<PAGE> 1
Filed Pursuant to Rule 424(b)(i)
ASHLAND BANKSHARES, INC.
1422 Winchester Avenue
Ashland, Kentucky 41105
Dear Shareholder: February 26, 1999
On behalf of the Board of Directors, I cordially invite you to attend a
special meeting of shareholders of Ashland Bankshares, Inc., which will be held
at 3:30 p.m., Eastern Standard Time, on March 31, 1999, at Bank of Ashland, 1422
Winchester Avenue, Ashland, Kentucky.
At the special meeting, you will be asked to consider and vote upon a
proposal to approve the affiliation agreement dated as of September 8, 1998 and
amended as of December 15, 1998, and the related plan of merger dated as of
September 8, 1998 and amended as of February 18, 1999, each by and between Fifth
Third Bancorp and Ashland. Pursuant to the affiliation agreement and plan of
merger, Ashland will merge into Fifth Third. The consummation of the merger is
subject to various conditions, including the receipt of Ashland shareholder
approval and of all required regulatory approvals.
At the time the merger becomes effective, each share of common stock of
Ashland will be canceled and converted, by virtue of the merger, into the right
to receive 9.754427 shares of common stock of Fifth Third, subject to adjustment
in certain circumstances. Based on the closing price per share of Fifth Third
common stock on the Nasdaq National Market on February 23, 1999, the value of
the 9.754427 shares of Fifth Third common stock was $655.40. The actual value of
the Fifth Third common stock to be received by Ashland shareholders will depend
on the market price of Fifth Third common stock at the time the merger becomes
effective.
The proposed merger is discussed in detail in the accompanying proxy
statement/prospectus, as well as in the affiliation agreement and plan of merger
which are included as Annex A and Annex B, respectively, in the proxy
statement/prospectus.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND RECOMMENDS
THAT YOU VOTE "FOR" THE PROPOSAL TO APPROVE THE AFFILIATION AGREEMENT AND PLAN
OF MERGER. APPROVAL OF THE PROPOSAL WILL ALSO AUTHORIZE THE BOARD OF DIRECTORS
TO EXERCISE ITS DISCRETION WHETHER TO PROCEED WITH THE MERGER IN THE EVENT THAT
ASHLAND HAS THE RIGHT TO EXERCISE ITS TERMINATION RIGHT, AS DESCRIBED IN THE
PROXY STATEMENT/PROSPECTUS. ASHLAND EXPECTS THAT THE ASHLAND BOARD OF DIRECTORS
WOULD EXERCISE ITS DISCRETION AND DECIDE WHETHER TO EITHER TERMINATE THE
AFFILIATION AGREEMENT AND PLAN OF MERGER OR, IN THE EVENT OF A SUBSTANTIAL
DECLINE IN THE TRADING PRICE OF FIFTH THIRD COMMON STOCK, AGREE TO AN ADJUSTMENT
TO THE TERMS OF THE MERGER, WITHOUT A RESOLICITATION OF SHAREHOLDERS.
THE AFFILIATION AGREEMENT AND THE RELATED PLAN OF MERGER MUST BE APPROVED
BY THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE ISSUED AND OUTSTANDING
SHARES OF ASHLAND COMMON STOCK ENTITLED TO VOTE. AN ABSTENTION OR FAILURE TO
VOTE HAS THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL. IT IS, THEREFORE,
IMPORTANT THAT YOU VOTE.
Your vote is very important, regardless of the number of shares you own.
Please sign and return the proxy card in the postage-paid return envelope
provided for your convenience. This will not prevent you from voting in person,
but will assure that your vote is counted if you are unable to attend the
special meeting.
Please vote and return your proxy today.
Sincerely,
William A. Stinnett, III
President and Chief Executive Officer
- ---------------
IMPORTANT: If your shares of Ashland common stock are held in the name of a
brokerage firm or nominee, only they can execute a proxy on your behalf. To
assure that your shares are voted, we urge you to telephone today the individual
responsible for your account at your brokerage firm and obtain instructions on
how to direct him or her to execute a proxy.
If you have any questions or need any help in voting your shares, please
telephone William A. Stinnett, III, President and Chief Executive Officer at
Ashland, (606) 329-9797.
<PAGE> 2
ASHLAND BANKSHARES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 31, 1999
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Ashland
Bankshares, Inc. ("Ashland") will be held on March 31, 1999 at 3:30 p.m.,
Eastern Standard Time, at Bank of Ashland, 1422 Winchester Avenue, Ashland,
Kentucky.
A Proxy Statement/Prospectus and Proxy Card for the special meeting are
enclosed herewith. The special meeting is for the purpose of considering and
voting upon the following matters:
1. A proposal to approve the affiliation agreement dated as of
September 8, 1998, as amended on December 15, 1998, and the related plan of
merger dated as of September 8, 1998, as amended on February 18, 1999, each
by and between Fifth Third Bancorp ("Fifth Third") and Ashland. Pursuant to
the affiliation agreement and plan of merger, Ashland will merge into Fifth
Third. At the time the merger becomes effective, each share of common stock
of Ashland will be converted by virtue of the merger into the right to
receive 9.754427 shares of common stock of Fifth Third subject to possible
adjustment in certain circumstances.
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 and plan of merger,
the Ashland Board of Directors may terminate the affiliation agreement and
the plan of merger if Ashland and Fifth Third cannot agree on an adjustment
to the terms of the merger. Approval of the proposal will also authorize
the Ashland Board of Directors to exercise its discretion whether to
proceed with the merger in the event that Ashland has the right to exercise
its termination right as described in the preceding sentence without notice
to, or a resolicitation of, shareholders. See "Terms of the Affiliation
Agreement-Termination; Amendment; Waiver" in the accompanying Proxy
Statement/Prospectus.
2. Such other business as may properly come before the special meeting
or any adjournments thereof. The Board of Directors is not aware of any
other business to come before the special meeting.
Pursuant to the Bylaws of Ashland, the Board of Directors has fixed
February 22, 1999 as the record date, for the determination of shareholders
entitled to receive notice of, and to vote at, the special meeting and any
adjournments thereof. Any action may be taken on any of the foregoing proposals
at the special meeting on the date specified above, or on any date or dates less
than 30 days later to which, by original or later adjournment, the meeting may
be adjourned. Only holders of record of Ashland common stock at the close of
business on the record date will be entitled to vote at the special meeting or
any adjournments thereof.
THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE ISSUED AND OUTSTANDING
SHARES OF ASHLAND COMMON STOCK ENTITLED TO VOTE IS REQUIRED TO APPROVE THE
AFFILIATION AGREEMENT AND PLAN OF MERGER. IN THE EVENT THERE ARE NOT SUFFICIENT
VOTES TO APPROVE THE FOREGOING PROPOSAL AT THE TIME OF THE MEETING, THE MEETING
MAY BE ADJOURNED BY A MAJORITY OF THE VOTES CAST IN ORDER TO PERMIT FURTHER
SOLICITATION OF PROXIES BY ASHLAND; PROVIDED, HOWEVER, THAT NO PROXY WHICH IS
VOTED AGAINST THE AFFILIATION AGREEMENT AND PLAN OF MERGER WILL BE VOTED IN
FAVOR OF ADJOURNMENT TO SOLICIT FURTHER PROXIES FOR SUCH PROPOSAL.
APPROVAL OF THE PROPOSAL WILL ALSO AUTHORIZE THE BOARD OF DIRECTORS TO
EXERCISE ITS DISCRETION WHETHER TO PROCEED WITH THE MERGER IN THE EVENT THAT
ASHLAND HAS THE RIGHT TO EXERCISE ITS TERMINATION RIGHT AS DESCRIBED ABOVE.
ASHLAND EXPECTS THAT THE ASHLAND BOARD OF DIRECTORS WOULD EXERCISE SUCH
DISCRETION AND DECIDE WHETHER TO TERMINATE THE AFFILIATION AGREEMENT AND PLAN OF
MERGER OR, IN THE EVENT OF A SUBSTANTIAL DECLINE OF THE TRADING PRICE OF FIFTH
THIRD COMMON STOCK, AGREE TO AN ADJUSTMENT TO THE TERMS OF THE MERGER, WITHOUT A
RESOLICITATION OF SHAREHOLDERS.
THE PROXY STATEMENT/PROSPECTUS DESCRIBES YOUR RIGHTS TO DISSENT FROM THE
MERGER AND THE PROCEDURES YOU MUST FOLLOW TO EXERCISE THOSE RIGHTS.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. EACH
SHAREHOLDER, WHETHER OR NOT HE OR SHE PLANS TO ATTEND THE SPECIAL MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN BY A SHAREHOLDER MAY BE REVOKED
BEFORE IT IS EXERCISED BY SUBMITTING A LATER DATED PROXY, BY ATTENDING THE
SPECIAL MEETING AND VOTING IN
<PAGE> 3
PERSON OR BY GIVING NOTICE OF REVOCATION TO ASHLAND IN WRITING ADDRESSED TO AND
RECEIVED BY THE SECRETARY OF ASHLAND BEFORE THE SPECIAL MEETING.
By Order of the Board of Directors
William A. Stinnett, III
President and Chief Executive Officer
Ashland, Kentucky
February 26, 1999
<PAGE> 4
PROXY STATEMENT FOR ASHLAND BANKSHARES, INC.
------------------------------------------------------
PROSPECTUS OF FIFTH THIRD BANCORP
------------------------------------------------------
The boards of directors of Ashland Bankshares, Inc. and Fifth Third Bancorp
have agreed that Fifth Third will acquire Ashland in a merger. If the merger is
approved by the shareholders of Ashland and all other closing conditions are
satisfied, each outstanding share of Ashland common stock will be exchanged for
9.754427 shares of Fifth Third common stock. In connection with the merger,
Ashland's wholly-owned bank subsidiary, Bank of Ashland, Inc., will be acquired
by Fifth Third Bank, Ohio Valley. The board of directors of Ashland believes
that the merger is in Ashland's and your best interests.
The merger cannot be completed unless the shareholders of Ashland approve
the merger. Ashland has scheduled a special meeting for its shareholders to vote
on this matter. The date, time and place of the special meeting are as follows:
March 31, 1999
3:30 p.m., Eastern Standard Time
Bank of Ashland
1422 Winchester Avenue
Ashland, Kentucky
Whether or not you plan to attend the special meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us. If you sign,
date and mail your proxy card without indicating how you wish to vote, your
proxy will be counted as a vote in favor of the merger. If you fail to return
your card, the effect will be a vote against the merger. YOUR VOTE IS VERY
IMPORTANT.
Fifth Third common stock is traded on the Nasdaq National Market under the
symbol "FITB."
------------------------------------------------------
FOR A DESCRIPTION OF CERTAIN SIGNIFICANT CONSIDERATIONS IN CONNECTION WITH
THE MERGER AND RELATED MATTERS DESCRIBED IN THIS DOCUMENT, SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------------------------------
THE SHARES OF FIFTH THIRD COMMON STOCK ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------------------------------------
THE INFORMATION IN THIS DOCUMENT IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT ISSUE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS DOCUMENT IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The date of this Proxy Statement/Prospectus is February 26, 1999
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 2
RISK FACTORS................................................ 7
THE SPECIAL MEETING......................................... 10
Purpose of the Special Meeting............................ 10
Voting and Revocability of Proxies........................ 10
Vote Required............................................. 10
Solicitation of Proxies................................... 10
PROPOSAL -- MERGER OF ASHLAND INTO FIFTH THIRD.............. 11
Structure of the Merger................................... 11
Corporate Governance...................................... 11
Merger Consideration...................................... 11
No Fractional Shares...................................... 12
Effective Time of the Merger.............................. 12
Exchange of Certificates.................................. 12
Background and Reasons for the Merger..................... 13
Opinion of Financial Advisor to Ashland................... 14
Federal Income Tax Consequences........................... 17
Accounting Treatment...................................... 18
Resale of Fifth Third Common Stock by Affiliates.......... 18
Dissenters' Rights of Appraisal........................... 19
TERMS OF THE AFFILIATION AGREEMENT.......................... 21
Representations and Warranties............................ 21
Conduct Pending Merger.................................... 21
Conditions to Closing..................................... 22
Termination; Amendment; Waiver............................ 23
Effect on Ashland Employees............................... 25
Interests of Certain Persons in the Merger................ 25
FIFTH THIRD BANCORP......................................... 27
Description of Business................................... 27
Recent Developments....................................... 27
Additional Information.................................... 28
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ASHLAND BANKSHARES, INC..................................... 29
General................................................... 29
Lending Activities........................................ 29
Investment Activities..................................... 39
Sources of Funds.......................................... 40
Asset/Liability Management................................ 42
Competition............................................... 44
Employees................................................. 45
Subsidiary Activities..................................... 45
Description of Property................................... 45
Legal Proceedings......................................... 45
Year 2000................................................. 45
SELECTED HISTORICAL FINANCIAL DATA OF FIFTH THIRD........... 46
SELECTED HISTORICAL FINANCIAL DATA OF ASHLAND............... 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION OF ASHLAND BANKSHARES, INC....... 50
CERTAIN BENEFICIAL OWNERS OF ASHLAND COMMON STOCK........... 55
ASHLAND MANAGEMENT.......................................... 56
DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE RIGHTS OF
SHAREHOLDERS.............................................. 58
Voting Rights............................................. 58
Dividends................................................. 59
Preemptive Rights......................................... 59
Rights Upon Liquidation................................... 60
Indemnification And Personal Liability of Directors And
Officers............................................... 60
Shareholders' Meetings; Quorum............................ 60
Subscription, Conversion, Redemption Rights; Stock
Nonassessable.......................................... 60
Change of Control Provisions.............................. 60
EFFECT OF GOVERNMENTAL POLICIES............................. 62
REGULATION OF FINANCIAL INSTITUTIONS........................ 62
Holding Company Regulation................................ 63
Capital Requirements...................................... 63
Regulation of Banks....................................... 63
LEGAL MATTERS............................................... 64
EXPERTS..................................................... 64
WHERE YOU CAN FIND MORE INFORMATION......................... 64
INDEX TO FINANCIAL STATEMENTS OF ASHLAND.................... F-1
</TABLE>
ii
<PAGE> 7
ANNEXES:
<TABLE>
<S> <C>
Annex A: Affiliation Agreement dated as of September 8, 1998 by and
between Fifth Third Bancorp and Ashland Bankshares, Inc.
(excluding exhibits) and Amendment to Affiliation Agreement
dated as of December 15, 1998 by and between Fifth Third
Bancorp and Ashland Bankshares, Inc.
Annex B: Plan of Merger dated as of September 8, 1998 by and between
Fifth Third Bancorp and Ashland Bankshares, Inc. (excluding
exhibits) and Amendment to Plan of Merger dated as of
February 18, 1999, by and between Fifth Third Bancorp and
Ashland Bankshares, Inc.
Annex C: Fairness Opinion of Professional Bank Services, Inc.
Annex D: Subtitle 13 of the Kentucky Business Corporation Act
</TABLE>
iii
<PAGE> 8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY DO ASHLAND AND FIFTH THIRD WANT TO MERGE?
A: Ashland believes that a merger with Fifth Third will benefit both its
shareholders and its customers. Fifth Third wants to better serve its
customers in Ashland's service areas and to expand its presence in those
markets.
Q: HOW WILL I BENEFIT?
A: The Ashland board of directors believes that you will benefit by becoming a
shareholder of a bank holding company with a strong financial performance
record. The Ashland board also believes that you will benefit from the
opportunity for potential future appreciation of Fifth Third common stock.
Q: WHAT WILL I RECEIVE FOR MY ASHLAND SHARES?
A: You will receive 9.754427 shares of Fifth Third common stock for each share
of Ashland common stock that you currently own. As of February 23, 1999, the
value of 9.754427 shares of Fifth Third shares was $655.40.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger as soon as possible after the special
meeting, assuming the required shareholder approval is obtained. The merger
is also subject to the approval of federal and state banking regulatory
authorities and the satisfaction of other closing conditions.
Q: WHEN AND WHERE WILL THE SPECIAL MEETING TAKE PLACE?
A: The special meeting will be held at 3:30 p.m., Eastern Standard Time, on
March 31, 1999 at Bank of Ashland, 1422 Winchester Avenue, Ashland,
Kentucky.
Q: WHAT DO I NEED TO DO NOW?
A: After reviewing this document, indicate on your proxy card how you want to
vote, sign it and mail it in the enclosed return envelope as soon as
possible.
Q: HOW WILL MY SHARES BE VOTED IF I RETURN A BLANK PROXY CARD?
A: If you sign and send in your proxy and do not indicate how you want to vote,
your proxy will be counted as a vote in favor of the merger.
Q: WHAT WILL BE THE EFFECT IF I DO NOT VOTE?
A: If you do not return your proxy card, it will have the same effect as if you
voted "no."
Q: CAN I VOTE MY SHARES IN PERSON?
A: Yes. You may attend the special meeting and vote your shares in person,
rather than signing and mailing your proxy card.
Q: CAN I REVOKE MY PROXY AND CHANGE MY MIND?
A: Yes. You may take back your proxy up to and including the day of the special
meeting by following the directions on page 10. Then you can either change
your vote or attend the special meeting and vote in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you instruct your broker on how to
vote. Your broker will send you directions on how you can instruct your
broker to vote. Your broker cannot vote your shares without instructions
from you.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates.
Q: WHO CAN ANSWER MY QUESTIONS ABOUT THE MERGER?
A: If you have more questions about the merger, please call William A.
Stinnett, III, President and Chief Executive Officer of Ashland, at (606)
329-9797.
1
<PAGE> 9
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document, including the Annexes,
and the documents we have referred you to. For more information about Fifth
Third, see "Where You Can Find More Information." (page 64)
THE COMPANIES
FIFTH THIRD BANCORP
38 FOUNTAIN SQUARE PLAZA
CINCINNATI, OHIO 45236
(513) 579-5300
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 ten subsidiary banks operate a general
banking business from 468 offices located throughout Ohio, Indiana, Kentucky,
Florida and Arizona. At December 31, 1998, on a consolidated basis, Fifth Third
had assets, deposits and shareholders' equity of approximately $28.9 billion,
$18.8 billion and $3.2 billion, respectively. Fifth Third common stock is traded
on the Nasdaq National Market under the symbol "FITB."
ASHLAND BANKSHARES, INC.
1422 WINCHESTER AVENUE
ASHLAND, KENTUCKY 41105
(606) 329-9797
Ashland is a registered bank holding company, incorporated under Kentucky law.
Ashland's principal asset is 100% of the outstanding stock of Bank of Ashland,
Inc. Ashland has no separate operations and its business consists only of the
business of Bank of Ashland, Inc. As of December 31, 1998, Ashland had $171.1
million in assets, $141.4 million in deposits and $25.5 million in shareholders'
equity.
THE MERGER
Pursuant to the affiliation agreement between Ashland and Fifth Third dated as
of September 8, 1998, and amended as of December 15, 1998, at the effective time
of the merger, Ashland will merge with and into Fifth Third. In a simultaneous
transaction, Bank of Ashland will merge with and into Fifth Third Bank, Ohio
Valley.
ASHLAND SHAREHOLDERS WILL RECEIVE FIFTH THIRD STOCK IN THE MERGER
If the merger is approved, you will have the right to receive 9.754427 shares
of Fifth Third common stock for each share of Ashland common stock that you
presently own. Based on the closing price per share of Fifth Third common stock
on the Nasdaq National Market on February 23, 1999, the value of 9.754427 shares
of Fifth Third common stock was $655.40.
In the event of any stock dividends, reclassifications, recapitalization,
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 merger is completed, the number of shares of Fifth
Third common stock which you have the right to receive will be adjusted so as to
give you the economic benefit of such event or action.
ADJUSTMENT TO MERGER CONSIDERATION IN THE EVENT OF A DECLINE IN FIFTH THIRD
STOCK PRICE
In the event of a substantial decline in the trading price of Fifth Third
common stock relative to a group of peer institutions, the Ashland board may
have the right to either terminate the affiliation agreement or agree to an
adjustment to the terms of the merger. If the Ashland board determines to
terminate the affiliation agreement in the event of a decline in the trading
price, it must give notice to Fifth Third. If notice of termination is given,
Fifth Third and Ashland have agreed to work together to reach an agreement on
the terms of the merger. If Fifth Third and Ashland cannot agree on an
adjustment within ten days of the date notice of termination was given, the
affiliation agreement will terminate.
Ashland expects that the Ashland board would exercise its discretion and
decide whether to either terminate the affiliation agreement and plan of merger
or agree to an adjustment to the terms of the merger without a resolicitation of
shareholders.
2
<PAGE> 10
NO FRACTIONAL SHARES WILL BE ISSUED
Fifth Third will not issue any fractional shares. Instead, you will receive
cash for any fractional share of Fifth Third common stock owed to you in an
amount based on the last trading price of Fifth Third common stock on the date
on which the merger occurs.
TAX CONSEQUENCES OF THE MERGER
If you do not dissent to the merger, the exchange of shares will be tax-free
to you for federal income tax purposes, except for taxes payable on any cash you
receive for fractional shares. If you properly dissent to the merger, you will
generally be treated as having received cash in redemption for your shares and
will be subject to taxes payable on the cash payment. The material federal
income tax consequences are set out in greater detail on page 17.
Tax matters are very complicated and the tax consequences of the merger to you
will depend on the facts of your own situation. You are urged to consult your
tax advisor for a full understanding of the tax consequences of the merger to
you.
REASONS FOR THE MERGER
The Ashland board has determined that it will be able to compete more
effectively in the rapidly changing environment of the banking industry, by
merging with Fifth Third.
You can find a more detailed discussion of the background to the affiliation
agreement and Ashland's and Fifth Third's reasons for the merger in this
document under "Proposal -- Merger of Ashland into Fifth Third -- Background and
Reasons for the Merger," beginning on page 13.
OPINION OF FINANCIAL ADVISOR
In deciding to approve the merger, the Ashland board considered an opinion
from Professional Bank Services, Inc., the financial advisor to Ashland, that
the merger consideration is fair from a financial viewpoint. This opinion is
attached as Annex C to this document. We encourage you to read and consider this
opinion.
RECOMMENDATION TO ASHLAND SHAREHOLDERS
The Ashland board believes that the merger is in your best interests and
unanimously recommends that you vote "for" approval of the affiliation
agreement.
VOTE REQUIRED
The affiliation agreement and the related plan of merger must be approved by
the affirmative vote of at least a majority of the shares of Ashland common
stock outstanding at the close of business on February 22, 1999. On that date,
there were 125,584 shares of Ashland common stock outstanding.
Approval of the affiliation agreement and the plan of merger will also
authorize the Ashland board to exercise its discretion on whether to proceed
with the merger in the event Ashland has the right to terminate the affiliation
agreement and the plan of merger or, in the event of a substantial decline in
the trading price of Fifth Third common stock, agree to an adjustment to the
terms of the merger.
OWNERSHIP OF FIFTH THIRD FOLLOWING THE MERGER
Based on the number of shares of Fifth Third and Ashland common stock
outstanding on the record date, Fifth Third will issue approximately 1,225,000
shares of its common stock to Ashland shareholders in the merger. This will
constitute approximately 0.46% of the outstanding stock of Fifth Third
immediately after the merger.
CONDITIONS TO THE MERGER
Fifth Third and Ashland will complete the merger only if certain conditions
are satisfied. Some of the conditions are listed below:
- the approval of the affiliation agreement and plan of merger by the Ashland
shareholders;
- the receipt of certain regulatory approvals under federal and state banking
laws and expiration of any waiting periods;
- registration by Fifth Third of the shares of Fifth Third common stock to be
issued to Ashland shareholders and listing of those shares on the Nasdaq
National Market; and
- receipt by Ashland and its shareholders of an opinion from Graydon, Head &
Ritchey, counsel to Fifth Third, that the exchange of shares by Ashland
shareholders will be tax-free to Ashland shareholders for federal income tax
purposes, except for fractional shares.
Certain of the conditions to the merger may be waived by the company entitled
to assert the condition.
3
<PAGE> 11
RIGHT TO TERMINATE
The boards of directors of Fifth Third and Ashland may jointly agree in
writing to terminate the affiliation agreement without completing the merger. In
addition, either company can individually terminate the affiliation agreement
if:
- the other party materially breaches any of the representations or warranties
it made or fails to comply with any of its obligations under the affiliation
agreement;
- the business, assets or financial condition of the other party materially
and adversely changes;
- the merger is not completed by June 30, 1999; or
- the Ashland shareholders do not approve the affiliation agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When considering the Ashland board's recommendation that Ashland shareholders
vote in favor of the merger, you should be aware that certain Ashland directors
and officers may have interests in the merger that are different from, or in
addition to, yours.
Fifth Third has agreed to enter into an employment agreement effective upon
completion of the merger with William A. Stinnett, III, current President and
Chief Executive Officer of Ashland. The agreement provides for the employment of
Mr. Stinnett as Chairman of the Fifth Third Bank, Ohio Valley through December
31, 2001. In addition, Fifth Third has agreed to create an advisory board in
Ashland, Kentucky and to appoint Paul Grumbles, current Chairman of Ashland, as
Chairman of that advisory board. Executive officers of Ashland may also be
entitled to certain benefits under Ashland's retirement plans.
Fifth Third has agreed to allow certain stock appreciation rights granted by
Ashland to Messrs. Stinnett and Grumbles to be paid according to the agreements
covering such rights immediately prior to the effective time of the merger.
Fifth Third will assume all provisions for indemnification and limitation of
liability now existing in favor of the directors or officers of Ashland and its
subsidiaries. Fifth Third also will purchase and keep in effect for a five-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 Ashland's existing directors' and officers' liability
insurance for acts or omissions occurring at or prior to the merger as long as
such coverage may be obtained on a commercially reasonably basis.
EFFECT ON ASHLAND EMPLOYEES
Fifth Third will use its best efforts to employ as many of the employees of
Ashland and Bank of Ashland who desire employment within the Fifth Third holding
company system to the extent of available positions and consistent with Fifth
Third's standard staffing levels and personnel policies.
The affiliation agreement also provides for the payment of severance amounts
to certain employees of Ashland and Bank of Ashland.
DISSENTERS' RIGHTS OF APPRAISAL
You will be entitled to exercise your statutory dissenters' rights rather than
receive the merger consideration, if and when the merger is completed, if you:
- do not vote in favor of the approval of the affiliation agreement and
related plan of merger;
- deliver written notice of your intent to demand payment of the fair value of
your shares of Ashland common stock at or prior to the special meeting
before the vote is taken; and
- otherwise comply with the requirements of Subtitle 13 of the Kentucky
Business Corporation Act, a copy of which is attached to this document as
Annex D.
If you properly exercise your dissenter's right, you would become entitled to
receive in cash the fair value of your shares of Ashland common stock as
estimated by Ashland subject to the review of a court, plus interest. If you
intend to submit a written demand for payment of the fair cash value of Ashland
common stock, you should deliver notice of such intent to William A. Stinnett,
III, President, Ashland Bankshares, Inc., 1422 Winchester Avenue, Ashland,
Kentucky 41105-1730.
ACCOUNTING
Fifth Third expects the merger to qualify for pooling-of-interests accounting
treatment.
4
<PAGE> 12
RECENT DEVELOPMENTS
Fifth Third's strategy for growth includes strengthening its presence in core
markets, expanding into contiguous markets and broadening its product offerings.
Consistent with this strategy, in addition to the merger, Fifth Third recently
entered into agreements to acquire Enterprise Federal Bancorp, Inc., a
Cincinnati, Ohio based savings and loan holding company, and South Florida Bank
Holding Corporation, a bank holding company headquartered in Ft. Myers, Florida.
Based on the per share market value of Fifth Third common stock on February 23,
1999, Fifth Third expects to issue total shares with an aggregate value of
approximately $110 million and $30 million to shareholders of Enterprise and
South Florida, respectively, representing approximately .77% of Fifth Third's
outstanding shares. These acquisitions are expected to be completed during the
second quarter of 1999, either shortly before or after the completion of the
merger with Ashland.
MARKET PRICE AND DIVIDEND DATA
Fifth Third common stock is traded on the Nasdaq National Market under the
symbol "FITB." On September 4, 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 February 23, 1999, the most recent practicable
date prior to the printing of this document the market prices of Fifth Third
common stock were $51.75 and $67.19, respectively.
The following table sets forth (in per share amounts), for the quarterly
periods indicated, the high and low closing sales prices and the dividends
declared during each quarterly period:
<TABLE>
<CAPTION>
FIFTH THIRD COMMON STOCK
-----------------------------
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
<S> <C> <C> <C>
1996:
First Calendar Quarter................................. $26.44 $19.33 $0.116
Second Calendar Quarter................................ $25.78 $22.00 $0.116
Third Calendar Quarter................................. $25.94 $22.11 $0.129
Fourth Calendar Quarter................................ $33.00 $25.56 $0.129
1997:
First Calendar Quarter................................. $39.78 $27.00 $0.129
Second Calendar Quarter................................ $38.06 $30.94 $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................................ $63.13 $47.50 $0.170
Third Calendar Quarter................................. $67.25 $49.25 $0.170
Fourth Calendar Quarter................................ $74.13 $50.31 $0.200
1999:
First Calendar Quarter
(through February 23, 1999).......................... $75.44 $62.38 $ --
</TABLE>
The following table sets forth the amount of dividends declared and paid by
Ashland for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Dividends per share................................. $7.20 $6.75 $6.15
===== ===== =====
</TABLE>
Ashland common stock does not trade in any established public market. The
last sale of Ashland common stock occurred on August 21, 1998 at a price of
$245.00 per share.
5
<PAGE> 13
COMPARATIVE PER SHARE DATA
The following table sets forth certain per-share information for both Fifth
Third and Ashland at the dates indicated and for the periods then ended. The
equivalent values of such information are based on the exchange ratio of
9.754427 shares of Fifth Third common stock for each share of Ashland common
stock. Neither Ashland nor Fifth Third can give any assurances that the
following table will accurately reflect figures and values applicable at the
date of completion of the merger.
<TABLE>
<CAPTION>
EQUIVALENT SHARE
BASIS - 9.754427
SHARES OF FIFTH THIRD
FIFTH THIRD ASHLAND COMMON STOCK(1)
------------------------------------- ------------------ ----------------------
HISTORICAL PRO FORMA HISTORICAL
----------------- ----------------- ------------------
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:
1998................... $ 1.80 $1.76 $ 1.80 $1.76 $ 23.89 $23.89 $ 17.56 $17.17
1997................... $ 1.76 $1.73 $ 1.76 $1.73 $ 23.53 $23.53 $ 17.17 $16.88
1996................... $ 1.45 $1.42 $ 1.45 $1.42 $ 24.15 $24.15 $ 14.14 $13.85
DIVIDENDS DECLARED PER
SHARE
Twelve months ended
December 31:
1998................... $ .710 $ -- $ .710 $ -- $ 7.20 $ -- $ 6.93 $ --
1997................... $ .569 $ -- $ .569 $ -- $ 6.75 $ -- $ 5.55 $ --
1996................... $ .489 $ -- $ .489 $ -- $ 6.15 $ -- $ 4.77 $ --
BOOK VALUE PER SHARE
At December 31:
1998................... $11.91 $ -- $11.95 $ -- $202.87 $ -- $116.18 $ --
</TABLE>
6
<PAGE> 14
RISK FACTORS
In making your determination as to how to vote on the merger proposal, you
should consider the following factors:
RISKS RELATING TO THE MERGER
THE EXCHANGE RATIO IS FIXED AND WILL NOT BE ADJUSTED UPON ANY CHANGES IN THE
VALUE OF ASHLAND STOCK PRIOR TO THE EFFECTIVE TIME OF THE MERGER.
The precise value of the merger consideration to be paid to Ashland's
shareholders will not be known at the time of the special meeting. The
affiliation agreement provides that 9.754427 shares of Fifth Third common stock
will be issued in the merger in exchange for each share of Ashland common stock.
This exchange ratio is fixed and will not be adjusted to reflect any changes in
the value of Ashland common stock between the date of the affiliation agreement
and the effective time of the merger. In addition, the value of Fifth Third
common stock will fluctuate prior to the effective time of the merger and may be
higher or lower than on the date of the affiliation agreement.
NO MARKET EXISTS FOR ASHLAND COMMON STOCK AND ITS VALUE IN THE MERGER HAS BEEN
SUBJECTIVELY DETERMINED.
Ashland's Board of Directors has subjectively determined that the exchange
ratio offered by Fifth Third is fair to Ashland's shareholders and has received
a financial opinion from Professional Bank Services, Inc. to that effect.
Ashland's Board also believes that the financial terms of the merger are the
most favorable that Ashland could obtain at this time. However, Ashland is a
privately owned company and its securities are not traded on any securities
exchange or other public securities market. Therefore, the actual value of
Ashland common stock may be more or less than the proposed merger consideration.
AFTER THE SPECIAL MEETING, ASHLAND'S BOARD MAY AGREE TO REVISED MERGER
CONSIDERATION OR COULD TERMINATE THE MERGER IN CERTAIN EVENTS.
The merger consideration that you receive in the merger could be
significantly different than the currently contemplated exchange ratio or the
merger could be canceled even though a majority of Ashland's shareholders voted
in favor of the merger. As part of the merger proposal, Ashland's board of
directors is requesting that Ashland's shareholders authorize the board to
exercise its discretion to agree to revised merger consideration if the value of
Fifth Third common stock drops below certain values and Fifth Third's stock
price drops more than an index of bank holding company stocks listed in the
affiliation agreement. See "Terms of the Affiliation Agreement -- Termination;
Amendment; Waiver." If the merger proposal is approved and those conditions
would be triggered, without resoliciting the approval of Ashland's shareholders,
Ashland's board will have the authority to renegotiate the exchange ratio, to
agree to a different method of determining the merger consideration or to
terminate the affiliation agreement.
ASHLAND'S SHAREHOLDERS WILL HAVE NO CONTROL OF FIFTH THIRD'S FUTURE OPERATIONS.
Ashland's shareholders own 100% of Ashland and, in the aggregate, have the
power to approve or reject any matters requiring the approval of shareholders
under Kentucky law and Ashland's articles of incorporation. After the merger,
Ashland's shareholders in the aggregate will hold approximately 0.46% of the
outstanding shares of Fifth Third common stock. Even if all of the former
Ashland shareholders voted in concert on all matters presented to Fifth Third's
shareholders from time to time, such number of Fifth Third shares likely will
not have a major impact on whether such proposals are approved or rejected.
CERTAIN DIRECTORS AND EXECUTIVE OFFICERS OF ASHLAND WILL RECEIVE BENEFITS IN
THE MERGER IN ADDITION TO THE MERGER CONSIDERATION RECEIVED BY ALL OTHER
ASHLAND SHAREHOLDERS.
In connection with the merger, Fifth Third has agreed to enter into an
employment agreement with William A. Stinnett, III, the current President and
Chief Executive Officer of Ashland. Pursuant to such agreement, Mr. Stinnett
will be employed as the Chairman of Fifth Third Bank, Ohio Valley until
7
<PAGE> 15
December 31, 2001, unless sooner terminated pursuant to the agreement and will
receive an annual base salary of $212,000 plus stock options to acquire 10,000
shares of Fifth Third common stock at a per share exercise price equal to the
fair market value on the date of grant. Immediately prior to the effective time
of the merger, pursuant to agreements between each of them and Ashland, Messrs.
Stinnett and Grumbles will receive approximately $670,000 and $270,000,
respectively, upon the exercise of certain stock appreciation rights. In
addition, Fifth Third has agreed to appoint Paul W. Grumbles, current Chairman
of Ashland, as chairman of a newly created advisory board of Fifth Third Bank,
Ohio Valley in Ashland, Kentucky.
ASHLAND MAY ENCOUNTER PROBLEMS IN CONTINUING TO OPERATE ASHLAND INDEPENDENTLY
THAT MAY DIMINISH THE VALUE OF ASHLAND'S STOCK IN THE FUTURE.
If the merger is not consummated, Ashland's shareholders should be aware
that Ashland's continuing operations will involve numerous risks. To compete
effectively going forward, Ashland would be required to meet technological
changes in the industry and increased costs associated with maintaining and
developing an increasingly broad range of products and services. If these
requirements are not met by Ashland, the value of Ashland's stock may be
diminished.
POST MERGER RISKS
FIFTH THIRD'S ACQUISITION STRATEGY COULD POSE RISKS.
Fifth Third has grown through acquisitions in recent years and anticipates
that it will make additional acquisitions in the future. Fifth Third frequently
evaluates strategic opportunities not only in the banking industry but also in
related financial service industries. One or more future acquisitions could be
material to Fifth Third. Fifth Third may need to issue more common stock to pay
for those acquisitions, which would further dilute the ownership interest of all
Fifth Third shareholders at the time of the acquisition. Acquisitions also could
require Fifth Third to use substantial cash or other liquid assets or to incur
debt. In those events, Fifth Third could become more susceptible to economic
downturns and competitive pressures.
FIFTH THIRD FACES INTENSE COMPETITION FOR FINANCIAL SERVICES.
Fifth Third competes with hundreds of commercial banks, savings and loans
and other financial services providers. In addition to the challenge of
attracting and retaining customers for traditional banking services, Fifth
Third's competitors now include securities dealers, brokers, mortgage bankers,
investment advisors and finance and insurance companies who seek to offer one
stop financial services to their customers that may include services that banks
have not been able or allowed to offer to their customers in the past. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems and the
accelerating pace of consolidation among financial services providers. Fifth
Third's ability to maintain its history of strong financial performance and
return on investment to shareholders will depend in part on Fifth Third's
ability to expand its scope of available financial services as needed to meet
the needs and demands of its customers.
FIFTH THIRD MAY ENCOUNTER DIFFICULTIES IN COMBINING THE OPERATIONS OF ACQUIRED
ENTITIES WITH FIFTH THIRD'S OWN OPERATIONS.
Because the markets and industries in which Fifth Third operates are highly
competitive, and because of the inherent uncertainties associated with the
integration of an acquired company, there can be no assurance that Fifth Third
will be able to realize fully the strategic objectives and operating
efficiencies in all of its acquisitions, including Ashland. In addition, Fifth
Third may lose key personnel, either from the acquired entity or from itself, as
a result of acquisitions. These factors could contribute to the benefits
expected from acquisitions not being achieved within expected time frames.
8
<PAGE> 16
GOVERNMENTAL REGULATION AND LEGISLATION COULD LIMIT FIFTH THIRD'S FUTURE
GROWTH.
Fifth Third and its subsidiaries are subject to extensive state and federal
regulation, supervision, and legislation which govern almost all aspects of the
operations of Fifth Third and its subsidiaries. Such laws may change from time
to time and are primarily intended for the protection of consumers, depositors
and the deposit insurance funds. The impact of any such changes may negatively
impact Fifth Third's ability to expand its services and to increase the value of
its business. In addition, Fifth Third's earnings are affected by the monetary
policies of the Federal Reserve Board. Such policies, which include regulating
the national supply of bank reserves and bank credit, can have a major effect
upon the source and cost of funds and the rates of return earned on loans and
investments. The Federal Reserve influences the size and distribution of bank
reserves through its open market operations and changes in cash reserve
requirements against member bank deposits. We cannot predict what effect any
presently contemplated or future changes in the laws or regulations or their
interpretations would have on Fifth Third, but such changes could be materially
adverse to Fifth Third's shareholders.
CHANGES IN INTEREST RATES COULD REDUCE FIFTH THIRD'S INCOME AND CASH FLOWS.
Fifth Third's income and cash flows depend to a great extent on "interest
rate differentials" and the resulting net interest margins, i.e., the difference
between the interest rates earned on interest-earning assets such as loans and
investment securities, and the interest rates paid on interest-bearing
liabilities such as deposits and borrowings. These rates are highly sensitive to
many factors which are beyond Fifth Third's control, including general economic
conditions and the policies of various governmental and regulatory agencies, in
particular, the Federal Reserve Board. Changes in monetary policy, including
changes in interest rates, will influence the origination of loans, the purchase
of investments, the generation of deposits, and the rates received on loans and
investment securities and paid on deposits. Fluctuations in these areas may
adversely affect Fifth Third.
FIFTH THIRD'S OPERATIONS MUST BE YEAR 2000 COMPLIANT.
As with other bank holding companies and other businesses generally, Fifth
Third is exposed to the risk that the year 2000 could cause system failures
which could be disruptive to Fifth Third's operations. Although Fifth Third has
undertaken significant projects to minimize the risk that the year 2000 will
result in any significant problems for Fifth Third, some factors are not within
Fifth Third's direct control and could disrupt Fifth Third's operations.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
This document, including information included or incorporated by reference
herein, contains or may contain forward-looking statements that involve risks
and uncertainties. This document 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 Ashland,
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, those risks discussed above.
9
<PAGE> 17
THE SPECIAL MEETING
This document and the accompanying form of proxy are being furnished to you
in connection with the solicitation by the board of directors of Ashland of
proxies to be used at the special meeting to be held on March 31, 1999, at 3:30
p.m., Eastern Standard Time, at Bank of Ashland, located at 1422 Winchester
Avenue, Ashland, Kentucky, and at any adjournments thereof. This document, the
enclosed Fifth Third 1998 Annual Report to Shareholders and the enclosed form of
proxy are first being sent to you on or about March 3, 1999.
PURPOSE OF THE SPECIAL MEETING
The purpose of the special meeting of Ashland shareholders is to approve
the affiliation agreement and the related plan of merger, and the transactions
contemplated thereby, including the merger of Ashland with and into Fifth Third.
See "Proposal -- Merger of Ashland into Fifth Third." Ashland shareholders 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 Ashland board in the event that there are
not sufficient votes to approve the affiliation agreement and the plan of merger
at the time of the special meeting. However, no proxy which is voted against the
affiliation agreement and the plan of merger will be voted in favor of
adjournment to solicit further proxies for such proposal. As of the date hereof,
the Ashland board knows of no business that will be presented for consideration
at the special meeting, other than matters described in this document.
VOTING AND REVOCABILITY OF PROXIES
Shareholders who execute proxies retain the right to revoke them at any
time. Unless revoked, the shares represented by proxies will be voted at the
special meeting and all adjournments thereof. Proxies may be revoked by written
notice to William A. Stinnett, III, President and Chief Executive Officer,
Ashland Bankshares, Inc., 1422 Winchester Avenue, Ashland, Kentucky 41105, 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 Ashland board will be voted in accordance with the
directions given therein. IF YOU DO NOT INDICATE YOUR VOTE ON THE PROXY, YOUR
PROXY WILL BE VOTED FOR APPROVAL OF THE AFFILIATION AGREEMENT AND THE PLAN OF
MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER. YOU ALSO
WILL BE DEEMED TO HAVE WAIVED THE APPRAISAL RIGHTS OF A DISSENTING SHAREHOLDER.
The proxy confers discretionary authority on the persons named therein to vote
Ashland common stock 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 in accordance with the discretion of the proxy holders.
Proxies marked as abstentions will not be counted as votes cast and, therefore,
will have the same effect as a vote against the merger.
VOTE REQUIRED
THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE SHARES OF ASHLAND COMMON
STOCK OUTSTANDING AS OF FEBRUARY 22, 1999 IS REQUIRED FOR THE APPROVAL OF THE
AFFILIATION AGREEMENT AND THE PLAN OF MERGER 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.
It is expected that substantially all of the 38,903 shares of Ashland
common stock beneficially owned by directors and executive officers of Ashland
at the record date (approximately 31% of the 125,584 total outstanding shares at
that date) will be voted for the approval of the affiliation agreement and the
plan of merger and the transactions contemplated thereby.
10
<PAGE> 18
SOLICITATION OF PROXIES
Ashland will pay the cost of soliciting proxies, except that Fifth Third
will pay all expenses of printing and mailing this document. Ashland 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 Ashland may solicit proxies
personally or by telegraph or telephone without additional compensation.
PROPOSAL -- MERGER OF ASHLAND INTO FIFTH THIRD
The following description summarizes all material terms of the affiliation
agreement and the plan of merger. We urge you to read the affiliation agreement
and the plan of merger, copies of which are attached as Annex A and Annex B,
respectively, and are incorporated by reference into this document.
STRUCTURE OF THE MERGER
Upon completion of the merger, Ashland will merge with and into Fifth Third
and Ashland will cease to exist as a separate entity. In a related simultaneous
transaction, Bank of Ashland will merge with and into Fifth Third Bank, Ohio
Valley.
CORPORATE GOVERNANCE
The respective boards of directors of Fifth Third and Fifth Third Bank,
Ohio Valley 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 of the
merger, 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 addition, pursuant to the affiliation agreement,
Fifth Third has agreed to enter into an agreement with William A. Stinnett, III
which provides that Mr. Stinnett will be employed as Chairman of Fifth Third
Bank, Ohio Valley commencing at the effective time of the merger and terminating
December 31, 2001. In the affiliation agreement, Fifth Third has also agreed to
create an advisory board in Ashland, Kentucky and to appoint Paul Grumbles to
chair that advisory board. Except as noted above, the officers of Fifth Third
and Fifth Third Bank, Ohio Valley after the merger is consummated will be those
officers who are in office at the effective time of the merger, subject to the
applicable code of regulations and in accordance with law. See "Terms of the
Affiliation Agreement -- Interests of Certain Persons in the Merger."
MERGER CONSIDERATION
Each share of Ashland common stock, excluding treasury shares and shares
that properly dissent to the merger, that is issued and outstanding immediately
prior to the effective time of the merger will be canceled and converted, by
virtue of the merger and without further action, into the right to receive
9.754427 shares of Fifth Third common stock. 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 has a similar economic effect before the time the
merger becomes effective, the exchange ratio will be adjusted so as to give
shareholders of Ashland 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 Ashland board may
have the right to terminate the merger. If the Ashland board determines to
terminate the affiliation agreement in the event of a decline in the trading
price, it must give notice to Fifth Third. If such notice is given, Fifth Third
and Ashland have agreed to work together to reach an agreement on the terms of
the merger. If Fifth Third and Ashland cannot agree on such adjustment with ten
days of the date such notice is given, the affiliation agreement and related
plan of merger will terminate. ASHLAND EXPECTS THAT THE ASHLAND BOARD WOULD
EXERCISE ITS DISCRETION AND DECIDE WHETHER TO EITHER TERMINATE THE AFFILIATION
AGREEMENT AND PLAN OF MERGER OR AGREE TO AN ADJUSTMENT TO THE TERMS OF THE
MERGER WITHOUT
11
<PAGE> 19
A RESOLICITATION OF SHAREHOLDERS. See "Terms of the Affiliation
Agreement -- Termination; Amendment; Waiver."
THE VALUE OF THE FIFTH THIRD COMMON STOCK YOU WILL RECEIVE 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 SEPTEMBER 4, 1998, THE
BUSINESS DAY IMMEDIATELY PRECEDING PUBLIC ANNOUNCEMENT OF THE MERGER, FIFTH
THIRD'S COMMON STOCK CLOSED AT $51.75. BETWEEN SEPTEMBER 4, 1998 AND FEBRUARY
23, 1999, FIFTH THIRD'S COMMON STOCK TRADED AS HIGH AS $75.44 AND AS LOW AS
$49.69. ON FEBRUARY 23, 1999, FIFTH THIRD'S COMMON STOCK CLOSED AT $67.19. 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
Only whole shares of Fifth Third common stock will be issued in connection
with the merger. In lieu of fractional shares, each holder of Ashland common
stock 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 closing price of Fifth Third common stock as
reported on the Nasdaq National Market on the date the merger is completed. No
shareholder will be entitled to dividends, voting rights or other rights in
respect of any such fractional share.
EFFECTIVE TIME OF THE MERGER
Unless we agree otherwise, the merger will become effective on a Friday
which is as soon as is reasonably possible following the date on which all
conditions contained in the affiliation agreement have been met or waived,
including the expiration of all applicable waiting periods. We anticipate that
the merger will become effective in April 1999, although no assurance can be
given in this regard. Ashland and Fifth Third each will have the right, but not
the obligation, to terminate the affiliation agreement if the merger is not
effective on or before June 30, 1999, subject to certain conditions.
EXCHANGE OF CERTIFICATES
After the effective time of the merger, you will cease to have any rights
as a shareholder of Ashland. Your sole right will pertain to the right to
receive shares of Fifth Third common stock and cash in lieu of fractional
shares, if any, into which your shares of Ashland common stock will have been
converted pursuant to the affiliation agreement or fair value in cash if you
perfect your dissenter's rights pursuant to Kentucky law.
As soon as practicable after the merger is completed, if you have not
dissented to the merger, Fifth Third will send to you a letter of transmittal
for use in submitting to Fifth Third, acting as exchange agent, certificates
formerly representing shares of Ashland common stock to be exchanged for
certificates representing Fifth Third common stock (and, to the extent
applicable, cash in lieu of fractional shares of Fifth Third common stock) which
you are entitled to receive as a result of the merger. You will also receive
instructions for handling lost Ashland share certificates. You 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 of
the merger until you have surrendered and exchanged your certificates evidencing
ownership of Ashland common stock. Any dividends payable on Fifth Third common
stock after the effective time of the merger will be paid to the exchange agent
and, upon receipt of the certificates representing Ashland common stock, the
exchange agent will forward to you (1) certificates representing your shares of
Fifth Third common stock, (2) dividends declared thereon subsequent to the
effective time of the merger, without interest, and (3) the cash value of any
fractional shares, without interest. YOU SHOULD NOT SUBMIT SHARE CERTIFICATES
UNTIL YOU HAVE RECEIVED WRITTEN INSTRUCTIONS TO DO SO.
At the effective time of the merger, the stock transfer books of Ashland
will be closed and no transfer of Ashland common stock will thereafter be made
on such books. If a certificate formerly representing Ashland
12
<PAGE> 20
common stock is presented to Ashland 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.
BACKGROUND AND REASONS FOR THE MERGER
In 1966, Paul W. Grumbles, Chairman of Ashland, W.R. Fosson, Saul Kaplan,
Edward Schottland, James Norris, Elmer Zwick and Howard Van Antwerp III
chartered Bank of Ashland. Each of these investors became directors of Bank of
Ashland and in 1984 also directors of Ashland. The current directors of Ashland
beneficially own approximately 40% of the stock of Ashland.
In the fourth quarter of 1997, senior management began to analyze long-term
opportunities for Ashland. Ashland reviewed its ability to grow its franchise in
a static market area. Additionally, Ashland looked at the rapidly changing
environment of the banking industry and the increase in competition faced by
banking organizations. To compete effectively going forward Ashland would be
required to meet technological changes in the industry and increased costs
associated with maintaining and developing an increasingly broad range of new
products and services.
In April 1998, Messrs. Grumbles and Stinnett began to review the future of
Ashland as an independent financial provider. They researched recently announced
mergers and acquisitions in the region and studied the acquiring companies with
the intention of identifying bank holding companies in the region that would be
compatible with Ashland. They also made general inquiries of investment banking
firms regarding their ability to assist in a review of Ashland's strategic
alternatives. In May 1998, Messrs. Grumbles and Stinnett then identified five
bank holding companies which might have an interest in combining with Ashland.
In May 1998, Messrs. Grumbles and Stinnett made brief contacts with such
companies on a confidential basis. Out of the five companies initially
identified, one was eliminated by Messrs. Grumbles and Stinnett as being
incompatible with Ashland, one was not interested in a business combination, one
was not interested in a business combination at the time, but indicated that it
may be interested in the future, and a fourth expressed interest. After initial
discussions, Messrs. Grumbles and Stinnett eliminated it in favor of Fifth Third
because of Fifth Third's operational compatibility, reputation in the industry
and strong financial performance.
On June 29, 1998, Messrs. Grumbles and Stinnett met with Messrs. Brumm and
Niehaus, each an Executive Vice President of Fifth Third, and Mr. Greenlee,
President of Fifth Third Bank, Ohio Valley, to review Fifth Third's interest in
a merger with Ashland. On July 3, 1998, Fifth Third delivered to Ashland a
non-binding expression of interest outlining, in general, the terms and
conditions under which Fifth Third would be willing to enter into a merger
transaction with Ashland. In exchange for all of the shares of Ashland, Fifth
Third proposed to exchange a fixed number of shares equaling $70 million.
Several of the founding directors and original investors were informed of the
proposal and agreed discussions with Fifth Third should proceed.
To assist in the analysis of the Fifth Third proposal, Ashland retained
Professional Bank Services, Inc. ("PBS"). PBS prepared a preliminary transaction
pricing analysis for Ashland which stated that it was the opinion of PBS that
the merger consideration was fair to the shareholders of Ashland from a
financial viewpoint. After Ashland's review of the PBS report and the execution
of a confidentiality agreement, Fifth Third then undertook its due diligence
examinations. On completion of the due diligence work, Fifth Third presented an
affiliation agreement for Ashland's consideration. Mr. Stinnett, of Ashland, met
with Mr. Niehaus on August 5, 1998 to review some of the key terms and
conditions of the affiliation agreement.
In a telephone conversation between Mr. Brumm and Mr. Stinnett on September
3, 1998, Mr. Brumm indicated that because of market volatility in Fifth Third's
stock that the proposed exchange ratio would need to be adjusted. It was
ultimately agreed to fix the number of shares at 1,225,000.
During the period of September 2 through September 7, 1998, Messrs.
Grumbles and Stinnett met individually with each other director to discuss the
details of the proposal. On September 8, 1998, the Ashland board at its regular
meeting met to consider the terms and conditions of the transaction as evidenced
by the affiliation agreement and related plan of merger. At that meeting, the
Ashland board again reviewed
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the Fifth Third proposal including, but not limited to, the financial terms and
conditions of the fixed exchange rate and discussed the financial market and
dividend history of Fifth Third. The proposed affiliation agreement and related
plan of merger were reviewed for the directors by Ashland's special counsel.
After extensive consideration of the terms and conditions of the affiliation
agreement and other related matters, including a fairness opinion rendered by
PBS, the Ashland board unanimously adopted and approved the terms and conditions
of the affiliation agreement.
THE ASHLAND BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF
ASHLAND AND ITS SHAREHOLDERS, THE COMMUNITY AND OTHER CONSTITUENCIES AND
UNANIMOUSLY RECOMMENDS THAT ASHLAND SHAREHOLDERS VOTE FOR THE APPROVAL OF THE
AFFILIATION AGREEMENT AND THE PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
Fifth Third's primary reason for consummating the merger is to further a
long-range commitment of realigning and expanding its banking system to better
meet and satisfy the needs of its customers, including those in Ashland's
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 its presence, consumer access and sales force.
OPINION OF FINANCIAL ADVISOR TO ASHLAND
PBS was engaged by Ashland to advise the Ashland board as to the fairness
of the consideration, from a financial perspective, to be paid by Fifth Third to
Ashland shareholders as set forth in the affiliation agreement and the plan of
merger.
PBS is a bank consulting firm with offices in Louisville, Chicago,
Nashville and Washington, D.C. As part of its investment banking business, PBS
is regularly engaged in reviewing the fairness of financial institution
acquisition transactions from a financial perspective and in the valuation of
financial institutions and other businesses and their securities in connection
with mergers, acquisitions, estate settlements, and other transactions. Neither
PBS nor any of its affiliates has a material financial interest in Ashland or
Fifth Third. PBS was selected to advise the Ashland board based upon its
familiarity with Kentucky financial institutions and knowledge of the banking
industry as a whole.
PBS performed certain analyses described herein and presented the range of
values for Ashland resulting from such analyses to the board of directors of
Ashland in connection with its advice as to the fairness of the consideration to
be paid by Fifth Third.
A fairness opinion of PBS was delivered to the board of directors of
Ashland on September 8, 1998, at a regular meeting of the board of directors and
has been updated as of the date of this document. A copy of the fairness
opinion, which includes a summary of the assumptions made and information
analyzed in deriving the fairness opinion, is attached as Annex C to this
document and should be read in its entirety.
In arriving at its fairness opinion, PBS reviewed certain publicly
available business and financial information relating to Ashland and Fifth
Third. PBS considered certain financial and stock market data of Ashland and
Fifth Third, compared that data with similar data for certain other
publicly-held bank holding companies and considered the financial terms of
certain other comparable bank transactions in the states of Kentucky, Ohio and
West Virginia that had recently been effected. PBS also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria that it deemed relevant. In connection with its
review, PBS did not independently verify the foregoing information and relied on
such information as being complete and accurate in all material respects.
Financial forecasts prepared by PBS were based on assumptions believed by PBS to
be reasonable and to reflect currently available information. PBS did not make
an independent evaluation or appraisal of the assets of Ashland or Fifth Third.
As part of preparing this fairness opinion, PBS performed a due diligence
review of Fifth Third on September 3, 1998. As part of the due diligence, PBS
reviewed the following items: report of independent auditors and management
letters and response thereto, for the year ending December 31, 1997; various
regulatory reports of examination; the most recent analysis and calculation of
the allowance for loan and lease
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losses for Fifth Third; internal loan review and asset quality reports;
investment portfolio activity reports; asset/liability management reports;
uniform holding company performance report for Fifth Third as of March 31, 1998;
March 31, 1998 reports of condition and income for the subsidiary banks; all
Fifth Third SEC filings since December 31, 1997; and discussion of any material
pending litigation and other issues with senior management of Fifth Third.
PBS reviewed and analyzed the historical performance of Ashland and Bank of
Ashland contained in: audited annual reports and financial statements dated
December 31, 1996 and 1997 of Ashland; March 31, 1998, December 31, 1997 and
December 31, 1996 consolidated reports of condition and income of bank and
Ashland; March 31, 1998 uniform bank and holding company performance reports;
June 30, 1998 unaudited internal financial statements of Ashland and Bank of
Ashland; historical common stock trading activity of Ashland; and the premises
and other fixed assets. PBS reviewed and tabulated statistical data regarding
the loan portfolio, securities portfolio and other performance ratios and
statistics. Financial projections were prepared and analyzed by PBS as well as
other financial studies, analyses and investigations as deemed relevant for the
purposes of this opinion. In review of the aforementioned information, PBS took
into account its assessment of general market and financial conditions, its
experience in other similar transactions, and its knowledge of the banking
industry generally.
In connection with rendering the fairness opinion and preparing its written
and oral presentation to the Ashland board, PBS performed the financial analyses
summarized herein. The summary describes all material analyses performed by PBS.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of these methods to the particular circumstances and therefore, such an opinion
is not readily susceptible to summary description. Accordingly, notwithstanding
the separate factors summarized below, PBS believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. In
performing its analyses, PBS made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond Ashland's or Fifth Third's control. The analyses performed by PBS are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the process by which businesses actually may be sold.
ACQUISITION COMPARISON ANALYSIS. In performing this analysis, PBS reviewed
all bank acquisition transactions in the states of Kentucky, Ohio and West
Virginia (the "Regional Area") since 1990. There were 144 bank acquisition
transactions in the Regional Area announced since 1990 for which detailed
financial information was available. The purpose of the analysis was to obtain
an evaluation range based on these Regional Area bank acquisition transactions.
In obtaining a range for the acquisition value of Ashland, 75th percentile
multiples of earnings and book value implied by the comparable transactions were
utilized. In addition to reviewing recent Regional Area bank transactions, PBS
performed separate comparable analyses for acquisitions of banks which, like
Ashland, were located in Kentucky, had an equity-to-asset ratio in excess of
13%, had total assets between $100.0 and $200.0 million, had a return on average
equity between 12.50% - 15.00% and bank transactions effected in the Regional
Area since January 1, 1996. In addition, 75th percentile values for the 144
Regional Area acquisitions expressed as multiples of both book value and
earnings were 2.00 and 21.05, respectively. The 75th percentile multiples of
book value and earnings for acquisitions of Regional Area which, like Ashland,
were located in Kentucky were 1.93 and 18.87, respectively. For acquisitions of
Regional Area banks which, like Ashland, had an equity-to-asset ratio in excess
of 13.00%, the 75th percentile multiples of book value and earnings were 1.72
and 24.39, respectively. For acquisitions of Regional Area banks with assets
between $100.0 and $200.0 million the 75th percentile multiples were 2.38 and
21.41. For Regional Area acquisitions of banks with a return on average equity
between 12.50% and 15.00%, the 75th percentile multiples of book value and
earnings were 2.07 and 17.42, respectively. The 75th percentile multiples of
book value and earnings for acquisitions of Regional Area banks since January 1,
1996 were 2.71 and 25.10, respectively.
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In the proposed transaction, Ashland shareholders will receive in aggregate
1,225,000 Fifth Third common shares for all 125,584 Ashland common shares or
9.754427 Fifth Third common shares per Ashland common share. At the close of
trading, on September 4, 1998, the closing price for Fifth Third common stock on
the Nasdaq National Market was $51.75 per share. Using this closing price of
$51.75 per Fifth Third common share, the proposed consideration to be received
represents an aggregate value of $63,393,750 or $504.79 per Ashland common
share. The $504.79 per Ashland common share represents a multiple of Ashland's
June 30, 1998 book value and a multiple of Ashland's annualized June 30, 1998
earnings of 2.60 and 21.32, respectively.
The market value of the proposed transaction's percentile ranking was
prepared and analyzed with respect to the above Regional Area comparable
transactions group. Compared to all Regional Area bank transactions, the
acquisition value ranks in the 90th percentile as a multiple of book value and
in the 77th percentile as a multiple of earnings. Compared to Regional Area
transactions where the acquired bank was located in Kentucky, the proposed
acquisition value ranks in the 91st percentile as a multiple of book value and
the 87th percentile as a multiple of earnings. Compared to Regional Area bank
transactions where the acquired institution had an equity-to-asset ratio in
excess of 13.00%, the acquisition value ranks in the 100th percentile as a
multiple of book value and the 60th percentile as a multiple of earnings. For
Regional Area bank acquisitions where the acquired institution had between
$100.0 and $200.0 million in assets, the acquisition value ranks in the 79th
percentile as a multiple of book value and the 72nd percentile as a multiple of
earnings. For Regional Area bank transactions where the acquired institution had
a return on average equity between 12.50% and 15.00%, the acquisition value
ranks in the 94th percentile as a multiple of book value and the 96th percentile
as a multiple of earnings. For Regional Area bank transactions effected since
January 1, 1996, the acquisition value ranks in the 73rd percentile as a
multiple of book value and in the 51st percentile as a multiple of earnings.
ADJUSTED NET ASSET VALUE ANALYSIS. PBS reviewed Ashland's balance sheet
data to determine the amount of material adjustments required to the
stockholders' equity of Ashland based on differences between the market value of
Ashland's assets and their value reflected on Ashland's financial statements.
PBS determined that two adjustments were warranted. Equity was increased
$1,035,000 to reflect the after tax appreciation in Ashland's held to maturity
securities portfolio. PBS also reflected a value of the non-interest bearing
demand deposits of approximately $3,897,000. The aggregate adjusted net asset
value of Ashland was determined to be $29,274,000 or $233.10 per Ashland common
share.
DISCOUNTED EARNINGS ANALYSIS. A dividend discount analysis was performed by
PBS pursuant to which a range of values of Ashland was determined by adding (a)
the present value of estimated future dividend streams that Ashland could
generate over a five-year period and (b) the present value of the "terminal
value" of Ashland's earnings at the end of the fifth year. The "terminal value"
of Ashland's earnings at the end of the five-year period was determined by
applying a multiple of 21.05 times the projected terminal year's earnings. The
21.05 multiple represents the 75th percentile price paid as a multiple of
earnings for all Regional Area bank transactions since 1990.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of Ashland's common stock. The
aggregate value of Ashland, determined by adding the present value of the total
cash flows, was $54,828,000 or $436.57 per share. In addition, using the
five-year projection as a base, a twenty-year projection was prepared by PBS
assuming an annual growth rate of 5.0%, and a return on assets of 2.00% would
remain in effect for the entire period beginning in year five. Dividends were
assumed to increase from 35.0% of income in years one through five to 75.0% of
income for years six through twenty. This long-term projection resulted in an
aggregate value of $40,303,000 or $320.92 per Ashland common share.
SPECIFIC ACQUISITION ANALYSIS. PBS valued Ashland based on an acquisition
analysis assuming a "break-even" earnings scenario to an acquiror as to price,
current interest rates and amortization of the premium paid. Based on this
analysis, an acquiring institution would pay in aggregate $43,762,000, or
$348.46 per share, assuming they were willing to accept no impact to their net
income in the initial year. This analysis was based on a funding cost of 7.0%
adjusted for taxes, amortization of the acquisition premium over
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15 years and a June 30, 1998 annualized net earnings level of $2,974,000. This
analysis was repeated assuming a potential acquiror would attain non-interest
expense reductions of 20% in the transaction. Based on this analysis an
acquiring institution would pay in aggregate $46,543,000 or $370.60 per Ashland
share.
PRO FORMA MERGER ANALYSIS. PBS compared the historical performance of
Ashland to that of Fifth Third and other regional holding companies. This
analysis included, among other things, a comparison of profitability, asset
quality and capital measures. In addition, the contribution of Ashland and Fifth
Third to the income statement and balance sheet of the pro forma combined
Ashland was analyzed.
The effect of the affiliation on the historical and pro forma financial
data of Ashland was prepared and analyzed. Ashland's historical financial data
was compared to the pro forma combined historical and projected earnings, book
value and dividends per share.
The fairness opinion is directed only to the question of whether the
consideration to be received by Ashland's shareholders under the affiliation
agreement and plan of merger is fair and equitable from a financial perspective
and does not constitute a recommendation to any Ashland shareholder to vote in
favor of the affiliation. No limitations were imposed on PBS regarding the scope
of its investigation or otherwise by Ashland.
Based on the results of the various analyses described above, PBS concluded
that the consideration to be received by Ashland's shareholders under the
affiliation agreement and plan of merger is fair and equitable from a financial
perspective to the shareholders of Ashland.
PBS will receive fees of approximately $15,000 for all services performed
in connection with the sale of Ashland and the rendering of the fairness
opinion. In addition, Ashland has agreed to indemnify PBS and its directors,
officers and employees, from liability in connection with the transaction, and
to hold PBS harmless from any losses, actions, claims, damages, expenses or
liabilities related to any of PBS' acts or decisions made in good faith and in
the best interest of Ashland.
FEDERAL INCOME TAX CONSEQUENCES
Fifth Third and Ashland and its shareholders will receive an opinion from
Graydon, Head & Ritchey that for federal income tax purposes the merger will
constitute a reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code.
In rendering its opinion, Graydon, Head & Ritchey will rely upon
representations contained in letters from Fifth Third and Ashland delivered for
purposes of the opinion. The opinion of Graydon, Head & Ritchey 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 and Ashland in the affiliation agreement are accurate. An opinion of
counsel only represents counsel's best legal judgment on the matters addressed
in the opinion, and has no binding effect or official status of any kind, and no
assurance can be given that contrary positions may not be taken by the Internal
Revenue Service or a court considering the issues. Neither Fifth Third nor
Ashland has requested or will request a ruling from the Internal Revenue Service
with regard to any of the federal income tax consequences of the merger.
Provided that the merger constitutes a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code for federal income tax purposes:
- no gain or loss will be recognized by Ashland as a result of the merger;
- no gain or loss will be recognized by Fifth Third as a result of the
merger;
- no gain or loss will be recognized by an Ashland shareholder who receives
solely Fifth Third common stock in exchange for Ashland common stock
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;
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- the aggregate federal income tax basis of the Fifth Third common stock
received by an Ashland shareholder who receives solely Fifth Third common
stock in exchange for Ashland common stock pursuant to the terms of the
affiliation agreement will be, in each instance, the same as the aggregate
federal income tax basis of the Ashland common stock 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;
- the holding period of the Fifth Third common stock received (including
any fractional share deemed received and redeemed for cash) by an Ashland
shareholder will include, in each case, the period during which the
Ashland common stock surrendered in exchange therefor was held, provided
that the Ashland common stock was held as a capital asset by such
shareholder on the date of the exchange; and
- a holder of Ashland common stock who receives cash in lieu of a
fractional share of Fifth Third common stock will, in general, recognize
capital gain under Section 302 of the Internal Revenue Code on the excess
of the amount received for such fractional share, over the shareholder's
adjusted basis in such fractional share.
An Ashland shareholder who perfects dissenters' rights with respect to such
person's shares of Ashland common stock will, in general, recognize capital gain
under Section 302 of the Internal Revenue Code on the excess amount received
over the shareholder's adjusted basis in their Ashland shares.
The foregoing discussion is a summary of the material federal income tax
consequences of the merger. The foregoing discussion 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 Ashland common stock acquired as a result of the exercise
of employee stock options or otherwise as compensation) or to taxpayers subject
to special treatment under the Internal Revenue 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).
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 Internal Revenue
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.
You are urged to consult your own tax adviser as to the specific tax
consequences to you of the merger, including the application of federal, state,
local, foreign, and other tax laws.
ACCOUNTING TREATMENT
Fifth Third intends for the merger to qualify for pooling-of-interests
accounting treatment. Under pooling-of-interests accounting treatment, as of the
effective time of the merger, the assets and liabilities of Ashland will be
added to those of Fifth Third at their recorded book values and the
shareholders' equity account of Ashland will be included on Fifth Third's
consolidated balance sheet.
RESALE OF FIFTH THIRD COMMON STOCK BY AFFILIATES
The shares of Fifth Third common stock to be issued to shareholders of
Ashland in connection with the merger will be registered under the Securities
Act of 1933. The Fifth Third shares will be freely transferable under the
Securities Act, except for shares issued to affiliates of Ashland or Fifth Third
at the time of the special meeting. An affiliate is a director, an executive
officer or a 10% or more shareholder at the time of the special meeting.
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Rule 145 under the Securities Act restricts the sale of Fifth Third common
stock received in the merger by affiliates. During the first year following the
effective time of the merger, affiliates of Ashland who do not become affiliates
of Fifth Third may resell the Fifth Third common stock received by them in
connection with the merger upon compliance with the following conditions of Rule
144:
- Fifth Third must have satisfied its reporting requirements under the
Exchange Act for the 12 months preceding the proposed sale);
- the number of shares sold in any three month period is limited to the
greater of (1) one percent of Fifth Third's shares outstanding or (2) the
average weekly trading volume during the four calendar weeks preceding
the sale; and
- the shares must be sold by a broker in a routine open market transaction
that does not involve the solicitation of orders for purchase.
Shares of Fifth Third common stock sold by (1) an affiliate's spouse or
relative living in the affiliate's household, or (2) any trust or estate in
which the affiliate or person listed in (1) collectively owns ten percent or
more of the beneficial interest or of which any such person serves as trustee or
executor, or (3) any corporation in which the affiliate or any person specified
in (1) beneficially owns at least ten percent of an equity interest, will be
aggregated with the number of shares sold by the affiliate for purposes of
determining whether the volume limitations of Rule 144 are exceeded.
After the one-year period, affiliates of Ashland who are not affiliates of
Fifth Third may resell their shares without regard to the volume limitation or
manner of sale requirement so long as Fifth Third has satisfied its reporting
requirements under the Exchange Act during the prior twelve month period.
If Fifth Third has not satisfied its reporting requirements, affiliates may
not resell their shares of Fifth Third common stock received in the merger until
two years have elapsed since completion of the merger. At such time, the shares
may be sold without any restriction.
Sales and other dispositions of Fifth Third common stock by any affiliate
of Ashland who becomes an affiliate of Fifth Third in connection with the
merger, must be made in compliance with the requirements of Rule 144 set forth
above until such person has not been an affiliate of Fifth Third for at least
three months and a period of at least two years has elapsed since the date the
shares were acquired in connection with the merger.
Even if the shares are sold, pledged or donated in compliance with Rule
145, the shares will remain subject to Rule 145 in the hands of the recipient
until the restrictive period applicable to the affiliate transferor have
expired.
The affiliation agreement provides that Ashland will use its best efforts
to cause each director, executive officer and other person who is deemed by
Ashland to be an affiliate (for purposes of Rule 145 and for purposes of
qualifying the merger for pooling-of-interests accounting treatment) of Ashland
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
for pooling-of-interests accounting treatment. Under that agreement, affiliates
of Ashland may not dispose of any shares received in the 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 Fifth Third have been
published.
DISSENTERS' RIGHTS OF APPRAISAL
Holders of Ashland common stock who so desire are entitled to relief as
dissenting shareholders under Subtitle 13 of the Kentucky Business Corporation
Act. An Ashland shareholder will be entitled to such relief, however, only if
such shareholder complies strictly with all of the procedural and other
requirements of
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Subtitle 13 of the Kentucky Business Corporation Act. The following description
is a summary of all material terms of Subtitle 13 of the Kentucky Business
Corporation Act which is attached hereto as Annex D.
To be entitled to exercise dissenters' rights, an Ashland shareholder must
- deliver to Ashland, before the vote on approval of the affiliation
agreement and related plan of merger is taken at the special meeting, a
written notice of his or her intent to demand payment for his or her
shares if the merger is consummated, and
- not vote his or her shares in favor of the proposal to approve the
affiliation agreement and the related plan of merger at the special
meeting.
The written notice of intent must be given in addition to and separate from
any proxy or vote against approval of the affiliation agreement and related plan
of merger; neither a proxy nor a vote against approval of the affiliation
agreement and related plan of merger shall constitute such written notice. If an
Ashland shareholder desires to exercise dissenters' rights, it is recommended,
although not required, that the written notice be sent by registered or
certified mail, return-receipt requested, to William A. Stinnett, III,
President, Ashland Bankshares, Inc., 1422 Winchester Avenue, Ashland, Kentucky
41105-1730.
Ashland shareholders electing to exercise their dissenters' rights under
Subtitle 13 of the Kentucky Business Corporation Act must not vote for approval
of the affiliation agreement and related plan of merger. A vote by a shareholder
against approval of the affiliation agreement and related plan of merger is not
required in order for that shareholder to exercise appraisal rights. However, if
a shareholder returns a signed proxy, but does not specify a vote against
approval of the affiliation agreement and related plan of merger or a direction
to abstain, the proxy, if not revoked, will be voted for approval of the
affiliation agreement and related plan of merger, which will have the effect of
waiving that shareholder's dissenters' rights.
Within 10 days after shareholder approval of the affiliation agreement and
related plan of merger at the special meeting (or any adjournment thereof),
Ashland will deliver a written dissenters' notice to all Ashland shareholders
who complied with the requirements of delivering written notice of his or her
intent to demand payment for his or her shares and not voting his or her shares
in favor of the merger. The dissenters' notice will: (1) state where demands for
payment must be sent and when and where certificates must be deposited; (2)
supply a form for demanding payment that includes the date of the first
announcement to news media or to Ashland shareholders of the terms of the
affiliation agreement and requires that any person asserting dissenters' rights
certify whether or not he or she acquired beneficial ownership of Ashland common
stock prior to that date; (3) set a date by which Ashland must receive a payment
demand, which may not be fewer than 30 nor more than 60 days after the date
Ashland delivers notice to dissenting shareholders; and (4) be accompanied by a
copy of Subtitle 13 of the Kentucky Business Corporation Act.
Upon the effective time of the merger, or upon receipt of a payment demand,
Ashland will pay each dissenter who demanded payment, certified acquisition of
the beneficial ownership of Ashland common stock before the date of the first
announcement to news media or to Ashland shareholders of the terms of the
affiliation agreement, and deposited his or her certificates in accordance with
the terms of the dissenters' notice, the amount Ashland estimates to be the fair
value of the shares immediately before the effective time of the merger, plus
accrued interest. The payment will be accompanied by Ashland's balance sheet as
of the end of its latest fiscal year, together with statements of income and
changes in shareholders' equity for such year and the latest available interim
financial statements, if any. The payment will also be accompanied by a
statement of Ashland's estimate of the fair value of Ashland common stock, an
explanation of how the interest was calculated, and a statement of dissenters'
rights to demand payment of his or her estimate of fair value under Section
271B.13-280 of the Kentucky Revised Statutes if dissatisfied with Ashland's
payment.
A dissenting Ashland shareholder, within 30 days of Ashland's payments,
must notify Ashland in writing of his or her own estimate of the fair value of
his or her shares and amount of interest due, and demand payment for the
difference between his or her estimate of fair value and the amount of Ashland's
payment if (1) the dissenter believes that the amount paid by Ashland is less
than the fair value of Ashland common stock or that the interest due was
incorrectly calculated; (2) Ashland fails to make payment within
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60 days after the date set for demanding payment; or (3) Ashland, having failed
to consummate the merger, does not return the deposited certificates within 60
days after the date set for demanding payment.
If, within 60 days from delivery to Ashland of the shareholder's demand for
payment of his or her estimate of fair value, such demand for payment remains
unsettled, Ashland will commence a proceeding and petition the Circuit Court of
Boyd County to determine the fair value of Ashland common stock and accrued
interest. Ashland will make all dissenters (whether or not Kentucky residents),
whose demands remain unsettled, parties to the proceeding as an action against
their shares and all such parties will be served with a copy of the petition.
Non-resident Ashland shareholders may be served by registered or certified mail
or by publication as provided by law. The failure of Ashland to commence an
action pursuant to this paragraph will not limit or affect the rights of
dissenting Ashland shareholders to otherwise commence an action as permitted by
law.
Each dissenting Ashland shareholder who is a party to the proceeding is
entitled to the amount, if any, by which the court finds the fair value of his
or her shares, plus interest, exceeds the amount paid by Ashland.
In an appraisal proceeding, the Boyd Circuit Court shall determine all
costs of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against
Ashland, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously or not in good faith in demanding
payment. The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable as follows: (1)
against Ashland and in favor of any or all dissenters' if the court finds
Ashland did not substantially comply with the statutory requirements set forth
in Sections 271B.13-200 through 271B.13-280 of the Kentucky Revised Statutes; or
(2) against either Ashland or a dissenter, in favor of any other party, if the
court finds that the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith with respect to the rights
provided by Subtitle 13 of the Kentucky Business Corporation Act. If the court
finds that the services of counsel for any dissenter were of substantial benefit
to other dissenters similarly situated, and that the fees for those services
should not be assessed against Ashland, the court may award to these counsel
reasonable fees to be paid out of the amounts awarded the dissenters who were
benefitted.
ANY HOLDER OF ASHLAND COMMON STOCK CONTEMPLATING THE EXERCISE OF
DISSENTERS' RIGHTS WITH RESPECT TO HIS OR HER SHARES OF ASHLAND COMMON STOCK IS
URGED TO REVIEW CAREFULLY THE PROVISIONS OF APPENDIX D BECAUSE DISSENTERS'
RIGHTS MAY BE LOST IF THE REQUIREMENTS OF SUBTITLE 13 OF THE KENTUCKY BUSINESS
CORPORATION ACT ARE NOT FULLY AND PRECISELY SATISFIED.
For a discussion of the tax consequences to a shareholder who exercises
dissenters' rights, see "Proposal -- Merger of Ashland Into Fifth
Third -- Federal Income Tax Consequences."
TERMS OF THE AFFILIATION AGREEMENT
REPRESENTATIONS AND WARRANTIES
Fifth Third and Ashland have made numerous representations and warranties
to each other with respect to financial and other matters. These include
representations and warranties to the effect that both Fifth Third and Ashland
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 Ashland or Fifth Third will survive beyond the effective time of the
merger.
CONDUCT PENDING MERGER
Except with the prior approval of Fifth Third or to permit the directors of
Ashland to exercise their fiduciary duties, Ashland and its representatives will
not, directly or indirectly: initiate, solicit, negotiate with,
21
<PAGE> 29
encourage discussions with, provide information to, or agree to a transaction
with, any corporation, partnership, person or other entity or group concerning:
- any merger of either Ashland or Bank of Ashland;
- any sale of substantial assets or 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
- any similar transaction involving Ashland or Bank of Ashland (any such
transaction being referred to herein as an "Acquisition Transaction").
Subject to the exercise by the directors of Ashland of their fiduciary
duties, Ashland 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.
In addition, Ashland has agreed, among other things, that prior to the
completion of the merger it will carry on its business in the ordinary course.
Ashland also has agreed to give Fifth Third and Fifth Third's representatives
reasonable access during business hours to its facilities and personnel. Ashland
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 structure;
- issue any additional shares of Ashland common stock or any other equity
securities other than pursuant to the exercise of options granted prior
to the date of the affiliation agreement;
- 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 or become obligated to make any capital expenditures in excess of
$25,000;
- make or renew any agreement for services to be provided to Ashland or
Bank of Ashland, or permit the automatic renewal of any such agreement,
except any agreement for services having a term of not more than three
months or requiring the expenditure of not more than $25,000;
- declare or pay any cash dividends on its stock other than customary
dividends paid per month or quarter 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;
- 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; or
- sell or otherwise dispose of or encumber any portion shares of the
capital stock of the Bank of Ashland which are now owned by it.
CONDITIONS TO CLOSING
The affiliation agreement and related plan of merger must be approved by
the affirmative vote of holders of at least a majority of the outstanding shares
of Ashland common stock at the record date. The merger also must be approved in
writing by the State of Ohio Department of Commerce-Division of Banks, an
application for which has been filed. In addition, notice must be filed with the
Kentucky Department of
22
<PAGE> 30
Financial Institutions. No assurance can be given that the required governmental
approvals will be forthcoming.
Fifth Third's and Ashland's obligations to consummate the merger are
subject to additional conditions set forth in the affiliation agreement. These
include the absence at the effective time of the merger of any material actions,
proceedings or investigations of any kind pending or threatened with respect to
the transactions contemplated by the affiliation agreement and both parties
having performed all of the obligations required of them under the affiliation
agreement.
Fifth Third's obligation to consummate the merger is further subject to
conditions set forth in the affiliation agreement, including:
- the continuing truth and accuracy in all material respects of all of the
representations and warranties of Ashland;
- delivery by Ashland's counsel of a legal opinion addressed to Fifth Third
relating to Ashland's incorporation, good standing, corporate power and
authority to enter into the affiliation agreement;
- the aggregate amount of consolidated shareholders' equity of Ashland
immediately prior to the effective time of the merger, as shown by and
reflected on its books and records of accounts on a consolidated basis in
accordance with generally accepted accounting principles consistently
applied, being not less than $24,342,000; and
- the total issued and outstanding shares of Ashland common stock not
exceeding 125,584 shares.
Ashland's obligation to consummate the merger is further subject to
conditions set forth in the affiliation agreement, including:
- the continuing truth and accuracy in all material respects of Fifth
Third's representations and warranties;
- delivery by counsel employed by Fifth Third of a legal opinion addressed
to Ashland relating to Fifth Third's incorporation, good standing,
corporate power and authority to enter into the affiliation agreement;
- registration by Fifth Third of the shares of Fifth Third common stock to
be issued to Ashland shareholders and listing of those shares on the
Nasdaq National Market; and
- receipt by it of an opinion of counsel to Fifth Third with respect to
certain tax matters.
TERMINATION; AMENDMENT; WAIVER
The affiliation agreement may be terminated and the merger abandoned at any
time prior to the effective time of the merger by written notice delivered by
Fifth Third to Ashland or by Ashland to Fifth Third in the following instances:
- by Fifth Third or Ashland, 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 30 days after notice, provided the party
in default has no right to terminate for its own default;
- by Fifth Third or Ashland 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 December
31, 1997;
- by Fifth Third or Ashland, if the merger has not been consummated by June
30, 1999, 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;
- by the mutual written consent of Fifth Third and Ashland;
23
<PAGE> 31
- automatically if Ashland's shareholders fail to approve and adopt the
affiliation agreement and related plan of merger; or
- by Fifth Third or Ashland, 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.
In addition to the foregoing circumstances under which the affiliation
agreement may be terminated, Ashland 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 Ashland Into Fifth Third -- Merger
Consideration." The provisions in the affiliation agreement governing such right
are complex and designed to permit either a termination of the affiliation
agreement or an adjustment to the terms of the merger if, and only if, the
market value of Fifth Third common stock has declined substantially from the
$51.75 closing price on September 4, and the market value of Fifth Third common
stock has declined substantially more than an index of 16 bank stocks on a
comparative basis.
The right of Ashland to terminate the affiliation agreement in accordance
with the foregoing will exist if both the following occur:
(1) For the 20 trading days ending on the date which is the later of
the date of the special meeting and the date the last governmental approval
required to consummate the merger has been received and all governmental
waiting periods have expired (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 $51.75; and
(2) the Average Closing Price divided by $51.75 is less than the index
ratio. The index ratio is defined as (x) identified below on the
Determination Date divided by $41.5933 (the weighted average closing price
of the 16 bank holding companies on September 8, 1998) minus (y) .10.
The 16 bank holding companies are: Northern Trust 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., Synovus Financial Corp., and Huntington
Bancshares, Inc.
If both of the termination conditions exist, then Ashland will have the
right to terminate the affiliation agreement by a vote of the majority of the
members of its board of directors at any time during the 10 day period
commencing two days after the Determination Date. To terminate the affiliation
agreement, the Ashland board must give notice to Fifth Third within the 10 day
period commencing two days after the Determination Date, provided such notice
may be withdrawn at any time. If such notice is given, Fifth Third and Ashland
have agreed to work together to reach an agreement on the terms of the merger.
If Fifth Third and Ashland cannot agree on such adjustment with 10 days of the
date such notice is given, the affiliation agreement will terminate.
The average closing price of Fifth Third common stock for the 20 trading
days before February 24, 1999 was $66.12. Based on this price, neither
termination condition would be triggered and Ashland 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 adjust the terms of the merger are all
subject to market conditions at the Determination Date. Accordingly, such
determinations cannot be made until after the date of this document. If the
above tests are met, there can be no assurances as to whether the Ashland board
of will exercise its right to terminate the affiliation agreement or, if so,
whether Fifth Third and Ashland will agree to adjust the terms of the merger in
lieu of termination. Ashland expects that the Ashland board would exercise its
discretion and decide whether to either terminate the affiliation agreement and
plan of merger or agree to an adjustment to the terms of the merger without a
resolicitation of shareholders.
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<PAGE> 32
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 Ashland shareholders. Approval of any amendment, modification or
supplement by Ashland shareholders is not required unless such amendment,
modification or supplement would adversely change in any manner the merger
consideration to be provided pursuant to the affiliation agreement.
EFFECT ON ASHLAND EMPLOYEES
Fifth Third is obligated to use its best efforts to employ as many of the
Ashland employees who desire employment, 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 Ashland under certain conditions. Such amounts will be
equal to Fifth Third's current severance policies and procedures with credit for
prior service with Ashland or Bank of Ashland.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Shares of Ashland common stock held by or for the benefit of directors and
executive officers of Ashland 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 Ashland. In addition,
directors and executive officers of Ashland 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 Ashland.
EMPLOYMENT AGREEMENT. Fifth Third has agreed in the affiliation agreement
to enter into an employment agreement effective as of the effective time of the
merger with William A. Stinnett, III, the current President and Chief Executive
Officer of Ashland.
Mr. Stinnett's employment agreement will provide that Mr. Stinnett will be
employed as the Chairman of Fifth Third Bank, Ohio Valley until December 31,
2001, unless sooner terminated pursuant to the terms of the agreement. Mr.
Stinnett will (1) receive an annual base salary of $212,000, (2) be granted
stock options to acquire 10,000 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 (3) be eligible to participate
in Fifth Third's benefit plans to the extent of similarly situated Fifth Third
employees.
ADVISORY BOARD. In addition, Fifth Third has agreed to create an advisory
board in Ashland, Kentucky. Fifth Third as sole shareholder of Fifth Third Bank,
Ohio Valley will appoint Paul Grumbles to chair that advisory board. To the
extent that Mr. Grumbles and his wife are currently covered by Ashland's medical
coverage, those policies will either be assumed by Fifth Third or Mr. Grumbles
and his wife will be admitted to coverage under Fifth Third's plan as a retiree,
in which case Mr. Grumbles would be able to continue to participate in such
health plans under Fifth Third's retiree policy for health insurance coverage at
the retiree's cost.
EMPLOYEE BENEFIT PLANS. Each employee of Ashland and Bank of Ashland,
including the executive officers of Ashland, 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 of Fifth Third. The former
Ashland employees will not be subject to any exclusion or penalty for
pre-existing conditions that were covered under Bank of Ashland's medical plan
immediately prior to the effective time of the or any waiting period relating to
coverage under Fifth Third's medical plan.
The affiliation agreement also provides that Ashland will take all actions
necessary to discontinue any and all 401(k) and employee after tax contributions
under any employee pension benefit plan, as defined in Section 3(2) of ERISA, as
of a date at least 30 days preceding the effective time of the merger. Ashland
or Bank of Ashland shall have the right to make discretionary contributions to
the Bank of Ashland, Inc. Profit Sharing Plan, but such contributions shall not
exceed $250,000 for the 1998 plan year and $20,883 for each
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<PAGE> 33
full month of the 1999 plan year. Neither Ashland or Bank of Ashland shall have
any obligation to freeze the Bank of Ashland, Inc. Profit Sharing Plan prior to
the effective time of the merger.
To the extent permitted by applicable law and provided Fifth Third
determines that the Bank of Ashland, Inc. Profit Sharing Plan was established,
funded, managed and operated in accordance with applicable law, Fifth Third
shall take the required steps to merge the Bank of Ashland, Inc. Profit Sharing
Plan into Fifth Third Bancorp Master Profit Sharing Plan. If the Bank of
Ashland, Inc. Profit Sharing Plan is merged into the Fifth Third Bancorp Master
Profit Sharing Plan, then upon the merger, service taken into account under the
Bank of Ashland, Inc. Profit Sharing Plan shall count as service taken into
account for all purposes under the Fifth Third Bancorp Master Profit Sharing
Plan. For purposes of all employee benefit plans, as defined by ERISA, sponsored
by Fifth Third or its subsidiaries or affiliates, including the Fifth Third
Bancorp Master Profit Sharing plan, prior service with Ashland or Bank of
Ashland shall be taken into account for purposes of determining eligibility for
and vesting, if applicable, of benefits. Fifth Third ceased admitting new
participants to the Fifth Third Bancorp defined benefit pension plan as of
January 1, 1998. Employees of Ashland and Bank of Ashland will not be admitted
to the Fifth Third Bancorp defined benefit pension plan.
In no event will any of the executive officers of Ashland receive any
payment that would be considered an "Excess Parachute Payment" under Section
280G of the Internal Revenue Code.
ASHLAND STOCK APPRECIATION RIGHTS. Mr. Stinnett and Mr. Grumbles have
rights to receive the appreciation earned on 2,500 shares and 500 shares,
respectively, of Ashland common stock between the grant dates and exercise
dates. Those rights were granted in 1990, 1993 and 1994. Fifth Third has agreed
in the affiliation agreement to allow these awards to be paid according to their
terms immediately prior to the effective time of the merger; provided, however,
that such payments will be limited so that no amount of such payment will
qualify as an "excess parachute payment" under Section 280G of the Internal
Revenue Code. Messrs. Stinnett and Grumbles will receive approximately $670,000
and $270,000, respectively, upon exercise of these awards.
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 Ashland and its subsidiaries, arising
under applicable Kentucky and federal law and under the Ashland articles of
incorporation and bylaws, or under the articles or bylaws of Bank of Ashland,
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 of the
merger for a period of five years after the effective time of the merger or, in
the case of claims asserted prior to the fifth anniversary of the effective time
until such matters are resolved. Fifth Third also shall purchase and keep in
force for a five-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 Ashland's existing directors' and officers'
liability insurance for acts or omissions occurring at or prior to the effective
time of the merger, but only to the extent such insurance may be purchased or
kept in full force on commercially reasonable terms. 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 Ashland or any of its subsidiaries who become affiliated with
any Fifth Third affiliate in such capacities after the effective time of the
merger 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."
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<PAGE> 34
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, and subject to regulation
by the Federal Reserve Board. Fifth Third, with its principal office located in
Cincinnati, is a multi-bank holding company that owns all of the outstanding
stock of nine commercial banks and one savings bank with 468 offices in Ohio,
Kentucky, Indiana, Florida and Arizona. Those institutions are: Fifth Third
Bank; Fifth Third Bank, Central Ohio; Fifth Third Bank, Northwestern Ohio, N.A.;
Fifth Third Bank, Ohio Valley; Fifth Third Bank, Western Ohio; Fifth Third Bank,
Florida; Fifth Third Bank, Northern Kentucky, Inc.; Fifth Third Bank, Kentucky,
Inc.; Fifth Third Bank, Indiana; and Fifth Third Bank, Southwest, F.S.B.
At December 31, 1998, Fifth Third, its affiliated banks and other
subsidiaries had consolidated total assets of $28.9 billion, consolidated total
deposits of $18.8 billion and consolidated total shareholders' equity of $3.2
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., Fifth Third International Company,
Heartland Capital Management, Inc. and Fifth Third/The Ohio Company. Fifth
Third's affiliates provide a full range of financial products and services to
the retail, commercial, financial, governmental, educational and medical
sectors, including a wide variety of checking, savings and money market
accounts, and credit products such as credit cards, installment loans, mortgage
loans and leasing. Each of the banking affiliates has deposit insurance provided
by the FDIC through the Bank Insurance Fund and the Savings Association
Insurance Fund.
Fifth Third, through its banking subsidiaries, also participates in several
regional shared ATM networks, including "Money Station(R)", "Honor(R)" and
"Star". These networks include approximately 5,400, 42,000 and 44,000 ATMs,
respectively. All Fifth Third banking subsidiaries also participate in the "PLUS
System(R)" network, which is an international ATM network with approximately
625,000 ATMs.
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 -- Dividends."
RECENT DEVELOPMENTS
Fifth Third's strategy for growth includes strengthening its presence in
core markets, expanding into contiguous markets and broadening its product
offerings. Fifth Third believes its has an excellent track record in integrating
acquired businesses. Since 1989, Fifth Third has completed 25 acquisitions,
which have contributed to its growth. Consistent with this strategy, in addition
to the merger, Fifth Third recently entered into agreements to acquire
Enterprise Federal Bancorp, Inc. and South Florida Bank Holding Corporation.
ENTERPRISE FEDERAL BANCORP, INC. On September 25, 1998, Fifth Third agreed
to acquire Enterprise Federal Bancorp, Inc., a savings and loan holding company
based in Cincinnati, Ohio which owns Enterprise Federal Savings Bank. As of
December 31, 1998, Enterprise had total assets of $544.1 million and total
deposits of $343.2 million.
In connection with the acquisition of Enterprise, shareholders of
Enterprise will receive .68516 shares of Fifth Third common stock for each
outstanding share of Enterprise capital stock. Fifth Third expects to issue
approximately 1,640,000 shares of Fifth Third common stock to shareholders of
Enterprise. Based on the fair market value per share of Fifth Third common stock
as of February 23, 1999, such shares would have an aggregate value of
approximately $110 million. Fifth Third expects that its acquisition of
Enterprise will be accounted for as a pooling-of-interests and will be completed
near the time of the merger with Ashland.
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<PAGE> 35
SOUTH FLORIDA BANK HOLDING CORPORATION. On October 22, 1998, Fifth Third
agreed to acquire South Florida Bank Holding Corporation, a bank holding company
based in Ft. Myers, Florida which owns South Florida Bank. As of December 31,
1998, South Florida had total assets of $90.2 million and total deposits of
$77.0 million.
In connection with the acquisition of South Florida, shareholders of South
Florida will receive .34800 shares of Fifth Third common stock for each
outstanding share of South Florida capital stock. Fifth Third expects to issue
approximately 440,000 shares of Fifth Third common stock to shareholders of
South Florida. Based on the fair market value per share of Fifth Third common
stock as of February 23, 1999, such shares would have an aggregate value of
approximately $30 million. Fifth Third expects that its acquisition of South
Florida will be accounted for as a pooling-of-interests and will be completed
near the time of the merger with Ashland.
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, 1998,
which is incorporated herein by reference, and to the Fifth Third 1998 Annual
Report to Shareholders which accompanies this document. See "Where You Can Find
More Information."
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<PAGE> 36
ASHLAND BANKSHARES, INC.
GENERAL
Ashland is a Kentucky corporation which was organized in 1984 for the
purpose of becoming a bank holding company. The principal asset of Ashland is
100% of the outstanding stock of Bank of Ashland, its only subsidiary. Ashland
presently has no separate operations and its business consists only of the
business of Bank of Ashland. Therefore, the information presented herein relates
principally to the Bank of Ashland.
As of December 31, 1998, Ashland had $171.1 million in assets, $141.4
million in deposits, and $25.5 million in stockholders' equity.
Originally chartered in 1966, Bank of Ashland operates as a state bank.
Bank of Ashland's primary business involves the attraction of deposits from the
general public and the use of such deposits together with borrowed funds to
originate loans secured by real estate, and to a lesser extent, consumer and
commercial business loans. Bank of Ashland also provides a full range of trust
services to its customers.
Bank of Ashland conducts business through its main office and three branch
offices located in Ashland and Boyd County, Kentucky. Ashland's customer base
includes individuals and small to medium sized businesses located in their
market area which includes the Kentucky counties of Boyd, Lawrence, Carter and
Greenup, and portions of Lawrence County, Ohio. Ashland's market area is an
industrial river community. Historically, the regional economy in and around
Ashland's market area had been based on the coal, oil and railroad industries,
and dependent upon a small number of large employers. Local companies which have
a significant presence in the area include Ashland, Inc., Marathon Ashland, LLC,
Corbin Ltd, AK Steel Corporation, and CSX Railroad. While the coal industry and
some heavy industry remains, the market area has experienced industrial decline
during the past several years due to layoffs and transfers of some of the
operations of these companies to other locations. Ashland's primary market area
also has a large medical community. Providers of medical services include King's
Daughters' Medical Center and Our Lady of Bellefonte Hospital.
The economy of Ashland's market area is in a period of transition from a
primarily industrial based economy to a service and retail based economy. In the
past five years, Ashland's market area has experienced increases in the retail
and service sections which has somewhat offset the impact of job losses and
consolidations from heavy industry. Although new housing starts has diminished
during the past several years, the valuation of homes in the market area has
generally increased.
LENDING ACTIVITIES
GENERAL. The principal lending activities of Ashland is the origination of
conventional fixed rate and variable rate mortgage loans for the acquisition and
construction of one-to-four family residential properties located in the primary
market area of Bank of Ashland. Ashland also originates multifamily and
commercial real estate and consumer and commercial business loans.
Loan originations come primarily from walk-in customers, continued business
from existing customers, real estate brokers and local dealers. All completed
loan applications are reviewed by Ashland's loan officers. As part of the
application process, information is obtained concerning the income, financial
condition, employment and credit history of the applicant. If commercial real
estate is involved, information may also be obtained concerning cash flow after
debt service. The quality of loans is analyzed based on Ashland's experience and
guidelines with respect to credit underwriting. Generally, all loans in excess
of $15,000 are appraised by independent appraisers.
The officers' loan committee, comprised of Bank of Ashland loan officers,
have the authority to approve loans over $25,000 up to $200,000. Loans over
$200,000 must be approved by the Bank of Ashland's President and Chief Executive
Officer or the Board of Directors' Loan Committee.
The aggregate amount of loans that Bank of Ashland is permitted to make
under applicable state regulations to any one borrower, including related
entities, and the aggregate amount that Bank of Ashland
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<PAGE> 37
could have invested in any one real estate project is generally 30% of permanent
capital and surplus. At December 31, 1998, the maximum amount which Bank of
Ashland could have lent to any one borrower, and the borrower's related
entities, and invested in any one project was $1.8 million. At December 31,
1998, Bank of Ashland's largest lending relationship to a single borrower or
group of related borrowers was a line of credit and loans secured by commercial
real estate totaling $1.75 million.
LOAN PORTFOLIO COMPOSITION. The following table sets forth certain
information concerning the composition of the loan portfolio of Ashland at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Real Estate:
One-to-four family................. $ 35,328 33.68% $ 37,051 35.2% $ 36,399 34.5%
Multifamily and commercial......... 16,708 15.93 15,754 15.0 13,073 12.4
Construction.......................... 249 .24 1,133 1.1 2,927 2.8
Consumer:
Home Equity........................ 3,204 3.05 3,153 3.0 3,324 3.1
Other consumer..................... 32,187 30.68 32,184 30.6 34,628 32.8
Commercial business................... 17,220 16.42 15,863 15.1 15,155 14.4
Student loans......................... -- -- 27 -- 57 --
-------- ----- -------- ----- -------- -----
Total loans................... 104,896 100.0% 105,165 100.0% 105,563 100.0%
===== ===== =====
LESS:
Unearned discounts.................... 1,563 2,447 3,517
Loan origination and acquisition
costs, net......................... (935) (883) (754)
Allowance for loan losses............. 1,461 1,469 1,421
-------- -------- --------
LOANS RECEIVABLE, NET................... $102,807 $102,132 $101,379
======== ======== ========
</TABLE>
LOAN PORTFOLIO MATURITY SCHEDULE. The following table sets forth certain
information as of December 31, 1998, regarding the dollar amount of loans
maturing in the portfolio of Ashland 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 IN DUE AFTER 1 YEAR DUE OVER
1 YEAR TO 5 YEARS AFTER 5 YEARS AFTER
OR LESS 12/31/98 12 /31/98 TOTALS
------- ---------------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate:
One-to-four family....................... $ 1,778 $10,279 $23,271 $ 35,328
Multifamily & commercial................. 1,173 5,927 9,608 16,708
Construction:
One-to-four family....................... 73 176 -- 249
Other Loans:
Consumer................................. 10,909 16,241 8,241 35,391
Commercial business...................... 8,807 5,157 3,256 17,220
------- ------- ------- --------
TOTALS........................... $22,740 $37,780 $44,376 $104,896
======= ======= ======= ========
</TABLE>
30
<PAGE> 38
The following table sets forth at December 31, 1998, the dollar amount of
loans due after one year, before net items, which have predetermined interest
rates and floating or adjustable interest rates:
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATES ADJUSTABLE RATES
------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Real Estate:
One-to-four family........................................ $20,382 $13,168
Multifamily & commercial.................................. 10,208 5,326
Construction:
One-to-four family........................................ 176 --
Other Loans:
Consumer.................................................. 20,996 3,486
Commercial business....................................... 5,387 3,027
------- -------
TOTALS............................................ $57,149 $25,007
======= =======
</TABLE>
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING. Ashland's primary
lending program is the origination of permanent loans, secured by mortgages on
owner occupied one-to-four family residences. As of December 31, 1998, $35.3
million, or 33.7% of Ashland's total loan portfolio, consisted of loans on
one-to-four family residences. Substantially all of these loans were secured by
properties located in Ashland's primary market area.
Ashland originates a variety of different types of residential mortgage
loans, including conventional 10, 15 and 20 year fixed rate loans, 1 year ARM's,
and 3, 5 and 10 year balloon payment loans. In addition, Ashland originates
fixed rate residential mortgage loans that convert to 1 year ARM's after the
initial 3 or 5 year term.
Ashland's current one-to-four family residential ARM's are fully amortizing
loans with contractual maturities of up to 30 years. The interest rates on
substantially all of the ARM's originated by Ashland are subject to adjustment
at one year intervals. Ashland's ARM products generally carry interest rates
which adjust based on a stated margin over the one year U.S. Treasury Constant
Maturities Index. Adjustments in the interest rate of Ashland's ARM's are
generally limited to 2% at any adjustment date, and 5% over the life of the
loan. As of December 31, 1998, the total balance of one-to-four family ARM's was
$13.8 million or 13.2% of Ashland's total loan portfolio.
Ashland also offers conventional fixed rate loans with maximum terms of up
to 20 years, although Ashland has recently emphasized origination of fixed rate
loans with terms to 15 years. The interest rate on such loans is generally based
on competitive factors. Ashland typically retains all fixed rate loans it
originates for its portfolio. As a result, such loans are not generally
underwritten to permit their sale in the secondary market.
Ashland evaluates both the borrower's ability to make principal and
interest payments, and the value of the property that will secure the loan.
Ashland generally originates residential mortgage loans with loan to value
ratios up to 80%, although the President may authorize the origination of
mortgage loans with loan to value ratios of up to 100%.
Ashland generally requires, in connection with the origination of
residential real estate loans, a title opinion and fire and casualty insurance
coverage, as well as flood insurance where appropriate to protect Ashland's
interest.
Ashland's residential mortgage loans customarily include "due on sale"
clauses, which are provisions giving Ashland the right to declare a loan
immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage when the loan is not
repaid.
COMMERCIAL BUSINESS LENDING. Ashland originates secured and unsecured
loans and letters of credit for commercial, corporate and business purposes to
local businesses. Such loans are primarily in the form of
31
<PAGE> 39
fixed asset loans. At December 31, 1998, Ashland had $17.2 million of commercial
business loans outstanding or 16.4% of the total loan portfolio. In addition, on
such date, Ashland had commercial business loan commitments totaling $4.0
million which were not funded.
Ashland's commercial business loans have terms of up to ten years, and
typically have rates which adjust based upon a stated margin over the prime
rate.
Ashland's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral, as well as an
evaluation of conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of Ashland's
current credit analysis.
Unlike residential mortgage loans which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of a higher risk and
typically are made on the basis of the borrower's ability to make repayment form
the cash flow of the borrower's business. As a result, the availability of funds
for repayment of commercial business loans may be substantially dependent upon
the success of the business itself. Further, the collateral for securing the
loans may depreciate over time, may be difficult to appraise, and may fluctuate
in value based on the success of the business.
CONSUMER LENDING. In order to increase the interest rate sensitivity of
the loan portfolio and provide a broader range of loan products to its retail
customers, Ashland originates a variety of secured and unsecured consumer loans,
including automobile, boat, home equity, deposit account and installment loans.
All of Ashland's consumer loans are originated in its market area. As of
December 31, 1998, consumer loans totaled $35.4 million or 33.7% of total loans
outstanding.
Consumer loan terms vary according to type of loan and value of collateral,
length of contract, and credit worthiness of the borrower. Ashland's consumer
loans are generally made at fixed interest rates with terms of up to 15 years.
The underwriting standards employed by Ashland for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Although credit worthiness of the
applicant is of primary consideration, the underwriting process also includes a
comparison of the value of the security in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws including federal and state bankruptcy and insolvency
laws may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defense by a consumer loan borrower against an
assignee of such loans, such as Ashland's, and a borrower may be able to assert
against such assignee claims and defenses which it has against the seller of the
underlying collateral. Consumer loan delinquencies often increase over time as
the loans age. Accordingly, although the level of nonperforming loans in
Ashland's consumer loan portfolio at December 31, 1998 are generally low
($46,000 or 0.04% of total loans), there can be no assurance that delinquencies
will not increase in the future.
COMMERCIAL REAL ESTATE LENDING. In order to increase the interest rate
sensitivity and yield of its loan portfolio, Ashland originates permanent and,
to a lesser extent, construction loans secured by commercial real
32
<PAGE> 40
estate. As of December 31, 1998, Ashland had $16.7 million in commercial real
estate loans, representing 15.9% of the total loan portfolio.
Ashland's commercial real estate loan portfolio includes loans secured by
apartment buildings, churches, office buildings, warehouses, and other income
producing properties located in its market area.
Ashland's permanent commercial real estate loans generally carry a maximum
term of 15 years and have adjustable rates generally based on the prime rate
plus a margin. These loans are generally made in amounts of up to 75% of the
lesser of the appraised value or the purchase price of the property. Appraisals
on property securing commercial real estate loans in excess of $15,000 are
performed by an independent appraiser designated by Ashland at the time the loan
is made. All appraisals on commercial real estate loans are reviewed by
Ashland's management. In addition, Ashland's underwriting procedures require
verification of the borrowers credit history, income and banking relationships,
references and income projection for the property. Ashland generally obtains
personal guarantees on these loans.
To a lesser extent, Ashland originates a limited number of loans for the
construction of commercial real estate. These loans typically have terms of up
to one year and are structured as a line of credit. Following a construction
phase, Ashland may provide permanent financing on the property. Commercial real
estate construction loans typically have adjustable rates of interest. Such
loans are typically underwritten based upon the same standards as discussed
above. As of December 31, 1998, Ashland had no commercial real estate
construction loans outstanding.
From time to time, Ashland purchases loan participations in commercial real
estate originated by other financial institutions. Properties securing such
loans are generally located in the Bank's market area. Ashland generally does
not purchase a commercial real estate loan of greater than 80% of the appraised
value. All purchased loan participations must comply with Ashland's underwriting
standards. Ashland requires that any appraisal of property be performed by
independent, professionally designated qualified appraisers to determine that
the property securing the loan satisfy these loan to value requirements. As of
December 31, 1998, Ashland had participation interests in commercial real estate
loans totaling $480,000.
As of December 31, 1998, Ashland's largest commercial real estate loan
outstanding was $1.0 million secured by commercial office buildings.
Commercial real estate lending entails a higher level of risk than loans
secured by one-to-four family residences. This greater risk is due to several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the related real
estate project, and thus may be subject to a greater extent of adverse
conditions in the real estate market or the economy generally. If the cash flow
from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired.
CONSTRUCTION LENDING. Ashland originates a modest amount of construction
loans to individuals for the construction of residential real estate. As of
December 31, 1998, Ashland's construction loan portfolio totaled $249,000 or
0.24% of its total loan portfolio. All of these loans are secured by properties
located in Ashland's market area.
Construction loans to individuals for construction of their residences are
structured to convert to permanent loans at the end of the construction phase,
which typically runs up to one year. These construction loans have rates and
terms comparable to one-to-four family loans then offered by Ashland. Generally,
the maximum loan to value ratio of owner occupied single family construction
loans is 80%. Residential construction loans are generally underwritten pursuant
to the same guidelines for originating permanent residential loans.
Ashland's construction loan agreements generally provide that loan proceeds
are disbursed in increments as construction progresses. Ashland reviews the
progress of the construction of the dwelling before disbursements are made.
33
<PAGE> 41
Construction loans are obtained principally through referrals from
management's contacts in the community as well as existing and walk-in
customers. The application process includes a submission to Ashland of accurate
plans, specifications, and costs of the home to be constructed. These items are
used as a basis to determine the appraised value of the subject property. Loans
are based on the lesser of current appraised value and/or the cost of the
construction (land plus building).
Construction lending generally affords Ashland an opportunity to receive
interest at rates higher than those obtainable from permanent residential loans,
and to receive higher origination and other loan fees. Nevertheless,
construction lending is generally considered to involve a higher level of credit
risk than one-to-four family residential lending due to, among other things, the
effect of general economic condition on builders, and cost increases associated
with delays in the construction process. In addition, the nature of these loans
is such that they are more difficult to evaluate and monitor. Finally, the risk
of loss on construction loans is dependent largely upon the accuracy of the
initial estimate of the individual property's value upon completion of the
project, and the estimated cost (including interest) of the project. If the cost
estimate proves to be inaccurate, Ashland may be required to advance funds
beyond the amount originally committed to permit completion of the project.
LOAN ORIGINATIONS, PURCHASES AND SALES
Real estate loans are originated by an in-house staff of salaried loan
officers. Loan applications are taken and processed in Ashland's offices, and
then submitted to the loan committee for approval. While Ashland originates both
adjustable rate and fixed rate loans, its ability to originate loans is
dependent upon the relative customer demand for loans in its market. Demand is
also affected by the interest rate environment. Since Ashland originates fixed
rate loans for its portfolio, such loans are generally not documented to permit
their sale in the secondary market.
Ashland has occasionally sold loan participations primarily without
recourse when the loan exceeds Ashland's lending limits. Sales of loan
participations generally have been beneficial to Ashland since these sales
usually generate income at the time of sale, produce future servicing income,
and provide funds for additional lending and other investments.
From time to time, Ashland purchases commercial real estate loan
participations. The participation interest is primarily secured by properties
located in Ashland's market area. Loans in which Ashland purchases participation
interest must meet the underwriting standards for the loans which Ashland
originates.
34
<PAGE> 42
The following table sets forth certain information in respect to Ashland's
loan originations, participations and sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
LOANS ORIGINATED:
Real Estate:
One-to-four-family......... $ 11,768 15.13% $ 9,175 12.64% $ 13,014 17.18%
Multifamily and
commercial............... 5,273 6.78 6,267 8.63 3,616 4.77
Construction............... 774 1.00 4,455 6.14 3,751 4.95
Consumer...................... 19,562 25.15 15,442 21.27 20,661 27.27
Commercial business........... 40,398 51.94 37,256 51.32 34,727 45.83
-------- ------ -------- ------ -------- ------
Total loans
originated.......... 77,775 100.00% 72,595 100.00% 75,769 100.00%
-------- ====== -------- ====== -------- ======
LOANS SOLD:
Participations................ ( 5,418) ( 1,846) ( 1,800)
-------- -------- --------
Loan principal repayments....... (72,091) (71,146) (65,335)
-------- -------- --------
Increase (decrease) in other
items, net.................... 409 1,150 589
-------- -------- --------
Net increase (decrease)......... $ 675 $ 753 $ 9,223
======== ======== ========
</TABLE>
MORTGAGE BACKED SECURITIES. In order to supplement loan production and
achieve its asset/liability management goals, Ashland invests in mortgage backed
securities. Mortgage backed securities can serve as collateral for borrowings,
and through repayments, as a source of liquidity. Ashland had a portfolio of
mortgage backed securities totaling $816,000 at December 31, 1998. All of the
mortgage backed securities owned by Ashland at December 31, 1998 were issued,
insured and guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC). As
of December 31, 1998, Ashland did not have any mortgage backed securities of a
single issuer in excess of 10% of Ashland's total equity.
At December 31, 1998, Ashland held one FHLMC mortgage-backed security with
an amortized cost of $816,000 including unamortized premium of $7,500, a fixed
interest rate of 6.50%, and a maturity date of June 11, 2013. The following
table sets forth certain information regarding Ashland's mortgage-backed
securities at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
------------------------------------------- -------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ------------------ ESTIMATED AMORTIZED ------------------ ESTIMATED
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
--------- ----- ---------- ---------- --------- ----- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
FHLMC.............. $816 $8 -- $824 $1,027 -- $(17) $1,010
==== == == ==== ====== ===== ==== ======
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------ ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----- ---------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
FHLMC.............. $1,158 -- $(34) $1,124
====== == ==== ======
</TABLE>
35
<PAGE> 43
The following table sets forth the purchases, sales and repayment
activities of mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -------
<S> <C> <C> <C>
Purchases................................................... $ 0 $ 0 $ 0
Sales:
CMO's and REMIC's......................................... -- -- 3,133
---- ---- ------
Principal repayments........................................ 210 131 113
Other increases (decreases)................................. -- (1) 57
---- ---- ------
Net Decrease...................................... $210 $132 $3,189
==== ==== ======
</TABLE>
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Ashland attempts to cause
the deficiency to be cured by contacting the borrower. A notice is mailed to the
borrower and Ashland imposes late charges after a payment is 10 days past due.
After a payment is 30 days past due, Ashland's collections personnel will either
contact the borrower by telephone or letter. After a payment is 90 days past
due, Ashland sends the borrower a demand letter and a property inspection is
ordered. When deemed appropriate by management, Ashland institutes action to
foreclose on the property or to acquire it by deed in lieu of foreclosure. If
foreclosed on, real property is sold at a public sale and may be purchased by
Ashland. A decision as to whether and when to initiate foreclosure proceedings
is based on such factors as the amount of the outstanding loan in relation to
the original indebtedness and the current value of the property, the extent of
delinquency and the borrower's ability and willingness to cooperate in curing
delinquencies. When property is acquired by foreclosure, 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. Foreclosed real estate is
periodically reviewed to ensure that fair value less estimated cost to sell is
not less than carrying value, and any allowance resulting therefrom is charged
to earnings as a provision for losses on foreclosed real estate. Costs to
develop or improve real estate are capitalized; costs of holding real estate are
expensed.
The following table sets forth the amount of loans in delinquent status at
December 31, 1998:
<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...... 29 $1,680 3 $172 6 $235
Multifamily and commercial real
estate............................ 2 41 1 38 1 17
Consumer(1)......................... 102 443 36 127 8 40
Commercial Business................. -- -- -- -- 1 62
--- ------ -- ---- -- ----
Total..................... 133 $2,164 40 $337 16 $354
=== ====== == ==== == ====
Percentage of total to total
loans............................. 2.06% 0.32% 0.34%
====== ==== ====
</TABLE>
- ---------------
(1) Includes recourse loans of (30-59 days, 50 loans -- $119) (60-89 days, 16
loans -- $47), and (90 days or more, 5 loans -- $11).
All delinquent loans are reviewed on a regular basis and are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. Interest unpaid at the time a loan is placed on non-accrual status is
charged against interest income. Future interest income is recognized on a cash
basis. The loan will remain on non-accrual as long as the loan is 90 days
delinquent unless a repayment plan is being followed.
The table below sets forth the amounts and categories of non-performing
assets in Ashland's loan portfolio. For all years presented, Ashland has had no
troubled debt restructurings (which involve forgiving a
36
<PAGE> 44
portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates).
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Non-accruing loans:
One-to-four family real estate............................ $127 $ 83 $ --
Construction.............................................. -- 390 --
Commercial business....................................... 62 195 --
Consumer.................................................. 6 -- --
---- ---- ----
Totals............................................ 195 668 --
---- ---- ----
Accruing loans delinquent more than 90 days:
One-to-four family real estate............................ 108 114 301
Multifamily and commercial real estate.................... 17 -- --
Commercial business....................................... -- -- --
Consumer.................................................. 34 34 306
---- ---- ----
Totals............................................ 159 148 607
---- ---- ----
Total non-performing loans.................................. 354 816 607
Other non-performing assets:
Foreclosed real estate.................................... -- -- 30
---- ---- ----
Total non-performing assets................................. $354 $816 $637
==== ==== ====
Total non-accrual loans as a percentage of total loans...... 0.19% 0.64% 0.00%
==== ==== ====
Total non-performing loans as a percentage of total loans... 0.34% 0.78% 0.58%
==== ==== ====
Total non-performing assets as a percentage of total
assets.................................................... 0.21% 0.49% 0.39%
==== ==== ====
</TABLE>
For the years ended December 31, 1998 and 1997, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $21,262 and $43,851, respectively. The
amounts included in interest income on such loans for the years ended December
31, 1998 and 1997, was $4,535 and $23,639, respectively.
As of December 31, 1998, there were 45 loans totaling $1.7 million which
were not included in the table above where known information about the possible
credit problems of borrowers caused management to have serious doubts as to the
ability of the borrower to comply with present loan repayment terms, have
certain deficiencies in loan documentation or lack current financial information
on the borrower which may result in disclosure of such loans in the future.
As of December 31, 1998, there were no concentrations of loans in any types
of industry which exceeded 10% of Ashland's total loans, that are not included
as a loan category in the preceding table.
Included in non-accruing loans at December 31, 1998, were four loans
totaling $195,000 secured by accounts receivable, inventory, and first and
second mortgages on residential real estate.
Regulations 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
37
<PAGE> 45
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, Ashland classifies as "substandard" all loans that are
delinquent more than 90 days, foreclosed real estate, loans to facilitate
workouts and the sale of foreclosed real- estate 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.
The aggregate amount of Ashland's classified assets at December 31, 1998,
was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Special mention...................................... $1,273
Substandard.......................................... 797
Doubtful............................................. 13
Loss................................................. 0
------
Total classified assets.................... $2,083
======
</TABLE>
Federal examiners are authorized to classify an institution's assets. If an
institution does agree with an examiner's classification of an asset, it may
appeal this determination to the appropriate regulatory authority. Ashland had
no disagreements with the examiners regarding the classification of assets at
the time of the last examination.
FDIC regulations require that institutions 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 allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans of which full
collectibility may not be reasonably assured considers among other matters, the
nature and volume of the loan portfolio, overall portfolio quality, the
estimated fair value of the underlying collateral, current economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan allowance.
Real estate properties acquired through foreclosure are recorded at fair
value at the date of foreclosure. Valuations are periodically updated by
management and a specific provision for losses on such property is established
by a charge to operations if the carrying value of the property exceeds its
estimated fair value less estimated selling expenses.
38
<PAGE> 46
The following table sets forth the activity in Ashland's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD.............................. $1,469 $1,421 $1,280
------ ------ ------
Charge-offs:
Real estate............................................... 0 0 0
Consumer.................................................. (242) (249) (231)
Commercial business....................................... (47) (101) (118)
------ ------ ------
Total............................................. (289) (350) (349)
Recoveries.................................................. 76 98 105
------ ------ ------
Net charge-offs............................................. (213) (252) (244)
------ ------ ------
Provision for loan losses................................... 205 300 385
------ ------ ------
BALANCE AT END OF PERIOD.................................... $1,461 $1,469 $1,421
====== ====== ======
Ratio of net charge-offs to average loans outstanding....... 0.21% 0.25% 0.26%
====== ====== ======
Allowance for loan losses to total loans.................... 1.40% 1.40% 1.35%
====== ====== ======
</TABLE>
The distribution of Ashland's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
AMOUNT LOAN IN EACH AMOUNT LOAN IN EACH AMOUNT LOAN IN EACH
OF LOAN AMOUNTS CATEGORY OF LOAN AMOUNTS CATEGORY OF LOAN AMOUNTS CATEGORY
LOSS BY TO TOTAL LOSS BY TO TOTAL LOSS BY TO TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS
--------- -------- -------- --------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All real estate......... $ 314 $ 52,285 49.9% $ 358 $ 53,938 51.3% $ 225 $ 52,399 49.6%
Commercial business..... 309 17,220 16.4 215 15,863 15.1 93 15,155 14.4
Consumer................ 467 35,391 33.7 708 35,364 33.6 699 38,009 36.0
Unallocated............. 371 -- -- 188 -- -- 404 -- --
------ -------- ------ ------ -------- ----- ------ -------- -----
Totals......... $1,461 $104,896 100 .0% $1,469 $105,165 100.0% $1,421 $105,563 100.0%
====== ======== ====== ====== ======== ===== ====== ======== =====
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. Ashland utilizes investment securities in basically all aspects
of its assets/liability management strategy. In making investment decisions, the
investment committee considers, among other things, Ashland's yield and interest
rate objective, its interest rate and credit risk position, and its liquidity
and cash flow.
Generally, the investment policy of Ashland is to invest funds among
categories of investments and maturities based upon Ashland's assets/liability
management policies, investment quality, loan and deposit volume, liquidity
needs and performance objectives. Effective January 1, 1994, Ashland adopted
SFAS No. 115. As required by SFAS No. 115, securities are classified into three
categories: trading, held to maturity, and available for sale. Securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities and are reported at fair value with
unrealized gains and losses included in earnings. Debt securities that Ashland
has a positive intent and the ability to hold to maturity are classified as held
to maturity and reported at amortized costs. All other securities not classified
as trading or held to maturity are classified as available for sale. Available
for sale securities are reported at fair value with unrealized gains and losses
included on an after tax basis, in a separate component of comprehensive income.
At December 31, 1998, Ashland had no securities classified as trading.
39
<PAGE> 47
Ashland's assets, other than loans receivable, are invested primarily in
U.S. Government Agency securities, municipal bonds, and other short term
investments, including federal funds sold. At December 31, 1998, Ashland's
interest bearing deposits in other financial institutions totaled $254,000 or
0.15% of its total assets, federal funds sold totaled $2.9 million, or 1.67% of
its total assets, and investment securities totaled $55.1 million or 32.21% of
its total assets.
The following table presents the contractual maturities or terms to
repricing of Ashland's investment in U.S. Treasury, U.S. government agency and
obligations of state and political subdivisions at amortized cost and the
weighted average yields at December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------------------------------------
MATURING WITHIN MATURING WITHIN MATURING WITHIN MATURING AFTER
ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS TEN YEARS TOTALS
------------------- ------------------- ------------------- ------------------- --------------------
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity..... $ 5 4.30% $ 904 6.47% $14,187 6.04% $9,128 5.41% $24,224 5.82%
Available for sale... 9,693 5.78 19,991 6.00 1,000 6.01 -- -- 30,684 5.93
------ ---- ------- ---- ------- ---- ------ ---- ------- ----
Totals...... $9,698 5.77% $20,895 6.02% $15,187 6.02% $9,128 5.41% $54,908 5.88%
====== ==== ======= ==== ======= ==== ====== ==== ======= ====
</TABLE>
INVESTMENT SECURITIES. It is Ashland's general policy to purchase
investment securities which are U.S. government or agency securities, municipal
securities, and overnight federal funds. As of December 31, 1998, the average
term to maturity or repricing of the investment security portfolio was six
years.
Ashland's investment security portfolio as of December 31, 1998 contained
neither tax exempt securities, nor securities of any issuer with an aggregate
book value in excess of 10% of Ashland stockholders equity, excluding those
issued by the U.S. government.
SOURCES OF FUNDS
GENERAL. Deposit accounts are a principal source of Ashland's funds for
use in lending and for other general business purposes. In addition to deposits,
Ashland derives funds from loan repayments and cash flows generated from
operations. Scheduled loan payments are a relatively stable source of funds,
while deposit inflows and outflows and their related costs of such funds have
varied. Borrowings may be used on a short term basis to compensate for seasonal
reductions in deposits or deposit inflows at less than projected levels, and may
be used on a longer term basis to support expanded lending activities.
DEPOSITS. Ashland attracts both short-term and long-term deposits from its
primary market area. Ashland offers regular passbook accounts, NOW accounts,
money market deposit and checking accounts, and fixed interest rate certificates
of deposits with varying maturities. Deposit account terms vary, according to
the minimum balance required, time period the fund must remain on deposit, and
the interest rate, among other factors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, competition,
and Ashland's pricing policies and capital requirements. Ashland serves as a
depository for public funds for various municipalities and related entities. As
of December 31, 1998, the amount of public funds on deposit with Ashland was
$12.4 million. These accounts are subject to volatility depending on government
funding needs and Ashland's desire to attract such funds.
Ashland regularly evaluates the internal cost of funds, surveys rates
offered by competing institutions, reviews its cash flow requirements for
liquidity and executes rate changes when deemed appropriate. Ashland utilizes
television, radio, and newspaper advertising and pricing to obtain deposits.
Ashland only solicits deposits in its market area. Ashland does not utilize
broker deposits.
At December 31, 1998, Ashland's certificates of deposit totaled $66.4
million or 47.0% of total deposits. Approximately $58.7 million of certificates
of deposit mature within one year. Based on past experience and Ashland's
pricing strategies, management believes that a substantial percentage of such
certificates will renew with Ashland at maturity. If there is a significant
deviation from historical experience, Ashland can use
40
<PAGE> 48
borrowings 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 Ashland at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
RATE AMOUNT PERCENT RATE AMOUNT PERCENT RATE AMOUNT PERCENT
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DESCRIPTION
Passbook/Statement........ 2.47% $ 10,293 7.3% 2.47% $ 9,793 7.1% 2.48% $ 10,122 7.4%
NOW and Demand............ 1.65% 52,333 37.0% 1.64% 48,142 35.2% 1.28% 40,791 29.6%
Market Access............. 3.25% 12,346 8.7% 3.47% 10,819 7.9% 3.69% 20,448 14.8%
---- -------- ----- ---- -------- ----- ---- -------- -----
2.02% 74,972 53.0% 2.04% 68,754 50.2% 2.14% 71,361 51.8%
---- -------- ----- ---- -------- ----- ---- -------- -----
CERTIFICATES OF DEPOSIT
1 yr. or less............. 4.68% 18,076 12.8% 4.85% 12,830 9.4% 4.72% 21,875 15.9%
1 to 2 1/2 years.......... 5.46% 20,467 14.5% 5.78% 28,727 21.0% 5.52% 19,338 14.0%
3 or more years........... 5.16% 505 0.3% 5.35% 962 0.7% 5.66% 1,505 1.1%
Negotiated................ 5.30% 20,775 14.7% 5.52% 19,326 14.1% 5.18% 17,598 12.8%
IRA (1 to 5 yrs.)......... 4.86% 6,598 4.7% 5.21% 6,317 4.6% 5.30% 6,125 4.4%
---- -------- ----- ---- -------- ----- ---- -------- -----
5.14% 66,421 47.0% 5.47% 68,162 49.8% 5.15% 66,441 48.2%
---- -------- ----- ---- -------- ----- ---- -------- -----
$141,393 100.0% 3.75% $136,916 100.0% 3.59% $137,802 100.0%
======== ===== ==== ======== ===== ==== ======== =====
</TABLE>
The following table sets forth rate and maturity information for Ashland's
certificates of deposit as of December 31, 1998.
<TABLE>
<CAPTION>
MATURITY DECEMBER 31, 1998
- -------- -----------------
(IN THOUSANDS)
<S> <C>
Less than 1 year.................................. $58,658
1 to 2 years...................................... 7,098
2 to 3 years...................................... 465
3 to 4 years...................................... 50
4 to 5 years...................................... 122
Thereafter........................................ 28
-------
$66,421
=======
</TABLE>
The following table presents the amount of Ashland's time deposits of
$100,000 or more, by the time remaining until maturity at December 31, 1998.
<TABLE>
<CAPTION>
MATURITY DECEMBER 31, 1998
- -------- -----------------
(IN THOUSANDS)
<S> <C>
Three months or less.............................. $ 9,937
Over 3 months to 6 months......................... 5,335
Over 6 months to 12 months........................ 4,765
Over 12 months.................................... 1,177
-------
$21,214
=======
</TABLE>
TRUST SERVICES. In order to generate fee income and provide a broad range
of services to its customers, Ashland provides a full range of trust services.
Such services include managing personal trusts, employee benefit plans,
investment management accounts, corporate trusts, disbursing of funds as
required by trust agreements, and brokerage services.
For the fiscal years ended December 31, 1998, 1997 and 1996, income from
trust services totaled approximately $422,000, $351,000 and $341,000,
respectively.
41
<PAGE> 49
ASSET/LIABILITY MANAGEMENT
Ashland's earnings depends upon its net interest income, which is the
difference between its interest income on its interest-earning assets, such as
loans, investment securities, mortgage-backed securities, and federal funds
sold, 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. Ashland has sought to limit these net earnings fluctuations and
manage interest rate risk by originating adjustable rate loans and purchasing
relatively short-term investments and securities.
The following tables set forth certain information relating to Ashland's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods presented, expressed both in dollars and rates. No tax equivalent
adjustments were made. Non-accruing loans have been included in the table as
loans carrying a zero yield. Average loans are calculated net of deferred loans,
fees and costs, loan discounts and the allowance for loan losses. Included in
interest income on loans are loan fees and other charges on loans totaling
$215,000, $244,000 and $225,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
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.......... $101,853 $ 9,259 9.09% $102,224 $ 9,345 9.14% $ 95,333 $ 8,789 9.22%
Mortgage-backed
securities.............. 937 59 6.30 1,105 70 6.33 4,015 383 9.54
Investment securities..... 48,631 2,917 6.00 45,017 2,714 6.03 44,528 2,745 6.16
Federal Home Loan Bank
stock................... 638 46 7.21 594 43 7.25 520 36 6.92
Federal funds and other
deposits................ 5,964 318 5.33 3,221 187 5.81 1,721 93 5.40
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total
interest-earning
assets........... $158,023 $12,599 7.97% $152,161 $12,359 8.12% $146,117 $12,046 8.24%
======== ======= ==== ======== ======= ==== ======== ======= ====
INTEREST-BEARING
LIABILITIES:
Passbook/statement
accounts................ $ 10,402 $ 256 2.46% $ 10,358 $ 254 2.45% $ 10,764 $ 268 2.49%
Demand deposits........... 18,068 -- -- 16,577 -- -- 14,813 -- --
Now accounts.............. 25,435 538 2.11 22,060 463 2.10 21,802 460 2.11
Market access accounts.... 16,319 642 3.93 15,884 605 3.81 18,125 693 3.82
Certificates of deposit... 67,403 3,568 5.29 67,059 3,535 5.27 63,288 3,286 5.19
FHLB advances............. 604 34 5.63 766 43 5.61 1,087 59 5.43
Other short-term
borrowings.............. 2,889 147 5.09 4,452 227 5.10 3,692 187 5.06
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total
interest-bearing
liabilities...... $141,120 $ 5,185 3.67% $137,156 $ 5,127 3.74% $133,571 $ 4,953 3.71%
======== ======= ==== ======== ======= ==== ======== ======= ====
Net interest income....... $ 7,414 $ 7,232 $ 7,093
======= ======= =======
Net interest rate
spread.................. 4.30% 4.38% 4.53%
==== ==== ====
Net interest margin....... 4.69% 4.75% 4.85%
==== ==== ====
Average interest-earning
assets to
interest-bearing
liabilities............. 112.0% 110.9% 109.4%
------ ------ ------
------ ------ ------
</TABLE>
The following schedule presents the dollar amounts of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume (change
in volume multiplied by prior year rate), and (2) changes in rate (change in
rate multiplied by prior year volume), and (3) 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".
42
<PAGE> 50
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- ----------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
----------------------------- ----------------------------
VOLUME RATE MIX TOTAL VOLUME RATE MIX TOTAL
------ ----- ---- ----- ------ ----- --- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME:
Loans receivable......................... $(34) $ (51) $ (1) $(86) $ 635 $ (76) $(3) $ 556
Mortgage-backed securities............... (11) -- -- (11) (278) (129) 94 (313)
Investment securities.................... 218 (14) (1) 203 30 (58) (3) (31)
Federal Home Loan Bank stock............. 3 -- -- 3 5 2 -- 7
Federal funds and other deposits......... 159 (16) (12) 131 81 7 6 94
---- ----- ---- ---- ----- ----- --- -----
Total interest income change...... $335 $ (81) $(14) $240 $ 473 $(254) $94 $ 313
---- ----- ---- ---- ----- ----- --- -----
INCREASE (DECREASE) IN INTEREST EXPENSE:
Passbook/statement accounts.............. $ 1 $ 1 $ -- $ 2 $ (10) $ (4) $-- $ (14)
Now accounts............................. 71 2 2 75 5 (2) -- 3
Market access accounts................... 17 19 1 37 (86) (2) -- (88)
Certificates of deposit.................. 18 13 2 33 196 51 2 249
FHLB advances............................ (9) -- -- (9) (18) 2 -- (16)
Other short-term borrowings.............. (80) -- -- (80) 38 2 -- 40
---- ----- ---- ---- ----- ----- --- -----
Total interest expense change..... $ 18 $ 35 $ 5 $ 58 $ 125 $ 47 $2 $ 174
---- ----- ---- ---- ----- ----- --- -----
Increase (decrease) in net interest
income................................. $317 $(116) $(19) $182 $ 348 $(301) $92 $ 139
==== ===== ==== ==== ===== ===== === =====
</TABLE>
The following table sets forth at the dates indicated the weighted average
yields on Ashland's interest-earning assets, the weighted average rates on
interest-bearing liabilities, the interest rate spread and the net interest
margin on the interest-earning assets. No tax equivalent adjustments were made.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON:
Loan portfolio............................................ 8.73% 8.94% 8.75%
Mortgage-backed securities................................ 6.44 6.44 6.19
Investment securities..................................... 5.88 5.96 5.96
FHLB stock................................................ 7.00 7.25 6.98
Federal funds and other interest earning assets........... 4.99 5.60 3.12
Total interest earning assets..................... 7.68 7.91 7.68
WEIGHTED AVERAGE INTEREST RATE PAID ON:
Passbook/statement accounts............................... 2.47 2.47 2.48
NOW and demand accounts................................... 1.65 1.64 1.28
Market access accounts.................................... 3.25 3.47 3.69
Certificates of deposit................................... 5.14 5.47 5.15
FHLB advances............................................. 5.65 5.65 5.65
Other short-term borrowings............................... 5.02 4.87 4.98
Total interest-bearing liabilities................ 3.52 3.79 3.64
Interest rate spread (yield on total interest-earning
assets less rate paid on total interest-bearing
liabilities)........................................... 4.16 4.12 4.04
Net interest margin (net interest income divided by total
interest-earning assets)............................... 4.57 4.48 4.35
</TABLE>
Bank of Ashland's interest rate spread is the principal determinant of
income. The interest rate spread and net interest income can vary considerably
over time because asset and liability repricing do not coincide. 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 Board of Directors of
Bank of Ashland and Ashland attempt to manage the exposure to interest rate risk
in a manner to maintain the projected annual percentage change in net interest
income and the projected
43
<PAGE> 51
change in the market value of portfolio equity (the "MVPE") within the limits
established by the Board of Directors, assuming a permanent and instantaneous
proportional shift in interest rates.
To monitor its interest rate risk, Bank of Ashland reviews reports produced
in house utilizing Profitstar, Inc. software. These reports outline the
projected change in MVPE and net interest income given various rate shock
scenarios.
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. Profitstar's discounted cash flow
model used by Bank of Ashland attempts to quantify interest rate risk as the
change in MVPE which would result from an instantaneous and proportional 100,
200, and 300 basis point (100 basis points equals 1%) change in market interest
rates.
The following table shows Bank of Ashland's estimated MVPE sensitivity
profile as of December 31, 1998:
<TABLE>
<CAPTION>
BOARD LIMIT $ CHANGE IN
RATE SHOCK % OF CHANGE MVPE % CHANGE IN
- ---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+300 -40% -10,027 -24%
+200 -20% -6,849 -16%
+100 -15% -3,510 -8%
0
-100 -15% +3,695 +9%
-200 -20% +7,590 +18%
-300 -40% +11,700 +28%
</TABLE>
The 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,
whereas 46% 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 early withdrawal levels from
certificates of deposit would likely deviate significantly from those assumed in
making the risk calculations.
In the event interest rates rise, the net interest income of Bank of
Ashland would be negatively impacted in year one; however, year two would show a
marked improvement as the lagging assets begin to reprice upward.
COMPETITION. Ashland faces strong competition in originating loans and
attracting deposits. Competition in originating loans come primarily from other
commercial banks, thrift institutions, and mortgage bankers who also make loans
secured by real estate located in Ashland's primary market area. Ashland
competes for loans principally on the basis of interest rates and loan fees it
charges, the types of loans it originates, and the quality of service it
provides to borrowers.
Ashland faces substantial competition in attracting deposits from other
commercial banks, thrift institutions, money market and mutual funds, credit
unions, and other investment vehicles. The ability of Ashland to attract and
retain deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk
and other factors. Ashland competes for these deposits by offering a variety of
deposit accounts at competitive rates and convenient business hours.
Ashland considers its primary market area to be Boyd, Greenup, Lawrence,
and Carter counties in Kentucky, and portions of Lawrence County, Ohio. As of
December 31, 1998, there were approximately 11
44
<PAGE> 52
financial institutions with offices located in Boyd County. Ashland estimates
that its market share in Boyd County of savings deposits is 12.0%.
EMPLOYEES. As of December 31, 1998, Ashland and Bank of Ashland had a
total of 67 full-time and 11 part-time employees. None of Ashland's employees
are represented by any collective bargaining group. Management considers its
employee relations to be good.
SUBSIDIARY ACTIVITIES. Ashland has no direct subsidiaries other than Bank
of Ashland. As of December 31, 1998, Bank of Ashland had no subsidiaries.
DESCRIPTION OF PROPERTY. The following table sets forth certain
information as of December 31, 1998 with respect to the property owned by
Ashland and Bank of Ashland.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
LAND, BUILDINGS,
OWNED GROSS IMPROVEMENTS
YEAR OR LEASE SQUARE FURNITURE AND
LOCATION ACQUIRED EXPIRATION FOOTAGE FIXTURES
- -------- -------- ---------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MAIN OFFICE(1)
1422 Winchester Avenue
Ashland, Kentucky............................. 1974 Owned 33,000 $1,347
BRANCH OFFICES
Rt. 23 West and Hoods Creek Pike
Ashland, Kentucky............................. 1969 Owned 2,108 $ 100
U.S. 60 at Cannonsburg
Ashland, Kentucky............................. 1972 Owned 2,108 $ 170
4201 Blackburn Ave
Ashland, Kentucky............................. 1980 Owned 5,035 $ 302
</TABLE>
- ---------------
(1) Approximately 27% of the main office building is leased to unaffiliated
parties. Rental income is approximately $46,000 per year.
LEGAL PROCEEDINGS. Ashland and Bank of Ashland are, from time to time,
parties to certain legal proceedings arising in the ordinary course of business.
Ashland and Bank of Ashland believe that none of these proceedings would, if
adversely determined, have a material adverse effect on financial condition.
YEAR 2000
Bank of Ashland created a Year 2000 Readiness Project Team in the fourth
quarter of 1997 to assess the company's Year 2000 preparedness. The project team
undertook a phased approach to its task -- awareness, assessment,
evaluation/budgeting, testing/validation, and implementation. The awareness,
assessment, evaluation and budgeting phases were completed prior to the signing
of the affiliation agreement. Bank of Ashland's Board of Directors approved a
budget of $275,000 for the upgrade of hardware, software and equipment and
required training of bank staff. Testing began in the second quarter of 1998 and
the testing of its core processing system was scheduled for November, 1998. All
testing was scheduled to be completed by year end 1998. With the signing of the
affiliation agreement in September, 1998, testing was postponed. The testing
will be rescheduled if the merger does not occur. As with many financial
providers, many of the bank's systems are vendor-supplied and venders have been
requested to provide certification of Year 2000 readiness. Bank of Ashland has
received a report from its regulator giving assurance that the vendor providing
the core processing system is making satisfactory progress toward Year 2000
compliance. Bank of Ashland has developed a contingency plan for the resolution
of Year 2000 issues. Ashland and Bank of Ashland believes its plan will result
in Year 2000 compliance but because of significant reliance on third-party
vendors there is a certain risk exposure for Bank of Ashland. Management
believes that many of Bank of Ashland's existing computer systems and programs
may be eliminated and that Bank of Ashland would convert to Fifth Third's
systems.
45
<PAGE> 53
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, 1998. Financial data for all
periods have been restated to reflect the second quarter 1998 mergers with
CitFed Bancorp, Inc. and State Savings Company. Both mergers were accounted for
as poolings-of-interest.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1998(2) 1997 1996(1) 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income.................................... $2,018,677 $1,919,083 $1,772,410 $1,518,713 $1,195,401
Interest expense................................... 1,015,853 1,006,833 931,377 825,497 558,091
---------- ---------- ---------- ---------- ----------
Net interest income................................ 1,002,824 912,250 841,033 693,216 637,310
Provision for credit losses........................ 109,171 90,095 68,382 45,934 41,183
---------- ---------- ---------- ---------- ----------
Net interest income after provision for credit
losses........................................... 893,653 822,155 772,651 647,282 596,127
Other operating income............................. 636,194 501,769 418,907 345,391 284,614
Operating expenses................................. 803,577 630,508 621,654 499,564 465,723
---------- ---------- ---------- ---------- ----------
Income before income taxes......................... 726,270 693,416 569,904 493,109 415,018
Applicable income taxes............................ 250,142 232,558 187,560 162,662 139,393
---------- ---------- ---------- ---------- ----------
Net income......................................... $ 476,128 $ 460,858 $ 382,344 $ 330,447 $ 275,625
========== ========== ========== ========== ==========
COMMON SHARE DATA:
Earnings per share................................. $ 1.80 $ 1.76 $ 1.45 $ 1.31 $ 1.12
Diluted earnings per share......................... 1.76 1.73 1.42 1.27 1.08
Cash dividends declared per share.................. 0.71 .56(8/9) .48(8/9) .42(2/3) .35(5/9)
Book value at period end........................... 11.91 10.52 9.56 8.23 6.97
Average shares outstanding (000's)................. 265,338 262,338 263,523 251,863 246,722
Average diluted shares outstanding (000's)......... 270,674 266,681 269,444 260,867 255,581
</TABLE>
- ---------------
(1) Operating expenses for 1996 include the special Savings Association
Insurance Fund assessment of $37.9 million pretax ($24.6 million after tax
or $.09 per share). For comparability, excluding the impact of this
assessment, net income, earnings per share and diluted earnings per share
would have been $407.0 million, $1.54 and $1.51, respectively.
(2) Provision for credit losses and operating expenses for 1998 include $16.7
million and $89.7 million of merger-related charges (total $106.4 million or
$.28 per share). For comparability, excluding the impact of these
merger-related charges, net income, earnings per share and diluted earnings
per share would have been $551.7 million, $2.08 and $2.04, respectively.
46
<PAGE> 54
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998(2) 1997 1996(1) 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION AT PERIOD END:
Securities...................................... $8,420,638 $8,224,475 $7,826,797 $5,683,298 $4,925,105
Loans and leases................................ 17,779,023 17,312,943 16,034,523 14,813,197 12,992,774
Assets.......................................... 28,921,782 27,710,673 26,076,597 22,110,700 19,399,912
Deposits........................................ 18,780,355 19,019,896 18,161,327 16,090,989 13,931,299
Short-term borrowings........................... 3,693,927 3,650,931 3,581,173 2,064,095 2,703,054
Long-term debt and convertible subordinated
notes......................................... 2,288,151 1,508,683 1,199,101 1,364,438 665,791
Shareholders' equity............................ 3,178,522 2,762,836 2,561,335 2,102,738 1,727,115
RATIOS:
PROFITABILITY RATIOS:
Return on average assets........................ 1.93% 1.74% 1.64% 1.58% 1.54%
Return on average shareholders' equity.......... 18.7% 18.4% 17.4% 17.0% 16.9%
Net interest margin............................. 3.94% 3.84% 3.78% 3.67% 3.91%
Overhead ratio(3)............................... 42.3% 43.3% 45.0% 46.6% 49.2%
Other operating income to total income(4)....... 38.4% 35.2% 32.9% 32.9% 31.3%
Dividend payout................................. 40.3% 33.6% 34.8% 33.8% 32.3%
CAPITAL RATIOS:
Average shareholders' equity to average
assets........................................ 10.33% 9.48% 9.46% 9.31% 9.12%
Tier 1 risk-adjusted capital.................... 12.09% 11.19% 11.73% 11.43% 11.58%
Total risk-adjusted capital..................... 14.22% 13.54% 14.46% 14.69% 13.70%
Tier 1 leverage................................. 10.39% 9.50% 9.17% 9.46% 9.51%
RATIO OF EARNINGS TO FIXED CHARGES:(5)
Including deposit interest...................... 1.71x 1.68x 1.61x 1.59x 1.74x
Excluding deposit interest...................... 3.17x 3.37x 3.39x 3.22x 4.04x
CREDIT QUALITY RATIOS:
Reserve for credit losses to nonperforming
assets........................................ 517.04% 318.95% 279.94% 248.70% 345.11%
Reserve for credit losses to loans and leases
outstanding................................... 1.50% 1.45% 1.46% 1.51% 1.55%
Net charge-offs to average loans and leases
outstanding................................... .55% .45% .41% .23% .14%
Nonperforming assets to loans, leases and other
real estate owned............................. .29% .45% .52% .61% .45%
</TABLE>
- ---------------
(1) Operating expenses for 1996 exclude the impact of the special Savings
Association Insurance Fund assessment of $37.9 million pretax ($24.6 million
after tax or $.09 per share). Including the impact of this assessment,
return on average assets, return on average equity and the overhead ratio
were 1.55%, 16.3% and 47.9%, respectively.
(2) Provision for credit losses and operating expenses for 1998 exclude $16.7
million and $89.7 million of merger-related charges (total $106.4 million or
$.28 per share). For comparability, including the impact of these
merger-related charges, return on average assets, return on average equity
and the overhead ratio were 1.67%, 16.2% and 47.6%, respectively.
(3) Operating expenses divided by the sum of taxable equivalent net interest
income and other operating income.
(4) Other operating income excluding securities gains and losses as a percent of
net interest income and other operating income excluding securities gains
and losses.
(5) 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.
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<PAGE> 55
SELECTED HISTORICAL FINANCIAL DATA OF ASHLAND
The following tables set forth certain consolidated financial and other
data of Ashland at the dates and for the periods indicated. The information is
derived in part from and should be read in conjunction with Ashland's
consolidated financial statements and notes thereto included elsewhere in this
document.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Total interest income................... $12,599 $12,359 $12,046 $11,259 $ 9,984
Total interest expenses................. 5,185 5,127 4,953 4,901 3,839
------- ------- ------- ------- --------
Net interest income................... 7,414 7,232 7,093 6,358 6,145
Provision for loan losses............... 205 300 385 150 98
------- ------- ------- ------- --------
Net interest income after provision
for loan losses.................... 7,209 6,932 6,708 6,208 6,047
------- ------- ------- ------- --------
Fees and service charges................ 825 676 666 605 615
Trust Department income................. 422 351 341 326 277
Gain (loss) on sale of securities....... 22 56 133 24 25
Other noninterest income................ 185 165 508 218 234
------- ------- ------- ------- --------
Total noninterest income.............. 1,454 1,248 1,648 1,173 1,151
------- ------- ------- ------- --------
Noninterest expense..................... 4,809 4,383 4,243 3,979 5,510(1)
------- ------- ------- ------- --------
Income before income taxes............ 3,854 3,797 4,113 3,402 1,688
Income tax expense...................... 853 835 1,053 830 167
------- ------- ------- ------- --------
Net income............................ $ 3,001 $ 2,962 $ 3,060 $ 2,572 $ 1,521
======= ======= ======= ======= ========
COMMON SHARE DATA:
Basic earnings per share(2)............. $ 23.89 $ 23.53 $ 24.15 $ 19.92 $ 11.69
Cash dividends declared per share....... 7.20 6.75 6.15 5.55 5.10
Book value at period end................ 202.87 185.27 168.15 153.87 131.69
Average shares outstanding.............. 125,600 125,893 126,716 129,130 130,100
</TABLE>
- ---------------
(1) Includes $1.5 million in indemnity payments made to certain customers' trust
accounts to offset losses on securities.
(2) Ashland had no potentially dilutive shares outstanding for any of the
periods presented.
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<PAGE> 56
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION AT PERIOD END:
Total assets........................ $171,096 $165,767 $164,347 $158,542 $146,552
Loans receivable, net............... 102,807 102,132 101,379 92,155 87,934
Investment Securities:
Held to maturity.................. 24,224 29,868 39,203 43,980 39,351
Available for sale................ 30,893 20,723 6,679 2,986 --
Mortgage-backed securities:
Held to maturity.................. 816 1,027 1,158 1,272 1,365
Available for sale................ -- -- -- 3,673 2,072
Federal funds sold.................. 2,850 1,750 5,950 3,875 5,150
Federal home loan bank stock........ 667 621 578 473 442
Deposits............................ 141,393 136,916 137,802 130,285 121,657
Borrowings:
Treasury tax and loan note........ 662 1,376 1,305 1,156 5,335
Federal home loan bank advances... 591 615 938 1,260 1,581
Securities sold under repurchase
agreements..................... 1,964 2,601 1,883 5,208 197
Stockholders' equity................ 25,477 23,276 21,233 19,510 17,106
RATIOS:
PROFITABILITY RATIOS:
Return on assets (ratio of net
income to average total assets)... 1.80% 1.84% 1.97% 1.76% 1.09%
Return on equity (ratio of net
income to average total equity)... 12.26% 13.26% 14.97% 13.94% 8.63%
Interest rate spread (average during
period)........................... 4.30% 4.38% 4.53% 4.31% 4.49%
Net interest margin(1).............. 4.69% 4.75% 4.85% 4.62% 4.71%
Ratio of noninterest expense to
average total assets.............. 2.88% 2.73% 2.73% 2.72% 3.95%
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 111.98% 110.94% 109.39% 108.65% 107.75%
Dividend payout ratio (ratio of
dividends declared per share to
net income per share)............. 30.14% 28.69% 25.47% 27.86% 43.63%
Ratio of non-interest income to
total income...................... 10.35% 9.18% 12.03% 9.44% 10.34%
Efficiency ratio (noninterest
expense divided by the sum of net
interest income and noninterest
income)........................... 54.23% 51.69% 48.54% 52.83% 75.52%
CREDIT QUALITY RATIOS:
Non-performing assets to total loans
and other real estate owned....... 0.34% 0.78% 0.62% 0.63% 1.26%
Allowance for loan losses to non-
performing assets................. 412.71% 180.02% 223.08% 216 .41% 104.36%
Allowance for loan losses to loans
receivable........................ 1.40% 1.40% 1.35% 1.38% 1.32%
Net charge-offs to average loans
outstanding....................... 0.21% 0.25% 0.26% 0.05% 0.04%
CAPITAL RATIOS:
Average stockholders' equity to
average assets.................... 14.68% 13.90% 13.16% 12.62% 12.63%
Tier 1 risk-adjusted capital........ 19.90% 18.58% 17.80% 16.90% 16.05%
Total risk-adjusted capital......... 21.15% 19.83% 19.10% 18.20% 17.30%
Tier 1 leverage capital............. 13.33% 12.28% 11.83% 11.10% 10.65%
</TABLE>
- ---------------
(1) Net interest income divided by average interest earning assets.
49
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION OF ASHLAND
FORWARD-LOOKING STATEMENTS
Ashland 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 context relating to present or future
trends, or factors affecting the banking industry, and specifically the
operations, markets, and products of Ashland. 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 the market areas in which Ashland 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.
INTRODUCTION
Management's discussion and analysis is intended to assist in understanding
the financial condition and results of operations of Ashland. The information
contained in this section should be read in conjunction with the financial
statements and accompanying notes contained elsewhere herein. Since Ashland does
not engage in any significant activities other than owning the stock of Bank of
Ashland, the following discussion relates primarily to the activities of Bank of
Ashland.
The principal business of Bank of Ashland has historically consisted of
attracting deposits from the general public and making loans secured by real
estate and loans for commercial and consumer purposes. Ashland's earnings are
primarily dependent on net interest income, the difference between interest
income and interest expense. Interest income is a function of the balance of
loans and investments outstanding during the period and the yield earned on such
assets. Interest expense is a function of the balance of deposits and
borrowings, outstanding during the period, and the rates paid on such deposits
and borrowings. Bank of Ashland's earnings are also affected by provisions for
loan losses, service charges and fee income, operating expenses and income
taxes. Operating expenses consist primarily of employee compensation and
benefits, occupancy and equipment expense, data processing, franchise taxes,
advertising and other general and administrative expenses.
Ashland is significantly affected by prevailing economic conditions, as
well as federal regulations concerning monetary and fiscal policies of financial
institutions. Deposit balances are influenced by a number of factors, including
interest rates paid on competing personal investments, and the level of personal
income and savings within Bank of Ashland's market area. In addition, growth of
deposit balances is influenced by the perceptions of customers regarding the
stability of the financial services industry. Lending activities are influenced
by the demand for housing lenders, economic conditions in Bank of Ashland's
market area, and competition from other lending institutions. The primary
sources of funds for lending activities include deposits, loan payments,
borrowings, and funds provided from operations.
FINANCIAL CONDITION
COMPARISON OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets increased $5.3 million or 3.2% from $165.8 million at December
31, 1997 to $171.1 million at December 31, 1998. Net loans increased $675,000 or
0.7% from $102.1 million at December 31, 1997 to $102.8 million at December 31,
1998, due primarily to increased origination of commercial business, consumer
construction, multifamily and commercial real estate loans as a result of
management's effort to profitably price its loan products and increase its loan
portfolio. Federal funds sold increased $1.1 million due to management's use of
funds from an increase in deposits to purchase such assets.
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<PAGE> 58
Total deposits increased $4.5 million or 3.3% from $136.9 million at
December 31, 1997 to $141.4 million at December 31, 1998. Borrowings decreased
$1.4 million or 30.4% from $4.6 million at December 31, 1997 to $3.2 million at
December 31, 1998. The decrease was primarily due to a decrease in treasury tax
and loan notes of $714,000, and a reduction in securities sold under repurchase
agreements of $637,000.
The allowance for loan losses decreased $8,000 from December 31, 1997 to
December 31, 1998 due to net charge-offs during the year ended December 31,
1998. The level of the allowance for loan losses at December 31, 1998 reflects
management's ongoing analysis of the loan portfolio and loan growth.
Stockholders' equity increased $2.2 million from $23.3 million at December
31, 1997 to $25.5 million at December 31, 1998. Such increase was due to net
earnings in excess of dividends paid.
COMPARISON OF DECEMBER 31, 1997 AND 1996
Total assets increased $1.5 million or 0.9% from $164.3 million at December
31, 1996 to $165.8 million at December 31, 1997. Investment securities increased
$4.7 million or 10.2% from $45.9 million at December 31, 1996 to $50.6 million
at December 31, 1997. The increase in such securities was funded with federal
funds which decreased $4.2 million. Loans increased $718,000 or 0.7% from $101.4
million at December 31, 1996 to $102.1 million at December 31, 1997.
Total deposits decreased $886,000 or 0.6% from $137.8 million at December
31, 1996 to $136.9 million at December 31, 1997. The decrease was a result of
management's policy of conservatively pricing retail deposits. Total borrowings
increased $466,000 from $4.1 million at December 31, 1996 to $4.6 million at
December 31, 1997, primarily as a result of an increase in securities sold under
repurchase agreements. The funds generated from increased borrowings, along with
the funds generated from the decrease in other short-term investments and cash
and cash equivalents along with funds provided from operations were used to fund
the increase in loans and the outflow in deposits.
The allowance for loan losses increased $48,000 or 3.4% from $1.4 million
at December 31, 1996 to $1.5 million at December 31, 1997. The level of the
allowance for loan losses at December 31, 1997 reflects management's ongoing
analysis of the loan portfolio and loan growth.
Stockholder's equity increased $2.1 million from $21.2 million at December
31, 1996 to $23.3 million at December 31, 1997, due to an increase in net
earnings in excess of dividends paid.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
GENERAL. Net income increased $39,000 or 1.3% to $3.0 million for the year
ended December 31, 1998. This increase was primarily due to an increase in net
interest income of $182,000, an increase in non-interest income of $206,000, and
a decrease in loan loss provision of $95,000, partially offset by an increase in
non-interest expense of $426,000.
INTEREST INCOME. Interest income increased $240,000 or 1.9% from $12.4
million for the year ended December 31, 1997 to $12.6 million for the year ended
December 31, 1998, primarily due to an increase in the average balance of
interest earning assets of $5.8 million from $152.2 million for the year ended
December 31, 1997 to $158.0 million for the year ended December 31, 1998. This
increase was primarily due to the purchase of investment securities and other
temporary investments. The average yield on interest earning assets decreased
from 8.12% for the year ended December 31, 1997 to 7.97% for the year ended
December 31, 1998, primarily due to a general decrease in market interest rates.
INTEREST EXPENSE. Interest expense increased $58,000 or 1.1% from $5.1
million for the year ended December 31, 1997 to $5.2 million for the year ended
December 31, 1998. Average interest bearing deposits increased $5.7 million for
the year ended December 31, 1998 compared to the year ended December 31,
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<PAGE> 59
1997, primarily as a result of management's marketing efforts and the
introduction of new retail deposit products. The average balance of other
borrowings decreased $1.7 million for the year ended December 31, 1998 compared
to the year ended December 31, 1997, primarily due to management's decision to
reduce short-term borrowings during periods of reduced loan demand. The average
cost of interest bearing liabilities decreased to 3.67% for the year ended
December 31, 1998 from 3.74% for the year ended December 31, 1997.
PROVISION FOR LOAN LOSSES. Management determines the allowance for loan
losses based on the quarterly analysis which takes into consideration knowledge
of the loan portfolio, size and composition of the portfolio, and current
delinquency information, as well as past loan loss experience. The analysis also
considers such factors as the current economic and regulatory environment. In
addition, management reviews individual problem credits to determine the need
for specific reserves. Management maintains the allowance for loan losses at a
level deemed adequate based on the quarterly analysis, and management will
continue to make a provision for loan losses based upon its continued analysis
of the loan portfolio. Future additions to the allowance for loan losses are
dependent upon the performance of the loan portfolio, the economy, changes in
real estate values, interest rates, and inflation. The provision for loan losses
decreased $95,000 or 31.7% from $300,000 for the year ended December 31, 1997 to
$205,000 for the year ended December 31, 1998. The decreased provision was a
result of management's continuing analysis of the loan loss allowance during
such periods.
NON-INTEREST INCOME. Non-interest income increased $206,000 or 16.5% from
$1.2 million for the year ended December 31, 1997 to $1.4 million for the year
ended December 31, 1998, primarily as a result of a $149,000 increase in fees
and service charges, a $71,000 increase in trust department income, and a
$20,000 increase in miscellaneous income, partially offset with a $34,000
decrease in security gains.
NON-INTEREST EXPENSE. Non-interest expense increased $426,000 or 9.7% from
$4.4 million for the year ended December 31, 1997 to $4.8 million for the year
ended December 31, 1998, primarily as a result of a $211,000 increase in
salaries and benefits, a $61,000 increase in software expense, and a general
increase in other operating expenses mainly due to higher operating costs.
Salaries and benefits increased primarily as a result of normal merit and cost
of living increases.
INCOME TAXES. Income taxes increased $18,000 or 2.2% from $835,000 for the
year ended December 31, 1997 to $853,000 for the year ended December 31, 1998
primarily as a result of a $57,000 increase in income before income taxes for
the year ended December 31, 1998 compared to the year ended December 31, 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL. Net income decreased $98,000 or 3.2% from $3.1 million for the
year ended December 31, 1996 to $3.0 million for the year ended December 31,
1997. This decrease was due primarily to a decrease in non-interest income of
$400,000, and an increase in non-interest expense of $140,000, partially offset
with an increase in net interest income of $139,000, a decrease in provision for
loan losses and income taxes of $85,000 and $218,000, respectively.
INTEREST INCOME. Interest income increased $313,000 or 2.6% from $12.0
million for the year ended December 31, 1996 to $12.4 million for the year ended
December 31, 1997, primarily due to an increase in the average balance of
interest earning assets of $6 million from $146.1 million for the year ended
December 31, 1996 to $152.1 million for the year ended December 31, 1997. The
increase in the average balance of interest earning assets was due to an
increase in the average balance of loans as a result of increased loan demand
within Ashland's market area. The average yield on interest earning assets
decreased 0.12% from 8.24% for the year ended December 31, 1996 to 8.12% for the
year ended December 31, 1997, primarily due to lower yields on loans and
investments.
INTEREST EXPENSE. Interest expense increased $174,000 or 3.5% from $5
million for the year ended December 31, 1996 to $5.1 million for the year ended
December 31, 1997, primarily as a result of a $3.6 million increase in the
average balance of interest bearing liabilities from $133.6 million for the year
ended
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<PAGE> 60
December 31, 1996 to $137.2 million for the year ended December 31, 1997. The
average balance of deposits increased $3.1 million as a result of Ashland's
marketing of new deposit products. The average balance of Federal Home Loan Bank
advances decreased $321,000 due to regularly scheduled principal payments. Other
short term borrowings increased $760,000 primarily as a result of an increase in
the average balance of securities sold under repurchase agreements of $863,000.
The average rate paid on interest bearing liabilities increased slightly from
3.71% for the year ended December 31, 1996 to 3.74% for the year ended December
31, 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $85,000
from $385,000 for the year ended December 31, 1996 to $300,000 for the year
ended December 31, 1997. At December 31, 1997, the ratio of the allowance for
loan losses to total loans was 1.40% compared to 1.35% at December 31, 1996.
Management maintains the allowance for loan losses at a level deemed adequate
based on their quarterly analysis, and management will continue to make a
provision for loan losses based on their continuing analysis of the loan
portfolio.
NON-INTEREST INCOME. Non-interest income decreased $400,000 or 24.3% from
$1.6 million for the year ended December 31, 1996 to $1.2 million for the year
ended December 31, 1997, primarily due to a decrease in realized gains on the
sale of foreclosed real estate of $329,000, and a decrease of $77,000 in
realized securities gains partially offset with a $10,000 increase in service
charges and fees, and an $11,000 increase in trust department income. Other
non-interest income decreased $14,000 for the year ended December 31, 1997
compared to the year ended December 31, 1996.
NON-INTEREST EXPENSE. Non-interest expense increased $140,000 or 3.3% from
$4.2 million for the year ended December 31, 1996 to $4.4 million for the year
ended December 31, 1997, due primarily to increases in salaries of $206,000, and
FDIC assessments of $8,000, partially offset with decreases of $2,000 for
employee benefits, $22,000 in occupancy expense, $5,000 in equipment expense,
$26,000 in franchise taxes, and $18,000 in other operating expenses. Salaries
increased as a result of normal merit and cost of living increases and the
addition of a senior lending officer. Other expenses decreased as a result of
management's continued effort to manage controllable expenses.
INCOME TAXES. Income taxes decreased $218,000 or 26.1% from $1.1 million
for the year ended December 31, 1996 to $835,000 for the year ended December 31,
1997, primarily due to a decrease in income before income taxes of $316,000, and
an increase in tax exempt income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of Ashland to generate sufficient cash to
fund current loan demand, meet savings deposits withdrawals, and pay operating
expenses. While funds are available to meet short-term liquidity needs from the
Federal Home Loan Bank and access to national federal funds markets, Ashland's
primary source of liquidity is cash and cash due from banks and federal funds
sold. Additional sources of liquidity are securities available for sale,
securities maturing within one year, and scheduled maturities and repayments of
loans. While maturities and scheduled amortization of loans are a predictable
source of funds, deposits flows and mortgage prepayments are greatly influenced
by market interest rates, economic conditions, and competition. Ashland attempts
to price its deposits to meet asset/liability objectives consistent with local
market conditions.
Ashland's most liquid assets are cash, cash due from banks and federal
funds. The level of these assets are dependent on Ashland's operating, financing
and investing activities. At December 31, 1998, 1997 and 1996, cash, cash due
from banks, and federal funds sold totaled $7.7 million, $7.5 million, and $11.6
million, respectively.
Ashland's primary sources of funds are deposits, borrowings, and principal
and interest payments on loans. While the scheduled amortization for loans are
predictable sources of funds, deposits flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions, and
competition.
Operating activities provided positive cash flows for the years ended
December 31, 1998 and 1997 and 1996.
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<PAGE> 61
The primary investing activities of Ashland are originating loans and, to a
lesser extent, purchasing mortgage backed and investment securities. During the
years ended December 31, 1998, 1997 and 1996, mortgage loan originations, net of
payments received, totaled $1.0 million, $1.1 million, and $9.6 million,
respectively. Purchases of mortgage backed and investment securities totaled
$30.4 million, $16.3 million and $9.5 million for the years ended December 31,
1998, 1997 and 1996, respectively. Sales, maturities and calls of mortgage
backed and investment securities totaled $26.4 million, $11.9 million and $13.9
million for each of the years ended December 31, 1998, 1997 and 1996,
respectively.
The primary financing activities of Ashland generally are deposits, and to
a lesser extent, borrowings. For the years ended December 31, 1998 and 1996,
deposits increased $4.5 million and $7.5 million, respectively. During the year
ended December 31, 1997, Ashland experienced a decrease in deposits of $886,000.
The decrease in deposits was funded primarily with the proceeds from the sales,
calls and maturities of mortgage backed and investment securities. During the
years ended December 31, 1998 and 1996, repayments exceeded borrowings by $1.3
million and $3.5 million, respectively. During the year ended December 31, 1997,
proceeds from borrowings exceeded repayments by $467,000.
At December 31, 1998, Ashland had outstanding commitments to originate
approximately $9.2 million in loans, including loans with an aggregate balance
of $680,000 at a fixed rate of interest. These loans were to be secured by
properties and other collateral within Ashland's market area. Ashland
anticipates that it will have sufficient funds available to meet its current
commitments.
At December 31, 1998, Ashland exceeded all of its capital requirements.
IMPACT OF 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
relative to Ashland is unrealized gains and losses on securities available for
sale. This Statement, adopted by Ashland in 1998, results in additional
financial statement disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 131 significantly changes the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 did not have a material impact
on the Corporation's consolidated financial statements.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
About Pensions and Other Post Retirement Benefits" was issued in February, 1998
and is effective for fiscal years beginning after December 15, 1997. This
Statement revises employer disclosures about pension and other post retirement
benefit plans. It does not change the measurement or recognition of those plans.
It standardizes the disclosure requirement for pensions and other post
retirement benefits to the extent practicable, requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminate certain disclosures that are no
longer as useful as they were when FASB No. 87, No. 88, and No. 106 were issued.
This Statement suggests combined formats for presentation of pension and other
post retirement benefit disclosures. The Statement also permits reduced
disclosure for nonpublic entities. The adoption of SFAS No. 132 did not have a
material effect on the consolidated financial statements of Ashland.
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<PAGE> 62
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June, 1998 and is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as: (1) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows
of a forecast at transaction, or (3) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available for sale security, or a foreign currency denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and
resulting designation.
Initial application of this Statement should be as of the beginning of an
entity's fiscal quarter, on that date, hedging relationships must be designated
anew and documented pursuant to the provisions of this Statement. Earlier
application of all of the provisions of this Statement is encouraged, but it is
permitted only as of the beginning of any fiscal quarter that begins after
issuance of this Statement. Management adopted SFAS No. 133 as permitted, on
July 1, 1998 without a material impact on Ashland's consolidated financial
position or results of operations.
CERTAIN BENEFICIAL OWNERS OF ASHLAND COMMON STOCK
The following table sets forth certain information in respect of the only
person known to Ashland to own beneficially more than 5% of the Ashland common
stock as of December 31, 1998, other than directors of Ashland, whose ownership
is reported under "Ashland Management."
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
OWNERSHIP
--------------------- PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SOLE SHARED CLASS
------------------------------------ ----- ------ ----------------
<S> <C> <C> <C>
Joseph L. Leach,................................. 6,717 -- 5.35%
1 River Street
Gallopolis, Ohio 45631
</TABLE>
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<PAGE> 63
ASHLAND MANAGEMENT
The following table presents the names and ages of the directors and
certain executive officers of Ashland, their current positions and offices held
with Ashland, their business experience during the past five years and certain
other information, together with their beneficial ownership of Ashland common
stock at December 31, 1998.
<TABLE>
<CAPTION>
SHARES OF ASHLAND COMMON STOCK
BENEFICIALLY OWNED AT
DECEMBER 31, 1998
--------------------------------
NUMBER OF SHARES OWNED
--------------------------------
DIRECTOR OF ASHLAND PERCENT OF
DIRECTORS AND EXECUTIVE OFFICERS SINCE SOLE(1) SHARED CLASS
-------------------------------- ------------------- ------- ------ ----------
<S> <C> <C> <C> <C>
Paul W. Grumbles, age 75,.................... 1966 10,464 -- 8.33%
Chairman of Ashland since
March, 1985 and Chairman of
Bank of Ashland since
December, 1981. Formerly
President of Bank of Ashland
from May, 1966
William A. Stinnett, III age 52,............. 1979 5,000 -- 3.98
President and CEO of Ashland and
Bank of Ashland since December,
1988. Formerly President of Ashland
and Bank of Ashland since December,
1981. Executive Vice President of
Bank of Ashland from December, 1979
to December, 1981.
Thomas L. Brunette........................... 1992 745 -- 0.59
Donald K. Cline.............................. 1984 340 -- 0.27
Cecil Fannin, III............................ 1997 160 -- 0.12
W. R. Fosson................................. 1996 5,200 -- 4.14
Donald M. Hall............................... 1986 452 -- 0.35
John I. Hanbury.............................. 1992 6,236 -- 4.96
Charles C. Hanebuth.......................... 1991 12 -- --
Saul Kaplan.................................. 1966 841 -- 0.67
W. Bryan Rogers, III......................... 1998 6 -- --
William R. Sparks............................ 1972 220 1,280 1.19
Richard T. Stai.............................. 1989 15 -- --
Erland P. Stevens, Jr........................ 1985 3,302 -- 2.62
Howard Van Antwerp, III...................... 1966 4,630 -- 3.68
All Directors and Executive Officers as a
group
(15 persons)............................... 37,623 1,280 0.31
</TABLE>
- ---------------
(1) Certain Ashland directors and executive officers disclaim beneficial
ownership of the shares included in the table, as follows:
- Mr. Grumbles -- 602 shares held by his wife;
- Mr. Stinnett -- 200 shares held by his children;
- Mr. Fannin -- 60 shares held by a corporation of which he is an officer;
- Mr. Hall -- 252 shares held by his wife;
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<PAGE> 64
- Mr. Hanbury -- 256 shares held by his wife and 5,970 shares held in an
irrevocable trust for the benefit of his wife;
- Mr. Stevens -- 1,701 shares held by his wife and 1,231 shares held by Bank
of Ashland in an irrevocable trust; and
- Mr. Van Antwerp -- 210 shares held by his wife and 800 shares held by Bank
of Ashland in a trust.
The following table presents certain information regarding the compensation
received by Paul W. Grumbles and William A. Stinnett, III, Chairman and
President and Chief Executive Officer, respectively, of Ashland. This
information is being presented because Mr. Grumbles and Mr. Stinnett are
expected to be appointed to positions with Fifth Third Bank, Ohio Valley.
Information regarding compensation of the five most highly compensated executive
officers of Fifth Third is incorporated herein by reference to Fifth Third's
Proxy Statement dated February 9, 1999. See "Where You Can Find More
Information."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) COMPENSATION(3)(4)
- --------------------------- ---- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Paul W. Grumbles, Chairman................. 1998 90,071 -- 13,314
William A. Stinnett, III,
President & CEO.......................... 1998 213,843 40,000 38,200
</TABLE>
- ---------------
(1) Does not include amounts attributable to other miscellaneous benefits
received by executive officers. The cost to Ashland of providing such
benefits to each of Mr. Grumbles and Mr. Stinnett was less than 10% of his
cash compensation.
(2) As to Mr. Stinnett, the bonus is a withdrawal under a stock appreciation
rights agreement that permits certain withdrawals annually until the
termination of the plan.
(3) As to each of Mr. Grumbles and Mr. Stinnett, includes contributions by Bank
of Ashland of $11,919 and $20,995 respectively, under the Bank of Ashland
Employees Profit Sharing Plan, a retirement plan qualified under Section
401(a) of the Internal Revenue Code. Under the provisions of the plan, a
participant is eligible to receive an employer profit sharing contribution
based on a percentage of his or her compensation received from Bank of
Ashland for the calendar year.
(4) As to Mr. Stinnett, includes contributions of $15,043 by Bank of Ashland,
under a supplemental employee retirement program.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK AND COMPARATIVE RIGHTS OF SHAREHOLDERS
Fifth Third is a corporation organized under the laws of the State of Ohio.
Ashland is a corporation organized under the laws of the Commonwealth of
Kentucky.
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 has proposed to amend its articles of incorporation to increase the number
of authorized shares of common stock to 500,000,000. Such proposal will be voted
on by Fifth Third's shareholders at its 1999 annual meeting on March 16, 1999.
As of February 1, 1999, Fifth Third had outstanding 267,147,048 shares of Fifth
Third common stock and no shares of Fifth Third preferred stock. Pursuant to
Article Fourth of Fifth Third's articles of incorporation, as amended, the board
of directors of Fifth Third may, without further action of the shareholders, (1)
divide into one or more new series the authorized shares of Fifth Third
preferred stock which have not previously been designated, (2) fix the number of
shares constituting any such new series, and (3) 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.
Ashland is authorized to issue 200,000 Ashland common stock. As of the
record date, Ashland had outstanding 125,584 shares of Ashland common stock.
Set forth below is a description of Fifth Third common stock and Ashland
common stock. This description and analysis are brief summaries of relevant
provisions of the articles of incorporation, as amended, and code of regulations
of Fifth Third and of the amended articles of incorporation and bylaws of
Ashland and are qualified in their entirety by reference to such documents.
VOTING RIGHTS
Holders of both Fifth Third common stock and Ashland common stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders.
The code of regulations of Fifth Third provides for the division of its
boards of directors into three classes of approximately equal size. Directors of
Fifth Third's 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 board of Fifth Third may
make it more difficult for a shareholder to acquire immediate control of Fifth
Third 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.
Kentucky law provides that each director shall hold office until the next
annual meeting following his or her election and until his or her successor is
elected and qualifies or until there is a decrease in the number of directors.
Fifth Third's 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 (1)
written notice is given by any shareholder of such corporation to the president,
a vice president or the secretary of such corporation, not less than forty-
eight hours before the time fixed for holding the meeting at which directors are
to be elected, indicating that
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<PAGE> 66
such shareholder desires that voting for the election of directors be
cumulative, and (2) announcement of the giving of such notice is made upon the
convening of the meeting by the chairman or the secretary or by or on behalf of
the shareholder giving such notice. In such event, each shareholder will be
entitled to cumulate such voting power as he or she possesses and to give one
nominee as many votes as the number of directors to be elected multiplied by the
number of his or her shares, or to distribute such votes on the same principle
among two or more candidates, as each shareholder sees fit. The availability of
cumulative voting rights enhances the ability of minority shareholders to obtain
representation on the board of directors.
Pursuant to Kentucky law and Ashland's bylaws, the shareholders of Ashland
also have a right to vote cumulatively in the election of directors.
DIVIDENDS
Holders of Fifth Third common stock and Ashland common stock are each
entitled to dividends as and when declared by the respective boards of directors
of each institution out of funds legally available for the payment of dividends.
Fifth Third and Ashland 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 Ashland 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.
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 and Kentucky,
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 Ashland 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 Ashland, and their respective affiliates, may pay.
PREEMPTIVE RIGHTS
Neither shareholders of Fifth Third nor shareholders of Ashland have
preemptive rights.
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<PAGE> 67
RIGHTS UPON LIQUIDATION
In the event of any liquidation, dissolution or winding up of Ashland, the
holders of Ashland common stock would be entitled to receive, after payment or
provision for payment of all debts and liabilities of Ashland (including the
payment of all fees, taxes and other expenses incidental thereto), the remaining
assets of Ashland available for distribution. With respect to Fifth Third, Fifth
Third's shareholders have identical rights on liquidation, dissolution or
winding up, subject to identical considerations in the event of any issuance of
Fifth Third preferred stock.
INDEMNIFICATION AND PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Fifth Third's code of regulations provides for the indemnification of each
director and officer of the corporation, to the fullest extent permitted by Ohio
law, against all expenses and liabilities reasonably incurred by or imposed on
him or her in connection with any proceeding or threatened proceeding in which
he or she may become involved by reason of his or her being or having been a
director or officer. Ashland's bylaws provides for the indemnification of each
director and officer of the corporation if such director or officer acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of Ashland, and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his or her conduct was unlawful.
Fifth Third and Ashland 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 Ashland for the indemnification of its officers and directors.
SHAREHOLDERS' MEETINGS; QUORUM
Special meetings of Fifth Third's shareholders may be called at any time by
the board of directors or by the shareholders of Fifth Third upon the written
application of the holders of at least 25% of all Fifth Third capital stock
entitled to vote on the matters to be considered at the meeting. Such
applications must set forth the purpose or purposes of the meeting. Special
meetings of Ashland's shareholders may be called at any time by a majority of
the members of the board of directors or by three or more shareholders of
Ashland owning, in the aggregate, at least 25% of all Ashland common stock
outstanding and entitled to vote on the matters to be considered at 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 and
under the bylaws of Ashland.
SUBSCRIPTION, CONVERSION, REDEMPTION RIGHTS; STOCK NONASSESSABLE
Neither Fifth Third common stock nor Ashland common stock has subscription
or conversion rights, and there are no mandatory redemption provisions
applicable thereto. Shares of Fifth Third common stock issued to shareholders of
Ashland 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 provisions which would also make
more difficult a change in control of Fifth Third or discourage a tender offer
or other plan to restructure Fifth Third. 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> 68
OHIO CONTROL SHARE ACQUISITION ACT. Section 1701.831 of the Ohio Revised
Code, the Ohio Control Share Acquisition 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 Ohio Control Share Acquisition Act. A
"control share acquisition" is defined under the Ohio Control Share Acquisition
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.
The Ohio Control Share Acquisition 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.
The Ohio Control Share Acquisition 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. In order to comply with the Ohio
Control Share Acquisition Act, the acquiring person may only acquire the shares
of the Ohio issuing public corporation upon the affirmative vote of (1) a
majority of the voting power of the shares of the Ohio issuing public
corporation that is represented in person or by proxy at the special meeting,
and (2) a majority of the voting power of the shares of the Ohio issuing public
corporation that is represented in person or by proxy at the special meeting
excluding those shares of the Ohio issuing public corporation deemed to be
"interested shares" for purposes of the Ohio Control Share Acquisition Act.
"Interested shares" are defined under the Ohio Control Share Acquisition
Act to mean shares in respect of which the voting power is controlled by any of
the following persons: (1) an acquiring person; (2) any officer of the Ohio
issuing public corporation; and (3) any employee who is also a director of the
Ohio issuing public corporation. "Interested shares" also include shares of the
Ohio issuing public corporation that are acquired by any person after the date
of the first public disclosure of the proposed merger and the date of the
special meeting, if either (a) the aggregate consideration paid by such person,
and any person acting in concert with him, for such shares exceeds $250,000, or
(b) 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 shares of
the Ohio issuing public corporation.
OHIO MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
prohibits an issuing public corporation from engaging in certain transactions
with an interested shareholder for a period of three years following the date on
which the person becomes an interested shareholder unless, prior to such date,
the directors of the issuing public corporation approve either the 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. 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.
The transactions restricted by Chapter 1704 include:
- 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; and
- 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.
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Chapter 1704 also applies to 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 transaction restricted by Chapter
1704 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 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 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 and provides such information to the target
company and the offerees within Ohio. The Ohio Division of Securities may
suspend the continuation of the control bid if the Ohio Division of Securities
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, the provision does not apply to the merger.
EFFECT OF GOVERNMENTAL POLICIES
The earnings of both Ashland 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
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 Ashland 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. 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 and banks, Fifth Third, Ashland and each of their
respective subsidiaries are also governed by the corporate law of their state of
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incorporation to the extent such law does not conflict with the laws
specifically governing bank holding companies and banks.
HOLDING COMPANY REGULATION
BANK HOLDING COMPANIES IN GENERAL. As bank holding companies, Fifth Third
and Ashland are registered with and subject to regulation by the Federal Reserve
Board. A bank holding company is required to file with the Federal Reserve Board
an annual report and such additional information as the Federal Reserve Board
may require pursuant to the Bank Holding Company Act.
The Federal Reserve Board also may make examinations of a holding company
and each of its subsidiaries. The Bank Holding Company Act requires each bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire substantially all of the assets of any bank, or before it may
acquire ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control directly or indirectly, more than 5% of the
voting shares of such bank.
The Bank Holding Company Act also restricts the types of businesses and
operations in which a bank holding company and its subsidiaries (other than bank
subsidiaries) may engage. Generally, permissible activities are limited to
banking and activities found by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto.
CAPITAL REQUIREMENTS
The Federal Reserve Board, the Office of the Comptroller of the Currency
and the FDIC maintain guidelines to implement risk-based capital requirements
for state member banks and bank holding companies. The guidelines provide for a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations, takes
off-balance sheet exposures into explicit account in assessing capital adequacy
and minimizes disincentives to holding liquid, low-risk assets.
Under the guidelines, banking organizations are required to have capital
equivalent to 8 percent of assets, weighted by risk. Banking organizations must
have at least four percent Tier 1 capital, which consists of core capital
elements including common shareholders' equity, retained earnings and perpetual
preferred stock, to risk weighted assets. The other half of required capital
(Tier 2) can include, among other supplementary capital elements, limited-life
preferred stock and subordinated debt and loan loss reserves up to certain
limits.
Under Federal Reserve Board policy, a holding company is expected to act as
a source of financial strength to each subsidiary bank and to commit resources
to support each of its subsidiaries. This support may be required at times when,
absent such Board policy, the holding company may not find itself able to
provide it.
Fifth Third and each of its subsidiary banks are in compliance with both
the current leverage ratios and the final risk-based capital standards. As of
December 31, 1998, Fifth Third had a leverage ratio of 10.39%, its Tier 1
risk-based capital ratio was 12.09% and its total risk-based capital ratio was
14.22%.
ASHLAND AND BANK OF ASHLAND ARE IN COMPLIANCE WITH BOTH THE CURRENT
LEVERAGE RATIOS AND THE FINAL RISK-BASED CAPITAL STANDARDS. AS OF DECEMBER 31,
1998, ASHLAND HAD A LEVERAGE RATIO OF 13.33%, ITS TIER 1 RISK-BASED CAPITAL
RATIO WAS 19.90% AND ITS TOTAL RISK-BASED CAPITAL RATIO WAS 21.15%.
REGULATION OF BANKS
The operations of the subsidiary banks of Fifth Third and Bank of Ashland
are subject to requirements and restrictions under federal and state law,
including requirements to maintain reserves against deposits, restrictions on
the types and amounts of loans that may be granted and the interest that may be
charged thereon, and limitations on the types of investments that may be made
and the types of services which may be offered. Various consumer laws and
regulations also affect the operations of these banking subsidiaries.
National banks are subject to the supervision of and are regularly examined
by the Comptroller of the Currency. In addition, national banks may be members
of the Federal Reserve System and their deposits are
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insured by the FDIC and, as such, may be subject to regulation and examination
by each agency. Federal Savings Banks are subject to supervision and examination
by the Office of Thrift Supervision. 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, in the case of banks chartered in Kentucky, by the
Kentucky Department of Financial Institutions, in the case of banks chartered in
Indiana, by the Indiana Department of Financial Institutions, and in the case of
banks chartered in Florida, by the Florida Department of Banking and Finance.
LEGAL MATTERS
Certain legal matters will be passed upon for Ashland by Stites & Harbison,
Lexington, Kentucky. 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 Ashland 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.
Graydon, Head & Ritchey, Cincinnati, Ohio, will render its opinion to Ashland
and its shareholders and Fifth Third with respect to certain federal income tax
consequences of the merger.
EXPERTS
The consolidated financial statements incorporated in this document by
reference from Fifth Third Bancorp's Annual Report on Form 10-K for the year
ended December 31, 1998 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 Ashland for the years ended
December 31, 1998 and 1997 and the consolidated statements of income,
shareholders' equity and cash flows for each of the three years period ended
December 31, 1998, included in this document have been audited by Smith,
Goolsby, Artis & Reams, P.S.C., 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.
WHERE YOU CAN FIND MORE INFORMATION
Fifth Third files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy reports, proxy
statements and other information filed by Fifth Third at the SEC's public
reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade
Center, 13th Floor, New York, New York 10048; or Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the
SEC at 1-800-SEC-0330 for further information about the public reference rooms.
Fifth Third's reports, proxy statements and other information are also available
from commercial document retrieval services and at the SEC's website located at
http://www.sec.gov.
Fifth Third has filed a registration statement to register with the SEC the
shares of Fifth Third common stock to be issued to Ashland shareholders in the
merger. This document is part of that registration statement and constitutes a
prospectus of Fifth Third as well as a proxy statement of Ashland for the
special meeting. Fifth Third Common Stock is traded on the Nasdaq National
Market tier of the Nasdaq Stock Market under the symbol "FITB." Documents filed
by Fifth Third with the SEC also can be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
Ashland is not subject to the SEC's information requirements or proxy
rules.
As allowed by SEC rules, this document does not contain all the information
that shareholders can find in the Fifth Third registration statement or the
exhibits to the Fifth Third registration statement.
64
<PAGE> 72
The SEC allows Fifth Third to "incorporate by reference" information into
this document, which means that it can disclose important information to
shareholders by referring them to another document filed separately with the
SEC. The information incorporated by reference is deemed to be part of this
document, except for any information superseded by information contained
directly in the document. This document incorporates by reference the documents
set forth below:
- Fifth Third's Annual Report on Form 10-K for the year ended December 31,
1998;
- Pages 1 and 13 through 39 of Fifth Third's 1998 Annual Report to
Shareholders (enclosed with this document); and
- Fifth Third's Proxy Statement dated February 9, 1999.
Additional documents that Fifth Third may file with the SEC between the
date of this document and the date of the special meeting of Ashland's
shareholders are also incorporated by reference. These include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
Copies of any of the documents incorporated by reference (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 March 24, 1999.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT TO VOTE YOUR SHARES AT THE SPECIAL MEETING. NO ONE
HAS BEEN AUTHORIZED TO PROVIDE ANY INFORMATION THAT IS DIFFERENT FROM WHAT IS
CONTAINED IN THIS DOCUMENT. THIS DOCUMENT IS DATED FEBRUARY 26, 1999.
SHAREHOLDERS SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS DOCUMENT
IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS
DOCUMENT TO SHAREHOLDERS NOR THE ISSUANCE OF FIFTH THIRD COMMON STOCK IN THE
MERGER WILL CREATE ANY IMPLICATION TO THE CONTRARY.
65
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
ASHLAND BANKSHARES, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report of Smith, Goolsby, Artis &
Reams, P.S.C.............................................. F-2
Consolidated Statements of Financial Condition at December
31, 1998 and 1997......................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
All schedules are omitted because the required information is not
applicable or is included in the Financial Statements and related Notes.
F-1
<PAGE> 74
SMITH, GOOLSBY,
ARTIS & REAMS, P.S.C.
R. MILTON GOOLSBY, C.P.A.
JOHN W. ARTIS, C.P.A.
C. ALAN REAMS, C.P.A.
LARRY J. WITHERS, C.P.A.
STEPHEN W. KANQUSE, C.P.A.
DELMAR H. FRALEY, C.P.A.
RODNEY M. ROBINETTE, C.P.A.
---------
G. DALE SWENTZEL, C.P.A.
STUART T. BLEVINS, C.P.A.
DAVID K. WHALEY, C.P.A.
SHARON K. KRETZER, C.P.A.
THERESA C. LYONS, C.P.A.
CERTIFIED PUBLIC ACCOUNTANTS
P.O. BOX 551 1330 CARTER AVE.
ASHLAND, KENTUCKY 41105-0551
(606) 329-1171 FAX (606) 325-0590
Board of Directors
Ashland Bankshares, Inc.
Ashland, Kentucky
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated statements of financial condition
of Ashland Bankshares, Inc. and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ashland Bankshares, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
SMITH, GOOLSBY, ARTIS & REAMS, P.S.C.
Ashland, Kentucky
January 22, 1999
F-2
<PAGE> 75
ASHLAND BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks................................... $ 4,870,837 $ 5,742,313
Federal funds sold........................................ 2,850,000 1,750,000
Term deposits with other banks............................ 225,000 225,000
Securities to be held to maturity......................... 24,223,804 29,868,023
Securities available for sale............................. 30,892,579 20,723,260
Mortgage-backed and related securities to be held to
maturity............................................... 816,267 1,026,704
Loans receivable net of allowance for loan losses of
$1,461,044 and $1,469,139, respectively................ 102,807,078 102,131,526
Premises and equipment, net............................... 1,918,889 1,897,469
Accrued interest receivable............................... 1,324,669 1,273,861
Federal Home Loan Bank stock.............................. 666,500 620,900
Other assets.............................................. 500,203 508,415
------------ ------------
TOTAL ASSETS...................................... $171,095,826 $165,767,471
============ ============
LIABILITIES
Deposits
Demand................................................. $ 17,703,421 $ 18,306,647
Interest bearing checking accounts..................... 23,852,676 21,883,792
Savings................................................ 33,416,143 28,562,839
Time, $100,000 and over................................ 21,213,996 19,326,290
Other time deposits.................................... 45,206,840 48,836,090
------------ ------------
TOTAL DEPOSITS.................................... 141,393,076 136,915,658
Securities sold under agreements to repurchase............ 1,964,000 2,601,068
Other borrowings.......................................... 706,593 1,376,147
Federal Home Loan Bank advances........................... 590,827 615,190
Accrued interest payable.................................. 249,903 358,664
Deferred income taxes..................................... 221,030 146,451
Other liabilities......................................... 493,168 478,274
------------ ------------
TOTAL LIABILITIES................................. 145,618,597 142,491,452
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $10; 200,000 shares authorized;
136,450 shares issued.................................. 1,364,500 1,364,500
Surplus................................................... 4,776,250 4,776,250
Retained earnings......................................... 20,539,073 18,442,729
Accumulated other comprehensive income.................... 137,593 20,477
Treasury stock at cost; 10,866 shares in 1998 and 10,816
shares in 1997......................................... ( 1,340,187) ( 1,327,937)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY........................ 25,477,229 23,276,019
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $171,095,826 $165,767,471
============ ============
</TABLE>
NOTE: The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 76
ASHLAND BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........................... $9,259,294 $9,345,295 $8,788,698
Interest on securities............................... 2,916,786 2,714,434 2,745,142
Interest on mortgage-backed and related securities... 59,461 70,111 382,895
Interest on federal funds sold....................... 297,152 180,366 80,353
Other interest and dividends......................... 66,325 48,522 49,291
---------- ---------- ----------
TOTAL INTEREST INCOME........................ 12,599,018 12,358,728 12,046,379
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits................................. 5,003,105 4,857,528 4,706,675
Interest on federal funds purchased and securities
sold under agreements to repurchase............... 116,219 185,730 142,086
Interest on Federal Home Loan Bank advances.......... 34,134 42,675 59,012
Interest on other short-term borrowings.............. 31,270 41,341 45,062
---------- ---------- ----------
TOTAL INTEREST EXPENSE....................... 5,184,728 5,127,274 4,952,835
---------- ---------- ----------
NET INTEREST INCOME.................................... 7,414,290 7,231,454 7,093,544
Provision for loan losses............................ (205,000) (300,000) (385,000)
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES..................................... 7,209,290 6,931,454 6,708,544
---------- ---------- ----------
NONINTEREST INCOME
Service fees......................................... 824,789 676,339 666,268
Trust department income.............................. 422,065 351,351 340,776
Gain on sale of foreclosed real estate............... 10,311 799 328,900
Securities gains..................................... 22,300 56,000 132,537
Other................................................ 174,427 164,065 178,707
---------- ---------- ----------
TOTAL NONINTEREST INCOME..................... 1,453,892 1,248,554 1,647,188
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries............................................. 2,144,893 1,993,011 1,787,286
Profit sharing and other employee benefits........... 506,969 448,178 450,278
Occupancy expense, net............................... 205,147 179,297 200,962
Equipment expense.................................... 374,815 390,335 395,135
Advertising.......................................... 158,353 149,811 150,068
Bank shares and franchise tax........................ 204,721 204,295 230,400
Other operating expenses............................. 1,214,543 1,018,134 1,028,408
---------- ---------- ----------
TOTAL NONINTEREST EXPENSES................... 4,809,441 4,383,061 4,242,537
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................. 3,853,741 3,796,947 4,113,195
APPLICABLE INCOME TAXES................................ 853,084 834,673 1,053,007
---------- ---------- ----------
NET INCOME............................................. $3,000,657 $2,962,274 $3,060,188
========== ========== ==========
EARNINGS PER SHARE..................................... $ 23.89 $ 23.53 $ 24.15
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING.................... 125,600 125,893 126,716
========== ========== ==========
</TABLE>
NOTE: The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 77
ASHLAND BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS EARNINGS INCOME STOCK TOTAL
---------- ---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996.......... $1,364,500 $4,776,250 $14,048,174 $ 403,707 $(1,082,862) $19,509,769
-----------
COMPREHENSIVE INCOME:
Net income for 1996............ 3,060,188 3,060,188
Other comprehensive income:
Change in unrealized gain
(loss) on securities
available for sale, net of
taxes of $194,803.......... (378,048) (378,048)
Less: Reclassification
adjustment, net of tax of
$43,784.................... (84,992) (84,992)
-----------
(463,040)
-----------
TOTAL COMPREHENSIVE
INCOME................... 2,597,148
Cash dividends paid ($6.15 per
share)....................... (778,822) (778,822)
Treasury shares
purchased -- 523............. (94,675) (94,675)
---------- ---------- ----------- --------- ----------- -----------
BALANCES, DECEMBER 31, 1996........ 1,364,500 4,776,250 16,329,540 (59,333) (1,177,537) 21,233,420
-----------
COMPREHENSIVE INCOME:
Net income for 1997............ 2,962,274 2,962,274
Other comprehensive income:
Change in unrealized gain
(loss) on securities
available for sale, net of
taxes of $41,265........... 79,810 79,810
-----------
TOTAL COMPREHENSIVE
INCOME................... 3,042,084
Cash dividends paid ($6.75 per
share)....................... (849,085) (849,085)
Treasury shares
purchased -- 640............. (150,400) (150,400)
---------- ---------- ----------- --------- ----------- -----------
BALANCES, DECEMBER 31, 1997........ 1,364,500 4,776,250 18,442,729 20,477 (1,327,937) 23,276,019
-----------
COMPREHENSIVE INCOME:
Net income for 1998............ 3,000,657 3,000,657
Other comprehensive income:
Unrealized gain on held-to-
maturity securities
transferred to
available-for-sale
securities net of deferred
income taxes of $16,135,
upon the adoption of SFAS
No. 133, July 1, 1998...... 31,322 31,322
Change in unrealized gain
(loss) on securities
available for sale, net of
taxes of $44,197........... 85,794 85,794
-----------
117,116
-----------
TOTAL COMPREHENSIVE
INCOME................... 3,117,773
Cash dividends paid ($7.20 per
share)....................... (904,313) (904,313)
Treasury shares
purchased -- 56.............. (13,720) (13,720)
Treasury shares
reissued -- 6................ 1,470 1,470
---------- ---------- ----------- --------- ----------- -----------
BALANCES, DECEMBER 31, 1998........ $1,364,500 $4,776,250 $20,539,073 $ 137,593 $(1,340,187) $25,477,229
========== ========== =========== ========= =========== ===========
</TABLE>
NOTE: The accompanying notes are an integral part of these consolidated
financial statements
F-5
<PAGE> 78
ASHLAND BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 3,000,657 $ 2,962,274 $ 3,060,188
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 311,886 281,287 298,554
Provision for loss on loans........................... 205,000 300,000 385,000
Amortization (accrual) of investment security
(discounts) premiums............................... (70,299) (44,808) (103,535)
Deferred income tax expense (benefit)................. 14,247 27,530 56,839
Federal Home Loan Bank stock dividends................ (45,600) (42,500) (36,400)
Investment securities (gains) losses.................. (22,300) (56,000) (132,537)
Loss (gain) on sale of other real estate.............. (10,311) (799) (328,900)
Gain on sale of equipment............................. -- -- (3,471)
Decrease (increase) in interest receivable................ (50,808) 22,907 110,988
Increase (decrease) in interest payable................... (108,761) (213,680) 4,966
Decrease (increase) in other assets....................... (3,257) 209,689 (301,444)
Increase (decrease) in other liabilities.................. 14,894 (57,869) 239,947
------------ ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 3,235,348 3,388,031 3,250,195
------------ ----------- ------------
INVESTING ACTIVITIES
Purchase of Federal Home Loan Bank stock.................. -- -- (68,800)
Proceeds from calls, sales and maturities of securities
held to maturity........................................ 3,220,300 11,113,935 10,518,761
Purchase of securities to be held to maturity............. (505,655) (1,685,117) (5,701,663)
Purchase of securities available for sale................. (29,923,794) (14,590,552) (3,786,791)
Proceeds from calls and maturities of securities available
for sale................................................ 22,954,536 675,000 --
Purchase of term deposit.................................. -- (225,000) --
Principal repayments on mortgage-backed securities to be
held to maturity........................................ 209,997 131,069 112,797
Proceeds from sale of mortgage-backed securities available
for sale................................................ -- -- 3,261,362
Loan originations, net of principal repayments............ (980,552) (1,052,970) (9,637,784)
Proceeds from sale of other real estate................... 110,311 30,454 516,087
Proceeds from the sale of equipment....................... -- -- 6,611
Purchase of premises and equipment........................ (259,167) (318,612) (256,548)
Purchase of software...................................... (62,670) (147,938) (22,756)
------------ ----------- ------------
NET CASH USED BY INVESTING ACTIVITIES.............. (5,236,694) (6,069,731) (5,058,724)
------------ ----------- ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits....................... 4,477,418 (885,896) 7,516,416
Net increase (decrease) in short term borrowings.......... (669,554) 71,636 148,942
Principal payments on Federal Home Loan Bank Advances..... (24,363) (323,027) (321,766)
Net (decrease) increase in securities sold under
agreements to repurchase................................ (637,068) 717,934 (3,325,131)
Cash dividends paid....................................... (904,313) (849,085) (778,822)
Treasury stock reissued................................... 1,470 -- --
Treasury stock purchased.................................. (13,720) (150,400) (94,675)
------------ ----------- ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES... 2,229,870 (1,418,838) 3,144,964
------------ ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 228,524 (4,100,538) 1,336,435
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 7,492,313 11,592,851 10,256,416
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 7,720,837 $ 7,492,313 $ 11,592,851
============ =========== ============
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY
INFORMATION:
CASH PAID FOR INCOME TAXES......................... $ 805,000 $ 740,000 $ 1,098,304
CASH PAID FOR INTEREST ON DEPOSITS AND OTHER
BORROWINGS....................................... $ 5,293,490 $ 5,340,953 $ 4,947,869
REAL ESTATE ACQUIRED IN FORECLOSURE OF LOANS....... $ 100,000 $ -- $ 29,655
UNREALIZED GAINS (LOSSES ON SECURITIES AVAILABLE
FOR SALE, NET OF DEFERRED INCOME TAXES........... $ 117,116 $ 79,810 $ (463,040)
</TABLE>
NOTE: The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 79
ASHLAND BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Ashland Bankshares, Inc. (the Corporation) is a one-bank holding company
organized primarily to acquire and own 100% of the outstanding stock of its sole
subsidiary, Bank of Ashland (the Bank). The Bank is a full service commercial
bank with trust powers that serves the financial needs of individuals and
businesses located in its market area through its main office located at 1422
Winchester Avenue, Ashland, Kentucky and three branch offices located in Ashland
and Boyd County, Kentucky. The Bank's primary market area also includes the
surrounding counties of Greenup, Carter and Lawrence in Kentucky and Lawrence
County, Ohio.
The business of the Bank is that of a financial intermediary engaged
primarily in attracting deposits from the general public and using such deposits
to originate residential and commercial real estate mortgage loans, consumer
loans and commercial loans primarily in its market area. The Banks revenues are
derived principally from interest earned on loans and to a lesser extent, from
interest earned on investments and service fees on deposit accounts. The
operations of the Bank are influenced significantly by general economic
conditions and by policies of financial institution regulatory agencies. The
Banks cost of funds is influenced by interest rates on competing investments and
general market interest rates. Lending activities are affected by the demand for
financing of real estate and other types of loan, which in turn is affected by
the interest rates at which such financings may be offered.
The Bank's net interest income is dependent primarily upon the difference
or spread between the average yield earned on loans and investments and the
average rate paid on deposits, as well as the relative amounts of such assets
and liabilities. The Bank, like most financial institutions, is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
reprice at different times, or on a different basis, than its interest earning
assets.
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. On an
ongoing basis, management reviews its estimates, including those related to
litigation and environmental liabilities, based on currently available
information. Changes in facts and circumstances may result in revised estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and the Bank. All intercompany balances and transactions have been
eliminated.
C. INVESTMENT SECURITIES AND MORTGAGE-BACKED AND RELATED SECURITIES
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that investment securities be categorized as held-to-maturity, trading,
or available-for-sale. Securities classified as held-to-maturity are carried at
cost only if the Corporation has the positive intent and ability to hold these
securities to maturity. Trading securities and securities available-for-sale are
carried at fair value with resulting unrealized gains or losses recorded to
F-7
<PAGE> 80
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
C. INVESTMENT SECURITIES AND MORTGAGE-BACKED AND RELATED SECURITIES (Continued)
operations or stockholders' equity, respectively. Investment and mortgage-backed
securities are classified according to management's intent upon acquisition.
Realized gains and losses on sales of securities are recognized using the
specific identification method.
Mortgage-backed and related securities are subject to prepayment, which
affects the yield and effective maturity of the investment. The Bank does not
purchase mortgage-backed and related securities with significant premiums in
order to minimize the effects of prepayments.
Equity securities that have a limited market (Federal Home Loan Bank stock)
are carried at cost which approximates fair values.
D. FINANCIAL INSTRUMENTS
Other off-balance-sheet instruments. In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.
E. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires that the company disclose estimated fair values for its financial
instruments. In accordance with SFAS No. 107, fair values are based on estimates
using present value and other valuation techniques in instances where quoted
prices are not available. These techniques are significantly affected by the
assumptions used, including discount rates and estimates of future cash flows.
As such, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, further, may not be realizable in an immediate
settlement of the instruments. SFAS No. 107 also excludes certain items from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent, and should not be construed to represent, the underlying value
of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating fair values of financial instruments as disclosed in Note 11:
CASH AND CASH EQUIVALENTS -- The carrying amounts of cash and short-term
instruments approximate their fair value.
SECURITIES TO BE HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE -- Fair
values for investment securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities (Federal Home Loan Bank stock) represents redemption value and
approximates fair value.
MORTGAGE-BACKED AND RELATED SECURITIES TO BE HELD TO MATURITY AND AVAILABLE
FOR SALE -- Fair values for mortgage-backed and related securities are based on
quoted market prices or dealer quotes.
LOANS -- For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate residential real
estate, commercial real estate and commercial and consumer loans) are estimated
using discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Loan fair value estimates include judgments regarding future expected loss
experience and risk characteristics. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral values,
where applicable.
ACCRUED INTEREST RECEIVABLE AND PAYABLE -- The carrying amounts of accrued
interest approximate their fair values.
F-8
<PAGE> 81
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
E. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
DEPOSIT LIABILITIES -- The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
SHORT-TERM BORROWINGS -- The carrying amounts of borrowings under
repurchase agreements, and other short-term borrowings maturing within 90 days
approximate their fair values. Fair values of other short-term borrowings are
estimated using discounted cash flow analysis based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
FEDERAL HOME LOAN BANK ADVANCES -- The fair values of the Bank's Federal
Home Loan Bank Advances are estimated using discounted cash flow analysis based
on the Bank's current incremental borrowing rates for similar types of borrowing
arrangements.
OTHER DEFERRED LIABILITIES -- The fair values of other deferred liabilities
are estimated using discounted cash flow analysis based on the Bank's current
incremental borrowing rates.
OFF-BALANCE-SHEET INSTRUMENTS -- Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. The fair value of such off-balance-sheet
instruments are immaterial and, therefore, not disclosed.
F. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans receivable, net are stated at unpaid principal balances, less the
allowance for loan losses, plus or minus net deferred loan origination costs or
fees, and unearned discounts.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
It is the Corporation's policy to establish an allowance for loan losses
for the purpose of absorbing losses associated with the loan portfolio. All
actual loan losses are charged to the related allowance and all recoveries are
credited to it. Additions to the allowance for loan losses are provided by
charges to operations based on various factors, including the market value of
the underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, historical
loss experience, delinquency trends and prevailing and projected economic
conditions.
Management evaluates the carrying value of loans periodically in order to
evaluate the adequacy of the allowance. While management uses the best
information available to make these evaluations, future adjustments to the
allowance may be necessary if the assumptions used in making the evaluations
require material revision.
The Corporation accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires
that impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loans observable market price or fair value of the
collateral.
Under SFAS No. 114, a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the
F-9
<PAGE> 82
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
F. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
loan agreement. In applying the provisions of SFAS No. 114, the Corporation
considers its investment in one-to-four-family residential loans and consumer
installment loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Corporation's
investment in multi-family and nonresidential loans, and its evaluation of any
impairment thereon, such loans are collateral dependent and as a result are
carried as a practical expedient at the lower of cost or fair value.
At December 31, 1998 and 1997, the Corporation had no loans that would be
defined as impaired under SFAS No. 114.
G. LOAN ORIGINATION FEES
Loan fees are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91. SFAS No. 91 requires loan origination fees
and certain related direct loan origination costs be offset and the resulting
net amount be deferred and amortized over the contractual life of the related
loans as an adjustment to the yield on such loans, using the level yield method.
H. FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in loss on
foreclosed real estate. The historical average holding period for such
properties is eighteen months.
I. PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises, furniture and equipment, and
leasehold improvements are carried at cost, less accumulated depreciation and
amortization computed principally by the straight-line method over estimated
useful lives of the assets, estimated to be ten to fifty years for buildings and
five to ten years for furniture, fixtures and equipment.
J. INCOME TAXES
The Corporation accounts for federal income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". Pursuant to the provisions of SFAS No.
109, a deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements that will result in taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, the general loan loss allowance, and certain components of retirement
expense. A temporary difference is also recognized for depreciation expense
computed using accelerated methods for federal income tax purposes.
F-10
<PAGE> 83
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
K. EARNINGS PER SHARE
Effective December 31, 1997, the Corporation began presenting earnings per
share pursuant to the provisions of SFAS No. 128, "Earnings Per Share".
Basic earnings per share is calculated based on the weighted average number
of common shares outstanding during the respective periods.
The Corporation had no potentially dilutive shares outstanding for any of
the years 1998, 1997 and 1996.
L. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. SFAS No. 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement, but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement, and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The adoption of SFAS No. 130 did
not have a material impact on the Corporation's consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS No. 131 significantly changes the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 did not have a material impact
on the Corporation's consolidated financial statements.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
About Pensions and Other Post Retirement Benefits" was issued in February, 1998
and is effective for fiscal years beginning after December 15, 1997. This
Statement revises employer disclosures about pension and other post retirement
benefit plans. It does not change the measurement or recognition of those plans.
It standardizes the disclosure requirement for pensions and other post
retirement benefits to the extent practicable, requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminate certain disclosures that are no
longer as useful as they were when FASB No. 87, No. 88, and No. 106 were issued.
This Statement suggests combined formats for presentation of pension and other
post retirement benefit disclosures. The Statement also permits reduced
disclosure for nonpublic entities. The adoption of SFAS No. 132 did not have a
material effect on the consolidated financial statements of the Corporation.
F-11
<PAGE> 84
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
L. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June, 1998 and is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at air value. If certain conditions are
met, a derivative may be specifically designated as: (1) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (3) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available for sale security, or a foreign currency denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and
resulting designation.
Initial application of this Statement should be as of the beginning of an
entity's fiscal quarter, on that date, hedging relationships must be designated
anew and documented pursuant to the provisions of this Statement. Earlier
application of all of the provisions of this Statement is encouraged, but it is
permitted only as of the beginning of any fiscal quarter that begins after
issuance of this Statement. Management adopted SFAS No. 133 as permitted, on
July 1, 1998 without a material impact on the Corporation's consolidated
financial position or results of operations.
M. CASH AND CASH EQUIVALENTS
For the purposes of reporting consolidated cash flows, the Corporation
considers cash, balances with banks, federal funds sold, securities purchased
under agreements to resell and interest-bearing cash deposits in other
depository institutions with initial maturities of three months or less to be
cash equivalents.
N. TRUST FEES
Trust fees are recorded on the accrual basis.
O. ADVERTISING COSTS
Advertising costs are expensed when incurred.
P. RECLASSIFICATIONS
Certain presentations of accounts previously reported have been
reclassified in these consolidated financial statements. Such reclassification
had no effect on net income or retained income as previously reported.
NOTE 2: DEBT SECURITIES
Debt securities have been classified in the consolidated statements of
financial condition according to management's intent. The carrying amounts of
these securities and their approximate fair values at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
HELD TO MATURITY:
Obligations of state and political
subdivisions........................... $24,223,804 $1,673,146 $ -- $25,896,950
=========== ========== ======== ===========
</TABLE>
F-12
<PAGE> 85
NOTE 2: DEBT SECURITIES (Continued)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U. S. Treasury Securities................ $ 5,258,882 $ 82,686 $ -- $ 5,341,568
U. S. Government Agency Securities....... 25,425,224 188,175 (62,388) 25,551,011
----------- ---------- -------- -----------
TOTALS............................ $30,684,106 $ 270,861 $(62,388) $30,892,579
=========== ========== ======== ===========
DECEMBER 31, 1997:
HELD TO MATURITY:
U.S. Treasury securities................. $ 2,988,869 $ 32,327 $ (1,197) $ 3,019,999
U.S. Government Agency securities........ 1,981,796 30,104 (2,930) 2,008,970
Obligations of state and political
subdivisions........................... 24,897,358 1,624,785 -- 26,522,143
----------- ---------- -------- -----------
TOTALS............................ $29,868,023 $1,687,216 $ (4,127) $31,551,112
=========== ========== ======== ===========
AVAILABLE FOR SALE:
U. S. Treasury Securities................ $ 3,415,616 $ 24,087 $ (4,989) $ 3,434,714
U. S. Government Agency Securities....... 17,276,619 35,034 (23,107) 17,288,546
----------- ---------- -------- -----------
TOTALS............................ $20,692,235 $ 59,121 $(28,096) $20,723,260
=========== ========== ======== ===========
</TABLE>
Debt securities carried at approximately $26,909,704 at December 31, 1998
and $24,466,886 at December 31, 1997, were pledged to secure deposits,
short-term borrowings and for other purposes required or permitted by law.
As disclosed in Note 1, management adopted SFAS No. 133 on July 1, 1998. As
permitted by this statement, securities to be held to maturity with a carrying
value of $2,979,848 were transferred to available for sale securities and an
unrealized gain was recorded in the amount of $47,457 net of deferred-income
taxes of $16,135.
Gross realized gains on the sales of securities to be held to maturity
were:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
GROSS REALIZED GAINS:
U.S. Treasury securities.................................. $ -- $ -- $1,761
Obligations of state and political subdivisions........... 22,300 56,000 2,000
------- ------- ------
$22,300 $56,000 $3,761
======= ======= ======
</TABLE>
The gains on securities to be held to maturity occurring in 1998, 1997 and
1996, subsequent to the adoption of SFAS No. 115, resulted from securities
called prior to their maturity date and securities sold within 90 days of
maturity.
F-13
<PAGE> 86
NOTE 2: DEBT SECURITIES (Continued)
The scheduled maturities of securities at December 31, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Due in one year or less................... $ 5,000 $ 5,058 $ 2,307,674 $ 2,311,489
Due from one year to five years........... 903,450 948,830 3,967,454 4,077,684
Due from five years to ten years.......... 14,186,959 15,150,829 12,399,596 13,289,507
Due after ten years....................... 9,128,395 9,792,233 11,193,299 11,872,432
----------- ----------- ----------- -----------
$24,223,804 $25,896,950 $29,868,023 $31,551,112
=========== =========== =========== ===========
AVAILABLE FOR SALE:
Due in one year or less................... $ 9,693,302 $ 9,711,207 $ 6,407,434 $ 6,407,063
Due from one year to five years........... 19,990,804 20,188,559 14,284,801 14,316,197
Due from five years to ten years.......... 1,000,000 992,813 -- --
----------- ----------- ----------- -----------
$30,684,106 $30,892,579 $20,692,235 $20,723,260
=========== =========== =========== ===========
</TABLE>
Accrued interest receivable includes $743,290 and $680,156 at December 31,
1998 and 1997, respectively, related to debt securities.
NOTE 3: MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities have been classified in the
consolidated statements of financial condition according to management's intent.
The carrying amounts of mortgage-backed and related securities and their
approximate fair values at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
HELD TO MATURITY:
DECEMBER 31, 1998
FHLMC.......................... $ 816,267 $7,701 $ -- $ 823,968
========== ====== ========= ==========
DECEMBER 31, 1997
FHLMC.......................... $1,026,704 $ -- ($ 16,819) $1,009,885
========== ====== ========= ==========
</TABLE>
The amortized cost of mortgage-backed and related securities to be held to
maturity includes unamortized premiums of $7,465 and $7,905 at December 31,
1998, and 1997 respectively.
Gross realized gains and gross realized losses on the sale of
mortgage-backed securities available for sale were $266,807 and $138,031,
respectively, for 1996 and none for 1998 and 1997.
NOTE 4: LOANS RECEIVABLE
The components of loans in the consolidated statements of financial
condition were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Real estate
One-to-four family.................................... $ 35,328,405 $ 37,050,870
Multifamily and commercial............................ 16,708,254 15,754,436
Construction.......................................... 249,010 1,132,847
</TABLE>
F-14
<PAGE> 87
NOTE 4: LOANS RECEIVABLE (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Consumer
Home equity........................................... 3,203,564 3,153,426
Other consumer........................................ 32,186,743 32,184,010
Commercial business..................................... 17,219,867 15,862,349
Student loans........................................... -- 27,252
------------ ------------
Total loans................................... 104,895,843 105,165,190
Less:
Unearned discounts.................................... 1,562,764 2,446,842
Loan origination and acquisition costs, net........... (935,043) (882,317)
Allowance for loan losses............................. 1,461,044 1,469,139
------------ ------------
Loans Receivable, Net................................. $102,807,078 $102,131,526
============ ============
</TABLE>
Loans with adjustable rates totaled $33,590,585 and $31,756,988 at December
31, 1998 and 1997, respectively.
Accrued interest receivable includes $532,365 and $530,474 at December 31,
1998 and 1997, respectively, related to loans receivable.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year..................... $1,469,139 $1,420,722 $1,279,495
Provision charged to operations................ 205,000 300,000 385,000
Loans charged off.............................. (289,512) (349,997) (348,272)
Recoveries..................................... 76,417 98,414 104,499
---------- ---------- ----------
Balance, end of year........................... $1,461,044 $1,469,139 $1,420,722
========== ========== ==========
</TABLE>
Certain directors, officers, and their business interests were loan
customers of the Bank during 1998 and 1997. The total loans to these persons and
their business interests at December 31, 1998 and 1997 amounted to $5,817,159
and $5,052,713, respectively. Such loans were made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable loans
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. During 1998, new
loans to such parties amounted to $2,497,884 and repayments amounted to
$1,733,440.
NOTE 5: PREMISES AND EQUIPMENT
Components of properties and equipment included in the consolidated
statements of financial condition at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land...................................................... $ 430,366 $ 430,366
Buildings and improvements................................ 1,960,987 1,914,278
Furniture and equipment................................... 2,459,939 2,247,481
----------- -----------
4,851,292 4,592,125
Accumulated depreciation.................................. (2,932,403) (2,694,656)
----------- -----------
$ 1,918,889 $ 1,897,469
=========== ===========
</TABLE>
F-15
<PAGE> 88
NOTE 5: PREMISES AND EQUIPMENT (Continued)
Depreciation expense amounted to $237,747, $244,016, and $263,708 in 1998,
1997, and 1996, respectively.
NOTE 6: INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ----------
<S> <C> <C> <C>
Currently payable
Federal........................................... $838,838 $807,036 $ 968,945
State............................................. -- 107 27,223
-------- -------- ----------
838,838 807,143 996,168
Deferred Federal tax expense...................... 14,246 27,530 56,839
-------- -------- ----------
$853,084 $834,673 $1,053,007
======== ======== ==========
</TABLE>
The net deferred tax asset (liability) in the accompanying consolidated
statements of financial condition include the following components:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax asset.......................................... $ 496,113 $ 481,339
Deferred tax asset valuation allowance...................... (404,010) (406,762)
Deferred tax liability...................................... (313,133) (221,028)
--------- ---------
Net deferred tax liability............................. $(221,030) $(146,451)
========= =========
</TABLE>
The provision for federal income taxes is less than that computed by
applying the federal statutory rate of 34.0% in 1998, 1997 and 1996, as
indicated in the following analysis:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory rate.............................................. 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax exempt income............................... (13.2) (13.9) (11.4)
Interest and other nondeductible expenses................. 1.3 1.4 1.3
Other (net)............................................... -- .5 1.7
----- ----- -----
22.1% 22.0% 25.6%
===== ===== =====
</TABLE>
F-16
<PAGE> 89
NOTE 6: INCOME TAXES (Continued)
The deferred tax asset, valuation allowance and deferred tax liability
according to the temporary differences which caused them were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax asset:
Allowance for loss on loans............................... $ 404,010 $ 406,762
Other accrued liabilities................................. 92,103 74,577
--------- ---------
Deferred tax asset..................................... 496,113 481,339
--------- ---------
Deferred tax asset valuation allowance:
Allowance for loss on loans............................... (404,010) (406,762)
--------- ---------
Deferred tax liability:
Depreciation of property and equipment.................... $(112,040) $(107,681)
Accretion to date on securities........................... (63,496) (53,669)
FHLB stock dividends...................................... (64,634) (49,130)
Unrealized gain on securities available for sale.......... (72,963) (10,548)
--------- ---------
Deferred tax liability................................. (313,133) (221,028)
--------- ---------
Net deferred tax liability........................ $(221,030) $(146,451)
========= =========
</TABLE>
NOTE 7: DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit each with
a minimum denomination of $100,000 or more was approximately $21,213,996 and
$19,326,290 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit
were as follows:
<TABLE>
<S> <C> <C>
1999 .................................................... $58,658,399
2000 .................................................... 7,098,080
2001 .................................................... 464,649
2002 .................................................... 49,629
2003 and thereafter....................................... 150,079
-----------
$66,420,836
===========
</TABLE>
Interest expense on deposits is summarized as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Certificates of deposit........................ $3,567,465 $3,535,817 $3,285,336
Interest bearing demand accounts............... 431,965 367,350 366,738
Savings........................................ 1,003,675 954,361 1,054,601
---------- ---------- ----------
$5,003,105 $4,857,528 $4,706,675
========== ========== ==========
</TABLE>
NOTE 8: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one
to 182 days from the transaction date.
F-17
<PAGE> 90
NOTE 8: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Average balance during the year............................. $2,297,448 $3,318,635
Average interest rate during the year....................... 5.03% 5.00%
Maximum month end balance during the year................... $2,336,671 $5,685,362
U.S. Treasury and U.S. Government Agency securities
underlying the agreements at year-end:
Carrying value......................................... $3,059,931 $4,230,663
Estimated fair value................................... $3,131,237 $4,259,230
</TABLE>
NOTE 9: OTHER BORROWINGS
Other borrowings consist of term treasury tax and loan deposits and are
generally repaid within one to ten days from the date of the transaction.
Securities with a carrying value of $5,000,325 and $4,978,142, and estimated
fair values of $5,023,638 and $5,006,465 were pledged at December 31, 1998 and
1997, respectively, as collateral for treasury tax and loan deposits.
NOTE 10: FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank of Cincinnati consists of a
monthly reduction loan collateralized with Federal Home loan Bank stock with a
carrying basis of $666,500 and certain residential mortgage loans in the amount
of $889,365. The advance originated December 31, 1993, in the amount of
$700,000, and the interest rate is fixed at 5.65%. Monthly payments are based on
a 20 year amortization with the entire balance due January 1, 2001. Scheduled
principal payments are due as follows:
<TABLE>
<S> <C> <C>
Due in: 1999 $ 25,776
2000 27,270
2001 537,781
--------
$590,827
========
</TABLE>
NOTE 11: FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Those 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. The contract or notional amounts of those
instruments reflect the extent of the Bank's involvement in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
Commitments to Extend Credit and Financial Guarantees. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank's experience has been that approximately 80 percent
of loan commitments are drawn upon by customers. The Bank evaluates each
F-18
<PAGE> 91
NOTE 11: FINANCIAL INSTRUMENTS (Continued)
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counter-party. Collateral held
varies but may include certificates of deposit and accounts receivable;
inventory, property, plant, and equipment; and income-producing commercial
properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. Standby letters of credit extend for one year and are
automatically renewed unless notification is given to the third party of the
Bank's intent to cancel. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Bank holds pledged certificates of deposit and personal
guarantees as collateral supporting those letters of credit for which collateral
is deemed necessary. The extent of collateral held for letters of credit at
December 31, 1998, varies from zero percent to 100.0%; the average amount
collateralized is 50 percent.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either 1998, 1997 or 1996.
The estimated fair values of the Corporation's financial instruments based
on the methods and assumptions set forth in Note 1 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from Banks and federal
funds sold....................... $ 7,720,837 $ 7,720,837 $ 7,492,313 $ 7,492,313
Term deposits...................... 225,000 227,991 225,000 225,000
Securities available for sale...... 30,892,579 30,892,579 20,723,260 20,723,260
Securities to be held to
maturity......................... 24,223,804 25,896,950 29,868,023 31,551,112
Mortgage-backed securities to be
held to maturity................. 816,267 823,968 1,026,704 1,009,885
Loans receivable, net.............. 102,807,078 103,413,647 102,131,526 100,245,876
Federal Home Loan Bank stock....... 666,500 666,500 620,900 620,900
Accrued interest receivable........ 1,324,669 1,324,669 1,273,861 1,273,861
FINANCIAL LIABILITIES:
Certificates of deposit............ 66,420,836 66,697,080 68,162,380 68,325,734
Other deposit accounts............. 74,972,240 74,972,240 68,753,278 68,753,278
Other short-term borrowings........ 706,593 706,593 1,376,147 1,376,147
Federal Home Bank advances......... 590,827 593,119 615,190 608,719
Securities sold under agreement to
repurchase....................... 1,964,000 1,967,206 2,601,068 2,601,673
Other deferred liabilities......... 228,240 211,851 192,100 170,451
Accrued interest payable........... 249,903 249,903 358,664 358,664
</TABLE>
A summary of the notional amounts of the Bank's financial instruments with
off-balance-sheet risk at December 31, 1998 follows:
<TABLE>
<S> <C>
Unused lines of credit -- commercial lending................ $3,961,920
Unused lines of credit -- consumer lending.................. 2,834,655
Standby letters of credit................................... 1,283,513
Loan commitments............................................ 1,116,916
----------
$9,197,004
==========
</TABLE>
F-19
<PAGE> 92
NOTE 11: FINANCIAL INSTRUMENTS (Continued)
Commitments to extend credit at December 31, 1998 included $8,517,004 of
adjustable rate loan commitments and unused credit lines.
NOTE 12: BENEFIT PLANS
The Bank has a non-contributory profit sharing plan covering substantially
all employees. Contributions to the plan charged to income were $250,000,
$216,412, and $225,000, in 1998, 1997 and 1996, respectively. The annual
contribution to this plan is discretionary.
The Corporation also has a non-qualifying Phantom Stock Option Plan
covering certain key executive officers. Under the Phantom Stock Option Plan,
the participants have rights to receive the appreciation on 3,000 shares of the
Corporation's common stock earned between the grant dates and the exercise
dates. The effective dates of the grants were January 1, 1991 and January 1,
1994, with expiration dates ranging from January 1, 1999 through January 1,
2004. The cost of the plan has been accrued and charged to expense in the years
earned and was $77,000, $66,000, and $75,000 for the years ended December 31,
1998, 1997, and 1996, respectively. Other liabilities at December 31, 1998,
includes $229,100 related to the Phantom Stock Options. Certain participants
have the option to withdraw up to 50.0% of their accumulated account balance
annually.
NOTE 13: COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements.
NOTE 14: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and standby letters of credit have
been granted to customers in the Bank's market area. Investments in state and
municipal securities primarily involve governmental entities within the Bank's
market area. The concentration of credit by type of loan are set forth in Note
4.
The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, and letters of credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the customer
default and the value of any existing collateral become worthless. The Bank's
credit policies and procedures for credit commitments and financial guarantees
are the same as those for extension of credit that are recorded on the
consolidated statements of condition. Because these instruments have fixed
maturity dates, and because many of them expire without being drawn upon, they
do not generally present any significant liquidity risk to the Bank.
NOTE 15: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital 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
require the Bank 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), and of Tier I capital (as defined) to
adjusted total assets (as
F-20
<PAGE> 93
NOTE 15: REGULATORY MATTERS (Continued)
defined). Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, the most recent notification from
regulatory agencies categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events subsequent to these dates that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the
following tables:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ---------- ----- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Capital (to Risk
Weighted Assets)........ $23,151,000 21.15% $8,756,000 *8.0% $10,945,000 *10.0%
Tier I Capital (to Risk
Weighted Assets)........ $21,782,000 19.90% $4,378,000 *4.0% $ 6,567,000 *6.0%
Tier I Capital (to Adjusted
Total Assets)........... $21,782,000 13.33% $4,900,000 *3.0% $ 8,167,000 *5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk
Weighted Assets)........ $21,133,000 19.83% $8,527,000 *8.0% $10,658,700 *10.0%
Tier I Capital (to Risk
Weighted Assets)........ $19,799,000 18.58% $4,263,000 *4.0% $ 6,395,200 *6.0%
Tier I Capital (to Adjusted
Total Assets)........... $19,799,000 12.28% $4,836,000 *3.0% $ 8,060,000 *5.0%
</TABLE>
NOTE 16: RETAINED EARNINGS
The Corporation's principal source of funds for dividend payments is
dividends received from the Bank. The Bank is restricted in the amount of
dividends it may pay the Corporation without prior regulatory approval. At
December 31, 1998, approximately $5,785,800 of the Bank's retained earnings was
free of such restrictions.
NOTE 17: AFFILIATION AGREEMENT
In September 1998, the Corporation entered into an affiliation agreement
with Fifth Third Bancorp. Fifth Third will exchange 9.754427 shares of its
common stock for each share of the Corporation's common stock outstanding. The
transaction is subject to regulatory and shareholder approval.
F-21
<PAGE> 94
NOTE 18: PARENT COMPANY INFORMATION
Condensed financial information for Ashland Bankshares, Inc., the
Corporation, as of December 31, 1998, 1997 and 1996, is set forth below:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash...................................................... $ 2,487 $ 11,341
Term deposits............................................. 225,000 225,000
Investment in Bank subsidiary............................. 21,919,475 19,819,179
Securities available for sale, at estimated fair value
(amortized cost $712,094 and $712,899, respectively)... 711,249 712,224
Securities to be held to maturity (estimated fair value
$2,601,095 and $2,563,046, respectively)............... 2,478,412 2,470,180
Deferred income taxes..................................... -- 229
Accrued interest receivable............................... 31,888 34,276
Other assets.............................................. 125,514 9,697
----------- -----------
TOTAL ASSETS...................................... $25,494,025 $23,282,126
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued income taxes...................................... $ -- $ 107
Other expenses payable.................................... 16,796 6,000
Common stock.............................................. 1,364,500 1,364,500
Surplus................................................... 5,181,316 5,181,316
Retained earnings......................................... 20,134,007 18,037,663
Treasury stock............................................ (1,340,187) (1,327,937)
Accumulated other comprehensive income.................... 137,593 20,477
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $25,494,025 $23,282,126
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Dividends received from Bank......................... $ 904,313 $ 999,486 $ 837,467
Equity in undistributed earnings of Bank............. 1,983,068 1,830,270 1,972,485
Interest on investments.............................. 179,825 181,369 330,302
Gain on sale of securities available for sale........ -- -- 128,777
---------- ---------- ----------
TOTAL INCOME................................. 3,067,206 3,011,125 3,269,031
EXPENSES............................................... 68,366 44,706 57,309
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................. 2,998,840 2,966,419 3,211,722
Provision for income taxes expense (benefit)......... (1,817) 4,145 151,534
---------- ---------- ----------
NET INCOME................................... $3,000,657 $2,962,274 $3,060,188
========== ========== ==========
</TABLE>
F-22
<PAGE> 95
NOTE 18: PARENT COMPANY INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 3,000,657 $ 2,962,274 $ 3,060,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion....................................... (8,716) (8,281) (59,765)
Equity in undistributed earnings of Bank
subsidiary.................................... (1,983,068) (1,830,270) (1,972,485)
Gain on sale of securities...................... -- -- (128,777)
Decrease (increase) in accrued interest
receivable.................................... 2,388 (3,482) (8,184)
Increase (decrease) in accrued income tax....... (107) (8,916) 9,023
Change in other assets and liabilities, net..... (104,792) 1,917 (6,459)
----------- ----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES... 906,362 1,113,242 893,541
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available for sale securities.......... (953,653) (591,798) (794,291)
Purchase of securities to be held to maturity...... -- -- (2,461,485)
Purchase of interest bearing term deposits......... -- (225,000) --
Proceeds from calls and maturities of securities
available
for sale........................................ 955,000 675,000 3,261,363
----------- ----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES... 1,347 (141,798) 5,587
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid..................................... (904,313) (849,085) (778,822)
Treasury stock reissued............................ 1,470 -- --
Purchase of treasury stock......................... (13,720) (150,400) (94,675)
----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES... (916,563) (999,485) (873,497)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................................ (8,854) (28,041) 25,631
Cash and cash equivalents at beginning of year..... 11,341 39,382 13,751
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............. $ 2,487 $ 11,341 $ 39,382
=========== =========== ===========
</TABLE>
F-23
<PAGE> 96
ANNEX A
AFFILIATION AGREEMENT DATED AS OF SEPTEMBER 8, 1998
BY AND BETWEEN
FIFTH THIRD BANCORP
AND
ASHLAND BANKSHARES, INC.
AND
AMENDED
AS OF
DECEMBER 15, 1998
<PAGE> 97
ANNEX A
AFFILIATION AGREEMENT
This Affiliation Agreement ("Affiliation Agreement") dated as of September
8, 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 Cincinnati, Hamilton County, Ohio ("Fifth Third"),
and ASHLAND BANKSHARES, INC., a corporation organized and existing under the
corporation laws of the Commonwealth of Kentucky, with its principal office
located in Ashland, Boyd County, Kentucky ("Ashland").
W I T N E S S E T H :
WHEREAS, Fifth Third and Ashland are registered bank holding companies
under the Bank Holding Company Act of 1956, as amended, and Fifth Third and
Ashland desire to effect a merger under the authority and provisions of the
corporation laws of the States of Ohio and Kentucky pursuant to which at the
Effective Time (as herein defined in Section ) Ashland will be merged into Fifth
Third, with Fifth Third to be and become the surviving corporation (the
"Merger");
WHEREAS, Ashland owns all of the outstanding stock of Bank of Ashland, Inc.
("Bank Subsidiary") which, at the Effective Time, will be merged with and into
Fifth Third's wholly-owned subsidiary Fifth Third Bank of Southern Ohio ("Fifth
Third Bank") with Fifth Third Bank to become the surviving corporation (the
"Subsidiary Merger"); and,
WHEREAS, under the terms of this Affiliation Agreement and a related Plan
of Merger (the "Plan of Merger"), in the form attached hereto as Appendix C
(hereinafter together referred to as the "Agreement") each of the issued and
outstanding shares of the common stock, $10.00 par value per share, of Ashland
which are issued and outstanding (excluding any treasury shares or shares owned
by Dissenting Shareholders (as hereinafter defined)) immediately prior to the
Effective Time ("Ashland Common Stock") will at the Effective Time be converted
into shares of common stock, without par value, of Fifth Third ("Fifth Third
Common Stock"), all as more fully provided in the Agreement;
WHEREAS, the parties intend for the Merger to qualify as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) and related provisions
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
Fifth Third and Ashland, agree together as follows:
I. MODE OF EFFECTUATING CONVERSION OF SHARES
A. Upon the terms and conditions set forth in the Agreement, Ashland shall
be merged into Fifth Third.
B. At the Effective Time, 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, as the case may be, of the Surviving
Corporation. 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.
C. At the Effective Time, each of the shares of Ashland Common Stock that
are issued and outstanding immediately prior to the Effective Time, other than
shares owned by Dissenting Shareholders, as hereinafter defined, will, at the
Effective Time, be converted by virtue of the Merger and without further action,
into 9.754427 shares of Fifth Third Common Stock (the "Exchange Ratio")
A-1
<PAGE> 98
D. At the Effective Time, all of the shares of Ashland 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 Ashland, 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 Ashland Common Stock shall have been converted by
virtue of the Merger or to their rights as Dissenting Shareholders.
E. After the Effective Time, each holder of a certificate or certificates
for shares of Ashland Common Stock, other than Dissenting Shareholders, 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 Ashland 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 Fifth Third Trust Department, as exchange agent (the "Exchange Agent"), will
send a notice and transmittal form to each Ashland shareholder of record at the
Effective Time, other than Dissenting Shareholders, advising such shareholder of
the effectiveness of the Merger and the procedures for surrendering to the
Exchange Agent outstanding certificates formerly evidencing Ashland Common Stock
(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) in exchange for new certificates of Fifth
Third Common Stock and the cash payment for any fraction of a share. Until so
surrendered, each outstanding certificate that prior to the Effective Time
represented shares of Ashland Common Stock shall be deemed for all corporate
purposes to evidence ownership of the number of full shares of Fifth Third
Common Stock into which the same shall have been converted; provided, however,
that dividends or distributions otherwise payable with respect to shares of
Fifth Third Common Stock into which Ashland Common Stock shall have been so
converted shall be paid with respect to such shares only when the certificate or
certificates evidencing shares of Ashland 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.
F. The Exchange Ratio referred to in Section shall be adjusted so as to
give the Ashland shareholders the economic benefit of any stock dividends,
reclassifications, recapitalizations, split-ups, exchanges of shares,
distributions or combinations or subdivisions of Fifth Third Common Stock
effected between the date of this Affiliation Agreement and the Effective Time.
In the event between the date of this Affiliation 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 Ashland shareholders, as of
the Effective Time.
G. When all necessary documents have been filed and recorded in accordance
with the laws of the States of Ohio and Kentucky, and at the Effective Time of
the Merger, the separate existence of Ashland shall cease and Ashland shall be
merged into Fifth Third (which will be the "Surviving Corporation"), which shall
continue its corporate existence under the laws of the State of Ohio under the
name "Fifth Third Bancorp".
H. 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.
I. 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
A-2
<PAGE> 99
Fifth Third who are in office at the time the Merger becomes effective shall be
the officers of the Surviving Corporation, subject to the Regulations of the
Surviving Corporation and in accordance with law.
J. The Regulations of Fifth Third at the Effective Time shall be the
Regulations of the Surviving Corporation, until amended as provided therein and
in accordance with law.
K. At the Effective Time, the effect of the Merger shall be as provided by
the applicable provisions of the laws of Ohio and Kentucky. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time: the
separate existence of Ashland 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 Ashland, and all
obligations owing by or due each of Fifth Third and Ashland 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
Kentucky Revised Statutes, Sections 271B.13-010 through 271B.13-310 (the
"Dissenting Shareholders"); and all rights of creditors of each Fifth Third and
Ashland shall be preserved unimpaired, and all liens upon the property of each
of Fifth Third and Ashland shall be preserved unimpaired, on only the property
affected by such liens immediately prior to the Effective Time.
L. From time to time as and when requested by the Surviving Corporation, or
by its successors or assigns, the officers and directors of Ashland in office at
the Effective Time shall execute and deliver such instruments and shall take or
cause to be taken such further or other action as shall be necessary in order to
vest or perfect in the Surviving Corporation or to confirm of record or
otherwise, title to, and possession of, all the assets, property, interests,
rights, privileges, immunities, powers, franchises and authority of Ashland and
otherwise to carry out the purposes of the Agreement.
M. The Agreement shall be filed (only if necessary) and recorded along with
Articles or a Certificate of Merger in accordance with the requirements of the
laws of the States of Ohio and Kentucky. Articles of Merger or a Certificate of
Merger shall not be filed with the Secretary of the States of Ohio or Kentucky
until, but shall be filed promptly after, all of the conditions precedent to
consummating the Merger as contained in Article VI of this Affiliation Agreement
shall have been fully met or effectively waived.
N. The Merger is intended to be a reorganization within the meaning of
Section 368(a) of the Code, and the Agreement is intended to be a "plan of
reorganization" within the meaning of the regulations promulgated under the Code
and for purposes of Sections 354 and 361 of the Code.
II. REPRESENTATIONS AND WARRANTIES OF ASHLAND.
Ashland 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 Ashland to Fifth Third in connection with the
execution of this Affiliation Agreement by Fifth Third:
A. Ashland (i) is duly incorporated, validly existing and in good standing
as a corporation under the corporation laws of the Commonwealth of Kentucky and
is a bank holding company under the Bank Holding Company Act of 1956, as
amended; (ii) is duly authorized to conduct the business in which it is engaged;
(iii) has 200,000 shares, $10.00 par value per share, of Ashland Common Stock
authorized pursuant to its Articles of Incorporation, which are the total number
of shares Ashland is authorized to have outstanding; (iv) has no outstanding
options, warrants or other rights entitling another person to acquire any
securities of Ashland; and (v) owns of record and beneficially free and clear of
all liens and encumbrances, all of the 136,450 outstanding shares of the capital
stock of the Bank Subsidiary, $10.00 par value per share. Ashland has no direct
or indirect subsidiaries other than Bank Subsidiary.
B. Bank Subsidiary is duly incorporated, validly existing and in good
standing as a bank under the laws of the Commonwealth of Kentucky, and has all
the requisite power and authority to conduct the banking business as now
conducted by it; and Bank Subsidiary does not have any outstanding securities of
any kind, nor any outstanding options, warrants or other rights entitling
another person to acquire any securities of any of the Bank Subsidiary of any
kind, other than 136,450 shares of the common capital stock, $10.00 par value
per share, of Bank Subsidiary owned of record and beneficially by Ashland.
A-3
<PAGE> 100
C. Ashland has previously furnished to Fifth Third its audited,
consolidated statements of financial condition, statements of income, statements
of changes in stockholders' equity and cash flows as at December 31, 1997, and
for the year then ended, together with the opinions of its independent certified
public accountants associated therewith. Ashland also has previously furnished
to Fifth Third its audited, consolidated statements of financial condition,
statements of income, statements of changes in stockholders' equity and cash
flows as at December 31, 1995 and December 31, 1996. Ashland also has furnished
to Fifth Third (i) its unaudited, consolidated financial statements as at July
31, 1998, and for the seven months then ended. Such audited consolidated
financial statements of Ashland fairly present the consolidated financial
condition of Ashland 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 Ashland or the
Bank Subsidiary required to be disclosed in the financial statements so
furnished other than the liabilities, obligations or indebtedness disclosed in
such financial statements (including footnotes).
D. Ashland and the Bank Subsidiary have good and marketable title to all of
the material properties and assets reflected in its separate statement of
financial condition as at December 31, 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
and encumbrances that do not materially adversely impair the use of the
property, (ii) statutory liens for taxes not yet due and payable and (iii) minor
defects and irregularities in title that do not materially adversely impair the
use of the property.
E. Except as disclosed in Schedule 1 and for events relating to the
business environment in general: (i) since December 31, 1997, to the date hereof
there have been no material adverse changes in the financial condition,
operations or business of Ashland and the Bank Subsidiary on a consolidated or
separate basis; (ii) Ashland is not aware of any events which have occurred
since December 31, 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 Ashland and the Bank Subsidiary on a consolidated or 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 Bank Subsidiary or banking industry;
and (iii) since December 31, 1997, to the date hereof there have been no
material changes in the methods of business operations of Ashland and the Bank
Subsidiary.
F. Except as disclosed in Schedule 1, there are no actions, suits,
proceedings, investigations or assessments of any kind pending, or to the best
knowledge of Ashland, threatened against Ashland or the Bank Subsidiary which
reasonably can be expected to result in any material adverse change in the
financial condition, operations or business of Ashland and the Bank Subsidiary
on a consolidated or separate basis.
G. Except as disclosed in Schedule 1, since December 31, 1997, to the date
hereof Ashland and the Bank Subsidiary each has been operated in the ordinary
course of business, has not made any changes in their respective capital or
corporate structures, nor any material changes in their respective 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 December 31, 1997, to the date hereof Ashland 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, Ashland and the Bank Subsidiary have
timely filed all federal, state and local tax returns required to be filed
(after giving effect to all extensions) by them, respectively, and have paid or
provided for all tax liabilities shown to be due thereon or which have been
assessed against them, respectively. All tax returns filed by Ashland or the
Bank Subsidiary through the date hereof constitute complete and accurate
representations of the tax liabilities of Ashland and the Bank Subsidiary for
such years and accurately set forth all items (to the extent required to be
included or reflected in such returns) relevant to its future tax liabilities,
including the tax basis of its properties and assets in all material respects.
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I. Except as disclosed in Schedule 1, neither Ashland nor the Bank
Subsidiary is a party to (i) any written employment contracts or written
contracts of any other kind with any of its officers, directors or employees or
(ii) any material contract, lease or agreement of any other kind which is not
assignable as a result of the merger provided for herein without the consent of
another party, except for contracts, leases or agreements which do not have
terms extending beyond six months from the date of this Affiliation Agreement,
or are terminable by Ashland or Bank Subsidiary upon 30 days notice, or
contracts, leases or agreements (excluding contracts, leases and agreements
pursuant to which credit has been extended by the Bank Subsidiary) which do not
require the annual expenditure of more than $25,000.00 thereunder.
J. Except as disclosed in Schedule 1, since December 31, 1997, to the date
hereof the Bank Subsidiary has not incurred any unusual or extraordinary loan
losses which are material to Ashland and the Bank Subsidiary on a consolidated
basis; to the best knowledge of the chief executive officer of Ashland and in
light of the Bank Subsidiary's historical loan loss experience and its
management's analysis of the quality and performance of its loan portfolio, as
of December 31, 1997, its reserve for loan losses was, in the opinion of
Ashland, adequate to absorb all known and reasonably anticipated losses as of
such date.
K. Except as disclosed in Schedule 1, neither Ashland nor the Bank
Subsidiary has, directly or indirectly, dealt with any broker or finder in
connection with this transaction and neither has incurred or will incur any
obligation for any broker's or finder's fee or commission in connection with the
transactions provided for in this Affiliation Agreement.
L. 1. The directors of Ashland, 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 adopted and approved the Agreement, and have directed
that the Agreement be submitted to a vote of Ashland's shareholders at the
annual or a special meeting of the shareholders to be called for that purpose,
all in accordance with and as required by law and in accordance with the
Articles of Incorporation and Bylaws of Ashland.
2. Ashland has the corporate power and authority to enter into the
Agreement and to carry out its obligations hereunder and thereunder subject to
certain required regulatory and shareholder approvals. The Agreement, when
executed and delivered, will have been duly authorized and will constitute valid
and binding obligations of Ashland, enforceable in accordance with their
respective terms, except to the extent that (i) enforceability thereof may be
limited by insolvency, reorganization, liquidation, bankruptcy, readjustment of
debt or other laws of general application relating to or affecting the
enforcement of creditors' rights generally and (ii) the availability of certain
remedies may be precluded by general principles of equity, subject, however, to
the receipt of requisite regulatory approvals and the approval of Ashland's
shareholders.
3. Except as disclosed in Schedule 1, neither the execution of the
Agreement, nor the consummation of the transactions contemplated hereby and
thereby, (i) conflicts with, results in a breach of, violates or constitutes a
default under, Ashland's Articles of Incorporation or Bylaws or, to the best
knowledge of Ashland, federal, state or local law, statute, ordinance, rule,
regulation or court or administrative order, or any agreement, arrangement, or
commitment, to which Ashland or the Bank Subsidiary is subject or bound; (ii) to
the best knowledge of Ashland, 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 Ashland or the
Bank Subsidiary; (iii) except as disclosed in Schedule 1, terminates or gives
any person the right to terminate, amend, abandon, or refuse to perform any
material agreement, arrangement or commitment to which Ashland or the Bank
Subsidiary is a party or by which Ashland's or the Bank Subsidiary's rights,
properties or assets are subject or bound; or (iv) accelerates or modifies, or
gives any party thereto the right to accelerate or modify, the time within
which, or the terms according to which, Ashland or the Bank Subsidiary is to
perform any duties or obligations or receive any rights or benefits under any
material agreements, arrangements or commitments. For purposes of subparagraphs
(iii) and (iv) immediately preceding, material agreements, arrangements or
commitments exclude agreements, arrangements or commitments having a term
expiring less than six months from the date of this Affiliation Agreement or
which do not require the expenditure of more than $25,000 per agreement (but
shall include all agreements, arrangements or commitments pursuant to which
credit has been extended by the Bank Subsidiary).
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M. Complete and accurate copies of the (i) Articles of Incorporation and
Bylaws of Ashland and (ii) the Articles of Incorporation and Bylaws of the Bank
Subsidiary in force as of the date hereof have been delivered to Fifth Third.
N. To the best knowledge of the chief executive officer of Ashland and
except as disclosed in Schedule 1, neither Ashland nor the Bank Subsidiary nor
any employee, officer or director of any of them has knowingly engaged in any
activity or knowingly omitted to take any action which, in any material way, has
resulted or could reasonably 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 Ashland and the Bank Subsidiary. To the best knowledge of Ashland
and except as disclosed in Schedule 1, the Bank Subsidiary 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 on Schedule 1, any information which has been or
shall be supplied with respect to their business operations and financial
condition for inclusion in the proxy statement/prospectus and registration
statement relating to the merger contains or shall contain or, in the case of
information relating to the proxy statement/prospectus, at the time it is
mailed, in the case of the registration statement, at the time it becomes
effective and in the case of the proxy statement/prospectus and the registration
statement, at the time the annual or special meeting of shareholders of Ashland
is held to consider the approval of the 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.
P. Except as disclosed in Schedule 1, there are no actions, proceedings or
investigations pending before any environmental regulatory body, or, to the best
knowledge of Ashland, threatened against or affecting Ashland or the Bank
Subsidiary in respect to any "facility" owned, leased or operated by Ashland or
the Bank Subsidiary (but excluding any "facility" as to which sole interest of
Ashland or the Bank Subsidiary is that of a lienholder or mortgagee, but
including any "facility" to which title has been taken pursuant to mortgage
foreclosure or similar proceedings and including any "facility" in which Ashland
or the Bank Subsidiary ever "participated in the management" of such facility
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), or under any Federal, state, local or municipal
statute, ordinance or regulation, in connection with any release of any
"hazardous substance", into the "environment" which, if adversely determined,
(a) would require the payment by Ashland or the Bank Subsidiary of more than
$25,000 and/or require Ashland or the Bank Subsidiary to incur expenses of more
than $25,000 (whether or not covered by insurance) or (b) would otherwise have a
material adverse effect on Ashland or the Bank Subsidiary, nor, to the best
knowledge of Ashland 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 Ashland or the Bank Subsidiary is a plaintiff or
complainant. To the best knowledge of Ashland, neither Ashland nor the Bank
Subsidiary is liable in any material respect under any applicable law for any
"release" by either of them or by any other "person" of a "hazardous
substance,"nor is Ashland or the Bank Subsidiary liable for any material costs
(as a result of the acts or omissions of Ashland or the Bank Subsidiary or, to
the best knowledge of Ashland, as a result of the acts or omissions of any other
"person") of any remedial action including, without limitation, costs of
security fencing, alternative water supplies, temporary evacuation and housing
and other emergency assistance undertaken by any environmental regulatory body
having jurisdiction over Ashland or the Bank Subsidiary to prevent or minimize
any actual or threatened release by Ashland or the Bank Subsidiary of any
"hazardous substances" 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 Ashland each
"facility" owned, leased or operated by Ashland or the Bank Subsidiary (but
excluding any "facility" as to which the sole interest of
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Ashland or the Bank Subsidiary is that of a lienholder or mortgagee, but
including any "facility" to which title has been taken pursuant to mortgage
foreclosure or similar proceedings and including any "facility" in which Ashland
or the Bank Subsidiary ever "participated in the management" of such facility)
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 Ashland and the Bank Subsidiary
taken as a whole.
Q. 1. Benefit Plans. Schedule 1 lists the name and a short description of
each Benefit Plan (as herein defined), together with an indication of its
funding status (e.g., trust, insured or general company assets). For purposes
hereof, the term "Benefit Plan" shall mean any plan, program, arrangement or
system of employee or director benefits maintained by Ashland or the Bank
Subsidiary for the benefit of employees, former employees or directors of
Ashland or the Bank Subsidiary 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) 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,
Ashland or the Bank Subsidiary has provided true, complete and correct copies of
all plan documents, if any, comprising each Benefit Plan, together with, when
applicable, (a) the most recent summary plan description, (b) the most recent
actuarial and financial reports and the most recent annual reports filed with
any governmental agency and (c) all Internal Revenue Service ("IRS") or other
governmental agency rulings and determination letters or any open requests for
IRS rulings or letters with respect to Benefit Plans.
3. Qualified Retirement Plan Compliance. With respect to each Benefit Plan
which is an employee pension benefit plan (as defined in section 3(2) of ERISA)
other than any such plan that meets the "top-hat" exception under section 201(1)
of ERISA (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 Internal
Revenue Code of 1986, as amended through the date hereof (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 Ashland and the Bank Subsidiary such Qualified Benefit Plan is in material
compliance with all qualification requirements of Section 401(a) of the Code;
and (c) to the best knowledge of Ashland and the Bank Subsidiary such Qualified
Benefit Plan is in material compliance with all notice, reporting and disclosure
requirements of ERISA and the Code. Ashland and the Bank Subsidiary do not
maintain any Qualified Benefit Plan which is an ESOP as defined in Section
4975(e)(7) of the Code nor has Ashland and the Bank Subsidiary previously
terminated a Qualified Benefit Plan.
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 Ashland and the Bank Subsidiary in material compliance
with applicable Code provisions; (b) to the best knowledge of Ashland and the
Bank Subsidiary such Welfare Benefit Plan has been operated in material
compliance with all applicable notice, reporting and disclosure requirements of
ERISA and the Code; and (c) to the best knowledge of Ashland and the Bank
Subsidiary such Welfare Benefit Plan, if a group health plan subject to the
requirements of Section 4980B of the Code ("COBRA") has been operated in
material compliance with such COBRA requirements.
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5. Prohibited Transactions. To the best knowledge of Ashland and the Bank
Subsidiary, 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. To the best knowledge of Ashland and the Bank
Subsidiary, no material actions, suits or claims (other than routine claims of
benefits) are pending or threatened against any Benefit Plan or against Ashland
or the Bank Subsidiary with respect to any Benefit Plan.
7. Disclosure of Unfunded Liabilities. All material Unfunded Liabilities
with respect to each Benefit Plan have been recorded and disclosed on the most
recent financial statement of Ashland and the Bank Subsidiary or, if not, in
Schedule 1. For purposes hereof, the term "Unfunded Liabilities" shall mean any
amounts properly accrued to date under generally accepted accounting principles
in effect as of the date of this Affiliation 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 Affiliation 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 Ashland or the Bank
Subsidiary and for which Ashland or the Bank Subsidiary is liable under
applicable law, (e) any authorized but unpaid profit sharing contributions or
contributions under Section 401(k) and Section 401(m) of the Code, (f) retiree
health benefit coverage and (g) unpaid premiums for contributions required under
any group health plan to maintain such plan's coverage through the Effective
Time.
8. Defined Benefit Pension Plan Liabilities. Ashland and the Bank
Subsidiary have never maintained any defined benefit plans within the meaning of
Section 3(35) of ERISA or any multiemployer plans and have never contributed to
or been obligated to contribute to a multiemployer plan as defined in Section
3(37) of ERISA which are subject to Title IV of ERISA.
9. Independent Trustee. Ashland and the Bank Subsidiaries (a) have not
incurred any asserted or, to the best knowledge of Ashland, 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 Ashland or the Bank
Subsidiary, (b) to the best knowledge of Ashland and the Bank Subsidiary 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", Ashland and Bank Subsidiary have no obligation to provide
medical benefits, or life insurance benefits to or with respect to retirees,
former employees, directors or any of their relatives other than as may be
required by COBRA or Kentucky Revised Statute 304.18-110.
11. Right to Amend and Terminate. Except as listed on Schedule 1, Ashland
or Bank Subsidiary 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 Section as a whole, the term "material"
in connection with a liability shall mean a liability or loss, taxes, penalties,
interest and related legal fees in the total amount of
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$25,000 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. The investment portfolios of Ashland and the Bank Subsidiary consist of
securities in marketable form. Except as disclosed in Schedule 1, since December
31, 1997 to the date hereof neither Ashland nor the Bank Subsidiary has incurred
any unusual or extraordinary losses in its investment portfolio, and, except for
matters of general application to the Bank 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, Ashland 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 Ashland's and the Bank Subsidiary's investment
portfolio on a consolidated basis.
S. Except as disclosed in Schedule 1, there are no actions, suits, claims,
proceedings, investigations or assessments of any kind pending, or to the best
knowledge of Ashland, threatened against any of the directors or officers of
Ashland or the Bank Subsidiary in their capacities as such, and no director or
officer of Ashland or the Bank Subsidiary currently is being indemnified or
seeking to be indemnified by either Ashland or the Bank Subsidiary pursuant to
applicable law or Ashland's Articles of Incorporation or Bylaws or the Bank
Subsidiary's Articles of Incorporation.
T. There is no "business combination," "moratorium," "control share," or
other state anti-takeover statute or regulation or any agreement to which
Ashland is a party which (i) prohibits or restricts Ashland'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 of
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 Ashland's
own account or for the account of the Bank Subsidiary or their customers, were
entered into (i) in accordance with prudent banking practices and all applicable
laws, rules, regulations and regulatory policies and (ii) with counterparties
believed to be financially responsible at the time; and each of them constitutes
the valid and legally binding obligation of Ashland or the Bank Subsidiary,
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 be general equity principles), and are in full
force and effect. Neither Ashland nor the Bank Subsidiary, nor to Ashland's
knowledge any other party thereto, is in breach of any of its obligations under
any such agreement or arrangement.
III. REPRESENTATIONS AND WARRANTIES OF FIFTH THIRD
Fifth Third represents and warrants to Ashland that as of the date hereof
or as of the indicated date, as appropriate:
A. Fifth Third is duly incorporated, validly existing and in good standing
as a corporation under the corporation laws of the State of Ohio, is a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended, and is duly authorized to conduct the business in which it is engaged,
and the Fifth Third Bank is duly incorporated, validly existing and in good
standing as a banking corporation under the laws of the State of Ohio 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
July 31, 1998, 266,516,245 shares of Fifth Third Common Stock were issued and
outstanding and 1,379,594 shares were held in its treasury. As of the date of
this Affiliation 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
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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 July 31, 1998, 14,147,556 shares of Fifth Third Common
Stock were reserved for issuance in connection with outstanding options granted
under its stock option plans and 11,252,259 shares were reserved for issuance
under options to be granted in the future.
C. All shares of Fifth Third Common Stock to be received by the
shareholders of Ashland as a result of the merger pursuant to the terms of the
Agreement are duly authorized and 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 Ashland its consolidated financial
statements as at December 31, 1995, December 31, 1996 and December 31, 1997 and
for the respective years then ended together with the opinions of its
independent public accountants associated therewith. Such consolidated financial
statements fairly present the consolidated financial condition of Fifth Third as
of their respective dates and for the respective periods covered thereby in
conformity with generally accepted accounting principles consistently followed
throughout the periods covered thereby. Neither Fifth Third nor any significant
subsidiaries of Fifth Third have any material liabilities, obligations or
indebtedness required to be disclosed in such financial statements other than
the liabilities, obligations and indebtedness disclosed in such financial
statements (including footnotes). Fifth Third has furnished to Ashland its
unaudited consolidated financial statements as at March 31, 1998 and for the
three (3) months then ended and as at June 30, 1998 and for the six (6) months
then ended.
E. Except for events relating to the business environment in general: (i)
since December 31, 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 December 31, 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
December 31, 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
Affiliation Agreement, including reserving for issuance to Ashland shareholders
in accordance with this Affiliation Agreement, a sufficient number of shares of
Fifth Third Common Stock. Approval and adoption of this Affiliation 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 or the rules of the National Association of Securities Dealers, Inc.
which apply to National Market issuers. No other corporate action is necessary
or required, including but not limited to approval of this Affiliation Agreement
or the transactions contemplated herein by the Board of Directors of Fifth
Third.
2. Fifth Third has corporate power and authority to enter into this
Affiliation Agreement and to carry out its obligations hereunder subject to
certain required regulatory approvals. This Affiliation Agreement, when executed
and delivered, will have been duly authorized and 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, subject, however, to the receipt of
requisite regulatory approvals.
3. Neither the execution of this Affiliation 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 its chief executive officer and chief
financial officer, any federal, foreign, state or local law, statute, ordinance,
rule, regulation or court or administrative order, or any agreement,
arrangement,
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or commitment to which Fifth Third is subject or bound; (ii) to the best
knowledge of the chief executive officer and chief financial officer of Fifth
Third, result in the creation of or give any person the right to create any
material lien, charge, encumbrance, security agreement or any other material
rights of others or other material adverse interest upon any material right,
property or asset belonging to Fifth Third or any of its subsidiaries other than
such rights as may be given the shareholders of Ashland pursuant to the
provisions of Sections of Kentucky Revised Statutes Sections 27lB.13-010 through
271B.13-310; (iii) terminate or give any person the right to terminate, amend,
abandon, or refuse to perform any material agreement, arrangement or commitment
to which Fifth Third is a party or by which Fifth Third's rights, properties or
assets are subject or bound; or (iv) accelerate or modify, or give any party
thereto the right to accelerate or modify, the time within which, or the terms
according to which, Fifth Third is to perform any duties or obligations or
receive any rights or benefits under any material agreement, arrangements or
commitments.
G. Complete and accurate copies of (i) the Second Amended Articles of
Incorporation, as amended, and (ii) the Code of Regulations of Fifth Third in
force as of the date hereof have been delivered to Ashland.
H. To the best knowledge of the chief executive officer of Fifth Third,
neither Fifth Third nor any of its subsidiaries has knowingly engaged in any
activity or omitted to take any action which, in any material way, has resulted
or could result in the violation of (i) any local, state or federal law or (ii)
any regulation, order, injunction or decree of any court or governmental body,
the violation of either or which could reasonably be expected to have a material
adverse effect on the financial condition Fifth Third and its subsidiaries taken
as a whole. To the best knowledge of the chief executive officer of Fifth Third,
Fifth Third and its subsidiaries possess all licenses, franchise, permits and
other governmental authorizations necessary for the continued conduct of their
businesses without material interference or interruption.
I. 1. To the best knowledge of the chief executive officer of Fifth Third,
neither the representations and warranties contained in this Affiliation
Agreement nor 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 Ashland is held to consider the
adoption of the 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 Ashland 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,
1997 and reports on Form 10-Q for the quarters ended March 31 and June 30, 1998;
b. any Current Report on Form 8-K with respect to any event occurring after
December 31, 1997 and prior to the date of this Affiliation Agreement;
c. any report filed by Fifth Third to amend or modify any of the reports
described above; and
d. all proxy statements prepared in connection with meetings of Fifth
Third's shareholders held or to be held subsequent to December 31, 1997.
The information set forth in the documents described in this Section
(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, 1997
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
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to Ashland. Fifth Third timely shall furnish Ashland with copies of all reports
filed by Fifth Third with the SEC subsequent to the date of this Affiliation
Agreement and until the Closing Date.
J. There are no actions, suits, proceedings, investigations or assessments
of any kind pending or, to the best knowledge of the chief executive officer and
chief financial officer of Fifth Third, threatened against Fifth Third or any
Fifth Third subsidiary, which reasonably can be expected to result in any
material adverse change in the consolidated financial condition, operations or
business of Fifth Third.
K. Since December 31, 1997 to the date hereof, none of Fifth Third's
subsidiaries has incurred any unusual or extraordinary loan losses which would
be material to Fifth Third on a consolidated basis; and to the best knowledge
and belief of the chief executive officer and chief financial officer of Fifth
Third, and in the light of any banking and thrift subsidiaries' historical loan
loss experience and their managements' analysis of the quality and performance
of their respective loan portfolios, as of December 31, 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. 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 the Agreement.
N. Fifth Third has no unfunded liabilities with respect to any Benefit Plan
(as such term is defined in Section 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
consistently applied ("GAAP") in the most recent year-end, audited financial
statements of Fifth Third supplied to Ashland 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 December 31, 1997, to
the date hereof Fifth Third and its affiliates, on a consolidated basis, have
not incurred any unusual or extraordinary losses in their respective investment
portfolios, and, except for events relating to the business environment in
general, including market fluctuations, the management of Fifth Third is not
aware of any events which are reasonably certain to occur in the future and
which reasonably can be expected to result in any material adverse change in the
quality or performance of the investment portfolios of Fifth Third and its
affiliates on a consolidated basis.
P. As of the date hereof, Fifth Third is not aware of the existence of any
factor that would materially delay or materially hinder issuance of any of the
required regulatory approvals necessary to consummate the Merger or the other
transactions contemplated hereby.
IV. OBLIGATIONS OF ASHLAND BETWEEN THE DATE OF THIS AFFILIATION AGREEMENT AND
THE EFFECTIVE TIME.
A. Ashland, in consultation with Fifth Third, will take all actions
necessary to call and hold its annual or a special meeting of its shareholders
as soon as practicable after the Fifth Third registration statement relating to
this transaction has been declared effective by the Securities and Exchange
Commission ("SEC") and under all applicable state securities laws for the
purpose of approving and adopting the 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 Ashland intends to inform the shareholders of
Ashland in the proxy materials relating to the annual or special meeting that
all directors of Ashland presently intend to vote all shares of Ashland Common
Stock which they own of record in favor of approving the Agreement and any such
other necessary documents or actions, and all directors will recommend approval
of the Agreement to the other shareholders of Ashland, subject only to such
directors' fiduciary obligations, their receipt of an updated fairness opinion
from Professional Bank Services ("PBS") received immediately prior to the
mailing of the
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proxy statement and their review of Fifth Third's registration statement to be
filed with the SEC as set forth in Section herein, and their reasonable
satisfaction with the information set forth therein.
B. (i) Consistent with GAAP, Ashland agrees that on or before the Effective
Time based on a review of the Bank Subsidiary's loan losses, current classified
assets and commercial, multi-family and residential mortgage loans and
investment portfolio, Ashland 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, provided that no
adjustment to general valuation allowances or reserves shall be made until
immediately prior to the Effective Time and all conditions precedent to the
obligations of the parties hereto have either been satisfied or waived as
confirmed by such parties in writing. Fifth Third shall provide such assistance
and direction to Ashland as is necessary in conforming to such polices,
practices, procedures and asset dispositions which are mutually agreeable
between the date of this Affiliation Agreement until the Effective Time; and
(ii) from the date of this Affiliation Agreement until the Effective Time,
Ashland and the Bank Subsidiary each will be operated in the ordinary course of
business, and neither of them will, without the prior written consent of Fifth
Third, which consent shall not be unreasonably withheld: make any changes in its
capital or corporate structures; issue any additional shares of its Ashland
Common Stock other than pursuant to the exercise of options granted prior to the
date hereof; issue any other equity securities, other than pursuant to the
exercise of options granted prior to the date hereof; 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 $25,000, per agreement, make,
enter into or renew any agreement for services to be provided to Ashland or the
Bank Subsidiary or permit the automatic renewal of any such agreement, except
any agreement for services having a term of not more than three months or
requiring the expenditure of not more than $25,000 per agreement (for this
purpose the phrase "permit the automatic renewal" includes the failure to send a
notice of termination of such contract if such failure would constitute a
renewal) open for business any branch office which has been approved by the
appropriate regulatory authorities but not yet opened or apply to the
appropriate regulatory authorities to establish a new branch office or expand
any existing branch office; acquire, become obligated to acquire, or enter into
any agreement to acquire, any banking or non-banking company or any branch
offices of any such companies; declare or pay any cash dividends on its own
stock other than normal and customary cash dividends per month or quarter paid
in such amounts and at such times as Ashland historically has done on its
Ashland Common Stock (provided such covenant shall only apply to Ashland and
provided subsequent to the Merger, Ashland shareholders will only receive
regularly paid dividends on Fifth Third stock), pay any stock dividends or make
any other distributions on its stock other than cash dividends as described in
the immediately preceding clause; change or otherwise amend any Benefit Plans
other than as required by law or as contemplated herein; and provide any
increases in employee salaries or benefits other than in the ordinary course of
business Ashland agrees that it will not sell or otherwise dispose of or
encumber any of the shares of the capital stock of the Bank Subsidiary which are
now owned by it.
C. Not later than the 15th day prior to the Effective Time, Ashland 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 "Ashland Affiliates"). Ashland shall
use its best efforts to cause each Ashland Affiliate to execute and deliver to
Fifth Third on or before the Effective Time an agreement in the form of Appendix
IV.C 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 Kentucky Department of Financial Institutions, and any other
governmental agencies as are required to secure the requisite approval of such
agencies to the consummation of the transactions provided for in the Agreement,
and the parties shall cooperate in the preparation of an
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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 Ashland in this
transaction (the expenses thereof, other than accounting, legal, investment
banking, financial consulting and associated expenses of Ashland and its
affiliates, to be paid by Fifth Third), and any other laws applicable to the
transactions provided for in the Agreement. Fifth Third shall use all reasonable
efforts to file all such applications within sixty (60) days of the date of this
Affiliation Agreement and to promptly secure all such approvals. Ashland shall
have the right to review, comment on and approve the proxy statement and any
amendments thereto included in the registration statement, prior to being filed.
Ashland agrees that it will, as promptly as practicable after request and at its
own expense, provide Fifth Third with all information and documents concerning
Ashland and Bank Subsidiary, as shall be required in connection with preparing
such applications, registration statements and other documents and in connection
with securing such approvals. Fifth Third agrees that it will, as promptly as
practicable after request and at its own expense, provide Ashland 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 Ashland and
in connection with approvals required to be obtained by Ashland hereunder.
B. Each of the parties hereto agrees to use its best efforts and to
cooperate with the other party in all reasonable respects in order to carry out
and consummate the transactions contemplated by the 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. Ashland agrees to permit Fifth Third, its officers, employees,
accountants, agents and attorneys, and Fifth Third agrees to permit Ashland, 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 Bank Subsidiary and The Fifth Third Bank as well, for the
purpose of making a detailed examination, or updating and amplifying prior
examinations, of the financial condition, assets, liabilities, legal compliance,
affairs and the conduct of the business of Ashland and the Bank Subsidiary or
Fifth Third or The Fifth Third Bank, 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 Section hereof); provided, however, that any such
examination by Fifth Third or Ashland shall not relieve Fifth Third or Ashland
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. 1. Ashland or Bank Subsidiary shall take all actions necessary to
discontinue any and all 401(K) and employee after tax contributions under any
Qualified Benefit Plan as of a date at least 30 days preceding the Effective
Time. Ashland or Bank Subsidiary shall have the right to make discretionary
contributions to the Bank of Ashland, Inc. Profit Sharing Plan ("Profit Sharing
Plan") with respect to the 1998 plan year but such contributions shall not
exceed $250,000, and neither Ashland or the Bank Subsidiary shall have any
obligation to freeze the Profit Sharing Plan prior to the Effective Time.
2. If Fifth Third so requests, Ashland or the Bank Subsidiary shall develop
a plan and timetable for terminating any or all of the Qualified Benefit Plans
and, with the advance written approval of Fifth Third, shall proceed with the
implementation of said termination plan and timetable to the extent permitted by
law and provided that no such termination shall occur before the Effective Time.
3. Ashland and Bank Subsidiary, without the advance written consent of
Fifth Third shall not (a) adopt any amendments to the Qualified Benefit Plans
after the date of this Affiliation Agreement unless required by applicable law
or the plan document (however, Fifth Third will be given advance notice of any
such amendment); or (b) make any distributions from the Qualified Benefit Plans
after the date of this Affiliation Agreement other than the payment of benefits
to participants or beneficiaries as permitted under the terms of the plans.
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4. Ashland or Bank Subsidiary shall provide to Fifth Third within 60 days
after the signing of this Affiliation Agreement, documentation reasonably
satisfactory to Fifth Third demonstrating that the requirements of Sections 404,
412, 415, 416 and 401(k) and (m) of the Code, to the extent applicable, have
been satisfied by all of its Qualified Benefit Plans.
5. With respect to any Benefit Plan (excluding the deferred compensation
arrangements with William A. Stinnett, III, as amended, dated September 11, 1990
and October 12, 1993, respectively and with Paul Grumbles dated January 31,
1994) that provides for vesting of benefits, there shall be no discretionary
acceleration of vesting without Fifth Third's consent whether or not such
discretionary acceleration of vesting is provided under the terms of the Benefit
Plan; provided that a Benefit Plan which pursuant to its terms provides for an
acceleration of vesting upon a change of control of Ashland shall not be deemed
to involve a discretionary acceleration of vesting and vesting thereunder shall
accelerate as of the Effective Time.
E. Fifth Third acknowledges receipt of a copy of the agreements, dated
September 11, 1990, as amended, and October 12, 1993, as amended, between
William A. Stinnett III and Ashland and dated January 31, 1994 between Paul W.
Grumbles and Ashland (the "Phantom Stock Options"). Fifth Third agrees to allow
the Phantom Stock Options granted to William A. Stinnett III and Paul W.
Grumbles to be paid according to their terms, (provided that such payments will
be limited so that no amount of such payment will qualify as an "excess
parachute payment" under Section 280G of the Internal Revenue Code of 1986, as
amended). In addition, Fifth Third agrees that it will enter into an Employment
Agreement with Mr. Stinnett for the employment of Mr. Stinnett as Chairman of
Fifth Third Bank of Southern Ohio through December 31, 2001.
F. Fifth Third will create an advisory board in Ashland, Kentucky as
required by the laws of the Commonwealth of Kentucky. Fifth Third as sole
shareholder of Fifth Third Bank of Southern Ohio will appoint Paul Grumbles to
chair that advisory board. To the extent that Mr. Grumbles and his wife are
currently covered by Ashland's medical coverage, those policies would either be
assumed by Fifth Third or Mr. Grumbles and his wife would be admitted to
coverage under Fifth Third's plan as a retiree. In which case, Mr. Grumbles
would be able to continue to participate in such health plans under Fifth
Third's retiree policy for health insurance coverage at the retiree's cost.
G. Ashland shall furnish Fifth Third with unaudited, consolidated financial
statements as at September 30, 1998, and for the quarter 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, as hereinafter defined. In the event that the Closing
Date does not occur before December 31, 1998, Ashland shall furnish Fifth Third
with its audited, consolidated financial statements as at December 31, 1998 and
for the year then ended as soon as they are reasonably available.
H. Fifth Third shall furnish to Ashland its unaudited consolidated
financial statements as at September 30, 1998 and for the nine (9) months then
ended as soon as such statements publicly are available and shall continue to
furnish information for subsequent calendar quarter periods to Ashland as soon
as such becomes publicly available until the Closing Date.
I. Fifth Third will take no action or omit to take any action that could
(i) delay consummation of the Merger; (ii) diminish the likelihood of the Merger
receiving all regulatory approvals or otherwise being consummated; or (iii)
prevent the Merger from qualifying as a reorganization under Section 368(a) of
the Code.
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 Ashland shall have duly approved the Agreement in
accordance with and as required by law and in accordance with its Articles of
Incorporation and Bylaws.
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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 Kentucky Department of Financial Institutions 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 the Effective Time without material adverse
effect to Fifth Third or Ashland 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 Ashland which specifically refers to the condition or conditions being
waived:
1. All of the representations and warranties of Ashland set forth in
Section of this Affiliation Agreement shall be true and correct in all material
respects as of the date of this Affiliation 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 (a) 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 (b) for breaches of
representations and warranties which would not have, or would not reasonably be
expected to have, a material adverse effect on the business or operations of
Ashland or the Bank Subsidiary taken as a whole.
2. Ashland shall have performed all of the obligations required of it under
the terms of this Affiliation 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
Ashland and the Bank Subsidiary taken as a whole.
3. Stites & Harbison, counsel for Ashland and the Bank Subsidiary, shall
have delivered an opinion addressed to Fifth Third in substantially the form
appended hereto as Appendix A.
4. The aggregate amount of consolidated shareholders' equity (including
Common Stock, Additional Paid-In Capital and Retained Earnings and excluding
Treasury Stock) of Ashland 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 GAAP, shall not be less than $24,342,000. For purposes of this
Section VI.B.4, any expenses or accruals after the date hereof relating to: (i)
the adjustments contemplated by Section IV.B of this Affiliation Agreement; (ii)
expenses associated with the Agreement or the Merger; or (iii) expenses or
losses associated with the valuing of Ashland's or the Bank Subsidiary's
investments at current market value as required by generally accepted accounting
principles (including, without limitation, the requirement of accounting rule
SFAS 115) shall be excluded for purpose of calculation of Ashland's shareholder
equity as contemplated herein.
5. The receipt of a certificate from Ashland and the Bank Subsidiary,
executed by the chief executive 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 hereof were true and correct
as of the date of this Affiliation Agreement and as of the Closing Date in all
material respects, except (y) for any such representations and warranties made
as of a specified date, which shall be true and correct in all material respects
as of such date and (z) for breaches of representations and warranties which
would not have, or would not reasonably be expected to have, a material adverse
effect on the business or operations of Ashland and the Bank Subsidiary taken as
a whole; and (ii) it has met and fully complied in all material respects with
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all of the obligations required of it under the terms of the 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
Ashland and the Bank Subsidiary taken as a whole.
6. The total issued and outstanding shares of Ashland Common Stock shall
not exceed 125,584 shares.
C. Conditions to the Obligations of Ashland:
The obligation of Ashland to consummate the transactions provided for in
the Agreement is subject to the fulfillment at or prior to the Effective Time of
each of the following conditions unless waived by Ashland 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 of this Affiliation Agreement shall be true and correct in all material
respects as of the date of this Affiliation 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 the 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, Esq., Counsel for Fifth Third, shall have delivered an
opinion addressed to Ashland in substantially the form appended hereto as
Appendix B.
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 were true and correct as of
the date of this Affiliation 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 the 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 Fifth Third.
5. Fifth Third shall have registered its shares of Fifth Third Common Stock
to be issued to the Ashland 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 Ashland
shareholder hereunder shall have been authorized for trading on the National
Market System of the National Association of Securities Dealers upon official
notice of issuance.
6. Fifth Third's Trust Department, as the Exchange Agent, will acknowledge
in writing to Ashland that it is in receipt of (i) certificates representing a
whole number of shares of Fifth Third Common Stock to be issued to the
shareholders of Ashland pursuant to this Affiliation Agreement, and (ii)
sufficient cash to be paid to the Ashland shareholders for fractional shares.
7. Ashland shall have received, as of the mailing of its Proxy
Statement/Prospectus contained in the Registration Statement, an update of the
opinion delivered to the board of directors of Ashland prior to the date of the
Affiliation Agreement to the effect that the Merger consideration is fair from a
financial viewpoint to the holders of Ashland Common Stock. Ashland shall use
its best efforts to obtain this update of the fairness opinion required by this
section.
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8. Fifth Third, Ashland and its shareholders shall have received an opinion
of Graydon, Head & Ritchey, dated as of the Closing Date, in form and substance
satisfactory to Ashland and its counsel, to the effect that the Merger will
constitute a reorganization within the meaning of Section 368(a)(1)(A) of the
Code.
VII. ADDITIONAL COVENANTS
A. The Bank Subsidiary shall be merged with and into Fifth Third Bank, to
be effective the Effective Time. The parties hereto agree to cooperate with one
another to effect such merger. Upon consummation of any merger of the Bank
Subsidiary, the separate corporate existence of the Bank Subsidiary shall cease
by operation of law.
B. Fifth Third shall use its best efforts to employ at Fifth Third or other
Fifth Third subsidiaries or affiliates as many of the Ashland and Bank
Subsidiary employees who desire employment within the Fifth Third holding
company system as possible, to the extent of available positions and consistent
with Fifth Third's standard staffing levels and personnel policies; provided
that such continuing employees will not be subject to any exclusion or penalty
for pre-existing conditions that were covered under the Bank Subsidiary's
medical plan immediately prior to the Effective Time or any waiting period
relating to coverage under Fifth Third's medical plan. Each employee of Ashland
and the Bank Subsidiary who becomes an employee of Fifth Third or any of its
subsidiaries or affiliates at or immediately subsequent to the Merger shall be
entitled to participate in all employee benefit plans sponsored by Fifth Third
or its subsidiaries or affiliates on the same terms and to the same extent as
similarly situated employees. To the extent permitted by applicable law and
provided Fifth Third determines that the Bank of Ashland, Inc. Profit Sharing
Plan] was established, funded, managed and operated in accordance with
applicable law, Fifth Third shall take the required steps to merge Bank of
Ashland, Inc. Profit Sharing Plan] into Fifth Third Bancorp Master Profit
Sharing Plan. If the Bank of Ashland, Inc. Profit Sharing Plan] is merged into
the Fifth Third Bancorp Master Profit Sharing Plan, then upon said merger,
service taken into account under the Bank of Ashland, Inc. Profit Sharing Plan]
shall count as service taken into account for all purposes under the Fifth Third
Bancorp Master Profit Sharing Plan. For purposes of all employee benefit plans,
as defined by ERISA, sponsored by Fifth Third or its subsidiaries or affiliates,
including the Fifth Third Bancorp Master Profit Sharing Plan, prior service with
Ashland or Bank Subsidiary shall be taken into account for purposes of
determining eligibility for and vesting, if applicable, of benefits. Fifth Third
ceased admitting new participants to the Fifth Third Bancorp defined benefit
pension plan as of January 1, 1998. Employees of Ashland and the Bank Subsidiary
will not be admitted to the Fifth Third Bancorp defined benefit pension plan.
Those employees who are not to be employed by Fifth Third or who are
terminated or voluntarily resign after being notified that, as a condition of
employment, such employee must work at a location more than thirty (30) miles
from such employee's former location of employment or that such employee's
salary will be decreased more than twenty percent (20%), in any case and in both
cases, within six months after the Effective Time, and who sign and deliver a
separation agreement and general release in the form attached as Appendix VII.B.
hereto, shall be entitled to termination pay equal to Fifth Third's current
severance policies and procedures with credit for prior service with Ashland or
Bank Subsidiary. Fifth Third shall provide sufficient notification to Ashland of
those employees it will not be hiring in order that such employees terminated by
Ashland can be given appropriate notice of termination in advance of the
effectiveness thereof. Nothing contained in this Paragraph VII.B. shall be
construed or interpreted to limit or modify in any way Fifth Third's at will
employment policy.
C. 1. From and after the Effective Time, Fifth Third shall assume the
obligations of Ashland and Bank Subsidiary or any of their subsidiaries arising
under applicable Kentucky and Federal law in existence as of the date hereof or
as amended prior to the Effective Time and under the Ashland Articles of
Incorporation and Bylaws or Bank Subsidiary Articles or Bylaws as in effect on
the date hereof to indemnify, defend and hold harmless each person who is now,
or has been at any time prior to the date hereof or who become, prior to the
Effective Time, an officer or director of Ashland, Bank Subsidiary, or any of
their subsidiaries (the "Indemnified Parties") against losses, claims, damages,
costs, expenses (including reasonable attorneys' fees), liabilities or
judgements or amounts that are paid in settlement (which settlement shall
require the prior written consent of Fifth Third) of or in connection with any
claim, action, suit, proceeding or investigation (a
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"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 Ashland, the Bank
Subsidiary or any of their subsidiaries if such Claim pertains to any matter or
fact arising, existing or occurring prior to the Effective Time (including,
without limitation, the merger and the transactions contemplated by the
Agreement), regardless of whether such Claim is asserted or claimed prior to, at
or after the Effective Time. Fifth Third shall pay expenses in advance of the
final disposition of any such action or proceeding to each Indemnified Party to
the full extent permitted by law and under the Ashland Articles of Incorporation
or Bylaws or Bank Subsidiary's Articles or Bylaws. Fifth Third's assumption of
the indemnification obligations of Ashland, Bank Subsidiary or any of their
subsidiaries as provided herein shall continue for a period of five years after
the Effective Time or, in the case of claims asserted prior to the fifth
anniversary of the Effective Time until such matters are finally resolved. Any
Indemnified Party wishing to claim indemnification under this provision, upon
learning of any Claim shall notify Fifth Third (but the failure to so notify
Fifth Third shall not relieve Fifth Third from any liability which Fifth Third
may have under this section except to the extent Fifth Third is materially
prejudiced thereby). Notwithstanding the foregoing, the Indemnified Parties as a
group may retain only one law firm to represent them with resect to each matter
under this section unless there is, under applicable standards of professional
conduct, a conflict on any one significant issue between the positions of any
two or more Indemnified parties.
2. From and after the Effective Time, the directors, officers and employees
of Ashland and its subsidiaries who become directors, officers or employees of
Fifth Third or any of its subsidiaries, except for the indemnifications rights
set forth in subparagraph (i) above, shall have indemnification rights with
prospective application only. The prospective indemnification rights shall
consist of such rights to which directors, officers or employees of Fifth Third
or the subsidiary by which such person is employed are entitled under the
provisions of the Articles of Incorporation of Fifth Third or similar governing
documents of Fifth Third or its applicable subsidiaries, as in effect from time
to time after the Effective Time, as applicable, and provisions of applicable
law as in effect form time to time after the Effective Time.
3. The obligations of Fifth Third provided under this Section 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.
4. In the event that Ashland currently maintains such insurance, Fifth
Third shall also purchase and keep in force for a five year period, a policy of
directors' and officers' liability insurance to provide coverage for acts or
omissions of the type currently covered by Ashland's existing directors' and
officers' liability insurance for acts or omission occurring on or prior to the
Effective Time, but only to the extent such insurance may be purchased or kept
in full force on commercially reasonable terms taking into account the cost
thereof and the benefits provided thereby. It is agreed that such costs shall be
commercially reasonable so long as they do not exceed 200% of the costs
currently paid for such coverage by Ashland.
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 Ashland concerning
Ashland or the Bank Subsidiary. Ashland 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 Ashland or Fifth Third, as the case may be,
and shall not be used by Fifth Third or Ashland, as the case may be, in any way
detrimental to Ashland or Fifth Third.
E. All notices under this Affiliation Agreement 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 Ashland to William A. Stinnett, III, Ashland Bankshares, Inc., 1422
Winchester Avenue, Ashland, Kentucky 41101- 7556, with a copy to Walter R.
Byrne, Jr., Esq., Stites & Harbison, 250 W. Main Street, Suite 2300, Lexington,
Kentucky 40507, 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
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copy to Paul L. Reynolds, Esq., Senior Vice President and General Counsel, Fifth
Third Bank, Legal Division, 38 Fountain Square Plaza, Mail Drop 10AT76,
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. The Agreement, together with the written instruments specifically
referred to herein and such other written agreements delivered by Fifth Third or
Ashland to each other pursuant hereto constitute the entire agreement between
the parties with regard to the transactions contemplated herein and supersede
any prior agreements, whether oral or in writing, This Affiliation 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 Affiliation Agreement to the
Effective Time, except with the prior approval of Fifth Third or to permit the
directors of Ashland to exercise their fiduciary duties, Ashland shall not, and
shall not permit its representatives to, directly or indirectly, initiate,
solicit, negotiate with, encourage discussions with, provide information to, or
agree to a transaction with, any corporation, partnership, person or other
entity or group concerning any merger of either Ashland or the Bank Subsidiary
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 Ashland or the Bank Subsidiary (any such
transaction being referred to herein as an "Acquisition Transaction"). Subject
to the exercise by the directors of Ashland of their fiduciary duties, Ashland
promptly shall communicate to Fifth Third the terms of any proposal which it may
receive in respect of an Acquisition Transaction and any request by or
indication of interest on the part of any third party with respect to initiation
of any Acquisition Transaction or discussions with respect thereto.
H. Fifth Third and Ashland 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 transactions contemplated by the
Agreement relating to the indemnifying party which is based or made in reliance
upon any representation, warranty, or covenant of such party in the Agreement or
any certification, document, or other information furnished or to be furnished
by such party pursuant to the 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,
Ashland and the Bank Subsidiary 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 Ashland and
the Bank Subsidiary for a period of five (5) years from the date such agreements
are executed. Fifth Third agrees that the cost of the conversion of Ashland and
the Bank Subsidiary 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 Ashland and
the Bank Subsidiaries for the Jeanie(R) service shall not exceed those charged
by the current EFT service provider of Ashland and the Bank Subsidiary, subject
to any increases in such costs and fees which would otherwise be permitted under
their current EFT processing agreements. In the event this Affiliation Agreement
is terminated pursuant to Section hereof for any reason except a material breach
or default by Ashland, and if, in such instance, Ashland desires to convert to
another provider of EFT services, Fifth Third shall pay all costs and expenses
associated with such conversion, provided, however, such costs and expenses are
reasonable when compared to costs and expenses ordinarily charged in the EFT
services industry. In no event shall Ashland or the Bank Subsidiary be required
to take any actions pursuant to this Paragraph I or otherwise under the
Agreement that are contrary to any applicable law, regulation, rule or order or
which constitute a breach of the fiduciary duties of the directors of Ashland or
the Bank Subsidiary.
J. Fifth Third and Ashland shall agree with each other as to the form and
substance of any press release related to the 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
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contained herein shall prohibit either party from making any disclosure which
its counsel deems required by law.
K. Each party hereto shall bear and pay all costs and expenses incurred by
it in connection with the transactions contemplated by the 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.
1. Between the date hereof and the Closing Date, Ashland 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 Affiliation 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 Ashland and its subsidiaries, taken as a whole.
2. Between the date hereof and the Closing Date, Fifth Third shall promptly
advise Ashland 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 Affiliation 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 Ashland and its subsidiaries, taken as a whole.
VIII. TERMINATION
A. This Affiliation Agreement may be terminated at any time prior to the
Effective Time by written notice delivered by Fifth Third to Ashland or by
Ashland to Fifth Third in the following instances:
1. By Fifth Third or Ashland, if there has been to the extent contemplated
in Sections and 2. and Sections 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 has not been cured (if capable of cure) within thirty (30) days after
receipt of written notice, provided, the party in default shall have no right to
terminate for its own default.
2. By Fifth Third or Ashland, if the business or assets or financial
condition of the other party, in each case taken as a whole, shall have
materially and adversely changed from that in existence at December 31, 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 Bank
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
Affiliation Agreement.
3. By Fifth Third or Ashland, if the merger transaction contemplated herein
has not been consummated by February 28, 1999, 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 Ashland.
5. By Fifth Third if any event occurs which renders impossible the
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 and B.
herein and non-compliance is not waived by Fifth Third.
6. By Ashland if any event occurs which renders impossible of satisfaction
in any material respect one or more of the conditions of the obligations of
Ashland to effect the Merger as set forth in Sections and C. herein and
non-compliance is not waived by Ashland.
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7. By Ashland if it determines by a vote of the majority of the members of
its Board of Directors at any time during the ten (10) day period commencing two
(2) days after the Determination Date if both of the following conditions are
satisfied:
(a) The Average Closing Price of Fifth Third Common Stock is less than
$51.75; and,
(b) (ii) the number obtained by dividing the Average Closing Price by the
Starting Price shall be less than (ii) the number obtained by dividing the Index
Price on the Determination Date by the Index Price on the Starting Date and
subtracting 0.10 from the quotient in this clause (b)(ii);
If Ashland elects to terminate this Affiliation Agreement pursuant to this
Section , it shall give notice to Fifth Third by the end of the ten (10) day
period referenced at the beginning of this Section , provided such notice may be
withdrawn at any time. If such notice is given, Fifth Third and Ashland will
work together to reach an agreement on terms of the transaction. If Fifth Third
and Ashland cannot agree on such adjustment within ten (10) days of the date
such notice is given, this Affiliation Agreement and the transaction that is the
subject hereof shall terminate.
For purposes of this Section VIII.A., 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 full trading days ending on the Determination Date
as reported The Wall Street Journal, expressed in decimal figures carried to
five figures.
"Determination Date" shall mean the date which is the later of (i) the date
of the Ashland shareholder meeting held to vote on the Merger and (ii) the date
the last governmental approval required to consummate the Merger has been
received and all governmental waiting periods before the Merger can be
consummated shall have expired.
"Index Group" means the sixteen (16) 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
sixteen (16) bank holding companies and the weights attributed to them are as
set forth in the form attached as Appendix VIII.A.7.
"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 market capitalizations listed above) of the closing prices on such date
of the common stock of the companies comprising the Index Group.
"Starting Date" means September 8, 1998.
"Starting Price" means $51.75 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 Section
VIII.A.7.
B. If Ashland shareholders, acting at a meeting held for the purpose of
voting upon the Agreement, fail to approve such agreements in the manner
required by law, then the Agreement shall be deemed to be automatically
terminated.
C. Upon termination as provided in this Section, this Affiliation
Agreement, except for the provisions of Paragraphs D, H and K of Section hereof
shall be void and of no further force or effect, and, except as provided in
Paragraph H of Section 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
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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 Affiliation
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 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 Ashland and Fifth Third) with the
Secretaries of the States of Ohio and Kentucky in accordance with law and the
Plan of Merger, 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 Effective Time may be changed by such mutual agreement. None of the
representations, warranties and agreements in this Affiliation Agreement or in
any instrument delivered pursuant to this Affiliation 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 Affiliation Agreement may be amended, modified or supplemented by the
written agreement of Ashland and Fifth Third upon the authorization of each
company's respective Board of Directors at any time before or after approval of
the Agreement by the shareholders of Ashland, but after any such approval by the
shareholders of Ashland, 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 the Agreement.
XI. GENERAL
This Affiliation 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
Affiliation 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., V.E, and VI.C.8 none of the provisions hereof shall be binding
upon and inure to the benefit of any other person, firm or corporation
whomsoever. Neither this Affiliation 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 Ashland shareholders
pursuant to the terms of this Affiliation Agreement.
XII. COUNTERPARTS
This Affiliation 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.
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<PAGE> 120
FIFTH THIRD BANCORP
(SEAL)
By: /s/ Robert P. Niehaus
------------------------------------
Robert P. Niehaus, Executive Vice
President
Attest: /s/ Paul L. Reynolds
--------------------------------
Paul L. Reynolds,
Assistant Secretary
ASHLAND BANKSHARES, INC.
By: /s/ Paul W. Grumbles
------------------------------------
Name: Paul W. Grumbles
----------------------------------
Title: Chairman
-----------------------------------
Attest: /s/ William A. Stinnett
----------------------------------
Name: William A. Stinnett
----------------------------------
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<PAGE> 121
AMENDMENT TO
AFFILIATION AGREEMENT
This Amendment to Affiliation Agreement (the "Amendment") is entered as of
this 15th day of December, 1998, by and between THE FIFTH THIRD BANK, an Ohio
banking corporation ("Fifth Third") and ASHLAND BANKSHARES, INC., a Kentucky
corporation ("Ashland").
W I T N E S S E T H :
WHEREAS, Fifth Third and Ashland entered into that certain Affiliation
Agreement, dated September 8, 1998 (the "Agreement");
WHEREAS, Ashland and Fifth Third desire to amend the Agreement to extend
the term of the Agreement, and to amend certain other provisions of the
Agreement on the terms and subject to the conditions set forth herein;
NOW THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. Amendments.
(a) Article VIII, Section A., Subsection 3 of the Agreement is hereby
amended and restated in its entirety as follows:
By Fifth Third or Ashland, if the merger transaction contemplated
herein has not been consummated by June 30, 1999, 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.
(b) Article V, Section D., Subsection 1 shall be amended and restated
in its entirety as follows:
1. Ashland and Bank Subsidiary shall take all actions necessary to
discontinue any and all 401(K) and employee after tax contributions
under any Qualified Benefit Plans as of a date which is 30 days
preceding the Effective Time. Ashland and Bank Subsidiary shall have the
right to make discretionary contributions to the Bank of Ashland, Inc.
Profit Sharing Plan ("Profit Sharing Plan") (a) with respect to the 1998
plan year but such contributions shall not exceed $250,000, and (b) with
respect to the 1999 plan year, but such contributions will not exceed
$20,833 per month (subject to the limitations of Sections 404 and 415 of
the Code) and shall be made until the last full month prior to the
Effective Time, and neither Ashland or Bank Subsidiary shall have any
obligation to freeze the Profit Sharing Plan prior to the Effective
Time. Prior to contributions with respect to the 1999 plan year, Ashland
will amend the Profit Sharing Plan to permit such contributions and
shall obtain the prior approval of Fifth Third prior to adopting such
amendment, which approval will not be unreasonably withheld if the
proposed amendment meets the intent of this Section.
(c) Paragraph 1 of Schedule 1 attached to the Agreement is hereby
amended and restated in its entirety as follows:
1. Ashland paid a quarterly dividend to each of its shareholders in
the amount of $1.80 per share on each of 3/15/98, 6/15/98, 9/1/98 and
12/15/98. Ashland intends to declare a quarterly dividend on March 15,
1999 and, unless the Closing Date occurs on a date prior thereto, on
June 15, 1999. Ashland intends to increase such dividends in the same
percentage as Fifth Third increased its quarterly dividend in December,
1998 or may increase such dividend in subsequent quarters thereafter.
Fifth Third consents to the payment of such dividends and to any such
increases commensurate with Fifth Third's dividend increases.
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<PAGE> 122
2. General.
Except as expressly modified hereby, the Agreement remains unaltered and in
full force and effect.
(b) Capitalized terms used and not otherwise defined herein will have
the meanings set forth in the Agreement.
(c) This Amendment shall be considered an integral part of the
Agreement, and all references to the Agreement in the Agreement itself or
any document referring thereto shall, on and after the date of execution of
this Amendment, be deemed to be references to the Agreement as amended by
this Amendment.
(e) This Amendment will be binding upon and inure to the benefit of
Ashland and Fifth Third and their respective successors and assigns.
(f) This Amendment may be executed in one or more counterparts, each
of which will be deemed an original and all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, Ashland and Fifth Third have executed this Agreement by
their duly authorized officers as of the date first above written.
FIFTH THIRD BANCORP
By: /s/ ROBERT P. NIEHAUS
-------------------------------------
Robert P. Niehaus, Executive Vice
President
Attest: /s/ PAUL REYNOLDS
------------------------------------
Paul Reynolds, Assistant
Secretary
ASHLAND BANKSHARES, INC.
By: /s/ PAUL W. GRUMBLES
-------------------------------------
Paul W. Grumbles, Chairman
Attest: /s/ WILLIAM A. STINNETT
------------------------------------
William A. Stinnett, President
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<PAGE> 123
ANNEX B
PLAN OF MERGER DATED AS OF SEPTEMBER 8, 1998
BY AND BETWEEN
FIFTH THIRD BANCORP
AND
ASHLAND BANKSHARES, INC.
AND AMENDED
AS OF
FEBRUARY 18, 1999
<PAGE> 124
ANNEX B
PLAN OF MERGER
THIS PLAN OF MERGER (the "Plan") dated as of September 8, 1998, is adopted
and made by and between ASHLAND BANKSHARES, INC., a Kentucky corporation having
its principal place of business at 1422 Winchester Avenue, Ashland, Kentucky
41105 ("Ashland"), and FIFTH THIRD BANCORP, an Ohio corporation, having its
principal place of business at 38 Fountain Square Plaza, Cincinnati, Ohio 45263
("Fifth Third").
PRELIMINARY STATEMENTS:
A. Ashland is a corporation organized and existing under the laws of the
Commonwealth of Kentucky, the authorized capital stock of which consists of: (a)
two hundred thousand (200,000) shares of common stock, $10.00 par value per
share ("Ashland Common Stock"); and
B. Ashland owns all of the outstanding capital stock of Bank of Ashland,
Inc., a Kentucky banking corporation with its principal place of business
located in Ashland, Kentucky (the "Bank Subsidiary"); and
C. Fifth Third is a corporation organized and existing under the laws of
the State of Ohio, the authorized capital stock of which consists of three
hundred million five hundred thousand (300,500,000) shares of which three
hundred million (300,000,000) shares are classified as common stock, without par
value ("Fifth Third Common Stock") and five hundred thousand (500,000) shares
are classified as preferred stock without par value; and
D. Ashland and Fifth Third desire to enter into a merger transaction
pursuant to the provisions of the Kentucky Business Corporation Act and the
corporate laws of the State of Ohio whereby Ashland shall merge into Fifth
Third, which shall be the surviving corporation; and
E. The Boards of Directors of each of Ashland and Fifth Third and the
shareholders of Ashland have adopted and approved the merger upon the terms and
conditions set forth in an Affiliation Agreement dated September 8, 1998 (the
"Affiliation Agreement") and this Plan (the Affiliation Agreement and the Plan
are sometimes referred to herein together as the "Agreement").
F. The parties intend for the Merger to qualify as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) and related provisions
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements of the Affiliation Agreement contained, the parties hereto do hereby
adopt the following Plan:
I. MODE OF EFFECTUATING CONVERSION OF SHARES
A. Upon the terms and conditions set forth in the Agreement, Ashland shall
be merged into Fifth Third.
B. At the Effective Time, 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, as the case may be, of the Surviving
Corporation. 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.
C. At the Effective Time, each of the shares of Ashland Common Stock that
are issued and outstanding immediately prior to the Effective Time, other than
shares owned by Dissenting Shareholders, hereinafter defined, will, at the
Effective Time, be converted by virtue of the Merger and without further action,
into 9.754427 shares of Fifth Third Common Stock (the "Exchange Ratio")
D. At the Effective Time, all of the shares of Ashland 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 Ashland, except as aforesaid, their sole
rights as shareholders
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<PAGE> 125
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 Ashland Common Stock shall have been converted by virtue of the
Merger or to their rights as Dissenting Shareholders.
E. After the Effective Time, each holder of a certificate or certificates
for shares of Ashland Common Stock, other than Dissenting Shareholders, 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 Ashland 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 Fifth Third Trust Department, as exchange agent (the "Exchange Agent"), will
send a notice and transmittal form to each Ashland shareholder of record at the
Effective Time, other than Dissenting Shareholders, advising such shareholder of
the effectiveness of the Merger and the procedures for surrendering to the
Exchange Agent outstanding certificates formerly evidencing Ashland Common Stock
(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) in exchange for new certificates of Fifth
Third Common Stock and the cash payment for any fraction of a share. Until so
surrendered, each outstanding certificate that prior to the Effective Time
represented shares of Ashland Common Stock shall be deemed for all corporate
purposes to evidence ownership of the number of full shares of Fifth Third
Common Stock into which the same shall have been converted; provided, however,
that dividends or distributions otherwise payable with respect to shares of
Fifth Third Common Stock into which Ashland Common Stock shall have been so
converted shall be paid with respect to such shares only when the certificate or
certificates evidencing shares of Ashland 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.
F. The Exchange Ratio referred to in Section I.C shall be adjusted so as to
give the Ashland shareholders the economic benefit of any stock dividends,
reclassifications, recapitalizations, split-ups, exchanges of shares,
distributions or combinations or subdivisions of Fifth Third Common Stock
effected between the date of the Affiliation Agreement and the Effective Time.
In the event between the date of the Affiliation 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 Ashland shareholders, as of
the Effective Time.
G. When all necessary documents have been filed and recorded in accordance
with the laws of the States of Ohio and Kentucky, and at the Effective Time of
the Merger, the separate existence of Ashland shall cease and Ashland shall be
merged into Fifth Third (which will be the "Surviving Corporation"), which shall
continue its corporate existence under the laws of the State of Ohio under the
name "Fifth Third Bancorp".
H. 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.
I. 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
Regulations of the Surviving Corporation and in accordance with law.
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J. The Regulations of Fifth Third at the Effective Time shall be the
Regulations of the Surviving Corporation, until amended as provided in the
Affiliation Agreement and in accordance with law.
K. At the Effective Time, the effect of the Merger shall be as provided by
the applicable provisions of the laws of Ohio and Kentucky. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time: the
separate existence of Ashland shall cease; Fifth Third shall possess all assets
and property of every description, and every interest in the Affiliation
Agreement, 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 Ashland, and all obligations owing by or due each of Fifth Third
and Ashland 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 Kentucky Revised Statutes, Sections 271B.13-010
through 271B.13-310 (the "Dissenting Shareholders"); and all rights of creditors
of each Fifth Third and Ashland shall be preserved unimpaired, and all liens
upon the property of each of Fifth Third and Ashland shall be preserved
unimpaired, on only the property affected by such liens immediately prior to the
Effective Time.
L. From time to time as and when requested by the Surviving Corporation, or
by its successors or assigns, the officers and directors of Ashland in office at
the Effective Time shall execute and deliver such instruments and shall take or
cause to be taken such further or other action as shall be necessary in order to
vest or perfect in the Surviving Corporation or to confirm of record or
otherwise, title to, and possession of, all the assets, property, interests,
rights, privileges, immunities, powers, franchises and authority of Ashland and
otherwise to carry out the purposes of the Agreement.
M. The Agreement shall be filed (only if necessary) and recorded along with
Articles or a Certificate of Merger in accordance with the requirements of the
laws of the States of Ohio and Kentucky. Articles of Merger or a Certificate of
Merger shall not be filed with the Secretary of the States of Ohio or Kentucky
until, but shall be filed promptly after, all of the conditions precedent to
consummating the Merger as contained in Article VI of the Affiliation Agreement
shall have been fully met or effectively waived.
N. The Merger is intended to be a reorganization within the meaning of
Section 368(a) of the Code, and the Agreement is intended to be a "plan of
reorganization" within the meaning of the regulations promulgated under the Code
and for purposes of Sections 354 and 361 of the Code.
II. 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 of the Affiliation Agreement is subject to the
fulfillment on or prior to the Effective Time of each of the following
conditions:
1. The shareholders of Ashland shall have duly approved the
Agreement in accordance with and as required by law and in accordance
with its Articles of Incorporation and Bylaws.
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 Kentucky Department
of Financial Institutions 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 the Effective Time without material adverse effect to
Fifth Third or Ashland and other than regularly-scheduled regulatory
examinations.
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4. Any waiting period mandated by law in respect of the final
approval by any applicable Federal regulator(s) of the transaction
contemplated of the Affiliation Agreement shall have expired.
B. Conditions to the Obligations of Fifth Third:
The obligation of Fifth Third to consummate the transactions provided
for of the Affiliation Agreement 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 Ashland which specifically refers to
the condition or conditions being waived:
1. All of the representations and warranties of Ashland set forth
in Section II of the Affiliation Agreement shall be true and correct in
all material respects as of the date of the Affiliation Agreement and at
and as of the Closing Date (as of the Affiliation Agreement hereinafter
defined) as if each such representation and warranty was given on and as
of the Closing Date, except (a) 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 (b) for breaches of
representations and warranties which would not have, or would not
reasonably be expected to have, a material adverse effect on the
business or operations of Ashland or the Bank Subsidiary taken as a
whole.
2. Ashland shall have performed all of the obligations required of
it under the terms of the Affiliation 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 Ashland and the Bank Subsidiary taken as a
whole.
3. Stites & Harbison, counsel for Ashland and the Bank Subsidiary,
shall have delivered an opinion addressed to Fifth Third in
substantially the form appended to the Affiliation Agreement as Appendix
A.
4. The aggregate amount of consolidated shareholders' equity
(including Common Stock, Additional Paid-In Capital and Retained
Earnings and excluding Treasury Stock) of Ashland 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 GAAP, shall not
be less than $24,342,000. For purposes of this Section, any expenses or
accruals after the date hereof relating to: (i) the adjustments
contemplated by Section IV.B of the Affiliation Agreement; (ii) expenses
associated with the Agreement or the Merger; or (iii) expenses or losses
associated with the valuing of Ashland's or the Bank Subsidiary's
investments at current market value as required by generally accepted
accounting principles (including, without limitation, the requirement of
accounting rule SFAS 115) shall be excluded for purpose of calculation
of Ashland's shareholder equity as contemplated of the Affiliation
Agreement.
5. The receipt of a certificate from Ashland and the Bank
Subsidiary, executed by the chief executive 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 of the
Affiliation Agreement were true and correct as of the date of the
Affiliation Agreement and as of the Closing Date in all material
respects, except (y) for any such representations and warranties made as
of a specified date, which shall be true and correct in all material
respects as of such date and (z) for breaches of representations and
warranties which would not have, or would not reasonably be expected to
have, a material adverse effect on the business or operations of Ashland
and the Bank Subsidiary taken as a whole; and (ii) it has met and fully
complied in all material respects with all of the obligations required
of it under the terms of the 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
Ashland and the Bank Subsidiary taken as a whole.
6. The total issued and outstanding shares of Ashland Common Stock
shall not exceed 125,584 shares.
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C. Conditions to the Obligations of Ashland:
The obligation of Ashland to consummate the transactions provided for
in the Agreement is subject to the fulfillment at or prior to the Effective
Time of each of the following conditions unless waived by Ashland 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 the Affiliation Agreement shall be true and
correct in all material respects as of the date of the Affiliation
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 the 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, Esq., Counsel for Fifth Third, shall have
delivered an opinion addressed to Ashland in substantially the form
appended to the Affiliation Agreement as Appendix B.
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 of the
Affiliation Agreement were true and correct as of the date of the
Affiliation 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 the 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 Fifth Third.
5. Fifth Third shall have registered its shares of Fifth Third
Common Stock to be issued to the Ashland 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 Ashland
shareholder hereunder shall have been authorized for trading on the
National Market System of the National Association of Securities Dealers
upon official notice of issuance.
6. Fifth Third's Trust Department, as the Exchange Agent, will
acknowledge in writing to Ashland that it is in receipt of (i)
certificates representing a whole number of shares of Fifth Third Common
Stock to be issued to the shareholders of Ashland pursuant to the
Affiliation Agreement, and (ii) sufficient cash to be paid to the
Ashland shareholders for fractional shares.
7. Ashland shall have received, as of the mailing of its Proxy
Statement/Prospectus contained in the Registration Statement, an update
of the opinion delivered to the board of directors of Ashland prior to
the date of the Affiliation Agreement to the effect that the Merger
consideration is fair from a financial viewpoint to the holders of
Ashland Common Stock. Ashland shall use its best efforts to obtain this
update of the fairness opinion required by this section.
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8. Fifth Third, Ashland and its shareholders shall have received an
opinion of Graydon, Head & Ritchey, dated as of the Closing Date, in
form and substance satisfactory to Ashland and its counsel, to the
effect that the Merger will constitute a reorganization within the
meaning of Section 368(a)(1)(A) of the Code.
III. TERMINATION
A. The Affiliation Agreement may be terminated at any time prior to the
Effective Time by written notice delivered by Fifth Third to Ashland or by
Ashland to Fifth Third in the following instances:
1. By Fifth Third or Ashland, if there has been to the extent
contemplated in Sections II.B.1 and 2. and Sections II.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 in the
Affiliation Agreement and such misrepresentations, breach or failure to
comply has not been cured (if capable of cure) within thirty (30) days
after receipt of written notice, provided, the party in default shall have
no right to terminate for its own default.
2. By Fifth Third or Ashland, if the business or assets or financial
condition of the other party, in each case taken as a whole, shall have
materially and adversely changed from that in existence at December 31,
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 Bank industry generally or changes that may occur
as a consequence of actions or inactions that either party hereto is
expressly obligated to take under the Affiliation Agreement.
3. By Fifth Third or Ashland, if the merger transaction contemplated
of the Affiliation Agreement has not been consummated by February 28, 1999,
provided the terminating party is not in material breach or default of any
representations, warranty or covenant contained of the Affiliation
Agreement on the date of such termination.
4. By the mutual written consent of Fifth Third and Ashland.
5. By Fifth Third if any event occurs which renders impossible the
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 II.A
and B. and non-compliance is not waived by Fifth Third.
6. By Ashland if any event occurs which renders impossible of
satisfaction in any material respect one or more of the conditions of the
obligations of Ashland to effect the Merger as set forth in Sections II.A
and C. hereof and non-compliance is not waived by Ashland.
7. By Ashland if it determines by a vote of the majority of the
members of its Board of Directors at any time during the ten (10) day
period commencing two (2) days after the Determination Date if both of the
following conditions are satisfied:
(a) The Average Closing Price of Fifth Third Common Stock is less
than $51.75; and,
(b) (ii) the number obtained by dividing the Average Closing Price
by the Starting Price shall be less than (ii) the number obtained by
dividing the Index Price on the Determination Date by the Index Price on
the Starting Date and subtracting 0.10 from the quotient in this clause
(b)(ii);
If Ashland elects to terminate the Affiliation Agreement pursuant to
this Section, it shall give notice to Fifth Third by the end of the ten
(10) day period referenced at the beginning of this Section, provided such
notice may be withdrawn at any time. If such notice is given, Fifth Third
and Ashland will work together to reach an agreement on terms of the
transaction. If Fifth Third and Ashland cannot agree on such adjustment
within ten (10) days of the date such notice is given, the Affiliation
Agreement and the transaction that is the subject hereof shall terminate.
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For purposes of this Section, 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 full trading days ending
on the Determination Date as reported The Wall Street Journal, expressed
in decimal figures carried to five figures.
"Determination Date" shall mean the date which is the later of (i)
the date of the Ashland shareholder meeting held to vote on the Merger
and (ii) the date the last governmental approval required to consummate
the Merger has been received and all governmental waiting periods before
the Merger can be consummated shall have expired.
"Index Group" means the sixteen (16) 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 sixteen
(16) bank holding companies and the weights attributed to them are as
set forth in the form of Exhibit A attached hereto.
"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 market capitalizations listed above) of
the closing prices on such date of the common stock of the companies
comprising the Index Group.
"Starting Date" means September 8, 1998.
"Starting Price" means $51.75 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
Section III.A.7.
B. If Ashland shareholders, acting at a meeting held for the purpose of
voting upon the Agreement, fail to approve such agreements in the manner
required by law, then the Agreement shall be deemed to be automatically
terminated.
C. Upon termination as provided in this Section, the Affiliation Agreement,
except for the provisions of Paragraphs D, H and K of Section VII thereof shall
be void and of no further force or effect, and, except as provided in Paragraph
H of Section VII thereof, 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.
IV. CLOSING AND EFFECTIVE TIME
The consummation of the transactions contemplated by the 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 II 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 Ashland and Fifth Third) with the Secretaries of
the States of Ohio and Kentucky in accordance with law and the Plan of Merger,
the Merger provided for in the Affiliation Agreement shall become effective at
the close
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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 Effective Time may be changed by such mutual agreement. None of the
representations, warranties and agreements in the Affiliation Agreement or in
any instrument delivered pursuant to the Affiliation Agreement, including this
Plan, shall survive the Effective Time, except for agreements of the parties
which by their terms are intended to be performed after the Effective Time.
V. AMENDMENT
The Agreement may be amended, modified or supplemented by the written
agreement of Ashland and Fifth Third upon the authorization of each company's
respective Board of Directors at any time before or after approval of the
Agreement by the shareholders of Ashland, but after any such approval by the
shareholders of Ashland, 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 the Agreement.
In Witness Whereof, each of the constituent parties to the Merger, by their
duly authorized officers, hereby certifies that its board of directors has duly
adopted this Plan and, with respect to Ashland, has recommended its approval by
its shareholders.
ASHLAND BANKSHARES, INC., a Kentucky
corporation
By: /s/ WILLIAM A. STINNETT, III
------------------------------------
William A. Stinnett, III, President
FIFTH THIRD BANCORP, an Ohio
corporation
By: /s/ ROBERT P. NIEHAUS
------------------------------------
Its: Executive Vice President
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<PAGE> 132
AMENDMENT TO
PLAN OF MERGER
This Amendment to Plan of Merger (the "Amendment") is entered as of this 18
day of February, 1999, by and between THE FIFTH THIRD BANK, an Ohio banking
corporation ("Fifth Third") and ASHLAND BANKSHARES, INC., a Kentucky corporation
("Ashland").
WITNESSETH:
WHEREAS, Fifth Third and Ashland entered into that certain Plan of Merger,
dated September 8, 1998 (the "Plan");
WHEREAS, Ashland and Fifth Third desire to amend the Plan to extend the
term of the Plan;
NOW THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. Amendments.
Article III, Section A., Subsection 3 of the Plan is hereby amended
and restated in its entirety as follows:
By Fifth Third or Ashland, if the merger transaction contemplated
in the Affiliation Agreement has not been consummated by June 30, 1999,
provided the terminating party is not in material breach or default of
any representations, warranty or covenant contained in the Affiliation
Agreement on the date of such termination.
2. General.
Except as expressly modified hereby, the Plan remains unaltered and in
full force and effect.
(b) Capitalized terms used and not otherwise defined herein will have
the meanings set forth in the Plan.
(c) This Amendment shall be considered an integral part of the Plan,
and all references to the Plan in the Plan itself or any document referring
thereto shall, on and after the date of execution of this Amendment, be
deemed to be references to the Plan as amended by this Amendment.
(e) This Amendment will be binding upon and inure to the benefit of
Ashland and Fifth Third and their respective successors and assigns.
(f) This Amendment may be executed in one or more counterparts, each
of which will be deemed an original and all of which together will
constitute one and the same instrument.
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<PAGE> 133
IN WITNESS WHEREOF, Ashland and Fifth Third have executed this Amendment by
their duly authorized officers as of the date first above written.
FIFTH THIRD BANCORP
By: /s/ ROBERT P. NIEHAUS
----------------------------------
Robert P. Niehaus,
Executive Vice President
Attest: /s/ PAUL REYNOLDS
------------------------------
Paul Reynolds,
Assistant Secretary
ASHLAND BANKSHARES, INC.
By: /s/ WILLIAM A. STINNETT
----------------------------------
William A. Stinnett,
President
Attest: /s/ CURTIS CASSELL
------------------------------
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<PAGE> 134
ANNEX C
FAIRNESS OPINION OF
PROFESSIONAL BANK SERVICES
<PAGE> 135
ANNEX C
FEBRUARY 26, 1999
Board of Directors
Ashland Bankshares, Inc.
1422 Winchester Avenue
Ashland, Kentucky 41101
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial view point, to the common shareholders of Ashland Bankshares,
Inc., Ashland, Kentucky (the "Company") of the proposed merger of the Company
with Fifth Third Bancorp, Cincinnati, Ohio ("Fifth Third"). In the proposed
merger, Company shareholders will receive 1,225,000 Fifth Third common shares
for all 125,584 Company common shares outstanding, as further defined in the
Affiliation Agreement between Fifth Third and the Company (the "Agreement"). On
September 4, 1998, the proposed consideration to be received represents an
aggregate value of $63,393,750 or $504.79 per Company common share based on the
closing price for Fifth Third common stock of $51.75 as quoted on the National
Association of Securities Dealers Automated Quotation System.
Professional Bank Services, Inc. ("PBS") is a bank consulting firm and as
part of its investment banking business is continually engaged in reviewing the
fairness, from a financial perspective, of bank acquisition transactions and in
the valuation of banks and other businesses and their securities in connection
with mergers, acquisitions, estate settlements and other purposes. We are
independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS performed a review and analysis of the
historic performance of the Company and its wholly owned subsidiary Bank of
Ashland, Ashland, Kentucky (the "Bank") including: (i) March 31, 1998, December
31, 1997 and December 31, 1996 Consolidated Reports of Condition and Income
filed by the Bank and the Company; (ii) December 31, 1997 and 1996 audited
annual reports of the Company; (iii) March 31, 1998 Uniform Bank Performance
Reports of the Company and the Bank; (iv) and June 30, 1998 unaudited internal
financial statements of the Company and the Bank. We have reviewed and tabulated
statistical data regarding the loan portfolio, securities portfolio and other
performance ratios and statistics. Financial projections were prepared and
analyzed as well as other financial studies, analyses and investigations as
deemed relevant for the purposes of this opinion. In review of the
aforementioned information, we have taken into account our assessment of general
market and financial conditions, our experience in other transactions, and our
knowledge of the banking industry generally.
We have not compiled, reviewed or audited the financial statements of the
Company or Fifth Third, nor have we independently verified any of the
information reviewed; we have relied upon such information as being complete and
accurate in all material respects. We have not made independent evaluation of
the assets of the Company or Fifth Third.
As part of preparing this Fairness Opinion, PBS performed a due diligence
review of Fifth Third on September 3, 1998. As part of the due diligence, PBS
reviewed the following items: report of independent auditors and management
letters and response thereto, for the year ending December 31, 1997; the most
recent analysis and calculation of allowance for loan and lease losses for Fifth
Third; internal loan review reports; investment portfolio activity reports;
asset/liability management reports; asset quality reports; Uniform Holding
Company Report for Fifth Third as of March 31, 1998; March 31, 1998 Reports of
Condition and Income for the subsidiary banks; all of the Fifth Third Securities
and Exchange Commission filings since December 31, 1997; and discussion of any
material pending litigation and other issues with senior management of Fifth
Third.
Based on the foregoing and all other factors deemed relevant, it is our
opinion as investment bankers, that, as of the date hereof, the consideration
proposed to be received by the shareholders of the Company under the Agreement
is fair and equitable from a financial view point.
Very truly yours,
/s/ PROFESSIONAL BANK SERVICES, INC.
<PAGE> 136
ANNEX D
SUBTITLE 13 OF THE KENTUCKY BUSINESS CORPORATION ACT
<PAGE> 137
ANNEX D
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271b.13-010. -- DEFINITIONS.
As used in this subtitle:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under KRS 271B.13-020 and who exercises that right when and in
the manner required by KRS 271B.13-200 to 271B.13-280.
(3) "Fair value" with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable. In
any transaction subject to the requirements of KRS 271B.12-210 or exempted by
KRS 271B.12-220(2), "fair value" shall be at least an amount required to be paid
under KRS 271B.12-220(2) in order to be exempt from the requirements of KRS
271B.12-210.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. (Enact. Acts 1988, ch. 23, ss. 123, effective January 1, 1989).
271b.13-020. RIGHT TO DISSENT.
(1) A shareholder shall be entitled to dissent from, and obtain payment of
the fair value of his shares in the event of, any of the following corporate
actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
1. If shareholder approval is required for the merger by KRS
271B.11-030 or the articles of incorporation and the shareholder is
entitled to vote on the merger; or
2. If the corporation is a subsidiary that is merged with its
parent under KRS 271B.11-040;
(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one (1) year after the date of sale;
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(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
1. Alters or abolishes a preferential right of the shares to a
distribution or in dissolution;
2. Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
3. Excludes or limits the right of shares to vote on any matter
other than a limitation by dilution through issuance of shares or other
securities with similar voting rights; or
4. Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under KRS271B.6-040;
(e) Any transaction subject to the requirements of KRS 271B.12-210 or
exempted by KRS 271B.12-220(2); or
(f) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for his shares
under this chapter shall not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation. (Enact. Acts 1988, ch. 23, ss. 124, effective
January 1, 1989.)
271b.13-030. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he shall dissent with respect to all
shares beneficially owned by any one (1) person and notify the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection
shall be determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(a) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(b) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
(Enact. Acts 1988, ch. 23, ss. 125, effective January 1, 1989.)
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
271b.13-200. NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under KRS
271B.13-020 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this subtitle and the corporation shall undertake to provide a copy
of this subtitle to any shareholder entitled to vote at the shareholders'
meeting upon request of that shareholder.
(2) If corporate action creating dissenters' rights under KRS 271B.13-020
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in KRS 271B.13-220. (Enact. Acts
1988, ch. 23, ss. 126, effective January 1, 1989.)
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271b.13-210. NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If proposed action creating dissenters' rights under KRS 271B.13-020 is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights:
(a) Shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(b) Shall not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section shall not be entitled to payment for his shares under this
chapter. (Enact. Acts 1988, ch. 23, ss. 127, effective January 1, 1989.)
271b.13-220. DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under KRS
271B.13-020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of KRS 271B.13-210.
(2) The dissenters' notice shall be sent no later than ten (10) days after
the date the proposed corporate action was authorized by the shareholders, or,
if no shareholder authorization was obtained, by the board of directors, and
shall:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after a payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership
of the shares before that date;
(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30), nor more than sixty
(60) days after the date the notice provided in subsection (1) of this
section is delivered; and
(e) Be accompanied by a copy of this subtitle. (Enact. Acts 1988; ch.
23, ss. 128, effective January 1, 1989.)
271b.13-230. DUTY TO DEMAND PAYMENT.
(1) A shareholder who is sent a dissenters' notice described in KRS
271B.13-220 shall demand payment, certify whether he acquired ownership of the
shares before the date required to be set forth in the dissenters' notice
pursuant to subsection (2)(c) of KRS 271B.13-220, and deposit his certificates
in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his share certificates
under subsection (1) of this section shall retain all other rights of a
shareholder until these rights are cancelled or modified by the taking of the
proposed corporate action.
(3) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice,
shall not be entitled to payment for his shares under this subtitle. (Enact.
Acts 1988, ch. 23, ss. 129, effective January 1, 1989.)
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271b.13-240. SHARE RESTRICTIONS.
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under KRS 271B.13-260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares shall retain all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(Enact. Acts 1988, ch. 23, ss. 130, effective January 1, 1989.)
271b.13-250. PAYMENT.
(1) Except as provided in KRS 271B.13-270, as soon as the proposed
corporate action is taken, or upon receipt of a payment demand, the corporation
shall pay each dissenter who complied with KRS 271B.13-230 the amount the
corporation estimates to be the fair value of his shares, plus accrued interest.
(2) The payment shall be accompanied by:
(a) The corporation's balance sheet as of the end of the fiscal year
ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated; and
(d) A statement of the dissenter's right to demand payment under KRS
271B.13-280. (Enact. Acts 1988, ch. 23, ss. 131, effective January 1,
1989.)
271b.13-260. FAILURE TO TAKE ACTION.
(1) If the corporation does not take the proposed action within sixty (60)
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under KRS 271B.13-220 and repeat the payment demand
procedure. (Enact. Acts 1988, ch. 23, ss. 132, effective January 1, 1989.)
271b.13-270 AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by KRS 271B.13-250
from a dissenter unless he was the beneficial owner of the shares before the
date set forth in the dissenters' notice as the date of the first announcement
to news media or to shareholders of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under KRS
271B.13-280. (Enact. Acts 1988, ch. 23, ss. 133, effective January 1, 1989.)
271b.13-280. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate (less any payment under KRS 271B.13-
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250), or reject the corporation's offer under KRS 271B.13-270 and demand payment
of the fair value of his shares and interest due, if:
(a) The dissenter believes that the amount paid under KRS 271B.13-250
or offered under KRS 271B.13-270 is less than the fair value of his shares
or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under KRS 271B.13-250 within
sixty (60) days after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does
not return the deposited certificates Or release the transfer restrictions
imposed on uncertificated shares within sixty (60) days after the date set
for demanding payment.
(2) A dissenter waives his right to demand payment under this section
unless he shall notify the corporation of his demand in writing under subsection
(1) of this section within thirty (30) days after the corporation made or
offered payment for his shares. (Enact. Acts 1988, ch. 23, ss. 134, effective
January 1, 1989.)
JUDICIAL APPRAISAL OF SHARES
271b.13-300 COURT ACTION.
(1) If a demand for payment under KRS 271B.13-280 remains unsettled, the
corporation shall commence a proceeding within sixty (60) days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty (60) day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county where a corporation's principal office (or, if none in the state, its
registered office) is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remained unsettled parties to the proceeding as in an
action against their shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section shall be plenary and exclusive. The court
may appoint one (1) or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters shall be entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding shall be entitled to
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the corporation elected to withhold payment under KRS
271B.13-270. (Enact. Acts 1988, ch. 23, ss. 135, effective January 1,
1989.)
271b.13-310. COURT COSTS AND COUNSEL FEES.
(1) The court in an appraisal proceeding commenced under KRS 271B.13-300
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court.
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The court shall assess the costs against the corporation, except that the court
may assess costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under KRS 271B.13-280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters, if
the court finds the corporation did not substantially comply with the
requirements of KRS 271B.13-200 to 271B.13-280; or
(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this subtitle.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited. (Enact. Acts 1988, ch. 23, ss. 136, effective
January 1, 1989.)
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