be governed by and construed under the laws of the State of Ohio (without
giving effect to the choice of law provisions thereof). Any term hereof
which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without affecting the remaining terms or their validity
or enforceability in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original and all of such counterparts together shall
constitute one and the same instrument.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to Fifth Third a counterpart hereof.
Very truly yours,
FIFTH THIRD BANCORP
By:
------------------------------------
Accepted and agreed as of
the date first above written:
Name:
----------------------------------------------------------
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<PAGE> 156
ANNEX C
FAIRNESS OPINION OF KEEFE, BRUYETTE & WOODS, INC.
APRIL 7, 1998
Board of Directors
State Savings Company
20 East Broad Street
Columbus, OH 43215
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the common stockholders of State Savings
Company ("State Savings") of the consideration to be received by such
stockholders in the proposed merger (the "Merger") of State Savings with and
into Fifth Third Bancorp ("Fifth Third"), pursuant to the Affiliation Agreement
("Agreement") dated as of January 2, 1998 between State Savings and Fifth Third
(the "Agreement"). Under the terms of the Merger, stockholders of State Savings
will receive 2,770.89 shares of Fifth Third's common stock for each of their
shares of common stock, par value $100 per share of State Savings ("the Exchange
Ratio"). It is our understanding that the Merger will be accounted for as a
pooling accounting transaction under generally accepted accounting practices.
Keefe, Bruyette & Woods, Inc. as part of its investment banking business,
is continually engaged in the valuation of banking businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. As specialists in the securities of banking companies, we have
experience in, and knowledge of, the valuation of banking enterprises. In the
ordinary course of our business as a broker-dealer, we may, from time to time,
purchase securities from, and sell securities to, State Savings and Fifth Third
and as a market maker in securities we may from time to time have a long or
short position in, and buy or sell, debt or equity securities of Fifth Third for
our own account and for the accounts of our customers. We have acted exclusively
for the Board of Directors of State Savings in rendering this fairness opinion
and will receive a fee from State Savings for our services.
In rendering our opinion, we have (i) reviewed, among other things, the
Affiliation Agreement, Audited Financial Statements of State Savings and Annual
Reports to stockholders and Annual Report on Form 10-K of Fifth Third for the
four years ended December 31, 1996, certain interim reports of State Savings and
certain interim reports to stockholders and Quarterly Reports on Form 10-Q of
Fifth Third and certain internal financial analyses and forecasts for State
Savings prepared by management; (ii) held discussions with members of senior
management of State Savings and Fifth Third regarding past and current business
operations, regulatory relationships, financial condition and future prospects
of the respective companies; (iii) compared certain financial and stock market
information for Fifth Third with similar information for certain other companies
the securities of which are publicly traded; (iv) reviewed the financial terms
of certain recent business combinations in the banking industry; and (v)
performed such other studies and analyses as we considered appropriate.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of all of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independently verifying any of such information. We have
relied upon the management of State Savings as to the reasonableness and
achievability of the financial and operating forecasts and projections (and the
assumptions and bases therefor) provided to us, and we have assumed that such
forecasts and projections reflect the best currently available estimates and
judgments of State Savings and that such forecasts and projections will be
realized in the amounts and in the time periods currently estimated by such
management. We have also assumed, without independent verification, that the
aggregate allowances for loan losses for State Savings and Fifth Third are
adequate to cover such losses. In rendering our opinion, we have not made or
obtained any evaluations or appraisals of the property of State Savings or Fifth
Third, nor have we examined any individual credit files.
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State Savings Company
Board of Directors
Page 2
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 position and results of operations of State
Savings and Fifth Third; (ii) the assets and liabilities of State Savings and
Fifth Third; and (iii) the nature and terms of certain other merger transactions
involving thrift and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
common stockholders of State Savings.
Very truly yours,
KEEFE, BRUYETTE & WOODS, INC.
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ANNEX D
OHIO REVISED CODE
TITLE XVII CORPORATIONS--PARTNERSHIPS
CHAPTER 1701: GENERAL CORPORATION LAW
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 of the Revised Code shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date on
which the agreement of merger was adopted by the directors of that corporation.
Within twenty days after he has been sent the notice provided in section 1701.80
or 1701.801 of the Revised Code, the dissenting shareholder shall deliver to the
corporation a written demand for payment with the same information as that
provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to the dissenting shareholder
within twenty days after the lapse of the fifteen-day period, unless a court for
good cause shown otherwise directs. If shares represented by a certificate on
which such a legend has been endorsed are transferred, each new certificate
issued for them shall bear a similar legend, together with the name of the
original dissenting holder of such shares. Upon receiving a demand for payment
from a dissenting shareholder who is the record holder of uncertificated
securities, the corporation shall make an appropriate notation of the demand for
payment in its shareholder records. If uncertificated shares for which payment
has been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as provided in
this paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has been made, acquires only such rights in the
corporation as the original dissenting holder of such shares had immediately
after the service of a demand for payment of the fair cash value of the shares.
A request under this paragraph by the corporation is not an admission by the
corporation that the shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
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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 dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 of the Revised
Code, fair cash value as to shareholders of a constituent subsidiary corporation
shall be determined as of the day before the adoption of the agreement of merger
by the directors of the particular subsidiary corporation. The fair cash value
of a share for the purposes of this section is the amount that a willing seller
who is under no compulsion to sell would be willing to accept and that a willing
buyer who is under no compulsion to purchase would be willing to pay, but in no
event shall the fair cash value of a share exceed the amount specified in the
demand of the particular shareholder. In computing such fair cash value, any
appreciation or depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be excluded.
(D) (1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind
their adoption of the action involved;
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(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.
(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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ANNEX E
ACQUIRING PERSON STATEMENT
1. The identity of the "Acquiring Person" is: Fifth Third Bancorp, a corporation
organized and existing under the laws of the State of Ohio and registered as
a bank holding company under the Bank Holding Company Act of 1956, as amended
(the "Acquiring Person").
2. This Acquiring Person Statement is being given by the Acquiring Person
pursuant to Section 1701.831 of the Ohio Revised Code.
3. The number of common shares, $100 par value, of State Savings Company, a
corporation organized and existing under the laws of the State of Ohio and a
multiple savings and loan holding company under Section 10 of the Home Owners
Loan Act, as amended, owned, directly or indirectly, by the Acquiring Person
on the date of this statement is: None .
4. The range of voting power, described in division (Z)(1) of Section 1701.01 of
the Ohio Revised Code, under which the proposed control share acquisition
will, if and on the date it is consummated, fall is: (c) a majority or more
of such voting power.
5. The proposed control share acquisition is to be consummated on the terms
contained in the Affiliation Agreement dated as of January 2, 1998 between
the Acquiring Person and State Savings Company (the "Affiliation Agreement"),
a copy of which is attached as Annex A to the Proxy Statement/Prospectus to
be dated April 7, 1998.
6. The acquiring Person hereby represents that the proposed control share
acquisition, if consummated in accordance with the terms of the Affiliation
Agreement, will not be contrary to law and hereby further represents that the
Acquiring Person has the financial capacity to make the proposed control
share acquisition.
IN WITNESS WHEREOF, the undersigned has caused this Acquiring Person Statement
to be executed and delivered to State Savings Company this Third day of April,
1998.
FIFTH THIRD BANCORP
By: /s/ PAUL L. REYNOLDS
------------------------------------
Name:Paul L. Reynolds
Title:Assistant Secretary
