Rule 424(b)(3) Prospectus relating to Registrant's
Registration Statement on Form S-4 (No. 333-60045)
[CSFC LETTERHEAD]
September 16, 1998
Dear Stockholder:
You are invited to attend a special meeting of stockholders (the
"Special Meeting") of CS Financial Corporation ("CSFC") scheduled to be held at
the principal office of CSFC, 1360 East Ninth Street, Cleveland, Ohio on Friday,
October 16, 1998 at 9:00 a.m., local time. Notice of the Special Meeting, a
Proxy Statement/Prospectus and an accompanying proxy card are enclosed.
At the Special Meeting, stockholders will be asked to consider and vote
upon a proposal to adopt an Agreement and Plan of Merger and Reorganization,
dated April 23, 1998 (the "Merger Agreement"), pursuant to which, among other
things, a newly-organized subsidiary of Charter One Financial, Inc. ("Charter
One") will be merged with and into CSFC (the "Merger"). Immediately following
the Merger, CSFC will be merged with and into Charter One, and The Cuyahoga
Savings Association, a wholly owned subsidiary of CSFC, will be merged with and
into Charter One Bank F.S.B., a wholly owned subsidiary of Charter One.
Consummation of the Merger is subject to certain conditions, including receipt
of regulatory approvals and the requisite votes of the stockholders of CSFC.
Adoption of the Merger Agreement requires the affirmative vote of a majority of
the voting power of CSFC. Upon consummation of the Merger, each share of CSFC
common stock issued and outstanding (except for shares held by holders who
properly dissent from the Merger) will be converted (subject to any changes that
may result from future stock splits, stock dividends or similar transactions)
into 60.3538 (or 63.37149 as a result of a five percent stock dividend declared
by Charter One payable on September 30, 1998 to stockholders of record on
September 14, 1998) shares of Charter One common stock.
THE BOARD OF DIRECTORS OF CSFC HAS CAREFULLY REVIEWED THE PROPOSED
MERGER AND HAS UNANIMOUSLY CONCLUDED THAT THE TRANSACTION IS ADVISABLE AND FAIR
TO, AND IN THE BEST INTERESTS OF, CSFC AND ITS STOCKHOLDERS. CSFC'S FINANCIAL
ADVISOR, MCDONALD & COMPANY SECURITIES, INC., HAS ISSUED AN OPINION THAT THE
EXCHANGE RATIO TO BE OFFERED TO CSFC'S STOCKHOLDERS IN THE MERGER IS, AS OF
APRIL 23, 1998, FAIR TO CSFC'S STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW.
ACCORDINGLY, I URGE YOU TO VOTE FOR THE MERGER.
Should any other matters be properly brought before the Special
Meeting, the persons named in the accompanying proxy card will vote the shares
represented by such proxy upon such matters as determined by a majority of the
Board of Directors. You are urged to read the accompanying Notice of Special
Meeting and Proxy Statement/Prospectus which contain a detailed description of
the Merger and other important information relating to CSFC, Charter One
(including the recently announced proposed acquisition of ALBANK Financial
Corporation) and the combined companies.
Each holder of CSFC common stock may have the right to dissent from the
Merger and to demand payment of the fair value of his or her shares in the event
the Merger Agreement is adopted and the Merger is consummated. Any right of any
such stockholder to receive such payment would be contingent upon strict
compliance with the requirements set forth in Section 1701.85 of the Ohio
General Corporation Law, the full text of which is attached as Annex C to the
accompanying Proxy Statement/Prospectus.
Your vote is important, regardless of the number of shares you own. ON
BEHALF OF THE BOARD OF DIRECTORS, I URGE YOU TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE
SPECIAL MEETING. This will not prevent you from voting in person but will assure
that your vote is counted if you do not attend the Special Meeting.
Thank you for your attention to this important matter.
Sincerely,
/s/ William R. Bryan
William R. Bryan
President and Chief Executive Officer
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
YOU WILL RECEIVE INSTRUCTIONS FOLLOWING THE MERGER
FOR EXCHANGE OF STOCK CERTIFICATES.
<PAGE>
CS FINANCIAL CORPORATION
1360 East Ninth Street
Cleveland, Ohio 44114
(216) 771-3550
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 16, 1998
NOTICE IS HEREBY GIVEN THAT a Special Meeting of Stockholders (the
"Special Meeting") of CS FINANCIAL CORPORATION ("CSFC") will be held on October
16, 1998 at 9:00 a.m., local time, at the principal office of CSFC, 1360 East
Ninth Street, Cleveland, Ohio for the following purposes:
(1) To consider and vote upon a proposal to adopt the Agreement
and Plan of Merger and Reorganization (the "Merger Agreement"), dated
as of April 23, 1998, by and among Charter One Financial, Inc.
("Charter One"), Charter One Bank F.S.B., CSFC and The Cuyahoga
Savings Association, a copy of which is included in the accompanying
Proxy Statement/Prospectus as Annex A, pursuant to which a
newly-organized subsidiary of Charter One will be merged with and into
CSFC, and each outstanding share of CSFC common stock will be
converted (subject to any changes that may result from future stock
splits, stock dividends or similar transactions) into 60.3538 (or
63.37149 as a result of a five percent stock dividend declared by
Charter One payable on September 30, 1998 to stockholders of record on
September 14, 1998) shares of Charter One common stock and the
corresponding rights associated with such Charter One common stock
(with cash paid in lieu of fractional share interests).
(2) To consider and vote upon such other matters as may properly
come before the Special Meeting or any adjournments or postponements
thereof, including proposals to adjourn the Special Meeting to permit
further solicitation of proxies by the Board of Directors of CSFC in
the event that there are not sufficient votes to adopt the Merger
Agreement at the time of the Special Meeting; provided, however, that
no proxy which is voted against the adoption of the Merger Agreement
will be voted in favor of adjournment to solicit further proxies for
such proposal.
The Board of Directors is not aware of any other business to come
before the Special Meeting.
A PROXY CARD AND A PROXY STATEMENT/PROSPECTUS FOR THE SPECIAL MEETING
ARE ENCLOSED.
Stockholders of record at the close of business on September 1, 1998
are the stockholders entitled to vote at the Special Meeting and any
adjournments and postponements thereof. There will be available for examination
at the Special Meeting a list of CSFC stockholders entitled to vote at the
Special Meeting.
<PAGE>
The affirmative vote of a majority of the voting power of CSFC is
required to approve the proposal to adopt the Merger Agreement.
You are requested to complete, sign and date the enclosed proxy card,
which is solicited on behalf of the Board of Directors, and to mail it promptly
in the enclosed postage-paid envelope. The proxy card will not be used if you
attend and vote at the Special Meeting in person.
Remember, if your shares are held in the name of a broker, fiduciary,
nominee or other record holder, only the record holder can vote your shares and
only after receiving your instructions. Please contact the person responsible
for your account and instruct him/her to execute a proxy card on your behalf.
Should you have any questions or require assistance, please call
William R. Bryan, at (216) 771-3550.
YOU ARE REQUESTED TO FILL IN AND SIGN THE ENCLOSED PROXY CARD, WHICH IS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS, AND TO MAIL IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. THE PROXY CARD WILL NOT BE USED IF YOU ATTEND
AND VOTE AT THE SPECIAL MEETING IN PERSON.
By Order of the Board of Directors
/s/ WILLIAM R. BRYAN
WILLIAM R. BRYAN
Chairman of the Board, President
and Chief Executive Officer
Cleveland, Ohio
September 16, 1998
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE CSFC THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES. AN ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
<PAGE>
PROXY STATEMENT
OF
CS FINANCIAL CORPORATION
FOR SPECIAL MEETING OF
STOCKHOLDERS
TO BE HELD ON OCTOBER 16, 1998
------------------
PROSPECTUS
OF
CHARTER ONE FINANCIAL, INC.
UP TO 2,238,075 SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE
------------------
This Proxy Statement/Prospectus relates to the approval and adoption of
the Agreement and Plan of Merger and Reorganization (the "Merger Agreement"),
dated as of April 23, 1998, by and among Charter One Financial, Inc. ("Charter
One"), Charter One Bank F.S.B. ("Charter One Bank"), a wholly-owned subsidiary
of Charter One, CS Financial Corporation ("CSFC") and The Cuyahoga Savings
Association ("CSFC Bank"), a wholly-owned subsidiary of CSFC, pursuant to which,
among other things, a newly-organized subsidiary of Charter One will be merged
with and into CSFC (the "Merger"). See "Summary--Summary of Certain Aspects of
the Merger" and "The Merger." The Merger Agreement is included as Annex A and
incorporated herein by reference.
The Merger Agreement provides that at the Effective Time (as defined
herein) each issued and outstanding share of the common stock, par value $5.00
per share, of CSFC (the "CSFC Common Stock"), excluding any shares as to which
dissenters' rights have been duly perfected under the Ohio General Corporation
Law (the "OGCL") and shares held by Charter One, CSFC or their subsidiaries,
other than in a fiduciary capacity or in satisfaction of a debt previously
contracted ("Excluded Shares"), will be canceled and converted into 30.1769
shares (the "Exchange Ratio") of the common stock, par value $.01 per share, of
Charter One (the "Charter One Common Stock"), including a corresponding number
of rights associated with Charter One Common Stock pursuant to the Rights
Agreement (the "Rights Agreement") dated November 20, 1989, as amended May 26,
1995, between Charter One and The First National Bank of Boston as Rights Agent
(the "Merger Consideration"). The Merger Agreement also provides that the
Exchange Ratio shall be appropriately adjusted to reflect any split,
combination, stock dividend or stock distribution with respect to Charter One
Common Stock effected by Charter One prior to the Effective Time. A two-for-one
stock split was declared by Charter One payable on May 20, 1998 to stockholders
of record on May 6, 1998 (the "Charter One Stock Split"). Accordingly, the
Exchange Ratio has been adjusted to 60.3538. In addition, a five percent stock
dividend was declared by Charter One payable on September 30, 1998 to
stockholders of record on September 14, 1998 (the "Charter One Stock Dividend").
The exchange ratio will be adjusted to 63.37149 as a result of the Charter One
Stock Dividend. For a discussion of the rights and the Rights Agreement, see
"Comparison of Rights of Stockholders of Charter One Financial, Inc. and CS
Financial Corporation -- Rights Agreement."
(Cover page continued on next page)
<PAGE>
--------------------
On June 15, 1998, Charter One announced that it had entered into a
definitive agreement providing for the acquisition (the "ALBANK Acquisition") of
ALBANK Financial Corporation ("ALBANK"). See "Recent Developments," "Unaudited
Pro Forma Combined Financial Statements" and "Unaudited Pro Forma Per Share
Data."
THE SHARES OF CHARTER ONE COMMON STOCK OFFERED HEREBY HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF
THRIFT SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE OHIO
SUPERINTENDENT OF FINANCIAL INSTITUTIONS, ANY STATE SECURITIES COMMISSION OR ANY
OTHER GOVERNMENTAL AGENCY, AND NEITHER THE SECURITIES AND EXCHANGE COMMISSION,
THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
OHIO SUPERINTENDENT OF FINANCIAL INSTITUTIONS, ANY STATE SECURITIES COMMISSION
NOR ANY OTHER AGENCY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF CHARTER ONE COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
--------------------
The date of this Proxy Statement/Prospectus is September 16, 1998
ii
<PAGE>
This Proxy Statement/Prospectus is being furnished to the holders of
shares of CSFC Common Stock in connection with the solicitation of proxies by
the Board of Directors of CSFC (the "CSFC Board") for use at a special meeting
of stockholders of CSFC (the "Special Meeting") scheduled to be held at 9:00
a.m., local time on Friday, October 16, 1998 at the principal office of the
CSFC, 1360 East Ninth Street, Cleveland, Ohio and at any and all adjournments
and postponements thereof.
This Proxy Statement/Prospectus also constitutes a prospectus of
Charter One, filed as part of the Registration Statement (defined below) with
respect to up to 2,238,075 shares of Charter One Common Stock to be issued upon
consummation of the Merger pursuant to the terms of the Merger Agreement,
including a corresponding number of rights associated with the Charter One
Common Stock pursuant to the Rights Agreement.
This Proxy Statement/Prospectus, and the accompanying notice and proxy
card, are first being mailed to stockholders of CSFC on or about September 17,
1998.
AVAILABLE INFORMATION
Charter One is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by Charter One can be obtained, upon
payment of prescribed fees, from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549. In addition,
such information can be inspected and copied at the public reference facilities
of the Commission located at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549 and at the Commission's Regional Offices located at the Northwestern
Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60611 and
7 World Trade Center, 13th Floor, New York, New York 10048. In addition, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the electronic filings of Charter One
with the Commission. The address of the Commission Web site is
"http://www.sec.gov."
Charter One has filed with the Commission a registration statement on
Form S-4 (333-60045) (together with all amendments, schedules, and exhibits
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the shares of Charter One Common
Stock to be issued pursuant to and as contemplated by the Merger Agreement. This
Proxy Statement/Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. The Registration Statement is
available for inspection and copying as set forth above. Statements contained in
this Proxy Statement/Prospectus or in any document incorporated by reference in
this Proxy Statement/Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
iii
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (EXCLUDING
EXHIBITS NOT SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT
CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED BY OR ON BEHALF OF CSFC, UPON THE WRITTEN OR
ORAL REQUEST OF SUCH PERSON, TO ROBERT J. VANA, CHIEF CORPORATE COUNSEL AND
CORPORATE SECRETARY, CHARTER ONE FINANCIAL, INC., 1215 SUPERIOR AVENUE,
CLEVELAND, OHIO 44114, TELEPHONE (216) 566-5300. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY REQUEST SHOULD BE
MADE BY October 6, 1998. PERSONS REQUESTING COPIES OF EXHIBITS TO DOCUMENTS
WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS MAY BE
CHARGED THE COST OF REPRODUCTION AND MAILING.
The following documents previously filed with the Commission by Charter
One (File No. 0-16311) are hereby incorporated by reference in this Proxy
Statement/Prospectus:
1. The Annual Report on Form 10-K of Charter One for the fiscal
year ended December 31, 1997 (the "1997 Charter One 10-K").
2. All other reports filed by Charter One pursuant to Section
13(a) or 15(d) of the Exchange Act since the end of the fiscal
year covered by the 1997 Charter One 10-K (including Charter
One's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998 and June 30, 1998 and Current Reports on
Form 8-K for the events on June 15, 1998, July 22, 1998 (the
"July 22, 1998 8-K") and August 18, 1998 (the "August 18, 1998
8-K")).
3. The portions of Charter One's proxy statement for the Annual
Meeting of Stockholders held April 22, 1998 that have been
incorporated by reference in the 1997 Charter One 10-K.
4. The description of the Charter One Common Stock contained in
Charter One's Registration Statement on Form 8-A with respect
thereto dated January 12, 1988 (and any amendment or report
filed for the purpose of updating the description).
5. The description of the rights issued pursuant to the Rights
Agreement contained in Charter One's Registration Statement on
Form 8-A with respect thereto dated November 21, 1989 as
amended on May 26, 1995 (and any amendment or report filed for
the purpose of updating the description).
All documents filed by Charter One with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing such documents.
iv
<PAGE>
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
All information contained in this Proxy Statement/Prospectus with
respect to Charter One and its subsidiaries has been supplied by Charter One,
and all information with respect to CSFC and its subsidiaries has been supplied
by CSFC.
-----------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS,
OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION, TO OR FROM ANY PERSON TO
WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR
PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/ PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CHARTER ONE OR CSFC OR ANY OF THEIR
RESPECTIVE SUBSIDIARIES, OR IN THE INFORMATION SET FORTH HEREIN, SINCE THE DATE
OF THIS PROXY STATEMENT/PROSPECTUS.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
BUSINESS OF CHARTER ONE FOLLOWING THE CONSUMMATION OF THE MERGER AND THE ALBANK
ACQUISITION, INCLUDING STATEMENTS RELATING TO THE EXPECTED IMPACT OF THE MERGER
AND THE ALBANK ACQUISITION ON CHARTER ONE'S FINANCIAL PERFORMANCE FOR THE
COMBINED COMPANY. SEE "THE MERGER -- BACKGROUND OF AND REASONS FOR THE MERGER"
AND -- "OPINION OF CSFC'S FINANCIAL ADVISOR," "UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS" AND "UNAUDITED PRO FORMA PER SHARE DATA." THESE
FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT
MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES:
(1) EXPECTED COST SAVINGS FROM THE MERGER AND/OR ALBANK ACQUISITION CANNOT BE
FULLY REALIZED; (2) DEPOSIT ATTRITION, CUSTOMER LOSS OR REVENUE LOSS FOLLOWING
THE MERGER AND/OR ALBANK ACQUISITION; (3) COMPETITIVE PRESSURE IN THE BANKING
INDUSTRY INCREASES; (4) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE
BUSINESSES OF CHARTER ONE, CSFC AND ALBANK ARE GREATER THAN EXPECTED; (5)
CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE MARGINS MORE THAN PLANNED; (6)
GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE
THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT
QUALITY; (7) THE IMPACT OF REGULATORY CHANGES IS OTHER THAN EXPECTED; (8)
CHANGES IN BUSINESS CONDITIONS AND INFLATION; AND (9) CHANGES IN THE SECURITIES
MARKETS. FURTHER INFORMATION ON OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL
RESULTS OF CHARTER ONE AFTER THE MERGER AND THE ALBANK ACQUISITION IS INCLUDED
IN THE COMMISSION FILINGS INCORPORATED BY REFERENCE HEREIN.
-----------------
v
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
AVAILABLE INFORMATION.......................................................................iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................................iv
SUMMARY.......................................................................................1
The Parties to the Merger............................................................1
The Special Meeting..................................................................1
Summary of Certain Aspects of the Merger.............................................3
Certain Related Matters..............................................................7
RECENT DEVELOPMENTS...........................................................................8
COMPARATIVE STOCK PRICES AND DIVIDEND INFORMATION.............................................9
SELECTED CONSOLIDATED FINANCIAL AND
OTHER DATA OF CHARTER ONE FINANCIAL, INC...................................................12
SELECTED CONSOLIDATED FINANCIAL AND
OTHER DATA OF CS FINANCIAL CORPORATION.....................................................14
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS............................................15
Unaudited Pro Forma Combined Statement of Financial Condition.......................16
Unaudited Pro Forma Combined Statements of Income...................................20
UNAUDITED PRO FORMA PER SHARE DATA...........................................................27
THE SPECIAL MEETING..........................................................................29
Time and Date; Record Date..........................................................29
Matters to Be Considered............................................................29
Voting Rights; Vote Required........................................................29
Proxies and Proxy Solicitation......................................................30
CHARTER ONE FINANCIAL, INC.
AND CHARTER ONE BANK, F.S.B................................................................31
General ...........................................................................31
Pending Structural Changes..........................................................32
Management and Operations after the Merger..........................................34
Beneficial Ownership of Certain Persons.............................................35
CS FINANCIAL CORPORATION AND
THE CUYAHOGA SAVINGS ASSOCIATION...........................................................38
General ...........................................................................38
Beneficial Ownership of Certain Persons.............................................38
THE MERGER...................................................................................40
General ...........................................................................40
Background of and Reasons for the Merger............................................40
Recommendation of the CSFC Board....................................................43
Opinion of CSFC's Financial Advisor.................................................43
Charter One - No Financial Advisor..................................................47
Merger Consideration................................................................47
Appraisal Rights....................................................................48
Fractional Shares...................................................................49
Effective Time......................................................................49
Exchange of Certificates; Lost Certificates.........................................50
Interests of Certain Persons in the Merger..........................................51
Representations and Warranties......................................................52
Conditions to the Merger............................................................53
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Regulatory Approvals................................................................54
Amendment; Termination; Liabilities and Remedies for Breach.........................55
Conduct of Business Pending the Merger..............................................57
Expenses ...........................................................................58
Accounting Treatment................................................................58
Resale of Charter One Common Stock by Affiliates....................................58
Certain Federal Income Tax Consequences of the Merger...............................59
Nasdaq Listing......................................................................61
The Corporate Merger................................................................61
The Bank Merger.....................................................................61
DESCRIPTION OF CHARTER ONE FINANCIAL, INC. CAPITAL STOCK.....................................61
General ...........................................................................61
Common Stock........................................................................62
Preferred Stock.....................................................................62
BUSINESS OF CS FINANCIAL CORPORATION.........................................................63
General.............................................................................63
Market Area.........................................................................63
Competition.........................................................................64
Lending Activities..................................................................64
Sources of Funds....................................................................69
Yields Earned and Rates Paid........................................................70
Subsidiaries of CSFC Bank...........................................................70
Federal Taxation....................................................................70
State Taxation......................................................................70
Properties..........................................................................71
Employees...........................................................................72
Legal Proceedings...................................................................72
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CS FINANCIAL CORPORATION..................................................72
General Overview....................................................................72
Results of Operations...............................................................72
Financial Condition.................................................................86
SUPERVISION AND REGULATION OF CS FINANCIAL
CORPORATION AND THE
CUYAHOGA SAVINGS ASSOCIATION...............................................................95
Regulation of CS Financial Corporation..............................................95
Regulation of The Cuyahoga Savings Association......................................95
COMPARISON OF RIGHTS OF STOCKHOLDERS OF
CHARTER ONE FINANCIAL, INC. AND CS FINANCIAL CORPORATION....................................105
Introduction.......................................................................105
Issuance of Capital Stock..........................................................105
Payment of Dividends...............................................................105
Advance Notice Requirements for Presentation
of New Business and Nominations of Directors
at Annual Meetings of Stockholders................................................106
Restrictions on Voting Rights; Quorum..............................................106
Number and Term of Directors.......................................................106
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Removal of Directors...............................................................107
Filling Vacancies on the Board of Directors........................................107
Amendment of Articles of Incorporation and Certificate of Incorporation............108
Amendment and Repeal of Regulations and Bylaws.....................................108
Control Share Acquisitions.........................................................108
Business Combinations with Certain Persons.........................................109
Prevention of Greenmail............................................................110
Limitations on Directors' Liability................................................110
Indemnification....................................................................111
Mergers, Acquisitions and Certain Other Transactions...............................112
Action Without a Meeting...........................................................113
Special Meetings of Stockholders...................................................113
Preemptive Rights..................................................................114
Appraisal Rights of Dissenting Stockholders........................................114
Special Provisions to Charter One's Bylaws.........................................115
Rights Agreement...................................................................115
LEGAL MATTERS...............................................................................119
EXPERTS.....................................................................................119
STOCKHOLDER PROPOSALS.......................................................................119
OTHER MATTERS...............................................................................120
INDEX TO FINANCIAL STATEMENTS OF CS FINANCIAL CORPORATION...................................121
ANNEXES
ANNEX A - Agreement and Plan of Merger and Reorganization,
dated April 23, 1998, by and among Charter One
Financial, Inc., Charter One Bank F.S.B., CS
Financial Corporation and The Cuyahoga Savings
Association
ANNEX B - Opinion of McDonald & Company Securities, Inc.
ANNEX C - Section 1701.85 of the Ohio General Corporation Law
</TABLE>
viii
<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere or incorporated by reference in this Proxy Statement/Prospectus.
Certain capitalized terms used in this summary are defined elsewhere in this
Proxy Statement/Prospectus. This summary is necessarily incomplete and is
qualified in its entirety by, and reference is made to, the more detailed
information contained elsewhere in this Proxy Statement/Prospectus, the
accompanying Annexes and the documents referred to and incorporated by reference
herein.
THE PARTIES TO THE MERGER
CHARTER ONE AND CHARTER ONE BANK
Charter One, a Delaware corporation, is the holding company for
Charter-Michigan Bancorp Inc. ("Charter Michigan") which is the holding company
for Charter One Bank, a federally chartered savings bank headquartered in
Cleveland, Ohio. As of June 30, 1998, Charter One had total consolidated assets
of $19.8 billion, deposits of $10.9 billion and stockholders' equity of $1.5
billion. Charter One's business has consisted primarily of the business of
Charter One Bank and its subsidiaries. The executive offices of Charter One are
located at 1215 Superior Avenue, Cleveland, Ohio 44114, and the telephone number
is (216) 566-5300.
On June 15, 1998, Charter One announced that it had entered into a
definitive agreement providing for the acquisition of ALBANK. The ALBANK
Acquisition is expected to be completed in the fourth quarter of 1998. See
"Recent Developments," "Unaudited Pro Forma Combined Financial Statements,"
"Unaudited Pro Forma Per Share Data" and "Charter One Financial, Inc. and
Charter One Bank, F.S.B. -- Pending Structural Change."
Information concerning Charter One and Charter One Bank is also
included in the Charter One documents incorporated by reference herein. See
"Incorporation of Certain Documents by Reference."
CSFC AND CSFC BANK
CSFC, an Ohio corporation, is the holding company for CSFC Bank, an
Ohio chartered savings and loan association headquartered in Cleveland, Ohio. As
of June 30, 1998, CSFC had total consolidated assets of $392.9 million, deposits
of $342.7 million and stockholders' equity of $30.6 million. CSFC's business has
consisted primarily of the business of CSFC Bank and its subsidiaries. CSFC's
executive offices are located at 1360 East Ninth Street, Cleveland, Ohio 44114
and its telephone number is (216) 771-3550.
THE SPECIAL MEETING
CSFC SPECIAL MEETING
Meeting Date; Record Date. The Special Meeting is scheduled to be held
at the principal office of CSFC, 1360 East Ninth Street, Cleveland, Ohio on
Friday, October 16, 1998 at 9:00 a.m., local time, unless adjourned or
postponed. Only holders of record of CSFC Common Stock at the close of business
on September 1, 1998 (the "Record Date"), are entitled to notice of and to vote
at the Special Meeting.
<PAGE>
Matters to be Considered. At the Special Meeting, holders of shares of
CSFC Common Stock will consider and vote upon a proposal to adopt the Merger
Agreement. See "-- Summary of Certain Aspects of the Merger" and "The Merger."
CSFC stockholders also may consider and vote upon such other matters as are
properly brought before the Special Meeting, including proposals to adjourn the
Special Meeting to permit further solicitation of proxies by the CSFC Board in
the event that there are not sufficient votes to approve any proposal at the
time of the Special Meeting; provided, however, that no proxy which is voted
against the proposal to adopt the Merger Agreement will be voted in favor of
adjournment to solicit further proxies for such proposal.
THE CSFC BOARD UNANIMOUSLY RECOMMENDS THAT CSFC STOCKHOLDERS VOTE FOR
ADOPTION OF THE MERGER AGREEMENT.
Vote Required. Adoption of the Merger Agreement requires the
affirmative vote of at least a majority of the voting power of CSFC. As of the
Record Date, there were 33,635 shares of CSFC Common Stock entitled to be voted
at the Special Meeting.
The affirmative vote of at least a majority of the outstanding shares
of CSFC Common Stock represented at the Special Meeting in person or by proxy
may authorize the adjournment of the Special Meeting.
Adoption of the Merger Agreement by the stockholders of CSFC is a
condition to, and required for, consummation of the Merger. See "The
Merger--Conditions to the Merger."
Proxies. Any proxy given pursuant to this solicitation or otherwise may
be revoked by the person giving it at any time before it is voted by delivering
to the Secretary of CSFC at 1360 East Ninth Street, Cleveland, Ohio 44114 on or
before the taking of the vote at the Special Meeting, a written notice of
revocation bearing a later date than the proxy or a later dated proxy relating
to the same shares of CSFC Common Stock, or by attending the Special Meeting and
voting in person. Attendance at the Special Meeting will not in itself
constitute the revocation of a proxy.
Appraisal Rights. The OGCL provides that stockholders of CSFC who are
entitled to vote on the Merger may exercise certain rights as dissenting
stockholders under Section 1701.84 of the OGCL. Stockholders of CSFC will not be
entitled to such rights absent strict compliance with Section 1701.85 (attached
hereto as Annex C and incorporated by reference herein),and failure to take any
one of the required steps may result in termination or waiver of the right of
the stockholder under the OGCL. See "The Merger -- Appraisal Rights."
Security Ownership. As of the Record Date, directors and executive
officers of CSFC and their affiliates were beneficial owners of 8,208 shares, or
24.40% of the then outstanding shares, of CSFC Common Stock and certain members
of their families were beneficial owners of 7,168 shares, or 21.31% of the then
outstanding shares, of CSFC Common Stock. The directors and executive officers
of CSFC and such family members have entered into voting agreements with Charter
One (the "Charter One Voting Agreements") whereby such directors and executive
officers and such family members have agreed to vote the shares of CSFC Common
Stock owned or controlled by them (15,376 shares, or 45.71%, in the aggregate)
for adoption of the Merger Agreement.
2
<PAGE>
As of the Record Date, Charter One, directors and executive officers of
Charter One and their affiliates did not beneficially own any shares of CSFC
Common Stock.
For additional information, see "The Special Meeting."
SUMMARY OF CERTAIN ASPECTS OF THE MERGER
GENERAL
The stockholders of CSFC are being asked to consider and vote upon a
proposal to adopt the Merger Agreement pursuant to which, among other things, a
newly-organized subsidiary of Charter One will be merged with and into CSFC.
Immediately following the Merger, CSFC will be merged with and into Charter One,
and CSFC Bank will be merged with and into Charter One Bank. Upon consummation
of the Merger, each share of CSFC Common Stock issued and outstanding
immediately prior to the Effective Time (as defined herein), other than Excluded
Shares, will be converted into the right to receive shares of Charter One Common
Stock, including the right to receive a corresponding number of rights
associated with the Charter One Common Stock pursuant to the Rights Agreement.
See "The Merger -- Merger Consideration." For a description of the rights, see
"Comparison of Rights of Stockholders of Charter One Financial, Inc. and CS
Financial Corporation -- Rights Agreement."
BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF
DIRECTORS
The CSFC Board has unanimously adopted the Merger Agreement and
approved the transactions contemplated thereby and has determined that the
Merger is advisable and fair to, and in the best interests of, CSFC and its
stockholders. THE CSFC BOARD THEREFORE UNANIMOUSLY RECOMMENDS THAT CSFC
STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT AT THE SPECIAL MEETING.
See "The Merger -- Opinion of CSFC's Financial Advisor."
For a discussion of the factors considered by the CSFC Board in
reaching its decision to adopt the Merger Agreement and approve the transactions
contemplated thereby, see "The Merger -- Background of and Reasons for the
Merger."
MERGER CONSIDERATION
The Merger Agreement provides that (after adjustment for the Charter
One Stock Split) each share of CSFC Common Stock issued and outstanding
immediately prior to the Effective Time, other than Excluded Shares, will be
canceled and converted into 60.3538 shares of Charter One Common Stock (or
63.37149 shares as a result of the Charter One Stock Dividend), including a
corresponding number of rights associated with Charter One Common Stock pursuant
to the Rights Agreement.
Subject to any changes that may result from future stock splits, stock
dividends or similar transactions, the Exchange Ratio will be fixed at 63.37149
Based on the last reported sale price for Charter One Common Stock on the Nasdaq
National Market on September 14, 1998 ($26.19 per share), the value of 63.37149
shares of Charter One Common Stock as of that date would have been approximately
$1,659.54. Subject to any changes that may result from future stock splits,
stock dividends or similar transactions, the maximum number of shares of Charter
One Common Stock which may be issued in connection with the Merger is 2,131,500
which would result in the existing
3
<PAGE>
CSFC shareholders holding approximately 1.6% of the merged entity on a fully
diluted basis (or approximately 1.3% taking into account the ALBANK
Acquisition). The market value of Charter One Common Stock to be received in the
Merger, however, is subject to fluctuation. Fluctuations in the market price of
Charter One Common Stock could result in an increase or decrease in the value of
the Merger Consideration to be received by CSFC stockholders in the Merger. An
increase in the market value of Charter One Common Stock would increase the
market value of the Merger Consideration to be paid in the Merger. A decrease in
the market value of Charter One Common Stock would have the opposite effect. The
Merger Consideration was determined through arm's- length negotiations between
Charter One and CSFC. See "The Merger -- Background of and Reasons for the
Merger."
OPINION OF FINANCIAL ADVISOR
McDonald & Company Securities, Inc. ("McDonald & Company"), has
delivered a written opinion to the CSFC Board that, as of April 23, 1998, the
Exchange Ratio is fair, from a financial point of view, to the holders of CSFC
Common Stock. As part of its engagement, McDonald & Company is not required to
subsequently reconfirm its opinion. A copy of the McDonald & Company opinion
dated April 23, 1998, is attached to this Proxy Statement/Prospectus as Annex B
and is incorporated by reference herein. McDonald & Company has received
$175,000 to date for services rendered in connection with the Merger and will be
paid additional fees upon the closing of the Merger. For information on the
assumptions made, matters considered, limits of the review by McDonald & Company
and compensation to McDonald & Company, see "The Merger -- Opinion of CSFC's
Financial Advisor."
EFFECTIVE TIME
The Merger shall become effective at the time and on the date the
certificate of merger relating to the Merger is filed with the Secretary of
State of Ohio (the "Effective Time"). Such filing will occur only after the
receipt of all requisite regulatory approvals, adoption of the Merger Agreement
by the requisite vote of CSFC's stockholders, and the satisfaction or waiver of
all other conditions to the Merger. The Merger is expected to be completed in
the fourth quarter of 1998.
EXCHANGE OF CERTIFICATES; NO FRACTIONAL SHARES
As soon as reasonably practicable (but not later than five business
days) after the Effective Time, Charter One will mail to CSFC stockholders a
transmittal letter and instructions to be used in surrendering their CSFC Common
Stock certificates for Charter One Common Stock certificates as calculated
pursuant to the Exchange Ratio. See "The Merger -- Exchange of Certificates;
Lost Certificates." No fractional shares of Charter One Common Stock will be
issued in the Merger to holders of CSFC Common Stock. Each holder of CSFC Common
Stock who otherwise would have been entitled to a fraction of a share of Charter
One Common Stock will receive a cash payment in lieu thereof. See "The Merger --
Fractional Shares."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of CSFC's management and the CSFC Board have interests
in the Merger in addition to their interests as stockholders of CSFC generally.
Charter One Bank will offer employment agreements to each of the three executive
officers of CSFC and will make certain lump sum payments to them in satisfaction
of certain retirement benefits. In addition, COFI will agree to assume
obligations of CSFC and CSFC Bank to indemnify their directors and officers
against certain liabilities. See "The Merger -- Interests of Certain Persons in
the Merger."
4
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties
of Charter One and Charter One Bank on the one hand, and CSFC and CSFC Bank on
the other hand. See "The Merger -- Representations and Warranties."
CONDITIONS TO THE MERGER
The respective obligations of the parties to consummate the Merger are
subject to the satisfaction or waiver of certain conditions specified in the
Merger Agreement, including, among other things, the receipt of the requisite
regulatory and stockholder approvals, the accuracy of the representations and
warranties contained therein, the performance of all obligations imposed
thereby, the receipt by Charter One and CSFC of certain opinions and the
satisfaction of certain other conditions. See "The Merger -- Conditions to the
Merger."
REGULATORY APPROVALS
Consummation of the Merger is subject to the approval of the Office of
Thrift Supervision (the "OTS") and the Ohio Division of Financial Institutions
(the "Division"). Charter One filed an application for approval of the Merger
with the OTS on June 5, 1998 and the Division on June 9, 1998. Although Charter
One anticipates receiving approval of the OTS and the Division in the third
quarter of 1998, there can be no assurance as to the timing of such approvals or
that they will be obtained.
The Merger may not be consummated for a period of 30 days after receipt
of the OTS's final approval, unless the OTS has not received any adverse comment
from the United States Department of Justice (the "Department of Justice")
during the first 15 days following final approval, in which case the Merger may
be consummated on or after the 15th day after final approval by the OTS. See
"The Merger -- Regulatory Approvals."
AMENDMENT; TERMINATION
Subject to applicable law, the Merger Agreement may be amended by
action of the Board of Directors of Charter One ("Charter One Board") and CSFC
Board at any time before or after adoption of the Merger Agreement by the
stockholders of CSFC; provided that, after such adoption, no amendment may
change the value or form of the Merger Consideration to be received by CSFC
stockholders without the approval of the CSFC stockholders. See "The Merger --
Amendment; Termination; Liabilities and Remedies for Breach."
The Merger Agreement may be terminated at any time prior to the
Effective Time either (A) by mutual consent of the Charter One Board and the
CSFC Board in writing, (B) by either party if, among other things, (i) the
required regulatory approvals are not obtained; (ii) the Merger is not
consummated by December 31, 1998; (iii) the other party has materially breached
any representation, warranty, covenant or agreement set forth in the Merger
Agreement and has failed to, or cannot, cure in a timely manner such breach
after receiving written notice of such breach, or (iv) any event occurs which
renders impossible the satisfaction in any material respect of one or more of
the conditions to the other party's obligations to effect the Merger, or (C) by
CSFC if the
5
<PAGE>
Final COFI Share Price (as defined below) is less than $26.80 (after adjustment
for the Charter One Stock Split) (or less than $25.52 as a result of the Charter
One Stock Dividend). The "Final COFI Share Price" means the average of the
closing prices per share of Charter One Common Stock reported on the Nasdaq
National Market during the 20 consecutive trading days ending on the fifth
business day prior to the date of the scheduled Merger closing. If the Final
COFI Share Price is less than $26.80 (or less than $25.52 as a result of the
Charter One Stock Dividend), the CSFC Board will determine whether or not to
terminate the Merger Agreement. The CSFC Board does not intend to resolicit
proxies from holders of CSFC Common Stock in such circumstances.
In the event that the Merger Agreement is terminated by a party solely
by reason of a material breach by the other party of any of its representations,
warranties, covenants or agreements contained in the Merger Agreement, then the
non-breaching party is entitled to seek such remedies and relief as are
available at law or in equity, including specific performance against the
breaching party. See "The Merger -- Amendment; Termination; Liabilities and
Remedies for Breach."
CONDUCT OF BUSINESS PENDING THE MERGER
CSFC and CSFC Bank have agreed to certain covenants with respect to the
conduct of their businesses and other matters pending the closing of the Merger.
CSFC has agreed to conduct its activities in the ordinary and usual course of
business, unless an exception is consented to by Charter One. Both parties will
use all reasonable efforts to preserve intact their material business
organization, assets and existing relationships. Neither party will take any
action which will materially impair the consummation of the Merger. In general,
CSFC has agreed to limit its activities to its ordinary course of business
consistent with past practice, except with the consent of Charter One. See "The
Merger -- Conduct of Business Pending the Merger."
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a "pooling of
interests" in accordance with generally accepted accounting principles. It is a
condition to the Merger that Charter One receive a letter from Deloitte & Touche
LLP to the effect that the Merger will qualify for pooling of interests
accounting treatment. Accordingly, upon consummation of the Merger, CSFC's
results of operations will be included in Charter One's consolidated results of
operations for periods both before and after the Effective Time. See "The Merger
- -- Accounting Treatment" and "-- Conditions to the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is a condition to the obligations of Charter One and CSFC to
consummate the Merger that they have received an opinion of Silver, Freedman &
Taff, L.L.P. to the effect that the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code") and that Charter One and CSFC will each be a party to a
reorganization. It is expected that for federal income tax purposes no gain or
loss will be recognized as a result of the Merger by Charter One or CSFC or any
CSFC stockholder upon receipt solely of Charter One Common Stock in the Merger
(except with respect to cash received by a CSFC stockholder in lieu of a
fractional share interest in Charter One Common Stock). CSFC stockholders
6
<PAGE>
are urged to consult their tax advisors concerning the specific tax consequences
to them of the Merger, including the applicability and effect of various state,
local and foreign tax laws. See "The Merger -- Certain Federal Income Tax
Consequences of the Merger" and "-- Conditions to the Merger."
EFFECTS OF THE MERGER ON STOCKHOLDERS
As a result of the Merger, holders of CSFC Common Stock who receive
shares of Charter One Common Stock in the Merger will become stockholders of
Charter One. For a comparison of applicable law and the corporate charters and
bylaws of Charter One and CSFC governing the rights of Charter One and CSFC
stockholders, see "Comparison of Rights of Stockholders of Charter One
Financial, Inc. and CS Financial Corporation."
CERTAIN RELATED MATTERS
THE CORPORATE MERGER
It is anticipated that the Merger will be followed immediately by the
merger of CSFC (as the surviving corporation in the Merger) with and into
Charter One (the "Corporate Merger").
THE BANK MERGER
It is anticipated that immediately following the Corporate Merger, CSFC
Bank will be merged with and into Charter One Bank (the "Bank Merger").
7
<PAGE>
RECENT DEVELOPMENTS
On June 15, 1998, Charter One, Charter Michigan and ALBANK entered into
an Agreement and Plan of Merger (the "ALBANK Merger Agreement"), which provides
for the ALBANK Acquisition. Consummation of the ALBANK Acquisition is subject to
customary conditions, including, among other things, (i) the approval of the
ALBANK Merger Agreement by a majority of the outstanding shares of ALBANK common
stock entitled to vote on the matter, (ii) the approval of the issuance of
shares of Charter One Common Stock in connection with the ALBANK Acquisition by
a majority of the shares of Charter One Common Stock actually voted on the
matter at the special meeting of stockholders, and (iii) receipt of regulatory
approvals. Completion of the ALBANK Acquisition is expected in the fourth
quarter of 1998.
Upon consummation of the ALBANK Acquisition, each of the issued and
outstanding shares of ALBANK common stock (other than treasury shares of ALBANK)
will be canceled and converted into 2.16 shares (or 2.268 shares as a result of
the Charter One Stock Dividend) of Charter One Common Stock, including a
corresponding number of rights associated with Charter One Common Stock pursuant
to the Rights Agreement. Assuming consummation of the ALBANK Acquisition,
approximately 30 million shares (as adjusted for the Charter One Stock Dividend)
of Charter One Common Stock will be issued to acquire ALBANK.
ALBANK, a Delaware corporation, is the holding company for ALBANK, FSB,
a federal savings bank, and ALBANK Commercial, a New York chartered commercial
bank, each with its headquarters in Albany, New York. At June 30, 1998, ALBANK
had total consolidated assets of $4.1 billion, deposits of $3.5 billion and
stockholders' equity of $379.4 million. ALBANK's executive offices are located
at 10 Pearl Street, Albany, New York 12207. ALBANK's telephone number is (518)
445-2100.
Charter One continues to explore other opportunities to acquire
financial institutions and other financial services-related businesses in order
to expand the scope of its services and its customer base. Discussions are
continually being carried on relating to such acquisitions. It is not presently
known whether, or on what terms, such discussions will result in further
acquisitions. It is the policy of Charter One not to comment on such discussions
or possible acquisitions until a definitive agreement has been reached.
8
<PAGE>
COMPARATIVE STOCK PRICES AND DIVIDEND INFORMATION
Charter One Common Stock is traded on the Nasdaq National Market
(symbol: COFI). Although CSFC Common Stock, which is held of record by fewer
than 120 shareholders, is not traded on any national exchange or the Nasdaq
Stock Market, the price for shares of CSFC Common Stock is quoted on the OTC
Bulletin Board operated by the National Association of Securities Dealers, Inc.
("NASD"). The following table sets forth the reported high and low sales prices
of shares of Charter One Common Stock, as reported on the Nasdaq National
Market, the high and low sales price for CSFC Common Stock on the OTC Bulletin
Board as reported by the NASD and the cash dividends per share declared and paid
by Charter One and paid by CSFC, respectively, for the periods indicated. The
stock prices and dividend amounts have been restated to give effect to stock
splits and stock dividends (including the Charter One Stock Split and the
Charter One Stock Dividend). The stock prices do not include retail mark-ups,
mark-downs or commissions.
<TABLE>
<CAPTION>
Charter One CSFC
Common Stock Common Stock
------------------------------------------------------------------------------------------------
Dividends
Declared Dividends
High Low and Paid High Low Paid
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 FISCAL YEAR
First Quarter..................... $15.23 $12.31 $0.09 $ --- $ --- $ 3.00 special,
1.50 regular
Second Quarter.................... 16.42 13.30 0.10 346.00 346.00 1.50
Third Quarter..................... 18.40 14.52 0.10 355.00 355.00 1.50
Fourth Quarter.................... 20.30 17.30 0.105 --- --- 1.50
1997 FISCAL YEAR
First Quarter..................... 22.73 18.66 0.105 --- --- 4.00 special,
1.50 regular
Second Quarter.................... 24.50 19.16 0.11 --- --- 1.50
Third Quarter..................... 27.90 23.36 0.11 630.00 380.00 1.50
Fourth Quarter.................... 30.48 25.77 0.12 1,000.00 600.00 1.60
1998 FISCAL YEAR
First Quarter..................... 32.44 22.86 0.12 1,000.00 775.00 10.00 special,
2.00 regular
Second Quarter.................... 34.89 28.57 0.13 1,835.00 1,600.00 2.00 regular
Third Quarter..................... 34.17 21.84 0.13 --- --- 2.00 regular
(through September 14, 1998)
</TABLE>
9
<PAGE>
Nothing contained in the Merger Agreement will preclude CSFC from
declaring and paying (x) its regular quarterly cash dividend on CSFC Common
Stock of not more than $2.00 per share in a manner, on dates and with respect to
record dates consistent with past practice (except for the payment of the last
dividend prior to consummation of the Merger which will be coordinated with, and
subject to the prior approval of, Charter One, to preclude any duplication of
dividends); and (y) a special cash dividend consistent with past practice in an
amount not to exceed the product of (A) $8.00 multiplied by (B) the fraction of
which the denominator is 12 and the numerator is the number of full calendar
months of 1998 (and any partial month consisting of at least 15 calendar days in
1998) prior to the Effective Time. The special dividend shall be payable on or
about the Merger closing date. CSFC shall not declare or pay any other dividends
or make any other capital distribution with respect to capital without the prior
written consent of Charter One. The CSFC Board is under no obligation to pay
dividends on CSFC Common Stock.
The timing and amount of the future dividends of Charter One will
depend upon earnings, cash requirements, Charter One's financial condition and
other factors deemed relevant by the Charter One Board. Dividends may also be
limited by certain regulatory restrictions. The Charter One Board has not yet
determined the dividend policy of Charter One after completion of the Merger.
The following table sets forth the last reported sale prices per share
of Charter One Common Stock and the equivalent per share price for CSFC Common
Stock giving effect to the Merger on (i) April 22, 1998, the last trading day
preceding public announcement of the signing of the Merger Agreement; and (ii)
September 14, 1998, the last practicable date prior to the mailing of this Proxy
Statement/Prospectus. The most recent trade of CSFC Common Stock known to
management was made on May 21, 1998 at $1,835 per share.
Charter One Equivalent Price per
Common Stock CSFC Share (1)
------------ ---------------------
April 22, 1998............. $34.64 $2,195.19
September 14, 1998......... $26.19 $1,659.54
- ---------------
(1) The equivalent price per CSFC share at each specified date represents the
closing market price of a share of Charter One Common Stock on that date
(adjusted for the Charter One Stock Split and the Charter One Stock
Dividend) multiplied by the Exchange Ratio of 63.37149.
As of August 15, 1998, the 133,573,730 outstanding shares of Charter
One Common Stock (adjusted for the Charter One Stock Dividend) were held by
approximately 11,445 record owners, and as of the Record Date, the 33,635
outstanding shares of CSFC Common Stock were held by approximately 116 record
owners.
10
<PAGE>
CSFC stockholders are advised to obtain current market quotations for
Charter One Common Stock. The market price of Charter One Common Stock may
fluctuate between the date of this Proxy Statement/Prospectus and the date of
the Special Meeting and between such date and the Effective Time. Fluctuations
in the market price of Charter One Common Stock will result in an increase or
decrease in the value of the Merger Consideration to be received by holders of
CSFC Common Stock in the Merger. An increase in the market value of Charter One
Common Stock will increase the market value of the Merger Consideration to be
received in the Merger. A decrease in the market value of Charter One Common
Stock will have the opposite effect. The market value of the Merger
Consideration at the time of the Merger will depend upon the market value of a
share of Charter One Common Stock at such time. No assurance can be given
concerning the market price of Charter One Common Stock before or after the
Effective Time. See "The Merger -- Merger Consideration."
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND
OTHER DATA OF CHARTER ONE FINANCIAL, INC.
<TABLE>
<CAPTION>
AT AND FOR THE SIX
MONTHS ENDED JUNE 30, AT AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------
1998 1997 1997 1996(1)
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA(2):
Interest income...................... $ 723,938 $667,777 $1,377,687 $1,293,883
Interest expense..................... 439,790 407,691 850,724 785,323
----------- -------- ------------ -----------
Net interest income ............. 284,148 260,086 526,963 508,560
Provision for loan and lease losses.. 10,156 9,625 40,861 17,549
----------- -------- ------------ -----------
Net interest income after provision
for loan and lease losses..... 273,992 250,461 486,102 491,011
Other income:
Net (loss) gain...................... 8,374 617 (3,074) 1,753
Other................................ 79,535 64,936 113,885 114,484
Administrative expenses.............. 163,856 155,005 373,930 357,193
----------- -------- ----------- -----------
Income before income taxes and
extraordinary item................ 198,045 161,009 222,983 250,055
Income taxes......................... 66,151 54,138 71,847 82,628
----------- --------- ----------- -----------
Income before extraordinary item .... 131,894 106,871 151,136 167,427
Extraordinary item - early extinguish-
ment of debt, net of tax benefit.. --- --- (2,727) ---
----------- --------- -------------- -----------
Net income....................... $131,894 $106,871 $ 148,409 $ 167,427
======== ======== =========== ===========
PER SHARE DATA(3):
Basic earnings per share:
Income before extraordinary item .... $ 0.98 $ 0.81 1.14 $ 1.26
Extraordinary item - early extinguish-
ment of debt, net of tax benefit.. --- --- (.02) ---
----------- ------------------------------ ------------
Net income ...................... $ 0.98 $ 0.81 $ 1.12 $ 1.26
=========== ==========================================
Diluted earnings per share:
Income before extraordinary item..... $ 0.95 $ 0.79 $ 1.11 $ 1.20
Extraordinary item - early extinguish-
ment of debt...................... --- --- (.02) --
------------------------------------------- -------------
Net income........................ $ 0.95 $ 0.79 $ 1.09 $ 1.20
============ ==========================================
Cash dividends declared and paid per
common share(4)..................... $ 0.25 $ 0.22 $ 0.45 $ 0.39
Book value per share.............. $ 11.04 9.59 $ 10.27 $ 9.35
FINANCIAL CONDITION:
Total assets......................... $19,813,254 $18,645,237 $19,760,265 $17,885,562
</TABLE>
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1995(1) 1994(1) 1993(1)
----------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA(2):
Interest income...................... $ 1,356,831 $ 1,262,829 $ 1,331,566
Interest expense..................... 918,804 825,532 914,101
------------ ----------- -----------
Net interest income ............. 438,027 437,297 417,465
Provision for loan and lease losses.. 8,664 19,044 20,580
------------ ----------- -----------
Net interest income after provision
for loan and lease losses..... 429,363 418,253 396,885
Other income:
Net (loss) gain...................... (93,527) (116,736) 8,991
Other................................ 90,343 82,409 96,426
Administrative expenses.............. 322,637 305,502 404,794
------------ ----------- -----------
Income before income taxes and
extraordinary item................ 103,542 78,424 97,508
Income taxes......................... 31,757 18,485 52,534
------------ ------------ -----------
Income before extraordinary item .... 71,785 59,939 44,974
Extraordinary item - early extinguish-
ment of debt, net of tax benefit.. --- (12,348) ---
------------ ----------- -----------
Net income....................... $ 71,785 $ 47,591 $ 44,974
============ =========== ===========
PER SHARE DATA(3):
Basic earnings per share:
Income before extraordinary item .... $ 0.50 $ 0.41 $ 0.32
Extraordinary item - early extinguish
ment of debt, net of tax benefit... --- (0.10) ---
------------ ----------- -----------
Net income ...................... $ 0.50 $ 0.31 $ 0.32
============ =========== ===========
Diluted earnings per share:
Income before extraordinary item..... 0.50 $ 0.42 $ 0.32
Extraordinary item - early extinguish-
ment of debt...................... --- (0.10) ---
------------ ------------ -----------
Net income........................ $ 0.50 $ 0.32 $ 0.32
============ =========== ===========
Cash dividends declared and paid per
common share(4)..................... $ 0.32 $ 0.25 $ 0.18
Book value per share................... $ 9.52 $ 8.86 $ 9.14
FINANCIAL CONDITION:
Total assets......................... $ 17,450,299 $17,948,222 $18,636,766
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AT AND FOR THE SIX
MONTHS ENDED JUNE 30, AT AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------
1998 1997 1997 1996(1)
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Mortgage-backed securities........... 5,374,578 5,939,437 5,285,482 6,359,463
Investment securities............... 30,759 362,324 582,589 246,060
Loans and leases, net................ 13,299,606 11,253,493 12,701,805 10,118,066
Deposits............................. 10,907,379 10,101,067 10,219,200 10,209,847
FHLB advances and other borrowings... 7,075,835 6,789,377 7,696,825 6,063,145
Stockholders' equity................. 1,479,382 1,288,081 1,376,889 1,245,587
OTHER PERIOD-END DATA:
Number of full service offices....... 225 220 220 207
Number of loan origination offices... 39 43 37 49
SELECTED RATIOS(2):
Net yield on average interest-earning
assets for the period............. 2.99% 2.97% 2.93% 3.02%
Return on average stockholders' equity 18.32 16.74 11.28 13.25
Return on average assets............. 1.33 1.18 0.79 0.96
Average stockholders' equity to average
assets............................ 7.28 7.03 7.04 7.22
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1995(1) 1994(1) 1993(1)
----------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Mortgage-backed securities........... 6,794,491 7,915,186 7,872,284
Investment securities............... 409,880 473,038 435,258
Loans and leases, net................ 8,649,620 8,449,525 9,111,694
Deposits............................. 9,235,461 9,165,967 9,970,224
FHLB advances and other borrowings... 6,431,124 7,220,534 6,888,456
Stockholders' equity................. 1,260,763 1,170,670 1,214,551
OTHER PERIOD-END DATA:
Number of full service offices....... 189 187 214
Number of loan origination offices... 56 48 43
SELECTED RATIOS(2):
Net yield on average interest-earning
assets for the period............. 2.48% 2.50% 2.40%
Return on average stockholders' equity 5.85 4.08 3.88
Return on average assets............. 0.39 0.26 0.25
Average stockholders' equity to average
assets............................ 6.71 6.42 6.32
</TABLE>
- -------------------------------
(1) As restated for applicable mergers and acquisitions. See Note 2 to the
Charter One 1997 Consolidated Financial Statements incorporated by
reference herein.
(2) Due to the effect of acquisitions, amounts are not necessarily indicative
of future results.
(3) Restated to reflect the two-for-one Charter One Stock Split which was paid
as of May 20, 1998 to stockholders of record on May 6, 1998 and the 5%
Charter One Stock Dividend to be paid September 30, 1998 to shareholders of
record on September 14, 1998.
(4) Dividends are historical per share amounts declared and paid by Charter
One, as adjusted for stock splits and stock dividends. No adjustment has
been made for mergers accounted for as a pooling of interests.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF CS FINANCIAL CORPORATION
<TABLE>
<CAPTION>
At and For the Six
Months Ended June 30, At and For the Year Ended December 31,
-----------------------------------------------------------------------------------------
1998 1997 1997 1996
-----------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income..................... $ 14,224 $ 13,190 $27,233 $25,835
Interest expenses................... 8,691 8,152 16,834 15,332
Provision for loan losses........... 13 224 232 160
Nonoperating income................. 910 657 1,458 713
General and administrative expenses(1) 4,252 3,801 7,767 9,481
Provision for income taxes.......... 742 564 1,296 517
---------- ------------ -------- --------
Net income........................ $ 1,436 $ 1,106 $ 2,562 $ 1,058
========== ========== ======= =======
PER SHARE DATA:
Net income
Basic............................. $ 42.68 $ 32.89 $ 76.16 $ 31.46
Diluted........................... 42.68 32.89 76.16 31.46
Stockholders' equity................ 909.65 841.27 870.94 811.39
Tangible stockholders' equity....... 909.65 841.27 870.94 811.39
Cash dividend declared.............. 4.00 3.00 16.60 10.00
Dividend payout ratio............... 9.37% 9.12% 21.80% 31.78%
FINANCIAL CONDITION:
Total assets........................ $392,877 $369,647 $378,650 $352,825
Net loans........................... 334,122 326,474 335,493 313,283
Cash and investments................ 34,900 20,911 21,015 16,914
Mortgage-backed securities.......... 760 1,133 940 1,343
Deposits............................ 342,748 318,015 326,713 293,593
Borrowed money...................... 14,660 17,763 17,063 25,950
Stockholders' equity................ 30,596 28,296 29,294 27,291
Amount of loans serviced for
others........................... 1,034 1,254 1,112 1,396
Number of offices................... 8 8 8 8
SELECTED RATIOS:
Return on average assets............ 0.74% 0.61% 0.70% 0.30%
Return on average equity............ 9.59 7.96 9.05 3.93
Average equity to average assets.... 7.76 7.69 7.74 7.69
Weighted-average yield on interest
earning assets................... 7.71 7.62 7.75 7.74
Weighted-average cost on interest
bearing liabilities.............. 5.07 5.03 5.05 4.96
Interest rate spread................ 2.64 2.59 2.70 2.78
Net interest margin................. 3.02 2.93 2.99 3.13
Stockholders' equity to total assets 7.79 7.65 7.74 7.74
</TABLE>
<TABLE>
<CAPTION>
At and for the Year Ended December 31,
-------------------------------------------------
1995 1994 1993
-------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income..................... $23,255 $19,747 $21,430
Interest expenses................... 14,636 10,219 10,484
Provision for loan losses........... 96 115 157
Nonoperating income................. (248) 345 (304)
General and administrative expenses(1) 7,041 7,482 7,488
Provision for income taxes.......... 397 735 778
-------- --------- ---------
Net income........................ $ 837 $ 1,541 $ 2,219
======= ======= =======
PER SHARE DATA:
Net income
Basic............................. $ 24.90 $ 45.81 $ 65.98
Diluted........................... 24.90 45.81 65.98
Stockholders' equity................ 789.92 774.04 740.22
Tangible stockholders' equity....... 789.92 774.04 740.22
Cash dividend declared.............. 9.00 12.00 11.85
Dividend payout ratio............... 36.15% 26.19% 17.96%
FINANCIAL CONDITION:
Total assets........................ $347,337 $311,126 $299,710
Net loans........................... 308,910 274,533 244,245
Cash and investments................ 21,396 16,519 34,510
Mortgage-backed securities.......... 1,754 2,198 2,895
Deposits............................ 275,025 241,095 240,232
Borrowed money...................... 36,333 33,812 24,050
Stockholders' equity................ 26,569 26,035 24,897
Amount of loans serviced for
others........................... 1,783 2,061 2,434
Number of offices................... 7 7 7
SELECTED RATIOS:
Return on average assets............ 0.25% 0.50% 0.72%
Return on average equity............ 3.18 6.05 9.25
Average equity to average assets.... 7.99 8.34 7.84
Weighted-average yield on interest
earning assets................... 7.33 6.89 7.31
Weighted-average cost on interest
bearing liabilities.............. 5.01 3.87 3.85
Interest rate spread................ 2.32 3.02 3.46
Net interest margin................. 2.73 3.28 3.76
Stockholders' equity to total assets 7.65 8.37 8.31
</TABLE>
- ------------------------
(1) The year 1996 was significantly affected by the one-time, nonrecurring
charge associated with the recapitalization of the Savings Association
Insurance Fund ("SAIF"), which, after tax, totaled $1.1 million or $31.93
per share. Excluding this nonrecurring SAIF assessment, earnings for the
year ended December 31, 1996 were $2.1 million or $63.40 per share.
Excluding the nonrecurring SAIF assessment, 1996 earnings produced a return
on average assets of 0.61% and a return on average equity of 7.76%.
14
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Statement of Financial
Condition as of June 30, 1998 combines the historical consolidated statements of
financial condition of Charter One and its subsidiaries, CSFC and its
subsidiaries and ALBANK and its subsidiaries as if Charter One had consummated
the ALBANK Acquisition and the Merger effective on June 30, 1998, after giving
effect to certain pro forma adjustments described in the accompanying notes. The
following Unaudited Pro Forma Combined Statements of Income for the six-month
periods ended June 30, 1998 and 1997 and for each of the years in the three-year
period ended December 31, 1997 present the combined historical results of
operations of Charter One and its subsidiaries, CSFC and its subsidiaries and
ALBANK and its subsidiaries as if Charter One had consummated the ALBANK
Acquisition and the Merger effective as of the beginning of the periods
indicated. Charter One's, CSFC's and ALBANK's fiscal years end on December 31.
Pro forma per share amounts are based on an Exchange Ratio of 2.268 shares of
Charter One Common Stock for each share of ALBANK Common Stock, and 63.37149
shares of Charter One Common Stock for each share of CSFC Common Stock. As a
result of the Charter One Stock Dividend, the pro forma per share amounts will
adjust and will be based upon an Exchange Ratio of 2.268 shares of Charter One
Common Stock for each share of ALBANK Common Stock, and 63.37149 shares of
Charter One Common Stock of each share of CSFC Common Stock. See "Recent
Developments." The ALBANK Acquisition and the Merger are expected to close in
the fourth quarter of 1998.
The Unaudited Pro Forma Combined Financial Statements and related
footnotes account for the ALBANK Acquisition and the Merger using the
"pooling-of-interests" method of accounting. Under the pooling-of-interests
method of accounting, the recorded assets, liabilities, stockholders' equity,
income and expenses of Charter One, CSFC and ALBANK are combined and recorded at
their historical cost-based amounts, except as noted below and in the footnotes.
The Unaudited Pro Forma Combined Financial Statements are intended for
informational purposes and are not necessarily indicative of the future
consolidated financial position or future results of operations of the entity
resulting from the combination of Charter One, ALBANK and CSFC or the
consolidated financial position or results of operations of the combined entity
that would have been achieved had the ALBANK Acquisition and the Merger been
consummated as of the date or at the beginning of the periods presented. The
Unaudited Pro Forma Combined Statements of Income do not reflect the cost to
effect the ALBANK Acquisition and the Merger and to combine operations of
Charter One, ALBANK and CSFC, or any expected cost savings therefrom. These
Unaudited Pro Forma Combined Financial Statements should be read in conjunction
with, and are qualified in their entirety by, the separate historical
consolidated financial statements and notes thereto of Charter One and ALBANK,
which are incorporated by reference herein through the incorporation by
reference herein of the July 22, 1998 8-K and the August 18, 1998 8-K (see
"Incorporation of Certain Documents by Reference"), and the separate historical
consolidated financial statements and notes thereto of CSFC included herewith
(see "Index to Financial Statements of CS Financial Corporation").
15
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------
Combined
Pro Forma
Charter One CSFC Pro Forma Amounts for
as Reported as Reported Adjustments the Merger
------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Cash and cash equivalents................... $ 183,683 $ 34,133 $ --- $ 217,816
Investment securities:
Available for sale, at fair value......... 30,759 --- --- 30,759
Held to maturity.......................... --- 755 --- 755
Mortgage-backed securities:
Available for sale, at fair value......... 1,974,801 --- --- 1,974,801
Held to maturity.......................... 3,399,777 749 --- 3,400,526
Loans and leases, net....................... 13,072,147 332,867 --- 13,405,014
Loans held for sale......................... 227,459 --- --- 227,459
FHLB stock.................................. 374,098 3,419 --- 377,517
Premises and equipment...................... 159,060 15,296 --- 174,356
Accrued interest receivable................. 99,301 1,278 --- 100,579
Real estate and other collateral owned...... 13,708 156 --- 13,864
Loans servicing assets...................... 72,576 --- --- 72,576
Goodwill.................................... 86,782 --- --- 86,782
Other assets................................ 119,103 4,224 --- 123,327
----------- --------- -------- -----------
Total assets............................ $19,813,254 $ 392,877 --- $20,206,131
=========== ========= ======== ===========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits.................................... $10,907,379 $342,744 $ --- $11,250,123
Federal Home Loan Bank advances............. 5,036,901 14,660 --- 5,051,561
Reverse repurchase agreements 1,799,846 --- --- 1,799,846
Other borrowings............................ 239,088 --- --- 239,088
Advance payments by borrowers for
taxes and insurance..................... 61,856 2,317 --- 64,173
Accrued interest payable.................... 51,633 82 --- 51,715
Accrued expenses and other liabilities...... 237,169 2,478 --- 239,647
------------ ---------- ------------ -----------
Total liabilities....................... $18,333,872 $362,281 $ --- $18,696,153
----------- -------- ----------- -----------
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust......................... $ --- $ --- $ --- $ ---
Stockholders' equity:
Common stock and paid-in capital............ $ 707,454 $ 355 $ (3,089)(3) $ 704,720
Retained earnings........................... 793,469 33,330 --- 826,799
Treasury stock.............................. (53,526) (3,089) 3,089 (3) (53,526)
Borrowings of employee investment and
stock ownership plan.....................
(1,943) --- --- (1,943)
Accumulated other comprehensive income...... 33,928 --- --- 33,928
----------- --------- ---------- -----------
Total stockholders' equity.............. 1,479,382 30,596 --- 1,509,978
----------- --------- ---------- -----------
Total liabilities and stockholders' equity $19,813,254 $ 392,877 $ --- $20,206,131
=========== ========= ========== ===========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------
Pro Forma
Should Both
ALBANK Pro Forma Mergers be
as Reported Adjustments Consummated
------------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Cash and cash equivalents................... $ 209,393 $ (53,000)(1) $ 374,209
Investment securities:
Available for sale, at fair value......... 328,257 --- 359,016
Held to maturity.......................... 77,123 --- 77,878
Mortgage-backed securities:
Available for sale, at fair value......... 391,550 --- 2,366,351
Held to maturity.......................... 16,978 --- 3,417,504
Loans and leases, net....................... 2,836,062 --- 16,241,076
Loans held for sale......................... --- --- 227,459
FHLB stock.................................. 25,864 --- 403,381
Premises and equipment...................... 56,005 (12,500)(1) 217,861
Accrued interest receivable................. 27,149 --- 127,728
Real estate and other collateral owned...... 5,207 --- 19,071
Loans servicing assets...................... 481 --- 73,057
Goodwill.................................... 79,027 --- 165,809
Other assets................................ 77,772 20,500(2) 221,599
---------- --------- -----------
Total assets............................ $4,130,868 $ (45,000) $24,291,999
========== ========= ===========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits.................................... $3,505,324 $ --- $14,755,447
Federal Home Loan Bank advances............. 62,061 --- 5,113,622
Reverse repurchase agreements --- --- 1,799,846
Other borrowings............................ 26,105 --- 265,193
Advance payments by borrowers for
taxes and insurance..................... 25,154 --- 89,327
Accrued interest payable.................... 1,159 --- 52,874
Accrued expenses and other liabilities...... 81,620 --- 321,267
---------- --------- -----------
Total liabilities....................... $3,701,423 $ --- $22,397,576
---------- --------- -----------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------
Pro Forma
Should Both
ALBANK Pro Forma Mergers be
as Reported Adjustments Consummated
------------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust......................... 50,000 $ --- $ 50,000
Stockholders' equity:
Common stock and paid-in capital............ $ 184,705 $(66,289)(3) $ 823,136
Retained earnings........................... 258,222 (45,000)(4) 1,040,021
Treasury stock.............................. (66,289) 66,289 (3) (53,526)
Borrowings of employee investment and
stock ownership plan.....................
(4,785) --- (6,728)
Accumulated other comprehensive income...... 7,592 --- 41,520
----------- --------- -----------
Total stockholders' equity............. 379,445 (45,000)(4) 1,844,423
----------- --------- -----------
Total liabilities and stockholders' equity $ 4,130,868 $(45,000) $24,291,999
=========== ========= ===========
</TABLE>
- --------------
See "Notes to Unaudited Pro Forma Combined Statement of Condition."
18
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF CONDITION
(1) Transaction costs of the ALBANK Acquisition (primarily investment banker
and other professional fees) and costs to combine operations are expected
to be in the range of $40.0 million to $50.0 million after tax. Unaudited
Pro Forma Combined Statements of Income do not reflect these charges. The
Unaudited Pro Forma Combined Statement of Financial Condition reflects
these charges at the mid-point of the expected pretax range ($65.5
million). It is anticipated that these charges will be incurred and
recognized prior to December 31, 1998. In addition, it is anticipated that
cash charges will be substantially paid-out by the end of 1998 or early
1999. The following table provides details of the estimated charges by type
of cost:
<TABLE>
<CAPTION>
EXPECTED PRE-TAX EXPECTED AFTER-TAX
TYPE OF COST RANGE RANGE
<S> <C> <C> <C> <C>
Transaction Costs $13 to $16 million $11 to $13 million
Costs to combine operations:
Severance and other employee termination costs $26 to $34 million $17 to $22 million
Duplicative systems and facilities costs $11 to $14 million $ 7 to $ 9 million
Other costs incidental to the merger $ 8 to $ 9 million $ 5 to $ 6 million
--- --- --- ---
Total $58 to $73 million $40 to $50 million
</TABLE>
(2) Represents the expected income tax benefit associated with the pro forma
adjustments.
(3) Elimination of CFSC's and ALBANK's treasury shares.
(4) Represents the after-tax effect of the pro forma adjustments, as described
in note (1) above, using a Federal income tax rate of 35%.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
-----------------------------------------------------------------------------------
Combined Pro Forma
Pro Forma Should Both
Charter One CSFC Amounts for ALBANK Mergers be
as Reported as Reported the Merger as Reported Consummated
--------------- --------------- ------------- -------------- -------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income.................................. $723,938 $14,224 $738,162 $145,164 $883,326
Interest expense................................. 439,790 8,691 448,481 71,737 520,218
--------- ----- -------- ------- ----------
Net interest income.......................... 284,148 5,533 289,681 73,427 363,108
Provision for loan and lease losses.............. 10,156 13 10,169 3,600 13,769
----------- --------- --------- --------- -----------
Net interest income after provision for loan
and lease losses.............................. 273,992 5,520 279,512 69,827 349,339
Net gain on sales................................ 8,374 --- 8,374 258 8,632
Other income..................................... 79,535 910 80,445 10,176 90,621
Other expenses................................... 163,856 4,252 168,108 48,965 217,073
---------- ----- -------- ------- --------
Income before income taxes....................... 198,045 2,178 200,223 31,296 231,519
Provision for income taxes....................... 66,151 742 66,893 11,214 78,107
---------- ------ --------- --------- ----------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
----------------------------------------------------------------------------------
Combined Pro Forma
Pro Forma Should Both
Charter One CSFC Amounts for ALBANK Mergers be
as Reported as Reported the Merger as Reported Consummated
--------------- --------------- ------------- -------------- -------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net income....................................... $131,894 $1,436 $133,330 $ 20,082 $153,412
======== ====== ======== ======== ========
Earnings per share:
Basic.......................................... $ 0.98 $42.68 $ 0.98 $ 1.56 $ 0.93
=========== ====== ========== ========= ===========
Diluted........................................ $ 0.95 $42.68 $ 0.95 $ 1.46 $ 0.89
=========== ====== ========== ========= ===========
Weighted average shares:
Basic.......................................... 134,406 34 136,538 12,890 165,771
======= == ======= ====== =======
Diluted........................................ 138,551 34 140,683 13,771 171,916
======= == ======= ====== =======
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
----------------------------------------------------------------------------------
Combined Pro Forma
Pro Forma Should Both
Charter One CSFC Amounts for ALBANK Mergers be
as Reported as Reported the Merger as Reported Consummated
-------------- --------------- --------------- ---------------- --------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income................................... $ 667,777 $13,190 $680,967 $ 130,048 $ 811,015
Interest expense.................................. 407,691 8,152 415,843 63,562 479,405
--------- ----- -------- ------------ ----------
Net interest income............................. 260,086 5,038 265,124 66,486 331,610
Provision for loan and lease losses............... 9,625 224 9,849 3,600 13,449
--------- ------ -------- ------------ ----------
Net interest income after provision for loan
and lease losses................................. 250,461 4,814 255,275 62,886 318,161
Net gain on sales................................. 617 --- 617 375 992
Other income...................................... 64,936 657 65,593 6,391 71,984
Other expenses.................................... 155,005 3,801 158,806 40,012 198,818
--------- ----- -------- ------------ ----------
Income before income taxes........................ 161,009 1,670 162,679 29,640 192,319
Provision for income taxes........................ 54,138 564 54,702 10,882 65,584
--------- ------- -------- ------------ ----------
Net income........................................ $ 106,871 $ 1,106 $107,977 $ 18,758 $ 126,735
========= ======= ======== ============ ==========
Earnings per share:
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
----------------------------------------------------------------------------------
Combined Pro Forma
Pro Forma Should Both
Charter One CSFC Amounts for ALBANK Mergers be
as Reported as Reported the Merger as Reported Consummated
-------------- --------------- --------------- ---------------- --------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Basic...........................................$ 0.81 $32.89 $ 0.81 $ 1.48 $ 0.78
============ ====== ========= ============== ==============
Diluted.........................................$ 0.79 $32.89 $ 0.79 $ 1.37 $ 0.75
============ ====== ========= ============== ==============
Weighted average shares:
Basic........................................... 131,473 34 133,605 12,703 162,414
======= == ======= ====== =======
Diluted......................................... 135,031 34 137,162 13,665 168,154
======= == ======= ====== =======
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------------------------------------------------
Combined Pro Forma
Pro Forma Should Both
Charter One CSFC Amounts for ALBANK Mergers be
as Reported as Reported the Merger as Reported Consummated
--------------- ---------------- ----------------- ------------ --------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income................................ $ 1,377,687 $27,233 $1,404,920 $ 269,176 $ 1,674,096
Interest expense............................... 850,724 16,834 867,558 132,430 999,988
----------- ------- ---------- ------------ --------------
Net interest income.......................... 526,963 10,399 537,362 136,746 674,108
Provision for loan and lease losses............ 40,861 232 41,093 7,200 48,293
----------- ------- ---------- ------------ --------------
Net interest income after provision for loan
and lease losses.............................. 486,102 10,167 496,269 129,546 625,815
Net gain (loss) on sales....................... (3,074) 58 (3,016) 682 (2,334)
Other income................................... 113,885 1,400 115,285 13,584 128,869
Merger expenses................................ 60,617 --- 60,617 --- 60,617
Other expenses................................. 313,313 7,767 321,080 84,390 405,470
----------- ------- ---------- ------------ --------------
Income before income taxes..................... 222,983 3,858 226,841 59,422 286,263
Provision for income taxes..................... 71,847 1,296 73,143 15,998 89,141
----------- ------- ---------- ------------ --------------
Net income before extraordinary item........... $ 151,136 $ 2,562 $ 153,698 $ 43,424 $ 197,122
=========== ======= ========== ============ ==============
Earnings per share before extraordinary item:
Basic........................................ $ 1.14 $ 76.16 $ 1.14 $ 3.41 $ 1.21
=========== ======= ========== ============ ==============
Diluted...................................... $ 1.11 $ 76.16 $ 1.11 $ 3.17 $ 1.17
=========== ======= ========== ============ ==============
Weighted average shares:
Basic........................................ 132,241 34 134,372 12,746 163,280
======= == ======= ====== =======
Diluted...................................... 135,986 34 138,117 13,700 169,189
======= == ======= ====== =======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
-----------------------------------------------------------------------------
Combined Pro Forma
Pro Forma Should Both
Charter One CSFC Amounts for ALBANK Mergers be
as Reported as Reported the Merger as Reported Consummated
-----------------------------------------------------------------------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income........................................ $ 1,293,883 $25,835 $1,319,718 $ 248,526 $ 1,568,244
Interest expense....................................... 785,323 15,332 800,655 122,885 923,540
------------- ------- ---------- ----------- ------------
Net interest income.................................. 508,560 10,503 519,063 125,641 644,704
Provision for loan and lease losses.................... 17,549 160 17,709 5,775 23,484
------------- ------- ---------- ----------- ------------
Net interest income after provision for loan
and lease losses...................................... 491,011 10,343 501,354 119,866 621,220
Net gain on sales...................................... 1,753 1 1,754 712 2,466
Other income........................................... 114,484 712 115,196 11,442 126,638
Federal deposit insurance special assessment........... 56,258 1,627 57,885 10,397 68,282
Other expenses......................................... 300,935 7,854 308,789 79,906 388,695
------------- ------- ---------- ----------- ------------
Income before income taxes............................. 250,055 1,575 251,630 41,717 293,347
Provision for income taxes............................. 82,628 517 83,145 15,510 98,655
------------- ------- ---------- ----------- ------------
Net income.............................................$ 167,427 $1,058 $168,485 $ 26,207 $ 194,692
============= ======= ========== =========== ============
Earnings per share:
Basic................................................$ 1.26 $31.46 $ 1.24 $ 1.99 $ 1.18
============= ======= ========== =========== ============
Diluted..............................................$ 1.20 $31.46 $ 1.19 $ 1.87 $ 1.12
$============ ======= ========== =========== ============
Weighted average shares:
Basic................................................ 131,195 34 133,326 13,146 163,142
======= == ======= ====== =======
Diluted.............................................. 139,956 34 142,088 14,048 173,949
======= == ======= ====== =======
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
--------------------------------------------------------------------------------
Combined Pro Forma
Pro Forma Should Both
Charter One CSFC Amounts for ALBANK Mergers be
as Reported as Reported the Merger as Reported Consummated
--------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income..................................... $ 1,356,831 $23,255 $1,380,086 $ 212,502 $ 1,592,588
Interest expense.................................... 918,804 14,636 933,440 104,015 1,037,455
------------ ------- ---------- ----------- ------------
Net interest income............................... 438,027 8,619 446,646 108,487 555,133
Provision for loan and lease losses................. 8,664 96 8,760 4,500 13,260
------------ ------- ---------- ----------- ------------
Net interest income after provision for loan
and lease losses................................... 429,363 8,523 437,886 103,987 541,873
Net gain (loss) on sales............................ (93,527) 34 (93,493) (836) (94,329)
Other income........................................ 90,343 (282) 90,061 10,284 100,345
Merger expenses..................................... 37,528 --- 37,528 --- 37,528
Other expenses...................................... 285,109 7,041 292,150 65,804 357,954
------------ ------- ---------- ----------- ------------
Income before income taxes.......................... 103,542 1,234 104,776 47,631 152,407
Provision for income taxes.......................... 31,757 397 32,154 18,348 50,502
------------ --- --- ---------- ----------- ------------
Net income.......................................... $ 71,785 $ 837 $72,622 $ 29,283 $ 101,905
============ ======= ========== =========== ============
Earnings per share:
Basic............................................. $ 0.50 $ 24.90 $ 0.50 $ 2.08 $ 0.58
============ ======= ========== =========== ============
Diluted........................................... $ 0.50 $ 24.90 $ 0.49 $ 1.96 $ 0.56
============ ======= ========== =========== ============
Weighted average shares:
Basic............................................. 132,100 34 134,232 14,047 166,089
======= == ======= ====== =======
Diluted........................................... 144,615 34 146,746 14,957 180,669
======= == ======= ====== =======
</TABLE>
26
<PAGE>
UNAUDITED PRO FORMA PER SHARE DATA
The following table presents selected per share data for Charter One,
CSFC and ALBANK on an historical and a pro forma basis as if Charter One had
consummated the ALBANK Acquisition and the Merger effective as of the dates or
at the beginning of each of the periods indicated. The ALBANK Acquisition and
the Merger are expected to close in the fourth quarter of 1998. The ALBANK
Acquisition and the Merger are expected to be accounted for under the
"pooling-of-interests" method of accounting and the unaudited pro forma
financial data is derived in accordance with such method.
The information shown below should be read in conjunction with the
historical consolidated financial statements of Charter One and ALBANK and
related notes thereto, which are incorporated by reference herein through the
incorporation by reference herein of the July 22, 1998 8-K and the August 18,
1998 8-K (see "Incorporation of Certain Documents by Reference"), the unaudited
pro forma financial data included herein and the separate historical
consolidated financial statements and notes thereto of CSFC included herewith
(see "Index to Financial Statements of CS Financial Corporation"). See
"Incorporation of Certain Documents by Reference" and " Unaudited Pro Forma
Combined Financial Statements -- Notes to Unaudited Pro Forma Combined Financial
Statements" for a description of assumptions and adjustments used in preparing
the unaudited pro forma financial data. Charter One's, CSFC's and ALBANK's
fiscal years end December 31. The pro forma per share data (which has not been
adjusted to reflect the Charter One Stock Dividend) has been included for
comparative purposes only and does not purport to be indicative of the results
that actually would have been obtained if the ALBANK Acquisition and the Merger
been effected at the beginning of the periods or on the dates indicated, as
applicable, or of those results that may be obtained in the future.
27
<PAGE>
<TABLE>
<CAPTION>
Combined Pro Pro Forma Pro Forma
Forma CSFC Should Both
Charter One CSFC Amounts for Equivalent ALBANK Mergers be
as Reported as Reported the Merger Shares as Reported Consummated
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Book value per share at:
June 30, 1998.............................. $11.04 $909.65 $11.09 $702.79 $28.70 $11.10(3)
December 31, 1997.......................... 10.27 870.94 10.32 653.99 27.86 10.67(3)
Shares outstanding at:
June 30, 1998.............................. 134,016,326 33,635 136,147,826 13,222,104 166,135,558(5)
December 31, 1997.......................... 134,082,558 33,635 136,214,058 12,906,845 165,486,782(5)
Cash dividends declared per common share for:
Six months Ended June 30, 1998............. $0.25 $4.00 $0.25 $ 15.84(1) $0.39 $35.93(4)
Six Months Ended June 30, 1997............. 0.22 3.00 0.22 13.94(1) 0.30 31.62(4)
Year Ended December 31, 1997............... 0.45 16.60 0.45 28.52(1) 0.66 64.68(4)
Year Ended December 31, 1996............... 0.39 10.00 0.39 24.71(1) 0.51 56.04(4)
Year Ended December 31, 1995............... 0.32 9.00 0.32 20.28(1) 0.40 46.00(4)
Basic earnings per share before extraordinary
item for:
Six months Ended June 30, 1998.............. $0.98 $42.68 $0.98 $62.10(2) $1.56 $0.93
Six months Ended June 30, 1997.............. 0.81 32.89 0.81 51.33(2) 1.48 0.78
Year Ended December 31, 1997................ 1.14 76.16 1.14 72.24(2) 3.41 1.21
Year Ended December 31, 1996................ 1.26 31.46 1.24 78.58(2) 1.99 1.18
Year Ended December 31, 1995................ 0.50 24.90 0.50 31.69(2) 2.08 0.59
Diluted earnings per share before extraordinary
item for:
Six months Ended June 30, 1998.............. $0.95 $42.68 $0.95 $60.20(2) $1.46 $0.89
Six months Ended June 30, 1997.............. 0.79 32.89 0.79 50.06(2) 1.37 0.75
Year Ended December 31, 1997................ 1.11 76.16 1.11 70.34(2) 3.17 1.17
Year Ended December 31, 1996................ 1.20 31.46 1.19 75.41(2) 1.87 1.12
Year Ended December 31, 1995................ 0.50 24.90 0.49 31.05(2) 1.96 0.57
</TABLE>
- -------------------------
(1) Amounts reflect cash dividends declared per common share for "Charter One
as Reported" multiplied by the Exchange Ratio of 63.37149.
(2) Represents "Combined Pro Forma Amounts for the Merger" multiplied by the
Exchange Ratio of 63.37149.
(3) Represents the pro forma combined stockholders' equity for Charter One,
CSFC, and ALBANK divided by the pro forma outstanding common shares of the
combined entity should both mergers be consummated.
(4) Represents "Pro Forma CSFC Equivalent Shares" multiplied by the ALBANK
exchange ratio of 2.268.
(5) Represents "Combined Pro Forma Amounts for the Merger" plus the product of
"ALBANK as Reported" and the ALBANK Exchange Ratio of 2.268.
28
<PAGE>
THE SPECIAL MEETING
This Proxy Statement/Prospectus and the accompanying proxy card are
being furnished to the stockholders of CSFC in connection with the solicitation
of proxies by the CSFC Board for use at the Special Meeting and at any
adjournment or postponement thereof.
TIME AND DATE; RECORD DATE
The Special Meeting will be held at the principal office of CSFC, 1360
East Ninth Street, Cleveland, Ohio on Friday, October 16, 1998 at 9:00 a.m.,
local time. This Proxy Statement/Prospectus is being sent to holders of record
of CSFC Common Stock as of the Record Date, and is accompanied by a proxy card
which the CSFC Board requests that stockholders execute and return to CSFC for
use at the Special Meeting and at any and all adjournments or postponements
thereof.
The CSFC Board has fixed the Record Date as of the close of business on
September 1, 1998 as the time for determining holders of CSFC Common Stock who
are entitled to notice of and to vote at the Special Meeting. Only holders of
record of CSFC Common Stock on the Record Date will be entitled to notice of and
to vote at the Special Meeting. As of the Record Date, there were outstanding
and entitled to vote at the Special Meeting 33,635 shares of CSFC Common Stock.
MATTERS TO BE CONSIDERED
At the Special Meeting, holders of CSFC Common Stock will consider and
vote upon a proposal to adopt the Merger Agreement. Holders of CSFC Common Stock
also may consider and vote upon such other matters as are properly brought
before the Special Meeting, including proposals to adjourn the Special Meeting
to permit further solicitation of proxies by the CSFC Board in the event that
there are not sufficient votes to adopt the Merger Agreement at the time of the
Special Meeting; provided, however, that no proxy which is voted against the
adoption of the Merger Agreement will be voted in favor of adjournment to
solicit further proxies for such proposal. As of the date hereof, the CSFC Board
knows of no business that will be presented for consideration at the Special
Meeting, other than the matters described in this Proxy Statement/Prospectus.
THE CSFC BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ADOPTION OF THE
MERGER AGREEMENT.
VOTING RIGHTS; VOTE REQUIRED
Each holder of record of CSFC Common Stock on the Record Date will be
entitled to cast one vote for each share registered in his/ her, or its name on
each matter presented for a vote of the stockholders at the Special Meeting.
Such vote may be exercised in person or by a properly executed proxy. See "--
Proxies and Proxy Solicitation" below. Approval of the Merger Agreement at the
Special Meeting will require the affirmative vote of the holders of a majority
of the outstanding shares of CSFC Common Stock entitled to vote at the Special
Meeting. For purposes of counting votes on this proposal, failures to vote,
abstentions and broker non-votes (i.e., proxies
29
<PAGE>
from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons as to certain proposals
on which such beneficial owners or persons are entitled to vote their shares but
with respect to which the brokers or nominees have no discretionary power to
vote without such instructions) will have the same effect as votes against the
Merger Agreement. Adoption of the Merger Agreement by the stockholders of CSFC
is a condition to, and required for, consummation of the Merger. See "The Merger
- -- Conditions to the Merger."
The affirmative vote of a majority of shares represented at the Special
Meeting may authorize the adjournment of the meeting.
As of the Record Date, directors and executive officers of CSFC and
their affiliates were beneficial owners of 8,220 shares, or 24.41% of the then
outstanding shares, of CSFC Common Stock and certain members of their families
were beneficial owners of 7,168 shares, or 21.31% of the then outstanding
shares, of CSFC Common Stock. The directors and executive officers of CSFC and
such family members have entered into the Charter One Voting Agreements whereby
such directors and executive officers and such family members have agreed to
vote the shares of CSFC Common Stock owned or controlled by them (15,376 shares,
or 45.71%, in the aggregate) for adoption of the Merger Agreement. See "CS
Financial Corporation and the Cuyahoga Savings Association-- Beneficial
Ownership of Certain Persons."
As of the Record Date, Charter One, Charter One's directors and
executive officers and their affiliates did not own any shares of CSFC Common
Stock.
PROXIES AND PROXY SOLICITATION
If a CSFC stockholder properly executes and returns a proxy in the form
distributed by CSFC, the proxies named will vote the shares represented by that
proxy at the Special Meeting. Where a stockholder specifies a choice, the proxy
will be voted in accordance with the stockholder's specification. If no specific
direction is given, the proxies will vote the shares in favor of adoption of the
Merger Agreement. If other matters are presented, the shares for which proxies
have been received will be voted in accordance with the discretion of the
proxies.
The affirmative vote of a majority of the shares represented at the
Special Meeting may authorize the adjournment of the Special Meeting; provided,
however, that no proxy which is voted against the Merger Agreement will be voted
in favor of adjournment to solicit further proxies for such proposal.
Any proxy given pursuant to this solicitation or otherwise may be
revoked by the person giving it at any time before it is voted by delivering to
the Secretary of CSFC at 1360 East Ninth Street, Cleveland, Ohio 44114, on or
before the taking of the vote at the Special Meeting, a written notice of
revocation bearing a later date than the proxy or a later dated proxy relating
to the same shares of CSFC Common Stock or by attending the Special Meeting and
voting in person. Attendance at the Special Meeting will not in itself
constitute the revocation of a proxy.
In addition to solicitation by mail, directors, officers, and employees
of CSFC, who will not be specifically compensated for such services, may solicit
proxies from the stockholders of CSFC, personally or by telephone, telegram or
other forms of communication. Brokerage houses,
30
<PAGE>
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy material to beneficial owners.
CSFC will bear its own expenses in connection with the solicitation of proxies
for the Special Meeting. See "The Merger--Expenses."
HOLDERS OF CSFC COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN
THE ACCOMPANYING FORM OF PROXY AND TO RETURN IT PROMPTLY TO CSFC IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
CHARTER ONE FINANCIAL, INC.
AND CHARTER ONE BANK, F.S.B.
GENERAL
Charter One is a Delaware corporation organized in 1987 for the purpose
of becoming a holding company and owning all of the outstanding common stock of
Charter One Bank in connection with Charter One Bank's 1988 conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. In 1996, Charter One formed a new subsidiary, Charter Michigan,
headquartered in Michigan. Charter One remains a unitary savings institution
holding company which, under existing laws, has very few restrictions on
permissible types of business activities. Charter One's business has consisted
primarily of the business of Charter One Bank and its subsidiaries. The
executive offices of Charter One are located at 1215 Superior Avenue, Cleveland,
Ohio 44114, and the telephone number is (216) 566-5300.
Charter One Bank, chartered in 1934 as The First Federal Savings and
Loan Association of Cleveland, was the first federally chartered savings and
loan association in Ohio. In 1982, Charter One Bank converted to a federally
chartered savings bank, changing its name to The First Federal Savings Bank and,
in 1992, changed its name once again, to Charter One Bank, F.S.B.
On October 3, 1997, Charter One combined with RCSB Financial, Inc.
("Rochester") in a strategic alliance (the "Rochester Merger"). Rochester's
principal subsidiary, Rochester Community Savings Bank, was merged with and into
Charter One Bank. Moreover, Charter One acquired First Nationwide's 21 branch
offices, located in the Detroit Metropolitan area, and Haverfield Corporation
("Haverfield") in 1996 and 1997, respectively.
On June 15, 1998, Charter One announced that it had entered into a
definitive agreement providing for the acquisition of ALBANK. See "Recent
Developments" and "Unaudited Pro Forma Combined Financial Information."
Headquartered in Cleveland, Ohio, as of June 30, 1998, Charter One Bank
operated through 225 banking offices: 103 in Ohio, 84 in Michigan (under the
name First Federal of Michigan), and 38 in Western New York (under the name
Rochester Community Savings Bank). The market areas served by Charter One Bank
include approximately 41% of the population of Ohio, 51% of Michigan, and 12% of
New York. In addition to the banking offices, Charter One has 39 loan production
offices, including offices outside the market areas of its banking offices.
31
<PAGE>
Charter One Bank and the other subsidiaries of Charter One are engaged
in a variety of financial services businesses. In addition to the general
business of attracting deposits and making real estate and other loans, Charter
One is engaged in mortgage banking, automobile lending, equipment leasing, data
processing, real estate appraisal, and retail brokerage services. Charter One's
earnings are affected by general economic and competitive conditions, changes in
market interest rates, conditions in the real estate market, government policies
and the actions of federal and state regulatory authorities.
Charter One Bank is a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati, which is a member of the FHLB System, and its deposits are insured
up to prescribed limits by the Federal Deposit Insurance Corporation ("FDIC").
Charter One Bank is subject to comprehensive examination, supervision and
regulation by its primary regulator, the OTS, and the FDIC.
For additional information, see "Selected Consolidated Financial and
Other Data of Charter One Financial, Inc." Additional information concerning
Charter One, Charter Michigan and Charter One Bank also is included in the
Charter One documents incorporated herein by reference. See "Incorporation of
Certain Documents by Reference."
PENDING STRUCTURAL CHANGE
In connection with the ALBANK Acquisition, Charter One has submitted an
application to the Board of Governors of the Federal Reserve System (the "FRB")
to become a bank holding company (the "Holding Company Conversion"). Upon
becoming a bank holding company, Charter One will deregister with the OTS as a
savings and loan holding company. No assurance can be given whether the
application submitted to the FRB will be approved, or, if approved, whether the
Holding Company Conversion will be consummated. Set forth below is a summary of
certain aspects of the regulation of bank holding companies.
GENERAL. Bank holding companies, are subject to comprehensive
regulation by the FRB under the Bank Holding Company Act of 1956, as amended
(the "BHCA"), and the regulations of the FRB. As a bank holding company, Charter
One will be required to file reports with the FRB and such additional
information as the FRB may require, and will be subject to regular inspections
by the FRB. The FRB also has extensive enforcement authority over bank holding
companies, including, among others things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to require that a
holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations as well as unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require, and
has required in the past, bank holding companies to contribute additional
capital to undercapitalized subsidiary banks.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the
32
<PAGE>
assets of another bank or bank holding company; or (iii) merging or
consolidating with another bank holding company.
As a savings and loan holding company, Charter One is generally nor
subject to any activity restrictions, but as a bank holding company it will be
subject to restrictive activity limitations imposed on bank holding companies.
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution (such as Charter One Bank), mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The scope of permissible activities may be
expanded from time to time by the FRB, and proposals to expand such activities
are pending. Such activities may also be affected by federal legislation.
INTERSTATE BANKING AND BRANCHING. In 1994, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was enacted
to ease restrictions on interstate banking. Effective September 29, 1995, the
Riegle-Neal Act allows the FRB to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other than such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The FRB may not approve the
acquisition of a bank that has not been in existence for the minimum time period
(not exceeding five years) specified by the statutory law of the host state. The
Riegle-Neal Act also prohibits the FRB from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the Riegle-Neal Act.
Additionally, effective June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opts out of the Riegle-Neal Act by adopting a law after the
date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies
equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. Interstate acquisitions of branches will be
permitted only if the law of the state in which the branch is located permits
such acquisitions. Interstate mergers and branch acquisitions will also be
subject to the nationwide and statewide insured deposit concentration amounts
described above.
33
<PAGE>
The Riegle-Neal Act authorizes the Office of the Comptroller of the
Currency (the "OCC") and the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The Riegle-Neal Act also required the appropriate federal
banking agencies to prescribe regulations by June 1, 1997 which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production. These regulations were required to include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state reasonably help to meet the credit needs of the communities
which they serve.
As a federal thrift institution, Charter One Bank, subject to certain
conditions, has nationwide branching authority regardless of any state law.
DIVIDENDS. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that its net income
for the past year is sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the holding company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the "well-capitalized" standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
CAPITAL REQUIREMENTS. The FRB has established capital requirements for
bank holding companies that generally parallel the capital requirements for
national banks and federal thrift institutions. As a savings and loan holding
company, Charter One is not subject to any minimum capital requirements.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
At the effective time of the ALBANK Acquisition, Herbert G. Chorbajian,
the current Chairman, President and Chief Executive Officer of ALBANK, will be
appointed to the Charter One Board to serve for a term expiring at Charter One's
annual meeting held in April 1999. Mr. Chorbajian will serve as a Vice Chairman
of the Charter One Board. Karen R. Hitchcock (who is currently a director of
ALBANK) will be appointed to the Charter One Board to serve for a term expiring
at Charter One's annual meeting scheduled to be held in April 2000 and, Charter
One has also agreed to take all reasonable steps, within 12 months of the
effective time, subject to OTS
34
<PAGE>
approval, to cause John J. Nigro (who is currently a director of ALBANK) to be
elected to the Charter One Board.
BENEFICIAL OWNERSHIP OF CERTAIN PERSONS
Persons and groups owning in excess of 5% of Charter One Common Stock
are required to file certain reports regarding such ownership with Charter One
and the Commission. Charter One's directors and executive officers are also
required to file certain reports regarding their ownership of Charter One Common
Stock with the Commission. Copies of those reports must also be furnished to
Charter One. A person is considered the beneficial owner of Charter One Common
Stock with respect to which such person has or shares voting or investment power
or has the right to acquire ownership at any time within 60 days, including,
without limitation, through the exercise of a stock option, warrant or right, or
the conversion of a security. The following table sets forth, as of August 15,
1998, the Charter One Common Stock beneficially owned by persons or groups
owning in excess of 5% of the Charter One Common Stock (adjusted to reflect the
Charter One Stock Split).
<TABLE>
<CAPTION>
Percent of Shares
Amount and Nature of Charter One
of Beneficial Common Stock
Name and Address of Beneficial Owner Ownership Outstanding
- ---------------------------------------------------------------- ------------------------- ----------------------
<S> <C> <C>
FMR Corporation 8,060,280(1) 6.20%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- ------------------
(1) According to the Schedule 13G/A filed by the reporting party on February 9,
1998, the reporting party had sole power to vote 679,304 shares (after
adjustment for the Charter One Stock Split) and no shares as to which
shared voting could be exercised. The reporting party has sole power to
dispose of all 8,060,280 shares (after adjustment for the Charter One Stock
Split).
35
<PAGE>
The following table sets forth information, as of August 15, 1998, of
the shares of Charter One Common Stock beneficially owned by directors of
Charter One individually, by the five most highly compensated executive officers
of Charter One, including the Chief Executive Officer, individually, and by
executive officers and directors of Charter One as a group. Ownership
information is based upon information furnished by the respective individuals.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND SHARES OF
NATURE OF CHARTER ONE
NAME OF BENEFICIAL COMMON STOCK
BENEFICIAL OWNER OWNERSHIP (1)(2)(3)(4) OUTSTANDING
--------------------------------------------------------------- --------------------------------------------------
<S> <C> <C>
Charles John Koch, Chairman of the Board, President and Chief Executive Officer 893,076 (5) *
Mark D. Grossi, Director and Executive Vice President 483,422 (6) *
John D. Koch, Director and Executive Vice President 529,616 (7) *
Richard W. Neu, Director, Executive Vice President and Chief Financial Officer 608,534 (8) *
Robert J. Vana, Senior Vice President, Chief Corporate Counsel and Secretary 227,562 (9) *
Eugene B. Carroll, Sr., Director 24,372 *
Phillip W. Fisher, Director 1,440,805(10) 1.13%
Denise M. Fugo, Director 13,546 *
Charles M. Heidel, Director 12,460(11) *
Charles F. Ipavec, Director 206,048 *
Philip J. Meathe, Director 36,178(12) *
Michael P. Morley, Director 8,224(13) *
Henry R. Nolte, Jr., Director 17,638(14) *
Ronald F. Poe, Director 14,964(15) *
Victor A. Ptak, Director 28,656(16) *
Melvin J. Rachel, Director 600 *
Jerome L. Schostak, Director 3,288,240(17) 2.58%
Mark Shaevsky, Director 66,996(18) *
Leonard S. Simon, Director 532,602(19) *
John P. Tierney, Director 5,960(20) *
Eresteen R. Williams, Director 6,614(21) *
All executive officers and directors as a group (22 persons) 8,687,291(22) 6.70%
</TABLE>
36
<PAGE>
- ------------------
<TABLE>
<CAPTION>
<S> <C>
* Does not exceed 1%
(1) Shares held under the Charter One Bank employee savings plan and the
Charter One ESOP are reported as of December 31, 1997.
(2) Assumes exercise of stock options held by beneficial owner exercisable
within 60 days.
(3) Included are shares owned directly or indirectly through a trust or
corporation or by spouses and minor children, as to which the
beneficial owner exercises sole voting and dispositive power, except as
otherwise noted herein.
(4) For the executive officers, included are shares allocated to such
executive officers under the Charter One ESOP, as well as a
proportionate share of the unallocated shares, which are deemed to be
beneficially owned by the executive officers as a result of the
executive officers' ability to direct the trustee's voting of such
shares through the vote of the executive officers' allocated shares.
(5) Included are 364,536 shares Mr. Charles John Koch has the right to
purchase pursuant to stock options exercisable within 60 days.
(6) Included are 206,536 shares Mr. Grossi has the right to purchase
pursuant to stock options exercisable within 60 days.
(7) Included are 238,146 shares Mr. John D. Koch has the right to purchase
pursuant to stock options exercisable within 60 days.
(8) Included are 579,578 shares Mr. Neu has the right to purchase pursuant
to stock options exercisable within 60 days.
(9) Included are 112,454 shares Mr. Vana has the right to purchase pursuant
to stock options exercisable within 60 days.
(10) Included are 1,128,438 shares owned by Martinique Hotel, Inc., a
personal holding company as to which Mr. Fisher serves as a director
and is a shareholder.
(11) Included are 6,614 shares Mr. Heidel has the right to purchase pursuant
to stock options exercisable within 60 days.
(12) Included are 6,614 shares Mr. Meathe has the right to purchase pursuant
to stock options exercisable within 60 days.
(13) Included are 3,824 shares Mr. Morley has the right to purchase pursuant
to stock options exercisable within 60 days.
(14) Included are 6,614 shares Mr. Nolte has the right to purchase pursuant
to stock options exercisable within 60 days.
(15) Included are 7,648 shares Mr. Poe has the right to purchase pursuant to
stock options exercisable within 60 days.
(16) Included are 9,922 shares Mr. Ptak has the right to purchase pursuant
to stock options exercisable within 60 days.
(17) Included are 6,614 shares Mr. Schostak has the right to purchase
pursuant to stock options exercisable within 60 days.
(18) Included are 6,614 shares Mr. Shaevsky has the right to purchase
pursuant to stock options exercisable within 60 days.
(19) Included are 256,132 shares Mr. Simon has the right to purchase
pursuant to stock options exercisable within 60 days.
(20) Included are 1,912 shares Mr. Tierney has the right to purchase
pursuant to stock options exercisable within 60 days.
(21) Included are 6,614 shares Ms. Williams has the right to purchase
pursuant to stock options exercisable within 60 days.
(22) Included are 2,018,983 shares the directors and executive officers as a
group have the right to purchase pursuant to stock options exercisable
within 60 days.
</TABLE>
37
<PAGE>
CS FINANCIAL CORPORATION AND THE CUYAHOGA SAVINGS ASSOCIATION
GENERAL
CSFC is a unitary savings and loan holding company that was organized
under the laws of the State of Ohio in 1973. CSFC's primary operating subsidiary
is CSFC Bank, which was originally organized in 1892 as an Ohio-chartered
savings and loan association under the name of "The Cuyahoga Building and Loan
Company." CSFC is headquartered in Cleveland, Ohio and operates eight full
service banking offices in Cuyahoga County, Ohio and one loan production office
in Mentor, Ohio. CSFC's principal executive offices are located at 1360 East
Ninth Street, Cleveland, Ohio 44114. CSFC's telephone number is (216) 771-3550.
CSFC Bank is principally engaged in the business of attracting deposits
from the general public and using such deposits, together with borrowings and
other funds, to make loans secured by real estate. CSFC Bank's income is derived
predominantly from interest on loans and investments and, to a lesser extent,
non-interest income. CSFC Bank's earnings are affected by general economic and
competitive conditions, changes in market interest rates, conditions in the real
estate market, government policies and the actions of federal and state
regulatory authorities. See "Business of CS Financial Corporation."
CSFC Bank is a member of the FHLB of Cincinnati, which is a member of
the FHLB System, and its deposits are insured up to prescribed limits by the
FDIC. CSFC Bank is subject to comprehensive examination, supervision and
regulation by its primary regulator, the Division, the OTS, and by the FDIC. See
"Supervision and Regulation of CS Financial Corporation and the Cuyahoga Savings
Association."
See "Selected Consolidated Financial and Other Data of CS Financial
Corporation" and "Business of CS Financial Corporation."
BENEFICIAL OWNERSHIP OF CERTAIN PERSONS
For purposes of the following table, a person is considered the
beneficial owner of CSFC Common Stock with respect to which such person has or
shares voting or investment power or has the right to acquire voting or
investment power at any time within 60 days, including, without limitation,
through the exercise of a stock option, warrant or right, or the conversion of a
security. The following table sets forth, as of the Record Date, the CSFC Common
Stock beneficially owned by (i) each person or group owning in excess of 5% of
the CSFC Common Stock, (ii) each director of CSFC, and (iii) all directors and
executive officers of CSFC as a group.
38
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Number of Shares Beneficially Percent of CSFC
Beneficial Owner Owned as of the Record Date Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
PERSONS AND GROUPS OWNING IN EXCESS OF 5% OF CSFC CORPORATION STOCK
<S> <C> <C>
William R. Bryan 6,397 (1) 19.02%
80 S. Franklin St.
Chagrin Falls, OH 44022
Nancy Bryan Fischer 3,558(2) 10.58
801 Holly Ridge
Houston, TX 77024
Betsy Bryan Hegyes 3,610(3) 10.73
22599 Byron East
Shaker Heights, OH 44122
John P. McGinty, Trustee FBO 2,391(4) 7.11
John P. McGinty Trust Dated 11/13/97
1039 Kirtland Lane
Lakewood, OH 44107
Thomas A. Quintrell 1,950 5.80
1100 Huntington Bldg.
925 Euclid Avenue
Cleveland, OH 44115
DIRECTORS AND EXECUTIVE OFFICERS
William R. Bryan, Chairman, 6,397(1) 19.02%
President & Chief Executive Officer
Robert I. Madow, Director 338(5) 1.00
Carlton B. Schnell, Director 409(6) 1.22
James Vickers, Director 23(7) *
Dr. Ralph Alfidi, Director 119 *
Sandra L. Myers, Executive Officer 386(8) 1.15
David Y. Wilcox, Executive Officer 536 1.59
---- -----
Directors and Executive Officers 8,208 24.40
===== =====
as a Group (seven persons)
</TABLE>
- --------------------------
* Percentage of shares beneficially owned is less than 1%.
(1) Includes 1,395 shares held solely in the name of William R. Bryan and 2,522
shares held solely in the name of Mary E. Bryan, wife of William R. Bryan.
Also includes 2,480 shares held by their children over which William R.
Bryan holds power of attorney over the following shares with respect to the
Merger: 495 shares in the name of Heidi Kathleen Bryan, 495 shares in the
name Jeffrey Jason Bryan, 495 shares in the name of Nancy Irene Bryan, 495
shares in the name of Rebecca Conaway Bryan, Tracy Ann Bryan, Custodian,
and 500 shares in the name of Tracy Ann Bryan. Mr. William R. Bryan is the
Chairman, President and Chief Executive Officer of CSFC.
39
<PAGE>
(2) Includes 2,358 shares held solely in the name of Nancy Bryan Fischer
(sister of William R. Bryan) and 1,200 shares held solely in the name of
Ronald Peter Fischer, husband of Nancy Bryan Fischer. William R. Bryan
holds a power of attorney over these shares with respect to the Merger.
Excludes 52 shares held by their adult children.
(3) Betsy Bryan Hegyes has granted to William R. Bryan a power of attorney over
all of her shares with respect to the Merger.
(4) Includes 2,256 shares held in the name of John P. McGinty, Trustee FBO John
P. McGinty Trust Dated 11/13/97 and 135 shares held in "street name."
Included in the 135 shares is 110 shares for the benefit of John P. McGinty
and 25 shares in an Individual Retirement Account for the benefit of Alice
McGinty (wife of John P. McGinty).
(5) Includes 288 shares held solely in the name of Robert Madow and 50 shares
in the name of TIP Company, owned by Mr. Madow's wife and children.
(6) Includes 270 shares held solely in the name Carlton B. Schnell and 139
shares held solely in the name of Dorothy A. Schnell (wife of Carlton B.
Schnell).
(7) Includes 23 shares held solely in the name of Lois A. Vickers (wife of
James Vickers).
(8) Includes 30 shares held jointly by Sandra L. Myers and Daniel D. Myers
(husband). Also includes 352 shares held solely in the name of Sandra L.
Myers and four shares held solely in the name of Daniel D. Myers.
THE MERGER
The information in this Proxy Statement/Prospectus concerning the terms
of the Merger is qualified in its entirety by reference to the full text of the
Merger Agreement, which is attached hereto as Annex A and incorporated by
reference herein. All stockholders are urged to read the Merger Agreement in its
entirety.
GENERAL
Pursuant to the Merger Agreement, a newly-organized subsidiary of
Charter One will be merged with and into CSFC. Immediately following the Merger,
CSFC will be merged with and into Charter One, and CSFC Bank will be merged with
and into Charter One Bank. Upon consummation of the Merger, each share of CSFC
Common Stock issued and outstanding immediately prior to the Effective Time,
other than Excluded Shares, will be canceled and converted into the right to
receive (subject to any changes that may result from future stock splits, stock
dividends or similar transactions) 60.3538 shares (or 63.37149 shares as a
result of the Charter One Stock Dividend) of Charter One Common Stock, including
the right to receive a corresponding number of rights associated with the
Charter One Common Stock pursuant to the Rights Agreement. See "-- Merger
Consideration," and "Comparison of Rights of Stockholders of Charter One
Financial, Inc. and CS Financial Corporation -- Rights Agreement."
BACKGROUND OF AND REASONS FOR THE MERGER
In the first quarter of 1998, Mr. William R. Bryan, the President and
Chief Executive Officer of CSFC, began a general assessment of the prospects and
potential directions of CSFC. Mr. Bryan's assessment was prompted in part by the
accelerating pace of mergers in the financial services industry, and by his view
of several issues facing CSFC Bank. The primary issues were (i) CSFC Bank's
difficulty in originating a desirable volume of market rate first mortgage
loans; (ii) CSFC Bank's problems in attracting and maintaining deposits and
(iii) substantial improvements necessary in CSFC Bank's technological capability
if it was to remain competitive with other institutions.
40
<PAGE>
In mid January 1998, Mr. Bryan met with representatives of McDonald &
Company to discuss the future of CSFC. Issues discussed included values, prices,
liquidity, market forces and technology. After this meeting, Mr. Bryan
determined that CSFC should either commit to make massive changes to its
operations or seek to sell CSFC to a buyer with adequate resources that would be
able to continue to serve the needs of its customers.
On February 18, 1998, Mr. Bryan met again with McDonald & Company to
discuss recent sales of savings banks and potential buyers in the marketplace.
McDonald & Company presented a list of potential buyers and a range of possible
per share prices. Mr. Bryan authorized McDonald & Company to contact four of the
potential purchasers, including Charter One, to determine if there would be any
interest in CSFC as an acquisition candidate. On the same day, Mr. Bryan
informed the senior executives of CSFC that he had engaged McDonald & Company to
make limited inquiries, for exploratory purposes, to certain institutions that
were considered potential purchasers. On February 20, 1998, Mr. Bryan informed
the CSFC Board that he had retained McDonald & Company. On March 20, 1998, the
CSFC Board was updated on the progress of McDonald & Company's search for a
potential purchaser.
McDonald & Company prepared, with the guidance and assistance of CSFC,
a descriptive memorandum dated March 20, 1998 to inform potential purchasers of
basic information concerning CSFC. On March 26, 1998, Mr. Charles J. Koch, the
Chief Executive Officer of Charter One and Mr. Bryan met to discuss the
possibility of a merger of Charter One and CSFC and their respective subsidiary
savings institutions.
At the invitation of McDonald & Company, Charter One and two other
potential purchasers submitted indications of interest to acquire CSFC on or
about April 3, 1998. These indications of interest were received, reviewed and
evaluated by McDonald & Company, and such indications of interest were
communicated to the CSFC Board, in advance of a meeting of the CSFC Board that
was scheduled for April 9, 1998. On April 9, 1998, Charter One submitted a
revised indication of interest, offering an increased price for each share of
CSFC Common Stock.
At the meeting of the CSFC Board held on April 9, 1998, representatives
of McDonald & Company and counsel to CSFC were present. McDonald & Company
reviewed with the CSFC Board the affiliation alternatives available to CSFC as
well as the potential of remaining independent. McDonald & Company provided a
detailed written and oral analysis and comparison of the indications of
interest.
After consideration, the CSFC Board resolved to authorize Mr. Bryan to
pursue negotiations with Charter One regarding an acquisition pursuant to the
terms outlined in Charter One's non-binding indication of interest dated April
9, 1998 and to execute and deliver to Charter One the non-binding indication of
interest on behalf of CSFC. The executed non-binding indication of interest
provided for execution of a definitive merger agreement by May 8, 1998 and that
CSFC would not negotiate with any other potential acquirer for a period ending
on such date. From April 9, 1998 through the date of the execution of the Merger
Agreement, April 23, 1998, numerous conversations and negotiations between the
parties, including their respective financial advisors and legal counsel, were
conducted. During this period Charter One conducted a due diligence review of
various books, records, contracts, and other documents of CSFC and CSFC reviewed
information provided by Charter One. Also during this period, the parties
negotiated the specific provisions of the Merger Agreement.
41
<PAGE>
At the CSFC Board meeting on April 23, 1998, McDonald & Company
conducted a presentation to the CSFC Board during which they reviewed the
information and analyses regarding Charter One's Merger proposal. McDonald &
Company pointed out that the Charter One proposal was based on a fixed exchange
ratio of 30.1769 shares of Charter One Common Stock for each share of CSFC
Common Stock, subject to adjustment for stock splits or similar events. McDonald
& Company indicated that on April 22, 1998, the daily closing price of the
Charter One Common Stock had been $72.75 which would translate into a value of
$2,195 per share of CSFC Common Stock at the Exchange Ratio.
The CSFC Board considered the Merger and the terms of the Merger
Agreement, including the Exchange Ratio, in light of economic, financial, legal
and market factors and concluded that the Merger is in the best interest of
CSFC, its stockholders, employees and customers. Among the factors considered by
the CSFC Board were the historical operating results, current financial
condition, business and management and future financial and other prospects of
Charter One and CSFC, respectively and combined, the Exchange Ratio in relation
to the historical trading prices of CSFC's common stock and the opinion of
McDonald & Company as to the fairness to CSFC stockholders, from a financial
point of view, of the Exchange Ratio. Also considered were the operating
philosophies, relative size, competitive position and geographic market areas of
CSFC Bank and Charter One Bank. The CSFC Board believes that the Merger will
afford CSFC stockholders the benefit of Charter One's stronger relative market
presence and the more liquid market for Charter One Common Stock, as well as the
greater potential for long-term growth and will offer enhanced abilities to meet
the needs of the Cleveland area communities served by CSFC Bank.
As a result of the foregoing considerations, the CSFC Board approved
and authorized the execution of the Merger Agreement. The Merger Agreement was
executed by the duly authorized officers of Charter One, Charter One Bank, CSFC
and CSFC Bank as of April 23, 1998.
Based upon the foregoing, the CSFC Board unanimously recommends that
its stockholders vote FOR adoption of the Merger Agreement and the Merger.
42
<PAGE>
RECOMMENDATION OF THE CSFC BOARD
The CSFC Board has unanimously adopted the Merger Agreement and
approved the transactions contemplated thereby and has determined that the
Merger is in the best interests of CSFC and its stockholders. THE CSFC BOARD
THEREFORE UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR ADOPTION OF THE
MERGER AGREEMENT AT THE SPECIAL MEETING.
OPINION OF CSFC'S FINANCIAL ADVISOR
CSFC retained McDonald & Company to render its opinion with respect to
the fairness, from a financial point of view, of the Exchange Ratio to the
holders of CSFC Common Stock. McDonald & Company rendered its oral opinion to
the CSFC Board on April 23, 1998, which it subsequently confirmed in writing,
that, as of the date of such opinion, the Exchange Ratio pursuant to the Merger
was fair, from a financial point of view, to the holders of CSFC Common Stock.
As part of its engagement, McDonald & Company is not required to subsequently
reconfirm its opinion.
THE FULL TEXT OF THE OPINION OF MCDONALD & COMPANY, WHICH SETS FORTH
CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEWS
UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS, AND
SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE MATERIAL CONSIDERATIONS SET
FORTH IN THE OPINION OF MCDONALD & COMPANY SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPINION.
MCDONALD & COMPANY'S OPINION IS DIRECTED TO THE CSFC BOARD AND ADDRESSES ONLY
THE EXCHANGE RATIO. MCDONALD & COMPANY HAS CONSENTED TO THE INCLUSION OF ITS
OPINION IN THIS PROXY STATEMENT/PROSPECTUS AND TO THE SUMMARIZATION OF ITS
OPINION IN THIS PROXY STATEMENT/PROSPECTUS.
In arriving at its opinion, McDonald & Company reviewed, among other
things, the Merger Agreement together with exhibits and schedules thereto,
certain publicly available information relating to the business, financial
condition and operations of CSFC and Charter One as well as certain other
non-public information, primarily financial in nature, furnished to it by CSFC
and Charter One relating to the respective businesses, earnings, assets and
prospects of CSFC and Charter One. McDonald & Company also held discussions with
members of senior management of CSFC and Charter One concerning their respective
businesses, assets, financial forecasts and prospects. McDonald & Company also
reviewed certain publicly available information concerning the trading of, and
the trading market for, CSFC Common Stock and Charter One Common Stock and
certain publicly available information concerning comparable companies and
transactions, all as set forth in McDonald & Company's opinion.
McDonald & Company was not engaged to and did not conduct a physical
inspection of any of the assets, properties, or facilities of either CSFC or
Charter One and was not engaged to and has not made, obtained or been furnished
with any independent evaluation or appraisal of any of such assets, properties,
or facilities or any of the liabilities of CSFC or Charter One. McDonald &
Company has assumed and relied, without independent investigation, upon the
accuracy and completeness of the financial and other information provided to it
or publicly available, has relied upon the representations and warranties of
CSFC and Charter One contained in the Merger Agreement, and has not
independently attempted to verify such information. McDonald & Company has also
assumed that all of the conditions to the Merger as set forth in the Merger
Agreement,
43
<PAGE>
including the tax-free nature of the reorganization for federal income tax
purposes, would be satisfied and that the Merger would be consummated on a
timely basis in the manner contemplated by the Merger Agreement. No limitations
were imposed by CSFC upon McDonald & Company with respect to the scope of
McDonald & Company's investigation, nor were any specific instructions given to
McDonald & Company in connection with its fairness opinion.
In connection with rendering its opinion dated April 23, 1998, McDonald
& Company considered a variety of financial analyses, which are summarized
below. McDonald & Company believes that its analyses must be considered as a
whole and that selecting portions of such analyses and of the factors considered
by McDonald & Company without considering all such analyses and factors may
create an incomplete view of the analytical process underlying McDonald &
Company's opinion. In its analyses, McDonald & Company made numerous assumptions
with respect to industry performance, business and economic conditions and other
matters. Any estimates contained in McDonald & Company's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates.
The following is a summary of selected analyses considered by McDonald
& Company and discussed with the CSFC Board of Directors, in connection with
McDonald & Company's opinion dated April 23, 1998:
COMPARISON WITH SELECTED COMPANIES. McDonald & Company compared the
financial performance and stock market valuation of Charter One with
corresponding data for the following selected companies: Astoria Financial
Corp., Bank United Corp., Dime Bancorp Inc., Golden West Financial, GreenPoint
Financial Corp. and Sovereign Bancorp Inc. In addition, McDonald & Company
compared the same data of CSFC with corresponding data for the following
selected companies: 1st Bancorp, First Federal Bancorp Inc., Fidelity Federal
Bancorp, First Franklin Corp., Glenway Financial Corp., LSB Financial Corp.,
Permanent Bancorp Inc. and Potters Financial Corp. At the time, none of the
companies listed above had announced a merger transaction or disclosed an
interest in pursuing a possible merger transaction which would have
significantly affected its stock market valuation.
CONTRIBUTION ANALYSIS. McDonald & Company analyzed the contribution of
each of CSFC and Charter One to, among other things, the shareholders' equity
and after-tax net income of the pro forma combined company. This analysis showed
that, among other factors, CSFC would have contributed 2.1% of the stockholders'
equity of the pro forma combined company as of December 31, 1997, 1.3% of the
pro forma net income for the combined company for the year ended December 31,
1997 and 1.5% of the pro forma net income for the combined company (including
estimated after-tax cost savings) for the year ended December 31, 1999 compared
to a proposed ownership of 1.5% of the combined company to be held by holders of
CSFC Common Stock.
PRO FORMA MERGER ANALYSIS. McDonald & Company analyzed certain pro
forma effects resulting from the Merger on the pro forma combined company over a
five year period from 1999 through 2003. This analysis, based upon the financial
forecasts of management of CSFC and Charter One and including estimates of cost
savings provided by the management of CSFC and Charter One, showed approximately
no dilution for Charter One in pro forma earnings per share in 1999 through
2003. McDonald & Company also analyzed the changes in the per share amount of
earnings, book value, tangible book value and indicated dividend represented by
one share of CSFC
44
<PAGE>
Common Stock after the Merger. The analysis indicated that, among other things,
exchanging one share of CSFC Common Stock at the Exchange Ratio for shares of
Charter One Common Stock on a pro forma basis would have resulted in 48.5%
accretion in earnings per share for each share of CSFC Common Stock for the year
ended December 31, 1998, a 19.3% and 23.8% decrease in book value per share and
tangible book value per share for each share of CSFC Common Stock as of December
31, 1998 and a dividend increase of 87.8% per share of CSFC Common Stock based
on Charter One's indicated annual dividend rate as of the date of the opinion.
ANALYSIS OF SELECTED MERGER TRANSACTIONS. McDonald & Company reviewed
five groups of selected pending bank acquisition transactions involving (i)
selling thrifts headquartered in Illinois, Indiana, Kentucky, Michigan, New
York, Ohio, Pennsylvania and West Virginia, (ii) selling thrifts with total
assets between $200 million and $800 million, (iii) selling thrifts with an
equity to assets ratio of between 7.0% and 9.0%, (iv) selling thrifts with a
return on average assets ratio of between 0.50% and 0.90%, and (v) selling
thrifts with a ratio of non-performing assets to total assets of between 0.75%
and 1.60%. McDonald & Company reviewed the ratios of the offer value to stated
book value and tangible book value, the multiple of the last 12 months earnings
of the acquired company (adjusted for the one-time SAIF assessment where
applicable), and the ratio of offer value to assets in each such transaction,
and computed the mean and median ratios and multiples for each group. The
calculations yielded ranges of median ratios of price to stated book value and
tangible book value of 177% to 236%. Median multiples of earnings among the five
groups ranged from 22.5x to 29.4x; and median ratios of offer value to assets
ranged from 14.3% to 25.1%. This analysis showed an imputed reference range of
$1,700 to $2,100 per share of CSFC Common Stock.
NO COMPANY OR TRANSACTION USED IN THE ABOVE ANALYSES AS A COMPARISON IS
IDENTICAL TO CSFC, CHARTER ONE OR THE MERGER. ACCORDINGLY, AN ANALYSIS OF THE
RESULTS OF THE FOREGOING NECESSARILY INVOLVES COMPLEX CONSIDERATIONS AND
JUDGMENTS CONCERNING THE DIFFERENCES IN FINANCIAL AND OPERATING CHARACTERISTICS
OF THE COMPANIES TO WHICH THEY ARE BEING COMPARED. MATHEMATICAL ANALYSIS (SUCH
AS DETERMINING THE MEAN OR MEDIAN) IS NOT, IN ITSELF, A MEANINGFUL METHOD OF
USING COMPARABLE COMPANY OR COMPARABLE TRANSACTION DATA.
DISCOUNTED CASH FLOW ANALYSIS. Using discounted cash flow analysis,
McDonald & Company estimated the present value of the future streams of
after-tax cash flows that CSFC could produce over a five year period from 1999
through 2004, under various assumptions, based upon CSFC's management forecasts.
McDonald & Company then estimated the terminal value of CSFC after the five year
period by applying an estimated perpetual growth rate to the sixth year's
projected after-tax cash flow and then applied to this value multiples ranging
from 10.0x to 16.7x. The five year cash flow streams and terminal values were
then discounted to present values using different discount rates chosen to
reflect different assumptions regarding the estimated required rates of return
of prospective buyers of CSFC. On the basis of such varying assumptions, this
discounted cash flow analysis indicated a reference range of $1,362 to $2,119
per share of CSFC Common Stock. This analysis was based upon CSFC and Charter
One management's forecasts including variations and assumptions made by McDonald
& Company, which included adjustments to reflect the anticipated effects of
potential merger-related cost savings estimated by CSFC and Charter One.
Management's forecasts are based upon many factors and assumptions, many of
which are beyond the control of CSFC or Charter One. As indicated above, this
analysis is not necessarily indicative of actual values
45
<PAGE>
or actual future results and does not purport to reflect the prices at which any
securities may trade at the present time or at any time in the future.
OTHER ANALYSIS. In addition to performing the analyses summarized
above, McDonald & Company also considered its analysis of the general market for
bank and thrift mergers, CSFC's relative share of the deposit market that it
serves and the general economic conditions and prospects of those markets.
In performing its analyses, McDonald & Company made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters. The analyses performed by McDonald & Company are
not necessarily indicative of actual values, which may be significantly more or
less favorable than the values suggested by such analyses. Such analyses were
prepared solely for purposes of McDonald & Company's opinion.
The term "fair from a financial point of view" is a standard phrase
contained in investment banking fairness opinions and refers to the fact that
McDonald & Company's opinion as to the fairness of the Exchange Ratio is
addressed solely to the financial attributes of the Exchange Ratio. The analyses
do not purport to be appraisals or to reflect the prices at which a company
might actually be sold. In addition, as described above, McDonald & Company's
opinion and related presentation to the CSFC Board of Directors were one of many
factors taken into consideration by the CSFC Board in making its determination
to approve the Merger Agreement. Consequently, the McDonald & Company analyses
described above should not be viewed as determinative of the CSFC Board's
conclusions with respect to the value of CSFC or of the decision of the CSFC
Board to agree to the Exchange Ratio.
McDonald & Company's opinion is based on economic and market conditions
and other circumstances existing on, and information made available as of, the
date of the opinion. In addition, the opinion does not address the underlying
business decision to effect the Merger or any other terms of the Merger.
McDonald & Company's opinion does not represent its opinion as to what the value
of CSFC Common Stock or Charter One Common Stock may be at the Closing Date.
McDonald & Company, as part of its investment banking business, is
customarily engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. McDonald & Company has
extensive experience with the valuation of financial institutions. CSFC's Board
of Directors selected McDonald & Company as its financial advisor because of
McDonald & Company's industry expertise with respect to financial institutions
and because of its substantial experience in transactions similar to the Merger.
McDonald & Company is not affiliated with either CSFC or Charter One.
In the ordinary course of business, McDonald & Company makes a market
in Charter One Common Stock and CSFC Common Stock and may actively trade
securities of Charter One or CSFC for its own account and for the accounts of
its customers. At any time and from time to time, McDonald & Company may hold a
short or long position in such securities. McDonald & Company has not provided
investment banking services to either Charter One or CSFC in the past two years
other than, with respect to CSFC, in connection with the Merger.
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CSFC has paid McDonald & Company, for its services as financial
advisor, a retainer of $25,000 and a fee of $150,000 upon rendering of the oral
opinion. Assuming the consummation of the Merger, McDonald & Company will be
paid additional fees based upon the average market sales price per share of
Charter One Common Stock for the 20 trading days ending on the fifth trading day
prior to the Effective Time. Assuming that such Average is equal to the last
reported sales price on September 14, 1998 of $26.19, such additional fees would
equal approximately $383,000. CSFC has also agreed to reimburse McDonald &
Company for its reasonable out-of-pocket expenses and to indemnify McDonald &
Company against certain liabilities, including certain liabilities under federal
securities laws.
CHARTER ONE - NO FINANCIAL ADVISOR
The Charter One Board has not retained an investment banker or other
financial advisor to assist the Board in analyzing the Merger or its fairness to
the stockholders of Charter One. Although "fairness opinions" are sometimes
obtained by acquirors such as Charter One, there is no requirement to obtain
such an opinion. The Charter One Board, which has significant experience
analyzing transactions of this type, determined that it had the expertise to
analyze the fairness of the Merger to Charter One's stockholders and further
determined that because of the relatively small size of the transaction any
benefit of a "fairness opinion" from an investment banker or financial advisor
was outweighed by its cost. In analyzing the fairness of the Merger to Charter
One's stockholders, the Charter One Board considered all relevant information,
including presentations from Charter One management regarding due diligence
investigations of CSFC and financial information regarding CSFC.
MERGER CONSIDERATION
The Merger Agreement provides that at the Effective Time each share of
CSFC Common Stock issued and outstanding immediately prior to the Effective
Time, other than Excluded Shares, will be canceled and converted into the right
to receive 30.1769 shares of Charter One Common Stock, including the right to
receive a corresponding number of rights associated with Charter One Common
Stock pursuant to the Rights Agreement. The Merger Agreement also provides that
the Exchange Ratio shall be appropriately adjusted to reflect any split,
combination, stock dividend or stock distribution with respect to Charter One
Common Stock effected by Charter One prior to the Effective Time. A two-for-one
stock split was declared by Charter One Financial, payable on May 20, 1998 to
stockholders of record on May 6, 1998. Accordingly, the Exchange Ratio has been
adjusted to 60.3538. As a result of the Charter One Stock Dividend, the Exchange
Ratio will adjust to 63.37149. For a discussion of the Rights Agreement, see
"Comparison of Rights of Stockholders of Charter One Financial, Inc. and CS
Financial Corporation -- Rights Agreement."
Based on the last reported sale price for Charter One Common Stock on
the Nasdaq National Market on September 14, 1998 ($26.19 per share), the value
of 63.37149 Shares of Charter One Common Stock as of that date would have been
approximately $1,659.54. The maximum number of shares of Charter One Common
Stock which may be issued in connection with the Merger is 2,131,500, which
would result in the existing CSFC shareholders holding 1.6% of the merged entity
on a fully diluted basis (or approximately 1.3% taking into account the ALBANK
Acquisition). The market value of Charter One Common Stock to be received in the
Merger, however, is subject to fluctuation. Fluctuations in the market price of
Charter One Common Stock could result in an increase or decrease in the value of
the Merger Consideration to be received by CSFC stockholders in the Merger. An
increase in the market value of Charter One Common Stock would increase the
market value of the Merger Consideration to be paid in the Merger. A decrease in
the market value of Charter One Common Stock would have the opposite effect. The
market value of the Merger Consideration at the time of the Merger will depend
upon the market value of a share of Charter One Common Stock at such time. The
Merger Consideration was determined through arm's-length negotiations between
Charter One and CSFC. See "-- Background of and Reasons for the Merger."
Pursuant to the Merger Agreement, Charter One had the right to cause
phase I and phase II environmental assessments to be conducted with respect to
certain CSFC properties. If the estimated after-tax remediation costs for all
such properties was more than $200,000, the amount of such estimated costs which
exceeded $200,000 would have been deducted from the Merger Consideration,
valuing the Merger Consideration based upon the Final COFI Share Price; provided
that in the event the deduction from the Merger Consideration as a result of
such estimated costs had
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exceeded $1,000,000, CSFC would have had the right to terminate the Merger
Agreement. Based on the results of environmental due diligence, Charter One and
CSFC have agreed that the grounds for adjustment of the Merger Consideration or
for termination set forth in this paragraph are no longer applicable.
APPRAISAL RIGHTS
The OGCL provides that stockholders of CSFC who are entitled to vote on
the Merger may exercise certain rights as dissenting stockholders under Section
1701.84 of the OGCL. Stockholders of CSFC will not be entitled to such rights
absent strict compliance with Section 1701.85, and failure to take any one of
the required steps may result in termination or waiver of the right of the
stockholder under the OGCL. The obligation of Charter One to consummate the
Merger is subject to a condition, among others, that dissenting shares of CSFC
Common Stock shall not exceed 7% of the issued and outstanding CSFC Common
Stock. See " -- Conditions to the Merger."
The following discussion is a summary of the principal steps a CSFC
stockholder must take to perfect dissenters' rights under the OGCL. This summary
does not purport to be complete and is qualified in its entirety by reference to
Section 1701.85 of the OGCL, a copy of which is attached hereto as Annex C. Any
CSFC stockholder contemplating the exercise of dissenters' rights is urged to
review carefully those provisions and to consult an attorney, since dissenters'
rights will be lost if the procedural requirements of Section 1701.85 of the
OGCL are not fully and precisely satisfied.
Any holder of CSFC Common Stock whose shares are not voted in favor of
the adoption of the Merger Agreement may be entitled to be paid the "fair cash
value" of such shares after the Merger closing date. A vote in favor of the
adoption of the Merger Agreement at the Special Meeting constitutes a waiver of
dissenters' rights. A proxy that is returned signed but on which no voting
preference is indicated will be voted in favor of the adoption of the Merger
Agreement and will be deemed a waiver of dissenters' rights. A dissenting
stockholder may revoke his, her, or its proxy at any time before its exercise by
filing with CSFC an instrument revoking it or a duly executed proxy bearing a
later date, or by attending and giving notice of a revocation of the proxy in an
open meeting (although attendance at the Special Meeting will not itself
constitute revocation of a proxy).
To be entitled to payment of the "fair cash value," a dissenting
stockholder must deliver a written demand no later than ten days following the
Special Meeting and must otherwise comply with Section 1701.85 of the OGCL. Any
written demand must specify the stockholder's name and address, the number and
class of shares held by such stockholder on the Record Date, and the amount
claimed as the "fair cash value" of said shares. Such written demand must be
delivered to CSFC at 1360 East Ninth Street, Cleveland, Ohio 44114, Attention:
Secretary. It is recommended, although not required, that such demand be sent by
registered or certified mail, return receipt requested. Voting against the
adoption of the Merger Agreement will not itself constitute a demand. CSFC will
not send any notices to CSFC stockholders as to the date on which the ten-day
period expires.
Because only stockholders of record may exercise dissenters' rights,
any person who beneficially owns shares that are held of record by a broker,
fiduciary, nominee or other holder and who wishes to exercise dissenters' rights
must instruct the record holder of the shares to satisfy the
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conditions set forth under Section 1701.85 of the OGCL. If a record holder does
not satisfy, in a timely manner, all of the conditions outlined in Section
1701.85 of the OGCL, the dissenters' rights for all of the shares held by that
stockholder will be lost.
If CSFC requests, dissenting stockholders must submit their share
certificates to CSFC within 15 days from the date of the making of such request,
for endorsement thereon by CSFC that demand for the "fair cash value" of such
shares has been made. Such certificates will be promptly returned to the
dissenting stockholders by CSFC. A dissenting stockholder's failure to deliver
such certificates terminates his, her, or its rights as a dissenting
stockholder, at the option of CSFC, exercised by written notice sent to the
dissenting stockholder within 20 days after the lapse of the 15-day period,
unless a court otherwise directs for good cause shown.
In the event CSFC and any dissenting stockholder have not reached an
agreement on the "fair cash value" of the shares of CSFC Common Stock within
three months after service of the demand by the dissenting stockholder, either
party may file a petition in the Court of Common Pleas of Cuyahoga County, Ohio,
or join or be joined in an action similarly brought by another dissenting CSFC
stockholder, for a judicial determination of the "fair cash value" of such
shares. The Court of Common Pleas may appoint one or more appraisers to
determine the "fair cash value," and if the court approves the appraisers'
report, judgment will be entered against CSFC for the payment thereof, with
interest at such rate and from such date as the Court of Common Pleas considers
equitable. Costs of the proceedings, including reasonable compensation to the
appraiser or appraisers to be fixed by the Court of Common Pleas, are to be
apportioned or assessed as the Court considers equitable.
THE FOREGOING SUMMARY IS NECESSARILY INCOMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SECTION 1701.85 OF THE OGCL, A COPY OF WHICH IS
ATTACHED HERETO AS ANNEX C.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Charter One
Common Stock will be issued upon the surrender for exchange of certificates
representing CSFC Common Stock, no dividend or distribution of Charter One will
relate to any fractional shares, and such fractional share interests will not
entitle the owner thereof to vote or to any rights as a stockholder of Charter
One. Each stockholder of CSFC who would be entitled to a fractional share in the
Merger will receive a cash payment (without interest) in an amount determined by
multiplying (i) the closing price of one share of Charter One Common Stock as
reported on the Nasdaq National Market on the last trading day preceding the
Effective Time by (ii) the fractional share interest to which the holder would
otherwise be entitled pursuant to the terms of the Merger Agreement.
EFFECTIVE TIME
The certificate of merger relating to the Merger will be filed with the
Secretary of State of Ohio as soon as practicable after the receipt of all
requisite regulatory approvals relating to the transactions contemplated by the
Merger Agreement, the adoption of the Merger Agreement by the requisite vote of
CSFC's stockholders and the satisfaction or waiver of the other conditions to
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consummation of the Merger, unless the Merger Agreement has been terminated. The
Merger will become effective (i.e., the Effective Time will occur) at the time
and on the date the certificate of merger relating to the Merger is filed with
the Secretary of State of Ohio.
EXCHANGE OF CERTIFICATES; LOST CERTIFICATES
EXCHANGE OF CERTIFICATES. As soon as reasonably practicable (but not
later than five business days) after the Effective Time, an exchange agent
selected by Charter One and reasonably acceptable to CSFC (the "Exchange Agent")
will deliver to each CSFC holder of record of a certificate or certificates,
which immediately prior to the Effective Time represented outstanding shares of
CSFC Common Stock (the "CSFC Certificates"), a transmittal letter and
instructions to be used in surrendering such CSFC Certificates in exchange for
(i) certificates representing the number of shares of Charter One Common Stock
into which their shares of CSFC Common Stock were converted pursuant to the
Merger Agreement, and (ii) a check representing the amount of cash in lieu of a
fractional share, if any, which such stockholder has the right to receive in
respect of the CSFC Certificates surrendered in connection with the Merger. No
interest will be paid or accrued on the cash in lieu of fractional shares
payable to holders of CSFC Common Stock. CSFC CERTIFICATES REPRESENTING SHARES
OF CSFC COMMON STOCK SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL AFTER
RECEIPT OF THE LETTER OF TRANSMITTAL AND SHOULD NOT BE RETURNED TO CSFC WITH THE
ENCLOSED PROXY.
As of the Effective Time, holders of CSFC Certificates who do not
surrender and exchange such certificates will not be entitled to receive
dividends or any other distributions declared by Charter One until the CSFC
Certificates are so surrendered. Following surrender of such CSFC Certificates
in accordance with the terms of the Merger Agreement, the holders of newly
issued Charter One certificates will be paid, without interest, any dividends or
other distributions with respect to the shares of Charter One Common Stock the
record date for which is after the Effective Time (less any taxes that may have
been imposed thereon).
Any certificate representing shares of Charter One Common Stock to be
issued in a name other than that in which the CSFC Certificate is registered
must be properly endorsed or otherwise in proper form for transfer, and the
holder requesting such exchange must pay to the Exchange Agent in advance any
transfer or other taxes in connection therewith or to establish the satisfaction
of the Exchange Agent that such tax has been paid or is not applicable.
After the Effective Time, there will be no further transfers on the
records of CSFC of the CSFC Certificates, and if such CSFC Certificates are
presented to Charter One for transfer, they will be canceled against delivery of
certificates for Charter One Common Stock.
LOST CERTIFICATES. In the event any CSFC Certificate has been lost,
stolen or destroyed, upon the delivery of an affidavit of that fact by the
holder of such certificate and the posting of any bond required by Charter One
or the Exchange Agent, Charter One or the Exchange Agent will issue for such
lost, stolen or destroyed CSFC Certificate, a certificate for the shares of
Charter One Common Stock to which the holder of such CSFC Certificate is
entitled under the terms of the Merger Agreement and any applicable cash in lieu
of a fractional share interest.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the CSFC management and the CSFC Board may be deemed
to have certain interests in the Merger in addition to their interest as
stockholders of CSFC generally. The CSFC Board was aware of these interests and
considered them in adopting the Merger Agreement and the transactions
contemplated thereby. Set forth below are descriptions of interests of executive
officers of CSFC in the Merger in addition to their interests as stockholders of
CSFC generally.
EMPLOYMENT AGREEMENTS. Charter One Bank shall offer employment
agreements to William R. Bryan, Sandra L. Myers and David Y. Wilcox, the three
senior executive officers of CSFC Bank. The employment agreement with William R.
Bryan is for a 12-month term commencing at the Effective Time and provides for
an annual base salary of $172,000 and bonuses at the expiration of the term
totaling $258,000. Mr. Bryan will also be paid $140,000 at the expiration of the
term in exchange for compliance with certain noncompetition and nonsolicitation
covenants. Mr. Bryan will also be entitled to health insurance coverage during
the employment term.
The employment agreement with Sandra L. Myers is for a 12-month term
commencing at the Effective Time and provides for an annual base salary of
$105,000 and bonuses at the expiration of the term totaling $163,000. Ms. Myers
will also be paid $70,000 at the expiration of the term in exchange for
compliance with certain noncompetition and nonsolicitation covenants. Ms. Myers
will also be entitled to health insurance coverage during the employment term.
The employment agreement with David Y. Wilcox is for a 12-month term
commencing at the Effective Time and provides for an annual base salary of
$105,000 and bonuses at the expiration of the term totaling $164,000. Mr. Wilcox
will also be paid $70,000 at the expiration of the term in exchange for
compliance with certain noncompetition and nonsolicitation covenants. Mr. Wilcox
will also be entitled to health insurance coverage during the employment term.
PAYMENT UNDER SERP AGREEMENTS. On December 18, 1987, CSFC Bank entered
into a series of supplemental employee retirement plan agreements ("SERP
Agreements") with William R. Bryan, Sandra L. Myers and David Y. Wilcox,
pursuant to which such individuals were entitled to certain lifetime payments
upon retirement. At the Effective Time, the SERP Agreements for Messrs. Bryan
and Wilcox and Ms. Myers will be canceled and each will receive a lump sum cash
payment in lieu thereof within five days after the Effective Time. The payments
will be based upon the accrued benefits under the respective SERP Agreements as
of the Effective Time. The lump sum amounts, based on benefit accruals through
June 30, 1998, were $207,301 for Mr. Bryan, $125,489 for Mr. Wilcox and $88,522
for Ms. Myers. Such amounts will be further adjusted for benefit accruals from
June 30, 1998 through the Effective Time.
INDEMNIFICATION PROVISIONS. Pursuant to the Merger Agreement, Charter
One Bank has agreed that from and after the Effective Time, all provisions for
indemnification and limitation on liability now existing in favor of employees,
agents, directors or officers of CSFC, CSFC Bank or their subsidiaries, as
provided by law or regulation or in their respective Articles of Incorporation
or Code of Regulations prior to the Effective Time shall be assumed by Charter
One and shall continue in full force and effect with respect to acts or
omissions occurring prior to the Effective Time for a period of three years
thereafter.
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REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties of CSFC
and Charter One as to, among other things: (i) the corporate organization,
existence and qualification to do business of each party and the corporate power
and authority of each party to enter into the Merger Agreement and consummate
the transactions contemplated thereby; (ii) the authorization of the execution
performance and delivery of the Merger Agreement by each party and the
enforceability of the Merger Agreement; (iii) the absences of conflicts between
either the Merger Agreement or the transactions contemplated thereby and any
provision of any law or decree or of any organizational document or contracts of
any party; (iv) the inapplicability of anti-takeover statutes; (v) the
capitalization of each party and the validly issued, fully paid and
non-assessable status of the Charter One Common Stock to be issued in the
Merger; (vi) the accuracy and conformity to generally accepted accounty
principles of each party's financial statements and filings and the absence of
material changes since December 31, 1997; (vii) the organization and ownership
of each party's subsidiaries; (viii) the adequacy of each party's reports and
filings; (ix) the compliance of each party with all applicable laws and
regulations; (x) the accuracy of the information supplied by each party for
inclusion in this Proxy Statement/Prospectus; (xi) the absence of litigation;
(xii) the possession by each party of all necessary licenses; (xiii) the proper
accounting, withholding and payment by each party of all applicable taxes; (xiv)
the maintenance of adequate insurance by each party; (xv) the legality,
enforceability and collectability of each party's loans, investments and risk
management arrangements; (xvi) the adequacy of each party's allowance for loan
losses; (xvii) the full disclosure of, conformity to law of, and absence of
litigation with respect to, each party's employee benefit plans; (xviii) the
compliance of each party with environmental laws; (xix) the full disclosure of
certain contracts and commitments specified in the Merger Agreement; (xx) the
absence of any material default by or against either party; (xxi) the absence,
since December 31, 1997, of certain changes in the operations of the parties;
(xxii) the accuracy and full disclosure of CSFC's corporate records; (xxiii) the
absence of undisclosed liabilities of either party; (xxiv) the possession by
each party of good and marketable title to its properties and valid and
enforceable leases; (xxv) the absence of restrictions on the ability of certain
CSFC shareholders to transfer CSFC Common Stock; (xxvi) the absence of actions
which would give rise to a claim for indemnification by officers or directors of
either party; (xxvii) the absence of insider loans or contracts in violation of
regulation; (xxviii) the absence of any obligation for CSFC to register its
securities under federal or state law; (xxix) the absence of any action by CSFC
which would delay the transaction or prevent it from qualifying for pooling of
interests accounting or treatment as a tax free reorganization; (xxx) the
absence of any brokers or finders other than McDonald & Company; (xxxi) the
accuracy of the information contained in the Merger Agreement and all documents
delivered pursuant thereto; (xxxii) CSFC's receipt of a fairness opinion from
McDonald & Company; and (xxxiii) the absence of any reasons known to the parties
why any governmental approvals or conditions precedent should not be obtained or
satisfied. For detailed information on such representations and warranties, see
the Merger Agreement attached hereto as Annex A.
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CONDITIONS TO THE MERGER
CONDITIONS TO THE OBLIGATIONS OF THE PARTIES. Notwithstanding any
other provision of the Merger Agreement, the obligations of Charter One and
Charter One Bank on the one hand, and CSFC and CSFC Bank on the other hand, to
consummate the Merger are subject to the following conditions precedent (except
as to those which Charter One or CSFC may choose to waive): (i) there shall have
been no preliminary or permanent injunction or other order by any federal or
state court which prevents the consummation of the Merger; (ii) there shall not
have been any action taken or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any federal or state
government or governmental agency or instrumentality of record, which would
prohibit ownership or operation of all or a portion of the business or assets of
CSFC or any CSFC subsidiary by Charter One or Charter One Bank, or which would
render any party hereto unable to consummate the transactions contemplated by
the Merger Agreement; (iii) the parties shall have received all applicable
regulatory approvals and consents to consummate the transactions contemplated in
the Merger Agreement and all required waiting periods shall have expired; (iv)
the Registration Statement shall have been declared effective under the
Securities Act and no stop orders shall be in effect and no proceedings for such
purpose shall be pending or threatened by the Commission and, if the offering
for sale of the Charter One Common Stock in the Merger is subject to the
securities laws of any state, the Registration Statement shall not be subject to
a stop order of any state securities authority; (v) each party shall have
received a tax opinion that the Merger will be treated as a tax-free
reorganization under Section 368(a) of the Code; and (vi) the Charter One Common
Stock to be issued to holders of CSFC Common Stock shall have been approved for
listing on the Nasdaq National Market subject to official notice of issuance.
CONDITIONS TO THE OBLIGATIONS OF CHARTER ONE AND CHARTER ONE BANK.
Notwithstanding any other provision of the Merger Agreement, the obligations of
Charter One and Charter One Bank to consummate the Merger are subject to the
following conditions precedent (except as to those which Charter One may choose
to waive): (i) all of the representations and warranties made by CSFC and CSFC
Bank in the Merger Agreement and in any documents or certificates provided by
CSFC and CSFC Bank shall have been true and correct in all material respects as
of the date of the Merger Agreement and as of the Effective Time as though made
on and as of the Effective Time, subject to the cure provisions contained in the
Merger Agreement; (ii) CSFC and CSFC Bank shall have performed in all material
respects all obligations and shall have complied in all material respects with
all agreements and covenants required by the Merger Agreement to be performed or
complied with by them prior to or at the Effective Time, subject to the cure
provisions contained in the Merger Agreement; (iii) there shall not have been
any action taken or any statute, rule, regulation or order enacted, promulgated
or issued or deemed applicable to the Merger by any federal or state government
or governmental agency or instrumentality or court, which would compel Charter
One or Charter One Bank to dispose of any material assets, as a result of the
Merger Agreement; (iv) no regulatory authority shall impose any non-standard or
unduly burdensome condition relating to the Merger as determined in the
reasonable judgment of Charter One; (v) since the date of the Merger Agreement,
CSFC shall not have suffered a material adverse effect; (vi) Charter One shall
have received the opinion of Arter & Hadden LLP, counsel to CSFC, in the form
specified in the Merger Agreement; (vii) Charter One shall have received a
certificate signed by the President and Chief Executive Officer of CSFC and CSFC
Bank, dated as of the Effective Time, certifying that based upon his best
knowledge, the conditions set forth in items (i), (ii) and (v) of this paragraph
have been
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satisfied; (viii) simultaneous with the execution and delivery of the Merger
Agreement, the directors of CSFC who are stockholders of CSFC and certain other
stockholders designated by Charter One shall have executed and delivered to
Charter One the Charter One Voting Agreements; (ix) Charter One shall have
received from Deloitte & Touche LLP, a letter to the effect that the Merger will
qualify for pooling of interests accounting treatment; (x) Charter One shall
have received the written affiliates' agreements as described in the Merger
Agreement; (xi) dissenting shares shall not exceed 7% of the issued and
outstanding CSFC Common Stock; and (xii) at the closing, each share of voting
capital stock of Cuyahoga Financial Services Agency, Inc. ("CFSA") shall have
been transferred to one or more individuals designated by Charter One without
any additional consideration therefor and in accordance with the OGCL. The
conditions set forth in items (viii) and (x) have already been satisfied.
CONDITIONS TO THE OBLIGATIONS OF CSFC AND CSFC BANK. Notwithstanding
any other provision of the Merger Agreement, the obligations of CSFC and CSFC
Bank to consummate the Merger are subject to the following conditions precedent
(except as to those which CSFC may choose to waive): (i) all of the
representations and warranties made by Charter One in the Merger Agreement and
in any documents or certificates provided by Charter One shall have been true
and correct in all material respects as of the date of the Merger Agreement and
as of the Effective Time as though made on and as of the Effective Time, subject
to the cure provisions contained in the Merger Agreement; (ii) Charter One shall
have performed in all material respects all obligations and shall have complied
in all material respects with all agreements and covenants required by the
Merger Agreement to be performed or complied with by it prior to or at the
Effective Time, subject to the cure provisions contained in the Merger
Agreement; (iii) Charter One shall not have suffered a material adverse effect
after the execution of the Merger Agreement; (iv) CSFC shall have received the
opinion of Silver, Freedman & Taff, L.L.P., counsel to Charter One, in the form
specified in the Merger Agreement; (v) CSFC shall have received a certificate
signed by the President and Chief Executive Officer of Charter One, dated as of
the Effective Time, that based upon his best knowledge, the conditions set forth
in items (i), (ii) and (iii) of this paragraph have been satisfied.
There can be no assurance that the conditions to consummation of the
Merger will be satisfied or waived. In the event the conditions to either
party's obligations become impossible to be satisfied in any material respect,
the other party may elect to terminate the Merger Agreement. See " -- Amendment;
Termination; Liabilities and Remedies for Breach."
For detailed information on conditions to the Merger, see the Merger
Agreement attached hereto as Annex A.
REGULATORY APPROVALS
Consummation of the Merger is subject to the approval of the OTS and
the Division. Charter One filed an application for approval of the Merger with
the OTS on June 5, 1998 and the Division on June 9, 1998. Although Charter One
anticipates receiving approval of the Merger from the OTS and the Division in
the third quarter of 1998, there can be no assurance as to the timing of such
approvals or that they will be obtained.
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The Merger may not be consummated for a period of 30 days after receipt
of the OTS's final approval, unless the OTS has not received any adverse comment
from the Department of Justice during the first 15 days following final
approval, in which case the Merger may be consummated on or after the 15th day
after final approval by the OTS.
It is a condition to the consummation of the Merger that all requisite
regulatory approvals be obtained without any nonstandard or unduly burdensome
condition relating to the Merger, as determined in Charter One's reasonable
judgment. There can be no assurance that such approvals will not contain terms,
conditions or requirements which cause such approvals to fail to satisfy such
conditions to the consummation of the Merger. See "-- Conditions to the Merger."
AMENDMENT; TERMINATION; LIABILITIES AND REMEDIES FOR BREACH
AMENDMENT. The Merger Agreement may be amended by the parties thereto
by action taken by their respective Boards of Directors at any time before or
after adoption of the Merger Agreement by the stockholders of CSFC; provided
that, after such adoption, no amendment shall be made which changes the form of
consideration or the value of the consideration to be received by the
stockholders of CSFC without the approval of the stockholders of CSFC or
otherwise amend the Merger Agreement in a manner not permitted by Ohio Revised
Code Section 1701.78(G).
TERMINATION. The Merger Agreement may be terminated at any time prior
to the Effective Time: (i) by the mutual written consent of the Boards of
Directors of Charter One and CSFC; (ii) by Charter One or CSFC if there shall
have been a final judicial or regulatory determination (as to which all periods
for appeal shall have expired and no appeal shall be pending) that any material
provision of the Merger Agreement is illegal, invalid or unenforceable (unless
the enforcement thereof is waived by the affected party) or denying any
regulatory application the approval of which is a condition precedent to a
party's obligations under the Merger Agreement; (iii) at any time on or before
December 31, 1998, by Charter One or CSFC in the event that any of the
conditions precedent to the obligations of the other party to the Merger are
rendered impossible to be satisfied or fulfilled by December 31, 1998 (other
than by reason of a breach by the party seeking to terminate); (iv) by Charter
One or CSFC at any time after the stockholders of CSFC fail to approve the
Merger Agreement and the Merger by the required vote at the Special Meeting; (v)
by Charter One or CSFC, in the event of a material breach by the other party of
any representation, warranty, covenant, obligation or agreement contained in the
Merger Agreement or in any schedule or document delivered pursuant thereto,
which breach would result in the failure to satisfy certain closing conditions
set forth in the Merger Agreement for Charter One and CSFC, and which breach
cannot be or is not cured within 30 days after written notice of such breach is
given by the non- breaching party to the party committing such breach; (vi) by
Charter One or CSFC on or after December 31, 1998, in the event the Merger has
not been consummated by such date (provided, however, that this right to
terminate shall not be available to any party whose failure to perform an
obligation hereunder has been the cause of, or has resulted in, the failure of
the Merger to occur on or before such date; (vii) by CSFC if the reduction to
the Merger Consideration due to environmental remediation costs exceeds
$1,000,000; (viii) by Charter One if the results of air quality testing at
certain sites specified in the Merger Agreement are either above the permissible
exposure limit or above the level agreed upon by CSFC and Charter One as of the
date of the Merger Agreement; or (ix) by CSFC if the Final COFI Share Price is
less than $26.80 (adjusted for the Charter One Stock Split) (or less than $25.52
as a result of the Charter One Stock Dividend). Based on the results of
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environmental due diligence, Charter One and CSFC have agreed that the grounds
for termination set forth in items (vii) and (viii) of this paragraph are no
longer applicable. If the Final COFI Share Price is less than $26.80 (or less
than $25.52 as a result of the Charter One Stock Dividend), the CSFC Board will
determine whether or not to terminate the Merger Agreement. The CSFC Board does
not intend to resolicit proxies from holders of CSFC Common Stock in such
circumstances.
LIABILITIES AND REMEDIES FOR BREACH. In the event that the Merger
Agreement is terminated by a party solely by reason of a material breach by the
other party of any of its representations, warranties, covenants or agreements
contained in the Merger Agreement, then the non-breaching party is entitled to
seek such remedies and relief against the breaching party as are available at
law or in equity, including specific performance.
If the Special Meeting does not take place, or if the CSFC Board
adversely alters or modifies its favorable recommendation of the Merger
Agreement and the Merger and the Merger Agreement is not approved by the
stockholders of CSFC by the required vote, then CSFC and CSFC Bank shall be
jointly liable to Charter One and Charter One Bank upon termination of the
Merger Agreement for up to $200,000 in expenses and a break up fee of
$2,500,000, unless Charter One or Charter One Bank is in material breach of the
Merger Agreement on the date of such event.
If an "Acquisition Proposal" (as defined below) occurs before the
Special Meeting, and the Merger Agreement is not approved by the stockholders of
CSFC by the required vote, and either an Acquisition Proposal is consummated or
a definitive agreement relating to an Acquisition Proposal is executed within 15
months after the termination of the Merger Agreement, then CSFC and CSFC Bank
shall be jointly liable to Charter One and Charter One Bank for a break up fee
of $2,500,000, unless Charter One or Charter One Bank is in material breach of
the Merger Agreement on the date of such action. "Acquisition Proposal" means
any of the following (other than the Merger): (i) a merger or consolidation, or
any similar transaction of any company with either CSFC or any Subsidiary of
CSFC, (ii) a purchase lease or other acquisition of a material portion of the
assets of CSFC or CSFC Bank, (iii) a purchase or other acquisition of
"beneficial ownership" by any "person" or "group" (as such terms are defined in
Section 13(d)(3) of the Securities Exchange Act) (including by way of merger,
consolidation, share exchange, or otherwise) which would cause such person or
group to become the beneficial owner of securities representing 25% or more of
the voting power of either CSFC or any Subsidiary of CSFC, (iv) a tender or
exchange offer to acquire securities representing 25% or more of the voting
power of CSFC, (v) a public proxy or consent solicitation made to stockholders
of CSFC seeking proxies in opposition to any proposal relating to any of the
transactions contemplated by the Merger Agreement, (vi) the filing of an
application or notice with the OTS or any other federal or state regulatory
authority (which application has been accepted for processing) seeking approval
to engage in one or more of the transactions referenced in clauses (i) through)
(iv) above, or (vii) the making of a bona fide offer to the Board of Directors
of CSFC or CSFC Bank by written communication, that is or becomes the subject of
public disclosure, to engage in one or more of the transactions referenced in
clauses (i) through (v) above.
If Charter One in material breach of the Merger Agreement refuses to
consummate the Merger, then Charter One and Charter One Bank shall be jointly
liable to CSFC and CSFC Bank for liquidated damages in the amount of $2,700,000.
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CONDUCT OF BUSINESS PENDING THE MERGER
The Merger Agreement contains covenants of CSFC concerning the conduct
of its business. The covenants remain in effect until the Effective Time or
until the Merger Agreement has been terminated. They include, among other
things, that CSFC shall not declare or pay any dividend or make any other
distributions with respect to its capital stock (whether in cash, stock or other
property), except it may declare and pay its regular quarterly cash dividend of
not more than $2.00 per share on CSFC Common Stock with record and payment dates
consistent with past practice, provided that the declaration of the last regular
quarterly dividend by CSFC prior to consummation of the Merger and the payment
thereof is coordinated with and approved by Charter One, so as to preclude any
duplication of dividend benefit; and a special cash dividend consistent with
past practice in an amount not to exceed the product of (A) $8.00 multiplied by
(B) the fraction of which the denominator is 12 and the numerator is the number
of full calendar months of 1998 (and any partial month consisting of at least 15
calendar days in 1998) prior to the Effective Time. CSFC and its subsidiaries
have covenanted to continue to carry on their respective businesses and
discharge or incur obligations and liabilities, only in the usual, regular and
ordinary course of business, and to not, among other things, without the prior
written consent of Charter One: (i) issue any capital stock or any options,
warrants, or other rights to subscribe for or purchase capital stock or any
securities convertible into or exchangeable for any capital stock; (ii) directly
or indirectly redeem, purchase or otherwise acquire any capital stock or
ownership interests of CSFC or any CSFC subsidiary; (iii) effect a
reclassification, recapitalization, split-up, exchange of shares, readjustment
or other similar change in or to any capital stock or otherwise reorganize or
recapitalize; (iv) change its Charter, Articles of Incorporation, Code of
Regulations or Bylaws; (v) enter into or modify any employment agreement,
severance agreement, change of control agreement, or plan relative to the
foregoing; or grant any increase (other than ordinary and normal increases to
rank and file employees consistent with past practices) in the compensation
payable or to become payable to directors, officers or employees, pay any bonus,
or adopt or make any change in any bonus, insurance, pension or other benefit
plan; (vi) except as permitted by the Merger Agreement and for deposit-taking in
the ordinary course of its business, borrow or agree to borrow any funds, or
indirectly guarantee or agree to guarantee any obligations of others; (vii) make
or restructure any loan or line of credit, in excess of amounts set forth in the
Merger Agreement; (viii) make any material changes in its policies concerning
loan underwriting or which persons may approve loans; (ix) enter into any
securities transaction for its own account or purchase or otherwise acquire any
investment security for its own account except as permitted by the Merger
Agreement; (x) increase or decrease the rate of interest paid on time deposits
or on certificates of deposit, except in a manner and pursuant to policies
consistent with past practices; (xi) enter into, modify or extend any agreement,
contract or commitment out of the ordinary course of business or having a term
in excess of six months and involving an expenditure in excess of $10,000; (xii)
except in the ordinary course of business, place on any of its assets or
properties any mortgage, pledge, lien, charge, or other encumbrance; (xiii)
cancel any material indebtedness owing to it or any claims which it may possess
or waive any rights of material value except as previously disclosed to Charter
One; (xiv) sell or otherwise dispose of any real property or any material amount
of tangible or intangible personal property other than as permitted by the
Merger Agreement; (xv) foreclose upon or otherwise take title to or possession
or control of any real property without first obtaining a phase one
environmental report thereon except as permitted by the Merger Agreement; (xvi)
knowingly or wilfully commit any act or fail to commit any act which will cause
a breach of any agreement, contract or commitment; (xvii) purchase any real or
personal property or make any capital expenditure except as permitted by the
Merger
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Agreement; (xviii) in the case of CSFC Bank, voluntarily make any material
changes in or to its asset and deposit mix; (xix) engage in any activity or
transaction outside the ordinary course of business; (xx) enter into or acquire
any derivatives contract or structured note; (xxi) enter into any new, or
modify, amend or extend the terms of any existing contracts relating to the
purchase or sale of financial or other futures, or any put or call option
relating to cash, securities or commodities or any interest rate swap agreements
or other agreements relating to the hedging of interest rate risk; (xxii) take
any action that would (A) materially impede or delay the consummation of the
transactions contemplated by the Merger Agreement or the ability of the parties
thereto to obtain any approval of any regulatory authority required for the
transactions contemplated by the Merger Agreement or to perform their covenants
and agreements under the Merger Agreement or (B) prevent the Merger from
qualifying as a pooling of interests for accounting purposes or as a
reorganization within the meaning of Section 368(a) of the Code; or (xxiii)
agree in writing or otherwise to take any of the foregoing actions or engage in
any of the foregoing activities.
FOR A MORE DETAILED AND COMPREHENSIVE LIST OF THE RESTRICTIONS ON THE
CONDUCT OF CSFC'S OPERATIONS PENDING THE MERGER, SEE THE MERGER AGREEMENT
ATTACHED HERETO AS ANNEX A.
EXPENSES
All expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby are to be paid by the party incurring such
expenses, except that Charter One will bear all third party printing costs.
ACCOUNTING TREATMENT
The Merger is intended to be accounted for under the pooling of
interests method of accounting. Under the pooling of interests method of
accounting, the historical cost basis of the assets and liabilities of Charter
One and CSFC will be combined and carried forward at their previously recorded
amounts, and the stockholders' equity accounts of Charter One and CSFC will be
combined on Charter One's consolidated statement of financial condition. Income
and other financial statements of Charter One issued after consummation of the
Merger will be restated retroactively to reflect the consolidated operations of
Charter One and CSFC as if the Merger had taken place prior to the periods
covered by such financial statements. It is a condition of the Merger that
Charter One receive a letter from Deloitte & Touche LLP to the effect that the
Merger will qualify for pooling of interests accounting treatment. Charter One
intends to rescind any remaining repurchase authorizations prior to consummation
of the Merger. Charter One considered this as part of its conclusion that
pooling of interests accounting is appropriate for the Merger and the ALBANK
Acquisition.
RESALE OF CHARTER ONE COMMON STOCK BY AFFILIATES
The shares of Charter One Common Stock to be issued to stockholders of
CSFC in connection with the Merger will be registered under the Securities Act
and will be freely transferable under the Securities Act, except for shares
issued to any stockholder who may be deemed to be an "affiliate" (as defined
under the Securities Act, but generally including directors, certain executive
officers and 10% or more stockholders) of CSFC or Charter One at the time of the
Special Meeting.
Rules 144 and 145 promulgated under the Securities Act restrict the
sale of Charter One Common Stock received in the Merger by affiliates and
certain of their family members and related interests. Generally speaking,
during the one year following the Effective Time, affiliates of Charter
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One and CSFC may not resell publicly the Charter One Common Stock received by
them in connection with the Merger except in compliance with certain limitations
as to the amount of Charter One Common Stock sold in any three-month period and
as to the manner of sale. After the one-year period, such affiliates of CSFC who
are not affiliates of Charter One may resell their shares without restriction.
The ability of affiliates to resell shares of Charter One Common Stock received
in the Merger under Rule 144 or 145 as summarized herein generally will be
subject to Charter One having satisfied its Exchange Act reporting requirements
for specified periods prior to the time of sale. Affiliates also would be
permitted to resell Charter One Common Stock received in the Merger pursuant to
an effective registration statement under the Securities Act covering such
shares or an available exemption from the Securities Act registration
requirements. This Proxy Statement/Prospectus does not cover any resales of
Charter One Common Stock received by persons who may be deemed to be affiliates
of Charter One or CSFC, and COFI has no obligation or intention to file a
registration statement to cover any such resales.
The Merger Agreement provides that CSFC will use its best efforts to
cause each director, executive officer and other person who is deemed by CSFC to
be an affiliate (for purposes of Rule 145 and for purposes of qualifying the
Merger for the pooling of interests method of accounting treatment) of CSFC to
execute and deliver a written agreement with Charter One intended to ensure
compliance with the Securities Act and to ensure that the Merger will qualify as
a pooling of interests.
Commission guidelines regarding qualifying for the pooling of interests
method of accounting also limit sales by affiliates of Charter One and CSFC in
the Merger. Commission guidelines indicate that the pooling of interests method
of accounting generally will not be challenged on the basis of sales by
affiliates if they do not dispose of any of the shares of either combining
company they owned prior to the consummation of a merger or shares of the
surviving company received in connection with a merger during the period
beginning 30 days before the merger and ending when financial results covering
at least 30 days of post-merger operations of the surviving company have been
published.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary description of the anticipated
material federal income tax consequences of the Merger to CSFC stockholders who
are citizens or residents of the United States. The following discussion does
not purport to be a complete analysis or listing of all potential tax effects
relevant to a decision whether to vote in favor of adoption of the Merger
Agreement. Further, the discussion does not address the tax consequences that
may be relevant to a particular CSFC stockholder subject to special treatment
under certain federal income tax laws, such as dealers in securities, banks,
insurance companies, tax-exempt organizations, non-United States persons and
stockholders who acquired their shares as compensation, nor any consequences
arising under the laws of any state, locality or foreign jurisdiction. The
discussion is based upon the Code, Treasury regulations thereunder and
administrative rulings and court decisions as of the date hereof. All of the
foregoing are subject to change, and any such change could affect the continuing
validity of this discussion.
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HOLDERS OF CSFC COMMON STOCK ARE URGED TO CONSULT THEIR TAX ADVISERS AS
TO THE PARTICULAR EFFECT OF THEIR OWN PARTICULAR FACTS AND CIRCUMSTANCES ON THE
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO THEM, AND ALSO AS TO THE EFFECT
OF ANY STATE, LOCAL, FOREIGN AND OTHER FEDERAL TAX LAWS.
Under current federal income tax law, and based upon assumptions and
factual representations to be made by Charter One and CSFC, and assuming that
the Merger is consummated in the manner set forth in the Merger Agreement, it is
anticipated that the following federal income tax consequences would result: (i)
the Merger will constitute a tax-free reorganization within the meaning of
Section 368(a) of the Code and neither Charter One nor CSFC will recognize any
gain or loss as a direct consequence of consummating the Merger; (ii) no gain or
loss will be recognized by any CSFC stockholder upon the exchange of CSFC Common
Stock solely for Charter One Common Stock pursuant to the Merger, and the tax
basis of the Charter One Common Stock received by each stockholder of CSFC who
exchanges CSFC Common Stock for Charter One Common Stock in the Merger will be
the same as the aggregate tax basis of the CSFC Common Stock surrendered in
exchange therefor (subject to any adjustments required as the result of receipt
of cash in lieu of a fractional share interest in Charter One Common Stock);
(iii) the holding period of the shares of Charter One Common Stock received by a
CSFC stockholder in the Merger will include the holding period of the CSFC
Common Stock surrendered in exchange therefor, provided that such shares of CSFC
Common Stock were held as a capital asset by such stockholder at the Effective
Time; and (iv) cash received in the Merger by a CSFC stockholder in lieu of a
fractional share interest of Charter One Common Stock will be treated as having
been received as a distribution in full payment in exchange for the fractional
share interest of Charter One Common Stock which such stockholder would
otherwise be entitled to receive, and will qualify as capital gain or loss
(assuming the CSFC Common Stock surrendered in exchange therefor was held as a
capital asset by such stockholder at the Effective Time).
Silver, Freedman & Taff, L.L.P., counsel to Charter One, will render an
opinion, dated as of the Effective Time, that the Merger will qualify as a
tax-free reorganization under the Code with the consequences set forth above.
The Silver, Freedman & Taff, L.L.P. opinion will be based entirely upon the
Code, regulations then in effect or proposed thereunder, then-current
administrative rulings and practice and judicial authority, all of which would
be subject to change, possibly with retroactive effect. Subject to waiver by
both Charter One and CSFC, which waiver is not expected to be made, consummation
of the Merger is conditioned upon the receipt by Charter One and CSFC of the
opinion of Silver, Freedman & Taff, L.L.P. See "-- Conditions to the Merger."
In the event that Silver, Freedman & Taff, L.L.P. is unable to furnish
the opinion as described herein, the tax consequences of the Merger are
materially different than described above, and both Charter One and CSFC waive
the condition of receipt of the opinion of Silver, Freedman & Taff, L.L.P., CSFC
stockholders will be resolicited and provided updated information regarding the
material federal income tax consequences of the Merger prior to consummation of
the Merger.
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No ruling has been or will be requested from the Internal Revenue
Service ("IRS"), including any ruling as to federal income tax consequences of
the Merger to Charter One, CSFC or CSFC stockholders. Unlike a ruling from the
IRS, the opinions of counsel are not binding on the IRS. There can be no
assurance that the IRS will not take a position contrary to the positions
reflected in such opinions or that such opinions would be upheld by the courts
if challenged.
NASDAQ LISTING
Charter One Common Stock currently is quoted on the Nasdaq National
Market. It is a condition to consummation of the Merger that the Charter One
Common Stock to be issued to the stockholders of CSFC pursuant to the Merger
Agreement shall have been approved for listing on the Nasdaq National Market
subject to official notice of issuance. See "-- Conditions to the Merger."
THE CORPORATE MERGER
It is anticipated that the Merger will be followed immediately by the
Corporate Merger. The respective obligations of CSFC (as the surviving
corporation in the Merger) and Charter One to consummate the Corporate Merger
are conditioned upon the satisfaction or waiver by Charter One and CSFC of all
conditions to consummation of the Merger set forth in the Merger Agreement.
THE BANK MERGER
It is anticipated that the Corporate Merger will be followed
immediately by the Bank Merger. The respective obligations of Charter One Bank
and CSFC Bank to consummate the Bank Merger are conditioned upon the
satisfaction or waiver by Charter One and CSFC of all conditions to consummation
of the Merger set forth in the Merger Agreement and approval by the OTS and the
Division.
DESCRIPTION OF CHARTER ONE FINANCIAL, INC. CAPITAL STOCK
The following information sets forth the material terms of Charter
One's capital stock and is subject to and qualified in its entirety by reference
to the provisions in the Charter One Certificate of Incorporation.
GENERAL
The Charter One Certificate of Incorporation authorizes the
issuance by Charter One of up to 200,000,000 shares of its capital stock
consisting of 180,000,000 shares of Charter One Common Stock (par value $.01 per
share) and 20,000,000 shares of Charter One preferred stock (par value $.01 per
share) ("Charter One Preferred Stock"). As of August 15, 1998, 127,213,076
shares of Charter One Common Stock and no shares of Charter One Preferred Stock
were issued and outstanding. Charter One Common Stock is traded on the Nasdaq
National Market under the symbol "COFI." The stock transfer agent and registrar
for Charter One Common Stock is Boston EquiServe, L.P.
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The Charter One Board has approved an Amendment No. 2 to the Second
Restated Charter One Certificate of Incorporation to increase the number of
authorized shares of Charter One Common Stock from 180,000,000 to 360,000,000
(the "Charter One Certificate Amendment"). The affirmative vote of the holders
of a majority of the outstanding shares of Charter One Common Stock represented
in person or by proxy at a meeting of Charter One's shareholders is required for
approval and adoption of the Charter One Certificate Amendment.
COMMON STOCK
Each share of Charter One Common Stock has the same relative rights and
is identical in all respects with each other share of Charter One Common Stock.
Charter One Common Stock represents non-withdrawable capital, is not of an
insurable type and is not insured by the FDIC or any other government agency.
Subject to any prior rights of the holders of any Charter One Preferred
Stock then outstanding, holders of Charter One Common Stock are entitled to
receive such dividends as are declared by the Charter One Board out of funds
legally available therefor. Full voting rights are vested in the holders of
Charter One Common Stock, each share being entitled to one vote. See "Comparison
of Rights of Stockholders of Charter One Financial, Inc. and CS Financial
Corporation -- Restrictions on Voting Rights; Quorum" and "-- Rights Agreement."
Subject to any prior rights of the holders of any Charter One Preferred Stock
then outstanding, in the event of liquidation, dissolution or winding up of
Charter One, holders of shares of Charter One Common Stock are entitled to
receive pro rata, any assets distributable to stockholders in respect of shares
held by them. Holders of shares of Charter One Common Stock do not have any
preemptive rights to subscribe for any additional securities which may be issued
by Charter One or cumulative voting rights. The outstanding shares of Charter
One Common Stock are fully paid and non-assessable.
Certain provisions of the Charter One Certificate of Incorporation may
have the effect of delaying, deferring or preventing a change in control of
Charter One pursuant to an extraordinary corporate transaction involving Charter
One, including a merger, reorganization, tender offer, transfer of substantially
all of its assets or a liquidation. Attached to each share of Charter One Common
Stock is a "Right" entitling the holder thereof to purchase shares of Series A
Participating Preferred Stock of Charter One upon the occurrence of certain
events as more fully described in the Rights Agreement. See "Comparison of
Rights of Stockholders of Charter One Financial, Inc. and CS Financial
Corporation -- Rights Agreement."
The foregoing discussion of the Charter One Common Stock is qualified
in its entirety by reference to the description of the Charter One Common Stock
contained in Charter One's Registration Statement on Form 8-A (as amended) with
respect thereto, which is incorporated by reference in this Proxy
Statement/Prospectus. See "Incorporation of Certain Documents by Reference."
PREFERRED STOCK
The Charter One Certificate of Incorporation authorizes the issuance by
Charter One of up to 20,000,000 shares of Charter One Preferred Stock, none of
which is issued and outstanding.
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The Charter One Preferred Stock may be issued in one or more series at
such time or times and for such consideration or considerations as the Charter
One Board may determine. The Charter One Board is expressly authorized at any
time, and from time to time, to provide for the issuance of Charter One
Preferred Stock with such voting and other powers, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, as shall be stated and expressed in the Charter One
Board resolution providing for the issuance thereof. The Charter One Board is
authorized to designate the series and the number of shares comprising such
series, the dividend rate on the shares of such series, the redemption rights,
if any, any purchase, retirement or sinking fund provisions, any conversion
rights and any special voting rights. The ability of the Charter One Board to
issue Charter One Preferred Stock without stockholder approval could make an
acquisition by an unwanted suitor of a controlling interest in Charter One more
difficult, time-consuming or costly, or otherwise discourage an attempt to
acquire control of Charter One.
Shares of Charter One Preferred Stock redeemed or acquired by Charter
One may return to the status of authorized but unissued shares, without
designation as to series, and may be reissued by the Charter One Board.
BUSINESS OF CS FINANCIAL CORPORATION
GENERAL
CSFC's business is conducted through its corporate headquarters in
Cleveland, Ohio and is limited to the holding of CSFC Bank's outstanding capital
stock and all of the non-voting shares of CFSA, a life insurance agency
organized under the laws of the state of Ohio and a member of the NASD. CSFC
Bank is CSFC's primary investment. The one voting share of CFSA is owned by
Betsy Bryan Hegyes, a shareholder of CSFC and the sister of William R. Bryan,
the Chairman and Chief Executive Officer of CSFC. The net income of CSFC is
presently derived primarily from the business of CSFC Bank.
CSFC is principally engaged in the business of attracting deposits from
the general public and using such deposits, together with borrowings and other
funds, to make loans secured by residential real estate and, to a lesser extent,
credit card consumer loans in its market area. CSFC's income is derived
predominantly from interest on loans and investments and, to a lesser extent,
noninterest income. CSFC's principal expenses are interest paid on deposits and
borrowings, and normal operating costs. A subsidiary of CSFC Bank manages its
real estate properties (which is not material to its operations as a whole).
MARKET AREA
CSFC's principal market area consists of suburban communities of
Cleveland. CSFC's business is conducted through its corporate office located in
Cleveland, Ohio and eight branch offices located in Cleveland, Chagrin Falls,
Parma, Rocky River, Maple Heights, Richmond Heights and Mayfield Heights, Ohio
and a loan production office in Mentor, Ohio. Loans and deposits are primarily
generated from the areas where its banking offices are located. CSFC does not
actively
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solicit deposits and loans outside its primary market areas and does not use
brokers to obtain deposits.
CSFC is a community financial institution that is committed to serving
the credit needs of those communities and neighborhoods from which it derives
its deposits and in which its banking offices are located. CSFC Bank policy is
to respond to all creditworthy segments of its market. Management believes that
doing so is basic to good business practice and to CSFC Bank's long-term
vitality. CSFC Bank makes an active effort to determine the credit needs of the
community, including those of low- and moderate-income areas and individuals,
and to evaluate the products it offers and the design of those products to
determine whether CSFC Bank's responsiveness to the community can be improved.
COMPETITION
CSFC faces substantial competition both in the attraction of deposits
and in the making of loans. The market for banking and bank-related services is
highly competitive. CSFC and its subsidiaries face competition from commercial
banks, savings and loan associations, mortgage bankers (especially those
affiliated with local residential real estate brokers), credit unions, money
market funds, insurance companies, and a growing list of other local, regional
and national institutions which offer financial services. It has become
increasingly more difficult for an institution to evaluate its overall
competitive situation, since it can no longer merely acknowledge and monitor its
traditional competitors - other savings and loan associations and commercial
banks. Many of the non-bank competitors are not subject to the same extensive
federal regulations that govern CSFC Bank. As a result, such non-bank
competitors may have certain advantages over CSFC in providing certain services.
The relative market share position of CSFC cannot be calculated in any
meaningful way because the sources and amounts of competition for loans and
deposits cannot be determined with any degree of accuracy.
CSFC competes by offering quality and innovative services at
competitive prices. It competes for loans principally through the interest rates
and loan fees it charges for its loan products. Further, CSFC believes it offers
a high degree of professionalism and quality in the services it provides
borrowers and their real estate brokers. It competes for deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposits and withdrawal privileges
at each. CSFC does not rely upon any individual, group, or entity for a
significant portion of its deposits. In addition, through CFSA, CSFC is able to
offer the customer many non-traditional banking services that provide investment
and product diversification.
LENDING ACTIVITIES
GENERAL. CSFC has consistently maintained a conservative posture with
respect to credit risk. Lending activities have traditionally concentrated on
conventional first mortgage loans secured by residential property. CSFC has no
foreign loans nor significant loan concentrations to any one borrower. At June
30, 1998, the net loan portfolio amounted to $334.1 million, representing
approximately 85.0% of CSFC's $392.9 million of assets at that date. All of the
loans are held for investment.
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The following table sets forth the composition of CSFC Bank's portfolio
of loans held for investment indicated in dollar amounts and percentages:
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
(Dollars in thousands)
At June 30, At December 31,
---------------------- -------------------------------------------------------------------------
1998 1997 1996 1995
---------------------- -------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOANS:
One-to-four family...... $317,928 94.7% $318,638 94.4% $303,356 96.2% $288,792 92.9%
Multi-family............ 14,359 4.3 14,790 4.4 7,526 2.4 7,901 2.5
Other real estate....... 2,382 0.7 2,639 0.8 3,131 1.0 11,363 3.7
Commercial.............. 469 0.1 566 0.2 598 0.2 2,244 0.7
Consumer................ 477 0.2 545 0.2 568 0.2 720 0.2
-------- ------ --------- ----- -------- ----- ---------- -----
Total loans........... 335,615 100.0 337,178 100.0 315,179 100.0 311,020 100.0
===== ===== ===== =====
Plus:
Accrued interest
receivable, net......... 771 534 28 (65)
Less:
Allowance for losses on
loans.................. (1,186) (1,184) (963) (910)
Deferred loan origination
fees.................... (1,078) (1,035) (961) (1,135)
-------- --------- ---------- ----------
Net loans............... $334,122 $335,493 $313,283 $308,910
======== ========= ========== ==========
</TABLE>
CSFC Bank is state chartered and authorized to make mortgage loans
throughout the State of Ohio. However, it has limited its mortgage origination
to the counties adjacent to Cuyahoga County (in which Cleveland is located) plus
Stark County. The Board of Directors of CSFC Bank ("CSFC Bank Board") has
authorized multifamily lending throughout the northern half of Ohio, but as of
April 30, 1998, CSFC Bank has accepted no apartment building loan applications
except within the above listed counties.
65
<PAGE>
Historically CSFC Bank invested in adjustable rate mortgage loans. Most
of these loans are based upon the monthly median cost of funds index published
by the OTS. Over the last three years, however, as the result of increased
competition and the need to grow assets, CSFC Bank has invested in fixed rate
mortgage loans as well as adjustable rate mortgage loans using the Treasury
Constant Maturity index. Adjustable rates include one-year, three-year,
five-year and seven-year adjustable products. At the end of the fixed period
these loans become one-year adjustable rate loans. Mortgage loans are offered
with maturities of 15, 20 and 30 years. The adjustable rate loans have an annual
interest rate change cap of 2% and a life-time interest rate change cap of 6%.
Fixed rate mortgages include a 2% prepayment penalty during the first five years
of the loan if no loan points are charged.
With the exception of an annual multi-family lending limitation of
approximately $7 million, all mortgage lending is secured by single-family,
owner-occupied residential properties. Loans exceeding an 85% loan-to-value
ratio require mortgage insurance, and a minimum of 5% cash or equity is
required. CSFC Bank will provide construction/permanent loans to borrowers who
employ a general contractor and who will be residing in the property once
construction is completed. Applicants for construction loans must provide a
construction contract with a responsible builder, plans, specifications and cost
breakdown. The borrower is required to sign a Construction Loan Agreement
describing how the construction loan funds will be disbursed. Loans to acquire
improved residential building sites on which the borrower intends to build and
occupy a new home, generally within one year, are made at a 75% loan to value
and five year term. It is anticipated that the construction and permanent
mortgage will subsequently be made by CSFC Bank. Construction lending rarely
exceeds 15% of annual mortgage lending. CSFC Bank has discontinued interim
construction financing or speculative construction financing, because of the
high risk inherent in such lending.
Lending policies approved by the CSFC Bank Board prescribe the elements
to be evaluated by the loan committee. These elements include a written loan
application, recent credit report, deposit, employment and income verifications
and additional documentation that may be required by the circumstances of the
transaction. The Loan Committee and Senior Underwriter are authorized to request
additional documentation as required to assist in rendering a decision.
Applicants are notified both verbally and in writing as to the decision
regarding their application.
CSFC Bank requires title insurance for all mortgage loans to insure its
mortgage is the first and best lien against the property. An insurance policy
protecting the secured property from fire, wind and other damage is required as
well.
In order to assure a high level of customer service throughout the
lending process, CSFC Bank undertakes an aggressive customer evaluation program
by soliciting comments from everyone involved in the transaction. The lending
process is monitored closely to ensure compliance with all lending laws and
regulations with procedures in place to prevent discriminatory lending
practices.
Multi-family loans generally offer a ten year term with a 20 or 25 year
amortization depending on the quality of the property and owner. These loans
also include a one, three or five year adjustable rate with a five year
prepayment penalty. Underwriting guidelines include a 75% loan to value
qualification, a debt coverage requirement of 120%, environmental reports,
income
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<PAGE>
property appraisal, management experience, a financial underwriting process, and
normally, personal recourse. All multi-family loans require the CSFC Bank
Board's approval.
Single family purchase and refinance loans up to $300,000, conforming
strictly to CSFC Bank's Underwriting Guidelines, can be approved by the Senior
Underwriter. Applications deviating from the Guidelines require formal Loan
Committee approval, and loans over $250,000 are reviewed by the CSFC Bank Board.
All loan denials are decided by Committee and individually reviewed by a member
of Senior Management.
Underwriting Guidelines and Lending Policies are approved by the CSFC
Bank Board. The CSFC Bank Board appoints Loan Committee members and approves
Underwriter authority. The CSFC Bank Board reviews at each monthly Board
Meeting, every loan exceeding $250,000 with the Senior Lending Officer and CEO
present to respond to questions relating to individual loan applications.
Underwriting Guidelines generally conform to secondary market standards. Some
minor variations exist since CSFC Bank generally holds in its own portfolio the
loans it originates and concentrates on the characteristics of the local market.
The collateral securing all loans is supported by a written appraisal
report prepared according to the Uniform Standards of Professional Appraisal
Practices ("USPAP"). Fee appraisers are licensed by the State of Ohio and
approved by the CSFC Bank Board based upon the recommendation of Senior
Management. Each appraisal is reviewed by the Senior Staff Appraiser or in his
absence, by the Loan Committee or Senior Underwriter.
CSFC Bank, in addition to the standard mortgage loans already
described, originates mortgage loans defined as B & C credit loans. These
mortgage loans are made to borrowers whose credit record does not meet generally
accepted credit criteria and therefore impose a somewhat higher repayment risk.
These loans have strict Underwriting Guidelines approved by the CSFC Bank Board
and require a higher interest rate. The collateral securing these loans is
carefully evaluated by the Loan Committee. All B & C credit applications may be
approved only by the Loan Committee. A trial balance listing all booked loans
originated under the B & C program is regularly reviewed by the CSFC Bank Board
for payment status. At June 30, 1998, CSFC Bank had approximately $10.8 million
of B & C credit loans outstanding.
CSFC Bank markets a "Professionals" mortgage lending program to high
income applicants who have not acquired sufficient liquid assets for a standard
down payment required to purchase a new home. CSFC Bank will originate a second
mortgage to the borrower with usually a five year term at a higher interest
rate. The applicant is nevertheless required to meet standard debt to income
guidelines with both mortgages.
CSFC Bank also markets a bridge loan program in which a second mortgage
is placed against the equity of the home being sold by the borrower to secure
the down payment advanced to purchase the new house. The second mortgage is paid
off when the previously owned home is sold.
A special downpayment assistance program for low- and moderate-income
home buyers and a below market interest rate program also for qualified
low-income home buyers are available through a community investment loan
representative who specializes in meeting the needs of
67
<PAGE>
low- and moderate-income applicants. Loans booked under these programs are
monitored regularly by the CSFC Bank Board.
CSFC Bank does not offer consumer loans or equity loan programs except
for credit card extensions of credit.
CSFC Bank will occasionally, with the CSFC Bank Board's approval, grant
a loan to a tenant in the non-residential real estate owned by CSFC Bank,
provided the funds are used for leasehold improvements.
LOAN CONTRACTUAL MATURITIES. CSFC Bank does not invest in loans that
are not self amortizing except for multi-family loans that provide for balloon
payments at the end of a ten year term. The loan portfolio has a weighted
average maturity of 290 months. The actual life of the portfolio will be less
than 290 months as homes are sold or loans are refinanced prior to their
scheduled maturity.
ENVIRONMENTAL RISKS. CSFC Bank encounters certain environmental risks
in its lending activities. Under federal and state environment laws, lenders may
become liable for the costs of cleaning up hazardous materials found at
locations on which the lender may have a security interest in the property.
Certain states may also impose liens with higher priorities than first mortgages
on properties to recover funds used in such efforts. Although these risks are
more usually associated with industrial and commercial loans, environmental
risks may be substantial for residential lenders since environmental
contamination may render the property unsuitable for residential use. In
addition, the value of the residential property may become substantially
diminished by the contamination of nearby properties. Appraisals for
single-family homes include comments on environmental influences and conditions.
CSFC Bank attempts to control its exposure to environmental risks with respect
to loans secured by larger properties by requiring borrowers to represent and
warrant that properties securing loans do not contain hazardous waste, asbestos
or other such substances; by requiring borrowers to indemnify the CSFC Bank,
with personal recourse, against environmental losses; by obtaining reports,
where deemed appropriate, from environmental engineers on loans secured by
non-residential properties and multifamily residential properties; and by
obtaining further environmental reviews and tests where indicated by information
obtained from borrowers or from property inspections or otherwise. No assurance
can be given, however, that the value of properties securing loans in CSFC
Bank's loan portfolio will not be adversely affected by the presence of
hazardous materials or that future changes in federal or state laws will not
increase CSFC Bank's exposure to liability for environmental cleanup.
SERVICING OF MORTGAGE LOANS. At June 30, 1998, CFSC Bank serviced only
$1.0 million in loans for others and has not sold loans to others for the last
17 years.
Mortgage servicing rights are generally considered to have a value
represented by the present value of the estimated future net servicing revenue
to be received from those rights. The price of servicing rights may vary based
on numerous factors such as the nature of servicing (adjustable-rate,
fixed-rate, 30-year term or 15-year term), the remaining life of the loans, the
interest rate on the loans, or payment and delinquency histories. The estimated
value of servicing rights is largely dependent upon certain prepayment and other
assumptions. To the extent these assumptions prove inaccurate, the actual value
of the servicing rights may be more or less than estimated. Prepayments
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<PAGE>
have historically been affected by interest rate fluctuations, economic
conditions and other factors. The market value of servicing rights, in addition
to being affected by prepayments, may be affected by other factors as well, such
as the market supply and demand for servicing rights. CSFC Bank has retained the
servicing rights of the loans in its portfolio and has not attempted to obtain a
price for the servicing rights of its portfolio of loans.
SOURCES OF FUNDS
GENERAL. Savings accounts, certificates of deposit and other types of
deposits have traditionally been the principal source of funds to CSFC Bank for
use in lending and for other general business purposes. In addition to deposits,
funds are derived from loan repayments. Borrowings may be used on a short-term
basis to compensate for seasonal or other reductions in deposits or inflows at
less than projected levels, as well as on a longer term basis to support
expanded lending activities.
DEPOSITS. A number of different programs have been designed to attract
both short-term and long-term savings of the general public. Although the
variety of deposit accounts offered increases CSFC Bank's ability to retain
deposits and allows it to be more competitive in obtaining new funds, it has not
eliminated the risk of disintermediation (the flow of funds away from savings
institutions into direct investment vehicles such as government and corporate
securities). CSFC Bank has become much more subject to short-term fluctuations
in deposit flows as customers have become more rate-conscious. As customers have
become more rate-conscious and willing to move funds to higher yielding
accounts, the ability of CSFC Bank to attract and retain deposits and CSFC
Bank's cost of funds has been, and will continue to be, significantly affected
by money market conditions.
The principal methods used to attract deposits include the offering of
a wide variety of services and accounts, competitive interest rates, and
convenient office locations and service hours. Traditional marketing methods are
utilized to attract new customers and deposits, with an emphasis on direct mail
offerings to targeted customers and prospects located in the vicinity of branch
locations.
BORROWINGS. CSFC Bank obtains advances from the FHLB of Cincinnati and
pledges as security for such advances the capital stock it owns in that entity,
deposits it has with the FHLB of Cincinnati, and certain of its home mortgages.
Such advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. FHLB of Cincinnati
advances are generally available to meet seasonal and other withdrawals of
savings accounts, and to expand lending, as well as to aid the efforts of
members to establish better asset/liability management by extending the
maturities of liabilities. Under these borrowing agreements, the maximum level
of advances available to CSFC Bank is generally limited to 25% of CSFC Bank's
total assets; however, the FHLB of Cincinnati may approve in excess of this
limit based upon CSFC Bank meeting all of its regulatory capital requirements.
At June 30, 1998, CSFC Bank had $14.7 million outstanding of FHLB of Cincinnati
advances.
It is also possible to borrow funds from governmental sources other
than the FHLB of Cincinnati, including the Federal Reserve Bank in limited
circumstances, and from non-governmental sources such as commercial banks or
insurance companies. CSFC Bank did not borrow from such sources in 1997 or to
date in 1998.
69
<PAGE>
YIELDS EARNED AND RATES PAID
Net interest income is the largest component of net income. Net
interest income is affected by the difference or spread between yields earned by
CSFC Bank on its loan, investment and mortgage-backed securities portfolios and
the rates of interest paid by CSFC Bank for its deposits and other borrowings,
as well as the relative amounts of its interest-earning assets and
interest-bearing liabilities. For information concerning the yields received by
CSFC Bank on its loan and other investments, the rates paid on its deposits and
borrowings, and CSFC Bank's resultant spread, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CS Financial
Corporation."
SUBSIDIARIES OF CSFC BANK
Regulations permit state chartered, federally insured institutions to
invest in the capital stock, obligations, or other specified types of securities
of subsidiaries (referred to as "service corporations") and to make loans to
such subsidiaries, and to joint ventures in which such subsidiaries are
participants, in an aggregate amount not exceeding 3% of an institution's
assets. In addition, CSFC Bank is authorized to make unlimited investments in
any subsidiary of CSFC Bank that is engaged in activities in which CSFC Bank can
directly engage.
CSFC Bank has one wholly owned service corporation subsidiary, Central
Land Corporation ("CLC") doing business as Cuyahoga Savings Management
Corporation. CLC was incorporated in 1973 and provides property management to
CSFC Bank's office buildings and branch offices.
FEDERAL TAXATION
CSFC is subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), which subjects corporations to an income tax generally
calculated at 35% of taxable income. CSFC and CSFC Bank file a consolidated
federal income tax return.
At December 31, 1997, CSFC had no net operating loss carryforwards for
federal income tax purposes.
Federal income tax returns for the years 1994 through 1997 are subject
to audit. The federal income tax return for 1997 has not yet been filed.
See Note 7 of the audited consolidated financial statements of CSFC
(see "Index to Financial Statements of CS Financial Corporation") for further
information concerning the financial statement reporting of federal income taxes
of CSFC and a discussion of 1996 legislation affecting the tax treatment of the
bad debt deduction.
STATE TAXATION
CSFC is subject to the Ohio franchise tax on holding companies of
financial institutions. The tax imposed is the greater of the tax on net worth
after adjustments to exclude the portion attributable to the financial
institution or the tax on net income. The tax on net income is computed on
federal
70
<PAGE>
taxable income adjusted to exclude distributions from the financial institution,
and subject to certain other adjustments. The rate of tax differs for the net
worth and net income computations and can include a surtax if based on net
income and an add-on litter tax under either method.
CSFC Bank is also taxed under Ohio law. CSFC Bank is subject to an Ohio
franchise tax based on its net worth plus certain reserve amounts. Total net
worth for this purpose is reduced by certain exempt assets. CSFC Bank pays the
tax at a rate of 1.5% of net worth less any tax credit for the assessment of
state chartered savings and loan associations to fund the operation of the
Division of Financial Institutions.
PROPERTIES
CSFC Bank owns two interconnected buildings in downtown Cleveland, the
Erieview Building and the Lincoln Building, that house the main offices of CSFC
and CSFC Bank. The portions of these buildings not occupied by CSFC or CSFC Bank
are offered for rental to third parties.
The Erieview Building is a 15 story building, built in 1965, containing
205,122 rentable square feet. CSFC Bank occupies 26,381 square feet (12.9% of
the total) on the first, second, and third floors and 7,200 square feet in the
basement which is not included in the Erieview Building's rentable square
footage. There are currently 18,859 square fee vacant (9.2% of the total) in the
Erieview Building.
The Lincoln Building was originally built in 1917 as a parking garage
for a now defunct hotel. The Lincoln Building currently has 250 parking spaces
in the basement, first, second and third floors. Part of the first floor (ground
level) contains street level retail stores and a restaurant.
The Lincoln Building has usable space of 128,176 square feet. CSFC Bank
occupies 26,410 square feet (20.6% of the total) for storage and meeting rooms.
Approximately 36,000 square feet is currently vacant (28.1% of the total).
All space occupied by CSFC Bank, including the area required for the
operations of the buildings, represents 25% of the total area and qualifies the
buildings as "Premises" under OTS regulations.
CSFC Bank also owns the buildings used for one Parma, Ohio branch
(4,000 square feet) and its Chagrin Falls, Ohio branch (2,800 square feet). CSFC
Bank leases five other branch locations, ranging in size from 2,400 square feet
to 3,200 square feet, and a loan production office of approximately 300 square
feet.
The book value of owned premises and leasehold improvements (net of
accumulated depreciation) at June 30, 1998 was approximately $15.3 million.
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<PAGE>
EMPLOYEES
As of June 30, 1998, CSFC and its subsidiaries had 124 full-time and 22
part-time employees. Eighteen of the employees of CSFC are represented by
collective bargaining units. CSFC believes it enjoys good relations with its
personnel.
LEGAL PROCEEDINGS
CSFC and CSFC Bank are involved as defendant in several legal
proceedings incident to their business. In the opinion of management, these
proceedings are not, either individually or in the aggregate, material to CSFC
or CSFC Bank.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CS FINANCIAL CORPORATION
The following discussion and analysis is intended to assist readers in
understanding the results of operations and changes in financial position for
the periods covered by the consolidated financial statements of CSFC included in
this Proxy Statement/Prospectus. It should be read in conjunction with those
financial statements, accompanying footnotes and supplemental financial data
presented elsewhere in this Proxy Statement/Prospectus.
GENERAL OVERVIEW
CSFC is a unitary savings and loan holding company owning all the
outstanding common stock of CSFC Bank and all of the non-voting shares of CFSA.
The financial statements and statistical data presented herein are the financial
statements and data for CSFC on a consolidated basis with CSFC Bank and on an
equity basis with CFSA.
The operations of CSFC, CSFC Bank and CFSA are significantly influenced
by general economic conditions, monetary and fiscal policies of the federal
government, and policies of regulatory authorities, including the Federal
Reserve Board, the Commission, the Division, the OTS, the FDIC and the Office of
the Comptroller of Currency. Deposit flows and cost of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for mortgage financing and for
consumer and other types of loans, which in turn are affected by the interest
rates at which such financing may be offered and other factors affecting the
supply of housing and the availability of funds.
RESULTS OF OPERATIONS
The Years Ended December 31, 1997, 1996 and 1995
CSFC's net income for the year ended December 31, 1997 was $2.6 million
or $76.16 per share, compared with $1.1 million or $31.46 per share for the year
ended December 31, 1996. The increase in 1997 compared to 1996 was mainly due to
the one time, after tax charge associated with the recapitalization of the SAIF,
which totaled $1.1 million or $31.93 per share in 1996. Excluding
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<PAGE>
the nonrecurring SAIF assessment, earnings for the year ended December 31, 1996
totaled $2.1 million or $63.40 per share. The increase in earnings, excluding
the SAIF assessment, is mainly attributable to the improvement in building
operations resulting from the concurrent purchase of the Erieview Building and
Lincoln Building and the cancellation of the long term lease on the same
properties. CSFC's net interest rate spread decreased to 2.70% in 1997 compared
to 2.78% for the same period in 1996. Earnings in 1997 produced a return on
average assets of .70% and a return on average equity of 9.05%.
CSFC's net income in 1996 increased 26.4% over 1995. CSFC's net income
for the year ended December 31, 1996 was $1.1 million or $31.46 per share,
compared with $837,000 or $24.90 per share for the year ended December 31, 1995.
Excluding the special SAIF assessment in 1996, net income would have been $2.1
million or $63.40 per share, a 154.6% increase over 1995. The increase in 1996
compared to 1995 was due to the improvement in net interest income, which
increased from $8.6 million in 1995 to $10.5 million in 1996 primarily due to
the effects of increases in net interest spread from 2.32% in 1995 to 2.78% in
1996 and the effect on the conversion of the Erieview Building and the Lincoln
Building from a leasehold estate to an equity investment in August 1996.
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<PAGE>
The following tables give summary balance sheet and income statement
information for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
At December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........... $ 1,467 0.4% $ 1,208 0.4% $ 1,094 0.3%
Interest-bearing deposits........... 16,683 4.4 11,757 3.3 17,189 5.0
FHLB stock.......................... 3,300 0.9 3,611 1.0 3,369 1.0
Mortgage-backed securities.......... 940 0.2 1,343 0.4 1,754 0.5
Investment securities............... 2,864 0.8 3,949 1.1 3,112 0.9
Loans receivable, net............... 335,493 88.6 313,283 88.8 308,910 88.9
Office premises and equipment,
net............................... 14,197 3.7 13,279 3.8 8,883 2.6
Prepaid expenses and other
assets............................ 2,513 0.7 3,197 0.9 2,135 0.6
Deferred federal income taxes....... 695 0.2 713 0.2 423 0.1
Investment in unconsolidated
subsidiary........................ 498 0.1 485 0.1 468 0.1
-------- ----- -------- ----- -------- -------
Total Assets...................... $378,650 100.0% $352,825 100.0% $347,337 100.0%
======== ===== ======== ===== ======== =====
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits.......................... $326,713 86.3% $293,593 83.2% $275,025 79.2%
FHLB advances..................... 17,063 4.5 25,950 7.4 36,333 10.5
Other liabilities................. 5,580 1.5 5,991 1.7 5,480 1.6
Capital lease obligation.......... --- --- --- --- 3,930 1.1
-------- ----- -------- ----- -------- ------
Total Liabilities................. 349,356 92.3 325,534 92.3 320,768 92.4
Total Shareholders' Equity........ 29,294 7.7 27,291 7.7 26,569 7.6
-------- ----- -------- ----- -------- ------
Total Liabilities and Share-
holders' Equity................ $378,650 100.0% $352,825 100.0% $347,337 100.0%
======== ===== ======== ===== ======== =====
Book value per share................ 870.94 811.39 789.92
Equity to assets.................... 7.74% 7.74% 7.65%
Tangible equity to assets........... 7.74 7.74 7.65
Total risk-based capital to risk-
based assets................... 14.12 14.20 14.18
</TABLE>
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<PAGE>
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Mortgage loans and mortgage-backed
securities................................ $ 25,639 $ 24,308 $ 21,684
Interest on securities and other............ 1,594 1,527 1,571
-------- --------- ---------
Total Interest Income..................... 27,233 25,835 23,255
======== ========= =========
INTEREST EXPENSE
Interest on deposits........................ 15,571 13,628 12,618
Other interest expense...................... 1,263 1,704 2,018
-------- --------- ---------
Total Interest Expense...................... 16,834 15,332 14,636
-------- --------- ---------
Net Interest Income........................... 10,399 10,503 8,619
Provision for Loan Losses..................... 232 160 96
-------- --------- ---------
Net Interest Income after Provision........... 10,167 10,343 8,523
Nonoperating Income (Loss).................... 1,458 713 248
General and Administrative Expenses........... 7,767 9,481 7,041
-------- --------- ---------
Income Before Taxes........................... 3,858 1,575 1,234
Income Tax Expense............................ 1,296 517 397
-------- --------- ---------
Net Income................................ $ 2,562 $1,058(1) $ 837
======== ====== ========
Earnings per share (basic and diluted)........ $ 76.16 $31.46(1) $ 24.90
Return on average assets...................... 0.70% 0.30%(1) 0.25%
Return on average equity...................... 9.05 3.93(1) 3.18
</TABLE>
- -------------------
(1) Excluding the after-tax impact of the one time SAIF assessment, net
income, earnings per share, return on assets and return on equity would
have been $2.1 million, $63.40, 0.61% and 7.76% respectively.
NET INTEREST INCOME. Net interest income, the primary component of
CSFC's earnings, is influenced by the distribution and volume of the assets and
liabilities, and the difference, or spread, between the yields earned and the
rates paid on those assets and liabilities.
For 1997, net interest income was $10.4 million, compared to $10.5
million in 1996. The decrease in 1997 resulted from an increase in the yield on
interest-earning assets of one basis point, while the cost of interest-bearing
liabilities increased nine basis points.
For 1996, net interest income totaled $10.5 million compared to $8.6
million in 1995. The decision to originate and hold fixed rate mortgages in
portfolio in 1996 and the significant upward repricing of introductory "teaser"
rate adjustable rate mortgages originated in 1994 caused CSFC's loan portfolio
yield to increase by 41 basis points while its interest bearing liability costs
decreased by five basis points.
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<PAGE>
An analysis of net interest income is presented in the following table.
For each major category of interest-earning assets and interest-bearing
liabilities, the average balance of funds employed during the period indicated
is shown along with the interest earned or paid on that balance for the period
and the weighted average rate earned or paid for that category. Average balances
are determined on a monthly basis.
<TABLE>
<CAPTION>
ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
For the Year Ended December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------ ---------------------------- -----------------------------
Average Average Average
Average Annualized Income/ Average Annualized Income/ Average Annualized Income/
Balance[1] Yield/Rate Expense Balance Yield/Rate Expense Balance Yield/Rate Expense
---------- ---------- ------- ------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS
FIXED:
One-to-four family........ $ 80,854 7.80% $ 6,309 $ 50,344 8.30% $ 4,177 $ 31,625 7.85% $ 2,482
Multi-family and other.... 3,721 8.36 311 2,844 7.91 225 1,562 7.49 117
VARIABLE:
One-to-four family...... 207,011 7.90 16,356 208,724 7.72 16,120 200,337 7.27 14,570
Multi-family and other... 9,418 8.18 770 8,240 7.79 642 9,659 7.02 678
VARIABLE TCM:
One-to-four family....... 24,812 8.60 2,135 34,842 8.05 2,804 42,108 7.47 3,144
Commercial.................. 580 6.38 37 1,475 9.15 135 2,350 8.64 203
Consumer.................... 565 9.73 55 612 10.62 65 775 9.81 76
Interest-bearing deposits
and other liquid investments 16,900 5.56 940 15,200 5.24 796 14,500 5.68 824
Mortgage backed securities` 1,140 7.28 83 1,540 7.34 113 1,974 7.40 146
Mortgage on Erieview........ --- --- --- 5,100 10.12 516 7,936 10.02 795
FHLB stock.................. 3,300 7.18 237 3,480 6.95 242 3,260 6.75 220
-------- ------- -------- ------- -------- -------
Total earning assets.... $348,301 7.82 $27,233 $332,401 7.77 $25,835 $316,086 7.35 $23,255
======== ======= ======== ======= ======== =======
INTEREST-BEARING
LIABILITIES
Money market checking
accounts................. $17,700 1.95 $345 $17,700 1.92 $340 $18,900 1.90 $360
Pass book accounts.......... 45,000 2.90 1,305 51,000 2.93 1,495 59,800 2.97 1,776
Liquid asset accounts....... 7,600 4.95 376 --- --- --- --- --- ---
Certificates of deposit..... 242,400 5.59 13,545 213,400 5.53 11,793 182,300 5.75 10,482
FHLB advances............... 19,981 6.32 1,263 27,481 6.20 1,704 31,900 6.33 2,018
-------- ------- -------- ------- -------- --------
Total interest-bearing
liabilities ............. $332,681 5.06 $16,834 $309,581 4.95 $15,332 $292,900 5.00 $14,636
======== ======= ======== ======= ======== ========
Net interest income........... $10,399 $10,503 $ 8,619
======= ======= ========
</TABLE>
[1] The average balance of loans includes the principal balance of
nonaccrual loans. Interest income includes amortization of deferred
loan fees of $278,735, $512,268 and $784,448 in 1997, 1996 and 1995.
76
<PAGE>
The effect on the net interest income due to changes in interest rates
and changes in the amounts of interest-earning assets and interest-bearing
liabilities is shown in the following table. Changes in interest due to both
rate and volume have been allocated to change due to volume and change due to
rate in proportion to the absolute amounts of the change in each.
<TABLE>
<CAPTION>
Change Due to
--------------------------------------
Total
Change Volume Rate
-------------------------------------------------
<S> <C> <C> <C>
1997 CHANGE FROM 1996
INTEREST INCOME:
Loans................................. $1,261 $1,133 $ 128
Investment Securities................. 137 83 54
------ ------ ------
Total................................... $1,398 $1,216 $ 182
====== ====== ======
INTEREST EXPENSE:
Deposits.............................. $1,943 $1,524 $ 419
FHLB Advances......................... (441) (465) 24
------ ------ ------
Total................................... $1,502 $1,059 $ 443
====== ====== ======
Change in net interest income............. $ (104) $ 157 $ (261)
====== ====== ======
1996 CHANGE FROM 1995
INTEREST INCOME:
Loans.................................. $2,605 $1,216 $1,389
Investment Securities.................. (25) 35 (60)
------ ------ ------
Total.................................... $2,580 $1,251 $1,329
====== ====== ======
INTEREST EXPENSE:
Deposits.............................. $1,010 $1,019 $ (9)
FHLB Advances......................... (314) (274) (40)
------ ------- ------
Total $ 696 $ 745 $ (49)
====== ======= ======
Change in net interest income............. $1,884 $ 506 $1,378
====== ======= ======
</TABLE>
ASSET/LIABILITY MANAGEMENT. As with most financial institutions, CSFC's
interest income and cost of funds are significantly affected by general economic
conditions and by policies of regulatory authorities. The function of
asset/liability management is to monitor the maturities and repricing schedules
of the components of the balance sheet, and to initiate actions to minimize
CSFC's vulnerability to changing interest rates while maximizing current and
expected net interest yield.
The CSFC Bank Board establishes policies and objectives with regard to
asset/liability management while senior management oversees the implementation
of such policies. The Executive Management Committee of CSFC Bank meets weekly
to review and establish rates on loan and deposit products, as well as to
establish strategies to monitor the flow of funds and coordinate the
77
<PAGE>
sources, uses and pricing of those funds. CSFC Bank does not use derivative
financial instruments in its asset/liability strategy.
Interest rate sensitivity arises from the changes in interest rates in
the economy and the effect those changes have on the value of the assets and
liabilities and net portfolio value ("NPV") of CSFC Bank. CSFC Bank utilizes the
OTS Interest Rate Risk Exposure Report to measure the interest rate risk in the
balance sheet. A portion of that report as of June 30, 1998 is summarized below
and reflects changes in the NPV for instantaneous and sustained shifts of 100
basis point increments in market interest rates:
INTEREST RATE SENSITIVITY OF
NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
As of June 30, 1998
-----------------------------------------------------
Net Portfolio Value
-----------------------------------------------------
Change in Rates
(basis points) Amount Change % Change
- ------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+400 $11,994 ($27,725) (70)%
+300 20,088 (19,631) (49)
+200 27,728 (11,991) (30)
+100 34,515 (5,204) (13)
0 39,719 --- ---
-100 43,129 3,410 9
-200 45,109 5,391 14
-300 47,967 8,249 21
-400 51,563 11,844 30
</TABLE>
78
<PAGE>
CSFC Bank's exposure to sudden interest rate changes of plus or minus
200 basis points is within the limits established by the CSFC Bank Board of a
35% decrease in NPV.
PROVISION FOR LOAN LOSSES. The provision for loan losses represents a
charge against current earnings in order to maintain the allowance for loan
losses at a level believed adequate by management to absorb potential losses in
the loan portfolio. Management's determination of the adequacy of the allowance
is based upon an ongoing review and analysis of the risk characteristics of the
loan portfolio, historical charge-offs and recoveries, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors. In 1997, based on management's assessment of the adequacy of
the allowance, the provision for loan losses was $232,000, compared to $160,000
in 1996 and $96,000 in 1995 primarily due to increased charge-offs and increased
nonperforming loans. A significant portion of the provision in 1997 and 1996 was
for the purpose of maintaining the general loan loss reserve, which covers
potential losses inherent in the portfolio which have not been specifically
identified. See "--Credit Risk Management" for a discussion of CSFC's allowance
for loan losses.
NONOPERATING INCOME. In 1997, nonoperating income totaled $1.5 million,
compared to $700,000 in 1996 and ($200,000) in 1995. Included in the
nonoperating income category are the following items: (i) loan service, escrow
fees and other charges, (ii) net office building rental income (iii) gain on the
sale of real estate, and (iv) other income.
In 1997, net office building income increased to $1.1 million, compared
to $400,000 in 1996 and ($700,000) in 1995. This increase resulted from the
purchase of the Erieview Building and Lincoln office buildings and concurrent
cancellation of the existing lease obligation in August 1996. This transaction
is more fully described in Note 4 of the audited financial statements of CSFC
for 1997 and 1996 (see "Index to Financial Statements of CS Financial
Corporation."). In September 1996, the amount of annual rent charged to CSFC
Bank as office occupancy expenses related to the Erieview and Lincoln Office
Buildings (which is recognized as building rental revenues in nonoperating
income) increased from $100,000 to $488,000 as a result of the August 1996
cancellation of the third party lease obligation.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
totaled $7.8 million in 1997, compared to $9.5 million in 1996 and $7.0 million
in 1995. The increase in 1996 is mainly attributable to the one time
nonrecurring charge associated with the recapitalization of the SAIF which
totaled $1.6 million. Excluding the nonrecurring SAIF assessment, general and
administrative expense for 1996 would have totaled $7.9 million. Occupancy
expense for 1997 and four months of 1996 was increased by the revised rent paid
to the building operations after the purchase of the Erieview Building and
Lincoln properties. Compensation in 1995 was low because the profit sharing
retirement plan contribution and management bonuses reflected the poor profit
performance for the year.
79
<PAGE>
The composition of general and administrative expenses is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Compensation, benefits and retirement......................... $4,554 $4,626 $4,089
Office occupancy.............................................. 1,172 870 797
Furniture & equipment......................................... 386 355 359
Franchise tax................................................. 343 341 313
SAIF assessment............................................... 193 2,229(1) 572
Marketing..................................................... 139 122 145
Data processing............................................... 129 128 127
Stationary and printing....................................... 127 125 120
Postage & courier............................................. 124 125 119
Loan expense.................................................. 105 110 67
Other expenses................................................ 495 450 333
------ ------- --------
Total general and administrative expenses, net.............. $7,767 $9,481 $7,041
====== ====== ======
General and administrative expenses to average assets......... 2.12% 2.71% 2.14%
</TABLE>
- ----------------------
(1) Includes the one time special SAIF assessment of $1.627 million.
INCOME TAXES. CSFC has provided $1.3 million for federal income taxes
in 1997, $517,000 in 1996 and $397,000 in 1995. Changes from year to year are
primarily due to changes in the level of pre-tax income. See Note 7 of the
audited consolidated financial statements of CSFC (see "Index to Financial
Statements of CS Financial Corporation") for a complete description of federal
income taxes.
Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997
Net income for the six months ended June 30, 1998 was $1,436,000 as
compared to $1,106,000 for the six months ended June 30, 1997. The increase in
net income resulted from an increase in net interest income of $495,000 and a
reduction in provision for loan losses of $226,000, and an increase in expenses
of $451,000 of which $271,000 relates to merger expenses. The loan loss
provision for the first half of 1997 was higher than normal based on the
increased level of substandard assets during the period. Return on average
assets for the first half of 1998 was 0.74% compared with 0.61% in the same
period of 1997. Return on average equity was 9.59% for the first half of 1998,
as compared with 7.96% for the same period of 1997. The following tables give
summary balance sheet and income statement information for June 30, 1998 and
1997:
80
<PAGE>
SUMMARY BALANCE SHEET
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents..................... $ 1,603 0.4% $ 1,231 0.3%
Interest-bearing deposits..................... 32,530 8.3 16,766 4.5
FHLB stock.................................... 3,419 0.9 3,182 0.9
Mortgage-backed securities.................... 760 0.2 1,133 0.3
Investment securities......................... 767 0.2 2,914 0.8
Loans receivable, net......................... 334,122 85.1 326,474 88.3
Office premises and equipment, net............ 15,296 3.9 13,135 3.6
Prepaid expenses and other assets............. 3,285 0.8 3,492 1.0
Deferred federal income taxes................. 575 0.1 833 0.2
Investment in unconsolidated subsidiary....... 520 0.1 487 0.1
------------ ----- ----------- -----
Total Assets.................................... $392,877 100.0% $369,647 100.0%
============ ===== =========== =====
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits...................................... $342,748 87.2% $318,015 86.0%
FHLB advances................................. 14,660 3.7 17,763 4.8
Other liabilities............................. 4,873 1.3 5,573 1.5
------------ ----- ----------- -------
</TABLE>
81
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Total Liabilities............................... 362,281 92.2 341,351 92.3
Total Shareholders' Equity...................... 30,596 7.8 28,296 7.7
------------ ----- ----------- -----
Total Liabilities and Shareholders' Equity...... $392,877 100.0% $369,647 100.0%
============ ===== =========== =====
Book value per share............................ $909.65 $841.27
Equity to assets................................ 7.79% 7.65%
Tangible equity to assets....................... 7.79 7.65
Total risk-based capital to risk-based assets... 14.21 13.83
</TABLE>
SUMMARY INCOME STATEMENT
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------------
1998 1997
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
INTEREST INCOME:
Mortgage loans and mortgage-backed securities............................... $13,312 $12,394
Interest on securities and other............................................ 912 796
------- ---------
Total Interest Income......................................................... 14,224 13,190
======= =======
INTEREST EXPENSE:
Interest on deposits....................................................... 8,209 7,533
Other interest expense..................................................... 482 619
------- ---------
Total Interest Expense........................................................ 8,691 8,152
------- --------
Net Interest Income........................................................... 5,533 5,038
Provision for Loan Losses..................................................... 13 224
------- ---------
Net Interest Income after Provision........................................... 5,520 4,814
</TABLE>
82
<PAGE>
<TABLE>
<S> <C> <C>
Nonoperating Income........................................................... 910 657
General and Administrative Expenses........................................... 4,252 3,801
------ --------
Income Before Taxes........................................................... 2,178 1,670
Income Tax Expense............................................................ 742 564
------ ---------
Net Income................................................................. $ 1,436 $ 1,106
======= =======
Earnings per share (basic and diluted)........................................ $42.68 $32.89
Return on average assets...................................................... 0.74% 0.61%
Return on average equity...................................................... 9.59 7.96
</TABLE>
NET INTEREST INCOME. Net interest income for the six months ended June
30, 1998 was $5.5 million compared to $5.0 million for the same period in 1997.
The interest rate spread increased five basis points to 2.64%. Due to a general
increase in interest rates, the weighted average yield on earning assets
increased sixteen basis points, while the yield paid on interest-bearing
liabilities increased four basis points. An analysis of net interest income is
presented in the following table. For each major category of interest-earning
assets and interest-bearing liabilities, the average balance of funds employed
during the period indicated is shown along with the interest earned or paid on
that balance for the period and the weighted average annualized rate earned or
paid for that category. Average balances are determined on a monthly basis.
83
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------
Average Average
Average Annualize Income/ Average Annualized Income/
Balance d Yield Expense Balance Yield Expense
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST BEARING ASSETS:
Mortgage Loans:
Fixed Rate...................... $120,916 7.98% $4,827 $75,060 8.29% $ 3,110
Adjustable Rate................. 215,278 7.97 8,577 244,305 7.64 9,336
Commercial Loans.................... 529 4.54 12 552 7.25 20
Consumer Loans...................... 499 9.62 24 562 9.96 28
Interest Bearing Deposits
and other Liquid
Investments......................... 23,018 5.53 637 19,539 5.44 531
Mortgage-Backed Securities 825 7.27 30 1,203 7.48 45
FHLB Stock.......................... 3,330 7.02 117 3,393 7.07 120
--------- ---------- ---------- ---------
Total Earning Assets............ $364,395 7.81 $14,224 $344,614 7.65 $13,190
-------- ------- -------- -------
INTEREST BEARING
LIABILITIES:
Money Market Checking
Accounts.......................... $ 18,191 1.94 $ 176 $18,595 1.94 $ 180
Passbook Accounts................... 41,688 2.89 602 48,112 2.93 704
Liquid Asset Accounts............... 19,430 4.84 470 806 4.96 20
Certificates of Deposit............. 251,177 5.54 6,962 239,856 5.53 6,628
FHLB Advances....................... 15,125 6.36 481 19,513 6.35 620
--------- ---------- --------- --------
Total Interest Bearing
Liabilities.................... $345,611 5.03 $ 8,691 $326,882 4.99 8,152
======== ======== ======== -------
Net Interest Income................. $ 5,533 $5,038
======== ======
</TABLE>
Note: The average balance of loans includes the principal balance of
non-accrual loans. Interest income includes amortization of deferred
loan fees of $123,901 and $152,052 in the first half of 1998 and 1997,
respectively.
84
<PAGE>
The effect on the net interest income due to changes in interest rates
and changes in the amounts of interest-earning assets and interest-bearing
liabilities is shown in the following table. Changes in interest due to both
rate and volume have been allocated to change due to volume and change due to
rate in proportion to the absolute amounts of the change in each.
<TABLE>
<CAPTION>
Change Due to
Total ---------------------------------
Change Volume Rate
------ ------ ----
(Dollars in thousands)
<S> <C> <C> <C>
Six Months Ended June 30, 1998 compared
with Six Months Ended June 30 1997
INTEREST INCOME:
Loans............................................. $ 931 $773 $158
Investments....................................... 103 93 10
------
Total................................................ $1,034 $866 $168
====== ==== ====
INTEREST EXPENSE:
Deposits........................................... 676 564 112
FHLB Advances...................................... (137) (138) 1
------ ---- ----
Total................................................ $539 $426 $113
==== ==== ====
Change in net interest income........................ $495 $440 $ 55
==== ==== ====
</TABLE>
PROVISION FOR LOAN LOSSES. See "-- Credit Risk Management" for a
discussion of CSFC's allowance for loan losses. Although management believes
that it uses the best information available to make such determinations and that
the allowance for loan losses is adequate at June 30, 1998, future adjustments
to reserves may be necessary, and net income could be significantly affected, if
circumstances and/or economic conditions differ substantially from the
assumptions used in making the initial determinations.
85
<PAGE>
Nonperforming assets reported to the OTS at June 30, 1998, December 31,
1997 and June 30, 1997 were $4.0 million, $4.5 million and $5.2 million,
respectively.
NONOPERATING INCOME. Nonoperating income for the first six months of
1998 totaled $910,000, compared to $657,000 for the same period in 1997.
Nonoperating income increased largely due to the favorable outcome of a lawsuit.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased to $4.25 million for the six months ended June 30, 1998 compared to
$3.80 million for the same period in 1997, due primarily to higher compensation,
higher legal fees which are included in other expenses, and merger costs.
The composition of general and administrative expenses is as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30,
--------------------------------------------
1998 1997
--------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Compensation, benefits and retirement................... $ 2,398 $2,271
Office occupancy........................................ 556 565
Furniture and equipment................................. 209 195
Franchise tax........................................... 192 174
SAIF assessment......................................... 101 94
Marketing............................................... 83 95
Data processing......................................... 62 69
Stationary and printing................................. 60 64
Postage and courier..................................... 60 59
Loan expense............................................ 48 38
Other expenses.......................................... 212 177
Merger costs............................................ 271 ---
------- ------
Total................................................ $4,252 $3,801
====== ======
</TABLE>
FINANCIAL CONDITION
REVIEW OF MAJOR ASSET PORTFOLIOS. CSFC's total assets increased $25.8
million from $352.8 million at December 31, 1996 to $378.6 million at December
31, 1997. Total assets at June 30, 1998 were $392.9 million compared to $378.6
million at December 31, 1997. The increase was primarily due to an increase in
cash and investments totaling $13.9 million and an increase in buildings,
property and equipment totaling $1.1 million, offset by a decrease of $1.4
million in mortgage
86
<PAGE>
loans. Total deposit liabilities increased by $16.0 million from December 31,
1997 to June 30, 1998, due to higher special offers being offered for such
deposits, while advances from the FHLB of Cincinnati decreased by $2.4 million.
Shareholders' equity increased $1.3 million to $30.6 million at June 30, 1998.
The following tables detail the composition of the portfolio of investments and
mortgage-backed securities and loan portfolio. All loans are held for investment
and all investments and mortgage-backed securities are held to maturity.
87
<PAGE>
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
Market Value Book Value
-------------------------------------- ------------------------------------------------------
At At At At December 31,
June 30, December 31, June 30, -----------------------------------------
1998 1997 1998 1997 1996 1995
-------------------------------------- ------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury notes.............. $ --- $2,004 $ --- $2,000 $2,998 $1,968
Municipal obligations............ 185 185 185 185 215 245
Mortgage-backed securities....... 760 939 760 940 1,343 1,754
FHLB stock....................... 3,419 3,300 3,419 3,300 3,611 3,369
SBA pools........................ 570 653 570 653 692 842
Accrued interest receivable...... 12 26 12 26 44 57
------ ------ ------ ------ ------ --------
Total.......................... $4,946 $7,107 $4,946 $7,104 $8,903 $8,235
====== ====== ====== ====== ====== ======
</TABLE>
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
At June 30, At December 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Types of Loans:
One-to-four family.... $317,928 94.7% $318,638 94.4% $303,356 96.2% $288,792 92.9%
Multi-family.......... 14,359 4.3 14,790 4.4 7,526 2.4 7,901 2.5
Other real estate..... 2,382 0.7 2,639 0.8 3,131 1.0 11,363 3.7
Commercial............ 469 0.1 566 0.2 598 0.2 2,244 0.7
Consumer.............. 477 0.2 545 0.2 568 0.2 720 0.2
--------
`
Total Loans........... $335,615 100.0% $337,178 100.0% $315,179 100.0% $311,020 100.0%
======== ===== ======== ===== ======== ===== ======== =====
Plus:
Accrued interest
receivable, net..... $ 771 $ 534 $ 28 $ (65)
Less:
Allowance for
losses on Loans...... (1,186) (1,184) (963) (910)
</TABLE>
88
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Deferred loan
origination fees.... (1,078) (1,035) (961) (1,135)
-------- --------- ---------- ---------
Net Loans............... $334,122 $335,493 $313,283 $308,910
======== ======== ======== ========
</TABLE>
CREDIT RISK MANAGEMENT. CSFC has consistently maintained a conservative
posture with respect to credit risk. CSFC has no investment securities that are
less than investment grade, except for $185,000 of general obligation municipal
bonds which were not rated, no foreign loans, nor significant loan
concentrations to any one borrower. CSFC's credit policies emphasize evaluation
of a borrower's financial condition before a loan is approved and close
monitoring of loan repayment after credit is extended. Most loan delinquencies
that occur are remedied within 90 days as a result of actions taken by CSFC's
collection staff. If a mortgage loan delinquency exceeds 90 days, measures are
instituted to enforce collection, including the commencement of a foreclosure
action. Loss experience as a result of foreclosure with respect to loans
originated by CSFC has historically been very low.
An analysis of loan loss (charge offs) recoveries and the provision for
loan losses is shown in the following table.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
RECONCILIATION OF ACTIVITY
<TABLE>
<CAPTION>
Six Months
Ended For the year ended December 31,
June 30, ------------------------------------------------------------------
1998 1997 1996 1995
-----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allowance for loan losses at beginning
of period.................................... $1,184 $ 963 $ 910 $ 791
Net (charge-offs) recoveries................... (8) (11) (107) 23
Provision for loan losses...................... 13 232 160 96
--------
Transfers in (out)............................. (3) -- -- --
End of period allowance for loan losses........ $1,186 $1,184 $ 963 $ 910
======
Total net loans at period end.................. $334,122 $335,493 $313,283 $308,910
Average loans.................................. 337,222 326,961 307,081 288,416
Net charge-offs to average loans............... 0.00% 0.00% 0.03% (0.01)%
Allowance for loan losses to net loans......... 0.35 0.35 0.31 0.29
</TABLE>
89
<PAGE>
The following table sets forth the amount of non-performing assets. All
amounts are net of any specific valuation allowance taken against the assets
affected, which allowance was $325,000 and $342,000 at December 31, 1997 and
June 30, 1998, respectively. For all dates presented, there has been no troubled
debt restructuring (which involved forgiving a portion of interest or principal
on any loans or making loans at rates materially less than market rates). Real
estate owned are assets acquired in settlement of loans.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
At At December 31,
June 30, --------------------------------------------------------------
1998 1997 1996 1995
-------------- ------------------- ---------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-accrual loans:
Mortgages..................................... $3,393 $3,942 $3,924 $3,990
Commercial.................................... 203 282 283 80
Consumer...................................... --- --- --- ---
-------- -------- --------- ---------
Total non-accrual loans..................... 3,596 4,224 4,207 4,070
----- ----- ----- -----
Restructured loans.............................. 188 188 190 261
--------
Total non-performing loans.................. 3,784 4,412 4,397 4,331
Real estate owned, net.......................... 156 86 225 86
--------
Total non-performing assets................. $3,940 $4,498 $4,622 $4,417
======
Non-performing assets to total assets........... 1.00% 1.19% 1.31% 1.27%
Non-performing loans to total loans............. 1.13 1.31 1.40 1.40
Allowance to total loans........................ 0.35 0.35 0.31 0.29
Allowance to non-performing loans............... 31.34 26.80 21.90 21.00
</TABLE>
Most of the loans included in the foregoing table are secured by real
estate or other collateral which limits CSFC's exposure to loss. At June 30,
1998, there were no commitments to lend additional funds to borrowers with
nonperforming loans. As of June 30, 1998, there were no concentrations of loans
in any types of industries which exceeded 10% of the total loans that are not
included as a loan category in the table above.
The ratio of nonperforming loans to total loans decreased from December
31, 1996 to December 31, 1997 and decreased from December 31, 1997 to June 30,
1998. Although CSFC's ratio of non-performing loans to total loans is higher
than industry norms, the history of low loan losses reflects the ability to
recover substantially all of the amounts due which reflects the collateral
quality in the portfolio and the strong collection practices employed. A
substantial amount of the interest income on nonperforming loans is eventually
collected at the time the loan is paid off. When the sale of the real estate
owned generates sufficient proceeds to compensate for the past due interest, it
is recorded as "gain on sale of real estate owned."
90
<PAGE>
An allocation of the ending allowance for losses by major category
follows:
ANALYSIS OF THE SPECIFIC AND GENERAL RESERVES
<TABLE>
<CAPTION>
At At
June 30, 1998 December 31, 1997
----------------------------------- ---------------------------------------
Allocation Allocation
----------------------------------- ---------------------------------------
Amount Percent Amount Percent
----------------------------------- ---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Category
Specific reserves:
Real estate owned............. $ 16 1.2% $16 1.2%
Mortgage...................... 131 9.5 171 12.9
Receivables (1)............... 13 0.9 11 0.9
Consumer...................... 23 1.7 16 1.2
Rent due...................... 159 11.6 111 8.4
--------
Total specific reserves........... 342 24.9 325 24.6
-------- ------ -------- ------
Total general reserves............ 1,031 75.1 997 75.4
-------- ------ -------- ------
Total reserves.................... $1,373 100.00% $1,322 100.0%
======== ====== ====== =====
</TABLE>
- ---------------
(1) Reserve for receivables held in other assets.
General reserves are available to absorb losses from any segment of the
portfolio.
The amount of the allowance for loan losses is based on management's
analysis of risks inherent in the various segments of the loan portfolio,
management's assessment of known or potential credits which have come to
management's attention during the ongoing analysis of credit quality, historical
loss experience, current economic conditions and other factors. If actual
circumstances and losses differ substantially from management's assumptions and
estimates, such allowance for loan losses may not be sufficient to absorb all
future losses, and net earnings could be significantly and adversely affected.
Loan loss estimates are reviewed periodically, and adjustments, if any, are
reported in earnings in the period in which they become known. In addition, CSFC
maintains a portion of the allowance to cover potential losses inherent in the
portfolio which have not been specifically identified.
Although management believes that it uses the best information
available to make such determinations and that the allowance for loan losses was
adequate at December 31, 1997 and at
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June 30, 1998, future adjustments to reserves may be necessary, and net income
could be significantly affected, if circumstances and/or economic conditions
differ substantially from the assumptions used in making the initial
determinations. Any downturn in the Ohio real estate market could result in CSFC
experiencing increased levels of nonperforming assets and charge-offs,
significant provisions for loan losses and significant reductions in income.
Additionally, various regulatory agencies, as an integral part of their
examination process, periodically review CSFC's allowance for loan losses. Such
agencies may require the recognition of additions to the allowance based on
their judgments of the information available to them at the time of their
examination.
DEPOSITS. CSFC's deposits increased $33.1 million from $293.6 at
December 31, 1996 to $326.7 million at December 31, 1997 and $16.0 million from
$326.7 million at December 31, 1997 to $342.7 million at June 30, 1998. CSFC had
no brokered deposits at June 30, 1998 and December 31, 1997, 1996 and 1995. The
following table sets forth the types of deposits at the dates indicated.
DEPOSITS BY TYPE
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CATEGORY
Money market checking
accounts................. $16,873 4.9% $17,858 5.5% $17,545 6.0% $17,863 6.5%
Passbook accounts.......... 39,826 11.6 41,404 12.7 48,497 16.5 53,284 19.4
Liquid asset accounts...... 20,485 6.0 18,622 5.7 --- 0.0 --- 0.0
Certificates of deposits
by rate:
4.00-5.00%............... 5,483 1.6 6,533 2.0 6,117 2.1 8,393 3.0
5.01-5.50%............... 103,385 30.2 97,143 29.7 109,118 37.1 83,093 30.2
5.51-6.00%............... 144,522 42.2 131,684 40.3 68,063 23.2 52,731 19.2
6.01-8.00%............... 12,174 3.5 13,469 4.1 44,253 15.1 59,648 21.7
8.01%-10.00%............. --- 0.0 --- 0.0 --- 0.0 13 0.0
-------- ----- -------- ----- -------- ----- -------- -----
265,564 77.5 248,829 76.1 227,551 77.5 203,878 74.1
------- ----- -------- ---- ------- ----- -------- -----
Total...................... $342,748 100.0% $326,713 100.0% $293,593 100.0% $275,025 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
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CSFC does not pay premium rates for deposits in excess of the insured
limit of $100,000. Some depositors choose to deposit sums in excess of the
insured limits based on their confidence in CSFC, and those deposits are
invested in the various deposit accounts CSFC offers. At December 31, 1997 there
were 223 accounts over the $100,000 limit with a total uninsured exposure of
$7.5 million. At December 31, 1996 and December 31, 1995 there were 151 accounts
with $4.4 million uninsured and 136 accounts with $4.1 million uninsured
respectively. At June 30, 1998, there were 254 accounts with $8.6 million
uninsured.
CAPITAL AND DIVIDENDS. Federal regulations prescribe three separate
regulatory capital requirements for savings associations: (i) a risk-based
capital requirement, (ii) a leverage limit (core capital requirement), and (iii)
a tangible capital requirement. Under the risk-based requirement, assets are
risk-weighted from 0% to 100% with cash and other non-risk assets requiring no
risk weighting, certain mortgage-backed securities 20%, qualifying (home)
mortgage loans 50% and commercial loans, other non-residential loans and real
estate owned 100%. The risk-based regulation requires that risk-based capital be
maintained in an amount equal to at least 8% of risk- weighted assets. The
leverage limit requires that core capital, which is generally defined as
shareholders' equity minus non-qualifying intangible assets, be maintained in an
amount not less than 3% of adjusted total assets. Under the tangible capital
requirement, tangible capital, defined as core capital minus all intangible
assets (other than a limited amount of purchased mortgage servicing rights),
must be maintained in an amount equal to at least 1.5% of adjusted total assets.
CSFC Bank was in compliance with these regulatory capital regulations on June
30, 1998, December 31, 1997 and 1996. See Note 10 to the audited consolidated
financial statements of CSFC (see "Index to Financial Statements of CS Financial
Corporation").
At June 30, 1998, shareholders' equity totaled $30.6 million, an
increase of $1.3 million compared to $29.3 million at December 31, 1997, which
represented an increase of $2.0 million over year-end 1996. The source of this
increase was the retention of earnings.
Dividends declared each year include a quarterly dividend and, for the
past 14 years, a special year end dividend so that the total years' dividend
reflects the year's performance with an eye toward the future while maintaining
adequate capital for future expansion plans. In December 1997 a $10 per share
special year end dividend was declared compared with $4 per share in December
1996 and $3 per share in 1995. Total dividends declared in 1997 represented a
21.8% payout of earnings ratio compared with 31.8% in 1996 and 36.2% in 1995.
LIQUIDITY. CSFC's liquidity is a measure of its ability to fund loans,
withdrawals of deposits and other cash outflows in a cost-effective manner.
Deposits, scheduled amortization and prepayments of loan principal, maturities
of investment securities, borrowings, and funds provided by operations are the
principal sources of funds. While loan payments and maturing investment are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
As presented in the Consolidated Statements of Cash Flows (see "Index
to Financial Statements of CS Financial Corporation"), operating activities,
including net income, generally provide cash.
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The primary investing activity during each period was loan originations
and purchase of investments, which totaled $41.0 million for the six months
ended June 30, 1998, $39.9 million for the six months ended June 30, 1997, $74.6
million in calendar year 1997 compared with $72.9 million in calendar year 1996
and $77.2 million in calendar year 1995. New loan originations were funded by
significant principal repayments and maturities on loans and investment
securities, which totaled $45.1 million for the six months ended June 30, 1998,
$28.4 million for the six months ended June 30, 1997, $54.4 million in 1997,
$60.1 million in 1996 and $42.0 million in 1995.
Under financing activities, cash was used in 1997 and 1996 primarily to
fund a net decrease in FHLB advances, while cash was provided by an increase in
certificates of deposit in 1997, 1996 and 1995. In 1997, funds were provided by
an increase in checking, passbook and liquid asset accounts while there was a
decrease in checking and passbook accounts in 1996 and 1995 which was before the
liquid asset account was introduced in May 1997.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments. If
CSFC requires funds beyond its ability to generate them internally, borrowing
agreements exist with the FHLB of Cincinnati, which provide an additional source
of funds. Under these borrowing agreements, the maximum level of advances
available is generally limited to 25% of CSFC Bank's total assets; however, the
FHLB may approve advances in excess of this limit based upon CSFC Bank meeting
all of its regulatory capital requirements. At June 30, 1998 and December 31,
1997, CSFC Bank had $14.7 million and $17.1 million, respectively, in
outstanding borrowings from the FHLB.
Currently, CSFC Bank anticipates that it will have sufficient funds to
meet its existing loan commitments. At June 30, 1998, the commitments to
borrowers for unused lines of credit and to originate loans totaled $11.4
million. Certificates of deposit which were scheduled to mature in one year or
less at June 30, 1998 totaled $242.6 million.
As a member of the FHLB, CSFC Bank is required to maintain specific
levels of "liquid" investments. Regulations currently in effect require liquid
assets of not less than 4% of net withdrawable accounts plus short-term
borrowings to assure that scheduled repayment of debt and withdrawals are met.
This requirement may be changed from time to time to reflect current economic
conditions. CSFC Bank was in compliance with these regulations at June 30, 1998
and anticipates remaining in compliance. It is the intention of CSFC's cash
management efforts to keep liquidity levels within regulatory guidelines, but at
minimal levels in order to maximize interest income from investing in loans
versus lower yielding short-term investment securities.
In August 1996, the debt associated with the capital lease was
extinguished when the Erieview Building and Lincoln Building were purchased and
the lease obligation was canceled. The first mortgage loan on the Erieview
Building and Lincoln Building was released as a part of the purchase
consideration.
IMPACT OF INFLATION AND CHANGING PRICES. The consolidated financial
statements and related data contained herein have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of
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historical dollars. Changes in the relative purchasing power of money over time
due to inflation are not recognized in the financial statements.
Unlike most industrial companies, substantially all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rate fluctuations generally have a more significant and direct impact
on a financial institution's performance than do the effects of inflation. To
the extent inflation affects interest rates, real estate values and other costs,
CSFC's lending activities are affected. Changes in inflation may cause changes
in interest rates. Significant increases in interest rates make it more
difficult for potential borrowers to qualify for mortgage loans. As a result,
the volume and related income on loan originations may be reduced. Significant
decreases in interest rates may result in higher loan prepayment activity,
although such conditions may enable potential borrowers to qualify for a
relatively high mortgage loan balance.
SUPERVISION AND REGULATION OF CS FINANCIAL CORPORATION
AND THE CUYAHOGA SAVINGS ASSOCIATION
REGULATION OF CS FINANCIAL CORPORATION
GENERAL. CSFC is a unitary savings and loan holding company that is
subject to regulation, supervision and examination by the OTS pursuant to the
Home Owner's Loan Act of 1933, as amended ("HOLA") and the Federal Depository
Insurance Act ("FDIA"). As such, CSFC is required to register and file periodic
reports with the OTS concerning its operations and the operations of its
subsidiaries including CSFC Bank. In addition, the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA") confers upon the OTS
enforcement authority over CSFC and its non-savings association subsidiaries.
FIRREA permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, CSFC generally is not
subject to restrictions on its activities. However, a savings and loan holding
company is prohibited from obtaining control of a savings association or a
savings and loan holding company without the prior approval of the OTS. If a
savings and loan holding company were to acquire control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and its activities and the activities of its subsidiaries
(other than a federally-insured savings association) would become subject to
such restrictions unless such other savings associations each qualify as a
qualified thrift lender ("QTL") and were acquired in a supervisory acquisition.
In addition, no director, officer or controlling shareholder of a savings and
loan holding company may, except with the prior approval of the OTS, acquire
control of any savings bank or savings and loan holding company. A savings and
loan holding company is also prohibited from engaging in certain activities for
or on behalf of the holding company's subsidiary savings association, which may
have the effect of evading any law or regulation applicable to the subsidiary
savings association.
REGULATION OF THE CUYAHOGA SAVINGS ASSOCIATION
GENERAL. CSFC Bank is an Ohio-chartered savings association, the
deposits of which are insured by the FDIC through the SAIF up to applicable
limits. CSFC Bank is subject to regulation and examination by the FDIC in its
capacity as the insurer of CSFC Bank's deposits. CSFC Bank is subject to
regulation and examination by the OTS, pursuant to HOLA and the FDIA and by the
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Division. In addition, CSFC Bank is subject to certain limited regulation by the
Federal Reserve Board.
STATE REGULATION. As an Ohio-chartered savings association, CSFC Bank
is subject to regulation and supervision by the Division. CSFC Bank is subject
to examination at least once within every eighteen month period by the Division,
the last of such examinations having been conducted in September, 1997. The
lending and investment authority of CSFC Bank is prescribed by Ohio laws and
regulations, as well as applicable federal laws and regulations, and CSFC Bank
is prohibited from engaging in any activities not permitted by such laws and
regulations.
CSFC Bank is required by Ohio law to comply with certain reserve and
net worth requirements. Ohio-chartered savings associations are required to
establish and maintain a reserve for the absorption of bad debts and other
losses in an amount equal to at least 3% of the savings association's savings
account balance. For purposes of complying with this reserve requirement, such
savings associations are able to include the amount of any permanent stock
issued and outstanding, contributed surplus, undivided profits, specific loss or
valuation reserves and any nonwithdrawable accounts. In addition, Ohio-chartered
savings associations that are rated a "composite one" (the highest rating under
the Uniform Financial Institution Rating System ("UFIRS")) are required to
establish and maintain a ratio of net worth to total assets not less than 3%.
All other Ohio-chartered savings associations are required to have a ratio of
net worth to total assets of not less than 4%. Net worth consists of common
stockholders' equity, noncumulative perpetual preferred stock (including any
related surplus), minority interests in the equity capital accounts of
consolidated subsidiaries and subordinated debentures (in varying amounts and
percentages). At June 30, 1998, CSFC Bank was in compliance with applicable
reserve and net worth requirements.
In addition, Ohio law restricts the ability of Ohio-chartered savings
associations to invest in, among other things, (i) commercial real estate loans
(including commercial construction real estate loans) up to 20% of total assets;
(ii) land acquisition and development loans up to 2% of total assets; (iii)
consumer loans, commercial paper and corporate debt securities up to 20% of
total assets; (iv) commercial business loans up to 10% of total assets; and (v)
capital stock, obligations and other securities of service corporations up to
15% of total assets.
The investment authority of Ohio-chartered savings associations is
broader in many respects than that of federally chartered savings associations.
However, since the enactment of FIRREA, state-chartered savings associations are
generally prohibited from acquiring or retaining any equity investment, other
than certain investments in service corporations, of a type or in an amount that
is not permitted for a federally chartered savings association. This prohibition
applies to equity investments in real estate, investments in equity securities
and any other investment or transaction that is in substance an equity
investment, even if the transaction is nominally a loan or other permissible
transaction. At June 30, 1998, CSFC Bank had no investments subject to the
foregoing prohibition.
Furthermore, a state-chartered savings association may not engage
as a principal in any activity not permitted for federal associations unless the
FDIC has determined that such activity would pose no significant risk to the
affected deposit insurance fund and the association is in
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compliance with the capital standards prescribed under FIRREA. When certain
activities are permissible for a federal association, the state-chartered
savings association may engage in the activity in a higher amount if the FDIC
has not determined that such activity would pose a significant risk or loss to
the affected deposit insurance fund and the savings association meets its
capital requirements. The increased investment authority does not apply to
investments in nonresidential real estate loans. At June 30, 1998, CSFC Bank had
no investments that were affected by the foregoing limitations.
FEDERAL REGULATION. The activities of savings associations are governed
by HOLA and, in certain respects, by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). These statutes (i) restrict the use of
brokered deposits by troubled savings associations that are not
well-capitalized, (ii) prohibit the acquisition of any corporate debt security
that is not rated in one of the four highest rating categories, (iii) restrict
the aggregate amount of loans secured by non-residential real estate property to
400% of capital, (iv) permit savings and loan holding companies to acquire up to
5% of the voting shares of non-subsidiary savings associations or savings and
loan holding companies without prior approval, (v) permit bank holding companies
to acquire healthy savings associations and (vi) require the federal banking
agencies to adopt regulations establishing loan-to-value limitations on real
estate lending. CSFC Bank is in compliance with each of these restrictions. CSFC
Bank does have the authority under HOLA to make certain loans or investments,
not exceeding 5% of its total assets, on each of (i) non-conforming loans (loans
in excess of the specific limitations of HOLA) and (ii) construction loans
without security for the purpose of financing what is or is expected to be
residential property.
The OTS has extensive authority over the operations of savings
associations, such as CSFC Bank. As a result of this authority, CSFC Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. When these examinations are conducted by
the OTS and the FDIC, the examiners may require a savings association to provide
for higher general or specific loan loss reserves. CSFC Bank and CSFC were
examined by the OTS in September 1997.
ENFORCEMENT. Under the FDIA, the OTS has primary enforcement
responsibility over savings associations and has the authority to bring
enforcement action against all "institution- affiliated parties," including
shareholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured savings association. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other acts or failures to act may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required. Under the FDIA, the FDIC has the authority to
recommend to the Director of OTS that enforcement action be taken with respect
to a particular savings association. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances.
LOANS-TO-ONE BORROWER. FIRREA limits the aggregate amount of loans that
may be made to any one borrower, including related entities, to 15% of a savings
association's unimpaired capital and surplus (unimpaired capital is equity and
loan loss reserves less goodwill; certain subordinated
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debt up to 50% of this total may be included). An additional amount may be lent,
equal to 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. At June 30, 1998, CSFC
Bank's loans-to-one borrower limit was $4.5 million. Loans secured by readily
marketable collateral may be made up to 25% of unimpaired capital. CSFC Bank did
not have any borrowers at June 30, 1998, whose aggregate outstanding credit was
in excess of the loans-to-one borrower regulations. At June 30, 1998, the five
largest loans or group of loans to any one borrower, including related entities,
amounted to $2.9 million, $2.9 million, $2.1 million, $ 2.0 million and $1.8
million, respectively. The five loans mentioned above were all performing at
June 30, 1998. CSFC Bank is in compliance with the loans-to-one borrower
limitations.
ASSESSMENTS. State-chartered savings associations are required to pay
the costs of operating the Division. The assessment for 1997 was for an 18 month
period and totaled $118,087, which will be recovered as a credit against CSFC
Bank's 1998 state franchise tax return. Savings associations are also required
to pay assessments to the OTS to fund the operation of the OTS. The general
assessment is paid on a semi-annual basis, and is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
CSFC Bank's latest quarterly thrift financial report. The assessments paid by
CSFC Bank in 1997 totaled $87,935.
DEPOSIT INSURANCE. CSFC Bank is required to obtain and maintain
insurance from the FDIC on all of its deposits. For the purpose of insuring
deposits, the FDIC maintains two separate insurance funds, the SAIF fund which
insures the deposits of savings associations and the Bank Insurance Fund ("BIF")
which generally insures the deposits of depository institutions other than
savings associations. CSFC Bank is a SAIF member bank.
Each savings association is required to pay in two quarterly payments,
a semi-annual assessment to the FDIC. For the purpose of determining the annual
assessment rate for each savings association, both BIF-insured and SAIF-insured
savings associations are placed into one of nine assessment risk categories
using a two-step process based first on capital ratios and then on supervisory
risk factors. At June 30, 1998, BIF and SAIF deposit insurance premium
assessments fell within a range from $0 to $27.00 per $100 of deposits. At June
30, 1998, CSFC Bank's annual deposit insurance premium assessment rate was $0
per $100 of deposits.
Pursuant to the Deposit Insurance Funds Act of 1996 (the "Funds Act"),
each savings association with SAIF-assessable deposits was required to pay a
one-time special assessment in 1996 of .0657% of the SAIF-assessable deposits
held by the savings association on March 31, 1995. Certain savings associations
were exempt from the special assessment based on hardship, being deemed a weak
institution or not holding SAIF-assessable deposits prior to January 1, 1993,
among other reasons. CSFC Bank paid $1.627 million, or approximately $1.074
million after tax, in the third quarter of 1996 with respect to the special
assessment. The special assessment was implemented to recapitalize the SAIF.
In addition, the Funds Act authorizes the FDIC to collect assessments
against BIF and SAIF- assessable deposits to be paid to the Financing
Corporation ("FICO") to service interest on FICO debt issued during the 1980s.
CSFC Bank's current annual FICO assessment rate is approximately 6.1 basis
points of deposits.
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CAPITAL REQUIREMENTS. By law, savings associations are required to
comply with three separate capital requirements: a tangible capital requirement,
a leverage ratio requirement and a risk- based capital requirement. The OTS may
also establish individual minimum capital requirements for savings associations
as it deems necessary or appropriate on a case-by-case basis.
The tangible capital requirement requires a savings association to
maintain "tangible capital" in an amount not less than 1.5% of its adjusted
total assets. "Tangible capital" of a savings association means core capital
less any intangible assets and purchased mortgage servicing rights not
includible in core capital and investments in subsidiaries that are not
includible subsidiaries. At June 30, 1998, CSFC Bank's tangible capital was
equal to 7.40% of its adjusted total assets.
The leverage ratio requirement requires a savings association to
maintain "core capital" in an amount not less than 3% of the adjusted total
assets. "Core capital" of a savings association consists of common stockholders'
equity (including common stock, surplus, retained earnings, and adjustments for
the cumulative effect of foreign currency translation, but excluding net
unrealized losses on available-for-sale equity securities with
readily-determinable fair values), noncumulative perpetual preferred stock and
any related surplus, minority interests in the equity accounts of fully-
consolidated subsidiaries, nonwithdrawable accounts and pledged deposits of
mutual savings associations and any remaining good will resulting from prior
regulatory accounting practices. Intangible assets, certain mortgage servicing
rights and investments in subsidiaries that are not includible subsidiaries must
be deducted from assets and capital in computing core capital. Certain deferred
tax assets must also be deducted from assets and capital in computing core
capital. At June 30, 1998, CSFC Bank's core capital was equal to 7.40% of its
adjusted total assets.
The total risk-based capital requirement requires a savings association
to maintain total capital equal to not less than 8% of its risk-weighted assets.
"Total capital" means core capital plus supplementary capital, provided that
such supplementary capital that is used to satisfy the requirement does not
exceed 100% of its core capital. "Supplementary capital" includes, among other
things, cumulative preferred stock, subordinated debt and general valuation loan
and lease allowances up to 1.25% of risk-weighted assets. "Risk-weighted assets"
are determined by multiplying certain categories of the savings association's
assets, including off-balance sheet items, by an assigned risk weight based on
the credit risk associated with those assets as specified in the OTS
regulations. At June 30, 1998, CSFC Bank's total capital was equal to 14.21% of
its risk- weighted assets.
CSFC Bank exceeded each of the capital requirements imposed by the OTS
at June 30, 1998. A savings association which fails to meet the capital
requirements must submit to the OTS Director a capital plan which addresses the
savings association's need for increased capital, describes the manner in which
it proposes to increase its capital and specifies types and levels of activities
in which it will engage. The capital plan must also indicate that any increase
in the savings association's assets must be met with a commensurate increase in
the savings association's tangible capital and risk-based capital. As part of
the submission of a capital plan, a savings association is required to certify
that, during the pendency of its application for approval of its capital plan,
it will not grow beyond its net interest credited, and will not make any capital
distributions or engage in certain other prohibited or restricted activities
without the OTS's prior approval. The OTS Director
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must, with certain limited exceptions, limit the asset growth of any savings
association not in compliance with the capital requirements. In addition, the
OTS Director must issue a capital directive to such a savings association which
may contain certain OTS regulatory restrictions and any other restrictions the
OTS Director deems necessary or appropriate under the circumstances. CSFC Bank
is not subject to any capital directive.
FDICIA established five capital categories for savings associations
("well capitalized," "adequately capitalized," undercapitalized," "significantly
undercapitalized" and "critically undercapitalized") and requires certain
mandatory action and authorizes other discretionary actions to be taken by the
OTS with respect to savings associations that fall in the three undercapitalized
categories, with the nature and extent of such action dependent primarily on the
category in which the savings association falls. The OTS has specified by
regulation the relevant capital level for each category. Under OTS regulations,
a savings association is considered (i) "well capitalized" if the savings
association has a total risk-based capital ratio of 10% or greater, has a Tier 1
risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater
and is not subject to any written agreement, order, capital directive or prompt
corrective action to meet a specific capital level for any capital measure; (ii)
"adequately capitalized" if the savings association has a total risk-based
capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or
greater and has a leverage ratio of 4% or greater (3% for certain highly rated
institutions assigned a composite rating of 1) and does not satisfy the
definition of a "well capitalized" savings association; (iii) "undercapitalized"
if the savings association has a total risk-based capital ratio that is less
than 8% or has either a Tier 1 risk- based capital or a leverage ratio that is
less than 4% or has a leverage ratio that is less than 3% and is assigned a
composite rating of 1; (iv) "significantly undercapitalized" if the savings
association has a total risk-based capital ratio that is less than 6%, or has
either a Tier 1 risk-based capital or a leverage capital ratio that is less than
3%; and (v) "critically undercapitalized" if the savings association's "tangible
equity" (core capital plus cumulative perpetual preferred stock minus intangible
assets and mortgage service rights) is equal to or less than 2% of its total
assets. The OTS also has the authority, after notice to and an opportunity for a
hearing by the savings association, to reclassify a "well capitalized" savings
association to an "adequately capitalized" savings association, or to require an
"adequately capitalized" or "undercapitalized" savings association to comply
with certain supervisory actions applicable to the next lower category, upon a
determination that the savings association is in an unsafe or unsound condition
or is engaged in an unsafe or unsound practice. At June 30, 1998, CSFC Bank met
the requirements of a "well capitalized" savings association under the OTS
regulations.
FDICIA requires that the OTS take corrective action to restrict asset
growth, acquisition, branching and new lines of business with respect to
"undercapitalized" savings associations and that the OTS take increasingly
severe additional actions if any savings association becomes "significantly
undercapitalized" or "critically undercapitalized." FDICIA also prohibits
dividends and other capital distributions and the payment of management fees to
a controlling person if, following such distribution or payment, the savings
association would fall within one of the three "undercapitalized" categories.
FDICIA requires a savings association that is "undercapitalized" to
submit a capital restoration plan for improving its capital to the OTS. The
savings and loan holding company of such a savings association must guarantee
that the savings association will comply with the capital restoration plan.
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Under FDICIA, a savings association that is "significantly
undercapitalized" is subject to severe restrictions on its activities and may be
required, among other things, to issue enough shares or obligations of the
association so that the association will be adequately capitalized after the
sale, to be acquired by a depository institution holding company or to combine
with another depository institution if one or more grounds exist for appointing
a conservator or receiver for the savings association. In addition, the
appropriate federal banking agency may restrict the transactions with
affiliates, the interest rate paid on deposits and asset growth, among other
things, of savings associations that are significantly undercapitalized. A
savings association that is "critically undercapitalized" will be subject, with
certain exceptions, to the mandatory appointment of a conservator or receiver by
the appropriate federal banking agency within 90 days after such savings
association becomes "critically undercapitalized." In addition, a savings
association that is "critically undercapitalized" will be subject to more severe
restrictions on its activities and on payment of subordinated debt, and may be
prohibited, among other things, from entering into material investment,
expansion, acquisition or deposition transactions or paying interest on new or
renewed liabilities at a rate that would significantly increase the
institution's weighted average cost of funds.
BROKERED DEPOSITS. A rule adopted by the FDIC permits only "well
capitalized" savings associations to solicit, accept, renew or roll over
brokered deposits without restriction. The term "brokered deposits" means
deposits that are obtained directly or indirectly from or through the mediation
or assistance of a deposit broker. "Adequately capitalized" savings banks may
obtain brokered deposits if they receive a waiver from the FDIC. The rule
adopted by the FDIC also prohibits savings associations that are not "well
capitalized" from soliciting deposits at rates significantly higher than
prevailing rates. CSFC Bank met the requirements for a "well capitalized"
institution at June 30, 1998. CSFC Bank does not utilize brokered deposits.
LIMITATIONS ON DIVIDENDS OF CSFC BANK. CSFC is a legal entity separate
and distinct from CSFC Bank and its other subsidiaries. If the Merger is not
consummated, the principal source of CSFC's funds on an unconsolidated basis is
expected to be dividends from CSFC Bank. Various statutory and regulatory
restrictions, however, limit directly or indirectly the amount of dividends CSFC
Bank can pay.
The capital distributions regulation imposes uniform limitations on the
ability of savings associations to engage in various distributions of capital
such as dividends, stock repurchases, and cash-out mergers. The OTS believes
that uniform treatment of these transactions provides a consistent policy
regarding savings associations' capital needs and the necessity of preserving
and enhancing the tangible capital levels of all savings associations.
CSFC Bank is currently a Tier I association. As a Tier I association,
CSFC Bank is permitted (without application) to make aggregate capital
distributions during a calendar year up to 100% of its net income to date plus
the amount that would reduce by one-half its surplus capital ratio at the
beginning of the calendar year. Capital distributions in excess of such amount
require that the association follow the regulation's advance notice and
opportunity for objection procedures.
A savings association with net capital below its regulatory capital
requirement (or a savings association meeting its capital requirement, but which
has received notice from the OTS that it is in need of more than normal
supervision) is not authorized to make any capital distributions unless it
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receives prior written approval from the OTS, or if the association is operating
in compliance with an approved capital plan, the capital distribution is
consistent with the association's capital plan. CSFC Bank has not been
specifically notified by the OTS that it is in need of more than normal
supervision.
The OTS may prohibit any capital distribution otherwise permitted under
this regulation upon a determination that the making of the capital distribution
would constitute an unsafe and unsound practice, such as where an association's
capital is diminishing due to substantial losses. All limitations on capital
distributions set forth in the regulation apply also to any direct or indirect
distributions of capital to affiliates, including those in connection with a
corporate reorganization.
QUALIFIED THRIFT LENDER TEST. All savings associations, including CSFC
Bank, are required to meet a QTL test to avoid certain restrictions on their
operations. This test requires a savings bank to have at least 65% of its
portfolio assets (as defined in the statute) in qualified thrift investments. At
June 30, 1998, the CSFC Bank was in compliance with a ratio of 97.42%. CSFC Bank
projects continued compliance for the foreseeable future.
A savings association that does not meet the QTL test must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the association may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations). In
addition, within one year of the date on which a savings association controlled
by a company ceases to be a QTL, the company must register as a bank holding
company and becomes subject to the rules applicable to such companies.
LIQUIDITY. All savings associations, including CSFC Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 4%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the savings association's
average daily balance of net withdrawable deposit accounts and current
borrowings. Monetary penalties may be imposed upon savings associations for
violations of liquidity requirements. At June 30, 1998, CSFC Bank was in
compliance with both requirements, with an overall liquid asset ratio of 6.97%
and a short-term liquid asset ratio of 6.97%.
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COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act of
1977 ("CRA"), a savings association has a continuing and affirmative obligation
to help meet the credit needs of its local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operations of
the savings association. The regulations promulgated under the CRA require each
savings association to identify the communities it serves and the types of
credit and other financial services that the savings association plans to extend
to those communities. The CRA also requires that the OTS assess a savings
association's record of helping to meet the credit needs of its community and
take such assessment into consideration when evaluating applications for
mergers, acquisitions and other transactions by savings associations. A less
than satisfactory CRA rating may be the basis for denying such applications.
In connection with its assessment of a savings association's CRA
performance, the OTS assigns a rating of "outstanding," "satisfactory," "needs
to improve" or "substantial noncompliance." Based on the most recently CRA
examination conducted in 1997, CSFC Bank received a rating of "satisfactory."
The OTS assigns a composite CRA rating based upon a Lending Test,
Investment Test, and Service Test keyed to, respectively, the number of loans,
investments and the level of retail banking services made available in the
savings association's assessment area. The Lending Test is a primary component
of the assigned composite rating. An "outstanding" rating on the Lending Test
will automatically result in at least a "satisfactory" rating on the composite,
but an institution cannot receive a "satisfactory" or better rating on the
composite if it does not receive at least a "low satisfactory" rating on the
Lending Test. Alternatively, a savings association may elect to be assessed by
complying with a strategic plan approved by the OTS.
TRANSACTIONS WITH RELATED PARTIES. CSFC Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an savings association, including CSFC)
or to make loans to certain insiders, is limited by Section 23A and 23B of the
Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
transactions with any individual affiliate to 10% of the capital and surplus of
the savings association and also limits the aggregate amount of transactions
with all affiliates to 20% of the savings association's capital and surplus.
Certain transactions with affiliates are required to be secured by collateral in
an amount and of a type specified in the FRA, and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the savings association as
those prevailing at the time for comparable transactions with nonaffiliated
companies. In the absence of comparable transactions, such transactions may only
occur under terms and circumstances, including credit standards, that in good
faith would be offered to or would apply to nonaffiliated companies.
Notwithstanding Sections 23A and 23B, savings associations are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies under Section 4(c) of the Bank Holding Company Act.
Further, no savings associations may purchase the securities of any affiliate
other than a subsidiary.
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CSFC Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as any entities that such persons control, are
governed by Section 22(h) of the FRA, Regulation O thereunder, Section 22(g) of
the FRA and the OTS's Conflicts Rule at 12 CFR 563.43. Among other things, these
regulations (i) require such loans to be made on terms substantially similar to
those offered to unaffiliated individuals, (ii) place limits on the amount of
loans CSFC Bank may make to such persons based, in part, on CSFC Bank's capital
position, and (iii) require certain approval procedures to be followed. Certain
of these transactions are also subject to conflict-of-interest regulations
enforced by the OTS. These regulations cover transactions by CSFC Bank and its
subsidiaries with affiliated persons involving the sale, purchase or lease of
property. Affiliated persons include officers, directors and controlling
shareholders. These conflict- of-interest regulations and other statutes also
impose restrictions on loans to affiliated persons.
Among other things, such loans must be made on terms substantially the
same as loans to unaffiliated individuals. CSFC is in compliance with all rules
relating to transactions with affiliated persons at June 30, 1998.
FEDERAL HOME LOAN BANK SYSTEM. CSFC Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or control bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB. As a
member, CSFC Bank is required to purchase and maintain stock in the FHLB of
Cincinnati. At June 30, 1998, CSFC Bank had $3.4 million in FHLB stock, which
was in compliance with the requirement.
The FHLBs are required to provide funds to cover certain obligations on
banks issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also have an adverse
effect on the value of the FHLB stock in the future. For the fiscal year ended
December 31, 1997, dividends paid by the FHLB of Cincinnati to CSFC Bank totaled
$237,000.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository savings associations to maintain non-interest-bearing reserves at
specified levels against their transaction accounts (primarily checking NOW
accounts) and non-personal time deposits. At June 30, 1998, CSFC Bank was in
compliance with these reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. Because required reserves
must be maintained in the form of vault cash or a non-interest-bearing account
at a Federal Reserve Bank, the effect of this reserve requirement is to reduce
CSFC Bank's earning assets.
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount windows," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
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COMPARISON OF RIGHTS OF STOCKHOLDERS OF
CHARTER ONE FINANCIAL, INC. AND CS FINANCIAL CORPORATION
INTRODUCTION
Upon the consummation of the Merger, holders of CSFC's Common Stock,
whose rights are presently governed by the OGCL and CSFC's Articles of
Incorporation and CSFC Regulations (the "CSFC Articles" and "CSFC Regulations,"
respectively) and, indirectly, CSFC Bank's Articles of Incorporation and Code of
Regulations, will become stockholders of Charter One, a Delaware corporation.
Accordingly, their rights will be governed by the Delaware General Corporation
Law (the "DGCL") and the Charter One Certificate of Incorporation and Charter
One Bylaws and, indirectly, Charter One Bank's Charter and Bylaws. The following
discussion summarizes the material differences affecting the rights of
stockholders but is not intended to be a complete statement of all differences
and is qualified in its entirety by reference to the OGCL, the DGCL, the Charter
One Certificate of Incorporation and the Charter One Bylaws, the CSFC Articles
and the CSFC Regulations, and the respective Charters and Bylaws of CSFC Bank
and Charter One Bank.
ISSUANCE OF CAPITAL STOCK
The CSFC Articles authorize the issuance of 500,000 shares of CSFC
common stock, par value $5.00 per share. The Charter One Certificate of
Incorporation currently authorizes the issuance of 180,000,000 shares of common
stock, par value $.01 per share, and 20,000,000 shares of serial preferred
stock, par value $.01 per share. See "Description of Charter One Financial, Inc.
Capital Stock." The ability of the Charter One Board to issue Charter One
Preferred Stock without stockholder approval could make an acquisition by an
unwanted suitor of a controlling interest in Charter One more difficult,
time-consuming or costly, or otherwise discourage an attempt to acquire control
of Charter One. As of August 15, 1998, 33,635 shares of CSFC Common Stock were
issued and outstanding. As of August 15, 1998, 127,213,076 shares of Charter One
Common Stock were issued and outstanding. CSFC and Charter One are each
authorized to issue additional shares of capital stock without stockholder
approval up to the amount authorized.
PAYMENT OF DIVIDENDS
The ability of CSFC and Charter One to pay dividends on their common
stock is governed by Ohio law, and Delaware law, respectively. Section 1701.33
of the OGCL provides that dividends may be paid in cash, property or shares of
the corporation's capital stock. The dividend may not exceed the combination of
the surplus of the corporation (defined as the excess of its assets over its
liabilities plus stated capital). The OGCL further provides that a corporation
must notify its stockholders if a dividend is paid out of capital surplus.
Delaware corporations may pay dividends out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which declared and for the
preceding fiscal year. Section 170 of the DGCL also provides that dividends may
not be paid out of net profits if, after the payment of the dividends, the
capital of the corporation is less than the capital represented by the
outstanding stock of all classes having a preference upon the distribution of
assets.
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The ability of CSFC and Charter One to pay dividends on their
common stock also is affected by restrictions upon their receipt of dividends
from their respective subsidiary savings institutions.
ADVANCE NOTICE REQUIREMENTS FOR PRESENTATION OF NEW BUSINESS AND NOMINATIONS OF
DIRECTORS AT ANNUAL MEETINGS OF STOCKHOLDERS
The Charter One Bylaws specify that notice of any stockholder
nomination or proposal for new business must be received by Charter One at least
60 but no more than 90 days in advance of the annual meeting; however, in the
event that fewer than 70 days' notice or prior public disclosure of the date of
the meeting is given or made, written notice must be submitted no later than the
tenth day following the earlier of the date such notice is given or public
disclosure made.
The CSFC Articles and Regulations do not contain a similar restriction.
RESTRICTIONS ON VOTING RIGHTS; QUORUM
The CSFC Articles do not contain any restrictions on voting rights. The
Charter One Certificate of Incorporation currently restricts the voting rights
of any Related Person (as defined in the Charter One Certificate of
Incorporation) with respect to each vote in excess of 20% of the voting power of
the outstanding shares to 1/100 of a vote.
The CSFC Regulations provide that the shareholders present in person or
by proxy at any meeting of shareholders shall constitute a quorum for such
meeting, but no action required by law, the Articles, or the Regulations to be
authorized or taken by the holders of a designated proportion of the shares of
any particular class or of each class, may be authorized or taken by a lesser
proportion. The Charter One Bylaws provide that the holders of a majority of
shares of common stock entitled to vote present in person or by proxy at a
meeting of stockholders constitutes a quorum at any such meeting. Pursuant to
the Charter One Certificate of Incorporation, however, to the extent the voting
rights of any Related Person are reduced, such reduced voting power will be
considered for purposes of determining a quorum.
NUMBER AND TERM OF DIRECTORS
Pursuant to the CSFC Regulations, the CSFC Board shall consist of not
less than five members. The CSFC Regulations provide that the number of
directors may be fixed or changed by a resolution adopted by the vote of the
shareholders entitled to exercise a majority of the voting power of the shares
represented at a meeting called to elect directors in person or by proxy at such
meeting and entitled to vote at such election. The CSFC Regulations further
provide that the CSFC Board will be divided into two classes with the term of
office of each class lasting two years.
The Charter One Certificate of Incorporation provides that the Charter
One Board may consist of the number of directors fixed by, or in the manner
provided in, the Charter One Bylaws. The Charter One Bylaws provide that the
number of directors shall be determined by a resolution adopted by the
affirmative vote of a majority of Charter One's continuing directors. The
Charter One Certificate of Incorporation also provides that the Charter One
Board shall be divided into three classes with the term of office of one class
expiring each year. See "-- Special Provisions to Charter One's Bylaws."
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REMOVAL OF DIRECTORS
The CSFC Regulations provide that the CSFC Board may remove any
Director and thereby create a vacancy in the CSFC Board if: (1) he be declared
of unsound mind by an order of court, or if he is adjudicated a bankrupt; or (2)
if he does not qualify within 60 days as provided by the Regulations. Section
1701.58 of the OGCL provides that if the shareholders have a right to vote
cumulatively in the election of directors, as is the case for CSFC, unless the
articles or the regulations expressly provide that no director may be removed or
that removal requires a greater vote, all the directors, all the directors of a
particular class, or any individual director may be removed, without assigning
any cause, by the vote of holders of a majority of the voting power entitling
them to elect directors in place of those to be removed, except that, unless all
the directors, or all the directors of a particular class are removed, no
individual director shall be removed if the votes of a sufficient number of
shares are cast against his removal that, if cumulatively voted at an election
of all of the directors, or all the directors of a particular class, as the case
may be, would be sufficient to elect one director.
The Charter One Certificate of Incorporation provides that directors
may be removed only for cause by a vote of a majority of the shares entitled to
be cast in the election of directors. The Charter One Certificate of
Incorporation provides that a vote to remove a director may only occur at an
annual meeting of stockholders or at a meeting of stockholders called expressly
for that purpose. The Charter One Certificate of Incorporation limits what will
constitute cause for removal to conviction of a felony by a court of competent
jurisdiction, an adjudication by a court of competent jurisdiction of gross
negligence on the part of a director or misconduct in the performance of such
director's duty to Charter One.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Both the CSFC Regulations and the Charter One Certificate of
Incorporation provide that any vacancy that occurs on the board of directors may
be filled by a majority vote of the board of directors and that any director so
chosen shall hold office for a term expiring at the meeting of stockholders at
which the term of the class to which they have been elected expires.
AMENDMENT OF ARTICLES OF INCORPORATION AND CERTIFICATE OF INCORPORATION
To amend an Ohio corporation's articles of incorporation, Section
1701.71 of the OGCL requires the approval of stockholders holding two-thirds of
the voting power of the corporation or, in cases when class voting is required,
of stockholders holding two-thirds of the voting power of each such class,
unless otherwise specified in such corporation's articles of incorporation.
The OGCL also permits amendment by a lesser vote (but not less than a
majority) if the Articles themselves so provide. The CSFC Articles provide that
notwithstanding any provision of law requiring for any action a super-majority
vote, such action may be taken by a majority of the voting power of the
corporation.
Section 242 of the DGCL provides that the certificate of incorporation
of a Delaware corporation may be amended only if first approved by the
corporation's board of directors and
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thereafter by a majority of the outstanding stock entitled to vote thereon, and,
if applicable, a majority of each class of shares entitled to vote thereon as a
class.
The Charter One Certificate generally may be amended by a majority vote
both of its Board of Directors and of the outstanding shares of its voting
stock; however, approval of 90% of the outstanding voting stock is required to
amend the provision of the Charter One certificate providing for approval by 90%
of the stockholders of certain business combinations with a 10% or greater
stockholder and approval of 75% of the outstanding voting stock is generally
required to amend certain other provisions.
AMENDMENT AND REPEAL OF REGULATIONS AND BYLAWS
Section 1701.11 of the OGCL provides that only the stockholders of a
corporation have the power to adopt, amend and repeal the corporation's Code of
Regulations. CSFC's Regulations may be changed, amended, or repealed in whole or
in part and a new Code of Regulations may be adopted by a majority of CSFC's
shares entitled to vote at any annual or special meeting at which proper notice
of the proposed amendment was given or, without a meeting, by the written
consent of the shareholders of record entitled to exercise a majority of the
voting power on such proposal.
Section 109 of the DGCL places the power to adopt, amend or repeal
by-laws in the corporation's stockholders, but permits the corporation, in its
certificate of incorporation, to vest such power with the board of directors
also. The Charter One Certificate provides that the Charter One Bylaws may be
adopted, amended or repealed either by the affirmative vote of the holders of
shares of at least 75% of the total votes eligible to be cast at a meeting duly
called and held or by a resolution adopted by a majority of the Charter One
Board.
CONTROL SHARE ACQUISITIONS
OHIO CONTROL SHARE ACQUISITION STATUTE. Under Section 1701.831 of the
OGCL, unless the articles of incorporation or regulations of a corporation
otherwise provide, any "control share acquisition" of an issuing public
corporation can only be made with the affirmative vote of a majority of the
voting power of the corporation and a majority of the portion of the voting
power of the corporation, excluding the voting power of the "interested shares."
A "control share acquisition" is defined as any acquisition of shares of a
corporation that, when added to all other shares of that corporation owned by
the acquiring person, or in respect to which that person may exercise or direct
the voting power, would entitle that person to exercise levels of voting power
in the following ranges; at least 20% but less than 33 1/3%, at least 33 1/3%
but less than a majority, or a majority or more.
Neither Delaware law nor the Charter One Certificate of Incorporation
contains a control share acquisition statute or provision. See " -- Business
Combinations with Certain Persons" for certain restrictions imposed by Ohio and
Delaware law and the Charter One Certificate of Incorporation.
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BUSINESS COMBINATIONS WITH CERTAIN PERSONS
OHIO BUSINESS COMBINATION STATUTE. Chapter 1704 of the OGCL prohibits
an interested stockholder from engaging in a wide range of business combinations
similar to those prohibited by Section 203 of the DGCL (discussed below). Under
Chapter 1704 of the OGCL an interested stockholder includes a stockholder who
directly or indirectly exercises or directs the exercise of 10% or more of the
voting power of the corporation. Chapter 1704 restrictions do not apply under
certain circumstances, such as when, prior to the date the interested
stockholder became an interested stockholder, the directors of the corporation
have approved the transaction or the interested stockholder's acquisition of
shares of the corporation.
DELAWARE BUSINESS COMBINATION STATUTE. Section 203 of the DGCL
("Section 203"), which applies to Charter One, regulates transactions with major
stockholders after they become major stockholders. Section 203 prohibits a
Delaware corporation from engaging in mergers, dispositions of 10% or more of
its assets, issuances of stock and other transactions ("business combinations")
with a person or group that owns 15% or more of the voting stock of the
corporation (an "interested stockholder"), for a period of three years after the
interested stockholder crosses the 15% threshold. These restrictions on
transactions involving an interested stockholder do not apply in certain
circumstances, including those in which (a) before the interested stockholder
owned 15% or more of the voting stock, the board of directors approved the
business combination or the transaction that resulted in the person or group
becoming an interested stockholder; (b) in the transaction that resulted in the
person or group becoming an interested stockholder, the person or group acquired
at least 85% of the voting stock other than stock owned by inside directors and
certain employee stock plans; (c) after the person or group became an interested
stockholder, the board of directors and at least 66 2/3% of the voting stock
other than stock owned by the interested stockholder approved the business
combination; or (d) certain competitive bidding circumstances were present.
Additionally, the Charter One Certificate of Incorporation sets forth
stockholder approval requirements for mergers and other similarly important
corporate transactions involving substantial stockholders. The Charter One
Certificate of Incorporation generally would prohibit a merger or consolidation,
sale of $5 million or more of assets, issuance or transfer of $5 million or more
of securities of Charter One, the adoption of a plan or proposal calling for the
liquidation or dissolution of Charter One or a subsidiary, the reclassification
of Charter One's securities or any agreement, contract or other arrangement
providing, directly or indirectly for any of the foregoing (a "business
transaction"), involving a "related person" (generally, a beneficial owner of
10% or more of Charter One's outstanding voting stock), unless, during the five
years following the related person's acquisition of 10% of Charter One's voting
power, the business transaction is approved by 90% of the holders of Charter
One's voting stock or the business transaction or the transaction by which the
related person acquires such status is first approved by a majority of Charter
One's Continuing Directors (as defined in the Charter One Certificate of
Incorporation). Business transactions with related persons after five years from
the date the related person achieves such status require the approval of at
least 75% of the holders of Charter One's voting stock not owned by the related
person (at a meeting held no earlier than five years after the date the related
person acquires such status) unless the proposed transaction either is approved
by a majority of the Continuing Directors, is solely between Charter One and any
subsidiary thereof or the business transaction satisfies certain fair price
criteria and various procedural requirements.
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The CSFC Articles do not contain a similar restriction.
PREVENTION OF GREENMAIL
The Charter One Certificate of Incorporation generally would prohibit
Charter One from acquiring, directly or indirectly, from an "interested person"
(generally, a beneficial owner of 5% or more of Charter One's voting stock) any
of its equity securities of any class, unless (i) the acquisition is approved by
the holders of at least 75% of Charter One's voting stock not owned by the
interested person, (ii) the acquisition is made as part of a tender or exchange
offer by Charter One or a subsidiary thereof to purchase securities of the same
class on the same terms to all holders of such securities and in compliance with
the Exchange Act and the rules and regulations thereunder; (iii) the acquisition
is pursuant to an open market purchase program approved by a majority of the
Charter One Board, including a majority of the Continuing Directors; or (iv) the
acquisition is at or below the market price (generally, the highest sale price
for the stock on the acquisition date on the Nasdaq National Market) and is
approved by a majority of the Charter One Board, including a majority of the
Continuing Directors.
The CSFC Articles do not contain a similar restriction. However,
Section 1707.043 of the Ohio Revised Code provides that an Ohio corporation may
recover profits realized from the disposition of its securities by certain
shareholders who engage in manipulative practices. A corporation may recover
profits realized from the disposition of its stock by a person who made a
proposal to acquire control of the corporation within 18 months of such
disposition. This right of recovery does not apply, however, to a person who
proves in court that his sole purpose in making the proposal was to succeed in
acquiring control of the corporation and that there were reasonable grounds to
believe that such person would acquire control of the corporation. Further, the
aggregate amount of the profit realized must exceed $250,000 before the
corporation may recover. If a corporation refuses to bring an action to recover
these profits, any shareholder may sue on behalf of the corporation. If a
judgment is rendered ordering the recovery of any profits, the party bringing
the action is entitled to recovery of its attorney fees.
LIMITATIONS ON DIRECTORS' LIABILITY
Under Delaware law, a Delaware corporation may include in its
certificate of incorporation a provision that eliminates or limits a director's
personal liability for monetary damages for breach of his or her fiduciary duty,
subject to certain limitations. The Charter One Certificate of Incorporation
provides that a director shall not be personally liable to the corporation or
its stockholders for monetary damages arising out of the director's breach of
his or her fiduciary duty as a director, except (i) for any breach of a
director's duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the OGCL which imposes
liability on directors for unlawful payment of dividends or unlawful stock
repurchases; or (iv) for any transactions from which the director derived any
improper personal benefit. Further, the Charter One Certificate of Incorporation
provides that if Delaware law is subsequently amended to eliminate or limit
director liability, then the liability of the directors shall be eliminated or
limited to the fullest extent of the law. These provisions do not, however,
relieve directors of their duty to act with due care. In addition, these
provisions do not prevent a stockholder from seeking equitable remedies,
including
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an injunction prohibiting a proposed action or transaction or rescission of a
consummated action or transaction.
Neither Ohio law nor the CSFC Articles contain a similar provision.
Ohio law, however, does limit generally a directors' liability to only those
situations where it is determined by a court of competent jurisdiction, based
upon clear and convincing evidence, that such director's action or failure to
act involved an act or omission undertaken with deliberate intent to cause
injury to the corporation or with reckless disregard for the best interests of
the corporation.
Under federal regulations, there is no provision for limitation of
directors' liability to CSFC Bank and Charter One Bank, and neither CSFC Bank
nor Charter One Bank's charter or bylaws contains any limitation on the
liability of directors of CSFC Bank and Charter One Bank for conduct in their
official capacities.
INDEMNIFICATION
Under Section 1701.13 of the OGCL, Ohio corporations are permitted to
indemnify directors, officers, employees and agents within prescribed limits and
must indemnify them under certain circumstances. Generally, if it is determined
that a director, officer, employee, or agent acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful, indemnification is
discretionary except as otherwise provided by a corporation's articles of
incorporation, code of regulations, or by contract, and except with respect to
the advancement of expenses of directors (as discussed in the next paragraph).
The OGCL does not authorize indemnification by a corporation (i) of a director,
officer, employee, or agent after a finding of negligence or misconduct in a
derivative suit absent a court order or (ii) of a director in an action
involving the unlawful distribution of loans, dividends or assets.
Indemnification with respect to expenses is required, however, to the extent
such person succeeds on the merits or otherwise. The statutory right to
indemnification is not exclusive in Ohio, and Ohio corporations may, among other
things, purchase insurance to indemnify those persons.
The OGCL provides that a director (but not an officer, employee, or
agent), subject to certain exceptions, is entitled to mandatory advancement of
expenses, including attorneys' fees, incurred in defending any action, including
derivative actions, brought against the director, provided the director agrees
to cooperate with the corporation concerning the matter and to repay the amount
advanced if it is proved by clear and convincing evidence that his act or
failure to act was done with deliberate intent to cause injury to the
corporation or with reckless disregard for the corporation's best interests.
The CSFC Regulations state that each person who is, has been or shall
hereafter be, a director, officer or employee of CSFC or who is serving or may
have served at the request of CSFC as a director, officer or employee of another
corporation, shall be indemnified by CSFC (including attorneys' fees),
judgments, decrees, fines, penalties or amounts paid in settlement in connection
with the defense of any pending or threatened action, suit or proceeding,
whether criminal, civil, administrative or investigative, to which he is or may
be made a party by reason of being or having been such director, officer or
employee, provided that (1) such person was not, and has not been adjudicated to
have been, negligent or guilty of misconduct in the performance of his duty to
such
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corporation; (2) such person has acted in good faith in what he reasonably
believed to be the best interest of such corporation; and (3) in any matter the
subject of a criminal action, suit or proceeding, such person had no reasonable
cause to believe that his conduct was unlawful.
Under Section 145 of the DGCL, directors, officers, employees and other
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by, or in the right of the corporation - a
"derivative action") if they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, regarding any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. A similar standard is applicable in the case
of derivative actions, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with the defense or
settlement of such actions. In the case of derivative actions, the DGCL requires
court approval before there can be any indemnification when the person seeking
indemnification has been found liable to the corporation. To the extent that a
person otherwise eligible to be indemnified is successful on the merits or
otherwise of any claim or defense described above, indemnification for expenses
(including attorneys' fees) actually and reasonably incurred is made mandatory
by the DGCL.
The Charter One Certificate of Incorporation generally requires
indemnification, including the payment of expenses in advance of the final
disposition of an action, to the extent that such indemnification is permitted
by the DGCL. Additionally, Charter One's provision specifies that any
indemnification payment to which an individual is entitled must be made within
60 days of receipt of a written request from the individual. Any advancement of
expenses must be made within 20 days of the receipt of a written request. The
Charter One Certificate of Incorporation also provides for the continuation of
indemnification after the termination of the person's association with Charter
One.
MERGERS, ACQUISITIONS AND CERTAIN OTHER TRANSACTIONS
Section 1701.78 of the OGCL generally requires mergers to be adopted by
the shareholders of each corporation which is not the surviving corporation, and
also by the shareholders of the surviving corporation if shares representing
more than one-sixth of the voting power of the surviving corporation are
transferred in the merger. The OGCL also requires dissolutions and sales of
substantially all assets to be adopted by the shareholders. In each case, the
OGCL requires adoption by two-thirds of the voting power of the corporation,
unless the articles of incorporation specify a different proportion (not less
than a majority). CSFC's articles provide that all of such matters may be
approved by holders of a majority of the voting power of the corporation.
Section 251 of the DGCL generally requires mergers to be adopted by the
shareholders of each corporation which is not the surviving corporation, and
also by the shareholders of the surviving corporation if shares representing
more than 20% of the common stock of the surviving corporation immediately prior
to the merger are transferred in the merger. The DGCL also requires dissolutions
and sales of substantially all assets to be adopted by the shareholders. In each
case, the DGCL requires adoption by a majority of the voting power of the
corporation. The Charter One Certificate of Incorporation requires
super-majority approval of certain transactions. See "--Business Combinations
with Certain Persons."
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Section 1701.59 of the OGCL permits a director, in determining what he
reasonably believes to be in the best interests of the corporation, to consider,
in addition to the interests of the corporation's stockholders, any of the
following: (i) the interests of the corporation's employees, suppliers,
creditors, and customers; (ii) the economy of the state and nation; (iii)
community and societal considerations; and (iv) the long-term as well as
short-term interests of the corporation and its stockholders, including the
possibility that these interests may be best served by the continued
independence of the corporation. The DGCL does not contain statutory provisions
permitting a director to consider outside interests in determining a course of
action, however, Charter One's Certificate of Incorporation does contain a
provision permitting consideration of such interests.
ACTION WITHOUT A MEETING
Section 1701.54 of the OGCL and the CSFC Regulations provide that any
action which may be authorized or taken at a meeting of stockholders may be
authorized or taken by written consent without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
stockholders entitled to notice of a meeting of the shareholders.
Section 228 of the DGCL permits any action required or permitted to be
taken at a stockholder's meeting to be taken by written consent signed by the
holders of the number of shares that would have been required to effect the
action at an actual meeting of the stockholders. Generally, holders of a
majority of outstanding shares can effect such an action. The DGCL also provides
that a corporation's certificate of incorporation may restrict or prohibit
stockholders' actions without a meeting. The Charter One Certificate of
Incorporation prohibits stockholders' action without a meeting.
SPECIAL MEETINGS OF STOCKHOLDERS
Under Section 1701.40 of the OGCL, the holders of at least 25% of the
outstanding shares of a corporation, unless the corporation's regulations
specify another percentage, which may in no case be greater than 50%, the
directors by action at a meeting or a majority of the directors acting without a
meeting, the chairman of the board, the president, or in case of the president's
death or disability, the vice president authorized to exercise the authority of
the president, and such other officers or persons as the articles or the
regulations authorize to call such meetings, have the authority to call special
meetings of stockholders. CSFC's Regulations provide that a special meeting can
be called at any time by any of the following: the Chairman of the Board, the
President or a Vice President, the majority of the CSFC Board or by written
request of persons holding at least 25% of all outstanding voting shares.
Under Section 211(d) of the DGCL, the board of directors or those
persons authorized by the corporation's certificate of incorporation or by-laws
may call a special meeting of the corporation's stockholders. The Charter One
Certificate of Incorporation provides that a special meeting may only be called
by a majority of the board of directors, including a majority of Continuing
Directors (as defined in the Charter One Certificate of Incorporation).
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PREEMPTIVE RIGHTS
Section 1701.15 of the OGCL provides that, subject to certain
limitations and conditions contained in the OGCL and unless the articles of
incorporation provide otherwise, stockholders shall have preemptive rights to
purchase additional securities of the corporation. CSFC's Articles expressly
eliminate preemptive rights.
Under Section 102 of the DGCL, no preemptive rights exist unless a
corporation's certificate of incorporation specifies otherwise. Under the
Charter One Certificate of Incorporation stockholders do not have preemptive
rights.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under the OGCL, dissenting stockholders are entitled to appraisal
rights in connection with the lease, sale, exchange, transfer, or other
disposition of all or substantially all of the assets of a corporation and in
connection with certain amendments to the corporation's articles of
incorporation. Stockholders of an Ohio corporation being merged into or
consolidated with another corporation are also entitled to appraisal rights.
Stockholders in the surviving corporation in a merger are also entitled to
dissenters rights of appraisal under certain circumstance, including the
circumstance that the merger involves the issuance by the surviving corporation
to the shareholders of other constituent corporation of such number of shares of
the surviving corporations as will entitle the holders of those shares to
exercise one-sixth or more of the voting power of that corporation in the
election of directors. Under the OGCL, a stockholder's written demand must be
delivered to the corporation not later than ten days after the taking of the
vote on the matter giving rise to appraisal rights. See "The Merger-- Appraisal
Rights."
Under Section 262 of the DGCL, appraisal rights are available to
dissenting stockholders in connection with certain mergers or consolidations.
However, unless the certificate of incorporation otherwise provides, Section 262
does not provide for appraisal rights (i) if the shares of the corporation are
listed on a national securities exchange or designated as a national market
system security on an inter-dealer quotations system by the NASD or held of
record by more than 2,000 stockholders (as long as the stockholders receive in
the merger shares of the surviving corporation or of any other corporation the
shares of which are listed on a national securities exchange or designated as a
national market system security on an inter-dealer quotations system by the NASD
or held of record by more than 2,000 stockholders) or (ii) if the corporation is
the surviving corporation and no vote of its stockholders is required on the
merger. The DGCL does not provide appraisal rights to stockholders who dissent
from the sale of all or substantially all of a corporation's assets or from an
amendment to the corporation's certificate of incorporation, although a
corporation's certificate of incorporation may so provide. Charter One's
Certificate does not provide appraisal rights beyond those specifically provided
under the DGCL. Under the DGCL, among other procedural requirements, a
stockholder's written demand for appraisal of shares must be received before the
taking of the vote on the matter giving rise to appraisal rights.
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SPECIAL PROVISIONS TO CHARTER ONE'S BYLAWS
In accordance with the Agreement and Plan of Merger by and between
Charter One and FirstFed, dated May 30, 1995, Charter One adopted certain
provisions to its Bylaws to govern directors, executive officers and committees
to the exclusion of any other provision in the Bylaws.
For a period of four years following the effective date of the merger
with FirstFed, Charles J. Koch and Jerome L. Schostak shall serve as Chairman
and Vice Chairman, respectively, of the Board of Directors. The Charter One
Bylaws also provide that for four years following the effective date of the
merger with FirstFed, if any person leaves the Board of Directors, his or he
successor will be the person recommended by the directors who were directors of
Charter One prior to the merger with FirstFed, or their successors, if such
departing director was a director of Charter One prior to the merger with
FirstFed, or by the directors who were directors of FirstFed prior to its merger
with Charter One, or their successors, if the departing director was a director
of FirstFed prior to its merger with Charter One.
The Charter One Bylaws also provide that for a period of four years
following the effective date of the merger, a vote of two-thirds of the entire
Charter One Board shall be necessary to approve (i) any amendment to the Charter
One Certificate of Incorporation or Bylaws, (ii) any merger, acquisition, sale
of substantially all of its assets or other extraordinary corporate transaction
involving Charter One, Charter One Bank or any other significant financial
institution subsidiary of Charter One or (iii) the dismissal or replacement of
any of the executive officers of Charter One or Charter One Bank or other
significant financial institution subsidiary.
The Charter One Bylaws also provide that for a period of at least four
years following the merger with FirstFed, the Charter One Board as the surviving
corporation shall have a five person Executive Committee and such other
committees as the Charter One Board shall establish in accordance with Section
141 of the DGCL, the Charter One Certificate of Incorporation and the Charter
One Bylaws.
RIGHTS AGREEMENT
CHARTER ONE RIGHTS AGREEMENT. On November 20, 1989, the Charter One
Board declared a dividend distribution of one Right for each outstanding share
of Charter One Common Stock to stockholders of record at the close of business
on December 1, 1989. As long as the Rights are attached to the common stock,
Charter One will issue one Right with each new share of common stock so that
each outstanding share will have an attached Right. Except as set forth below,
each Right, when exercisable, entitles the registered holder to purchase from
Charter One 1/100 share of preferred stock designated as Series A Participating
Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), at
a price of $20.00 (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement between Charter One
and The First National Bank of Boston, as Rights Agent. See "Incorporation of
Certain Documents by Reference."
The Rights are attached to all certificates representing shares of
Charter One's outstanding common stock, and no separate Rights Certificates (as
defined below) have been distributed. Until the earlier to occur of (i) a public
announcement that, without the prior consent of Charter One, a person or group
of affiliated or associated persons has acquired, or obtained the right to
acquire,
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beneficial ownership of securities having 20% or more of the voting power of all
outstanding voting securities of Charter One (an "Acquiring Person") or (ii) ten
days (unless such date is extended by the Charter One Board) following the
commencement of (or a public announcement of an intention to make) a tender
offer or exchange offer which would result in any person or group and related
persons becoming an Acquiring Person, without the prior consent of Charter One
(the earlier of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the common stock certificates
outstanding as of the Distribution Date, by such common stock certificate. Until
the Distribution Date, the Rights will be transferred with, and only with,
common stock certificates. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
common stock outstanding as of the Distribution Date will also constitute the
transfer of the Rights associated with the common stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of common stock as of the close of business on the
Distribution Date, and the separate Rights Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on the earlier of (i) December 1, 1999, (ii) consummation of a
merger transaction with a person or group who acquired Charter One Common Stock
pursuant to a Permitted Offer (generally, a tender offer or exchange offer for
all outstanding shares of Charter One Common Stock at a price and on terms
determined by at least a majority of the members of the Charter One Board to be
both adequate and otherwise in the best interests of Charter One and its
stockholders) and also is offering in the merger the same price per share and
form of consideration paid in the Permitted Offer, or (iii) redemption by
Charter One as described below.
The Purchase Price payable, and the number of shares of Series A
Preferred Stock or other securities or property issuable upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock, (ii) upon the grant to
holders of the Series A Preferred Stock of certain rights or warrants to
subscribe for Series A Preferred Stock, or certain convertible securities having
the same or more favorable rights, privileges and preferences as the Series A
Preferred Stock at less than the current market price of the Series A Preferred
Stock, or (iii) upon the distribution to holders of the Series A Preferred Stock
of evidences of indebtedness or assets (excluding regular quarterly cash
dividends out of earnings or retained earnings) or of subscription rights or
warrants (other than those referred to above).
In the event that a person becomes an Acquiring Person (unless pursuant
to a Permitted Offer), proper provision shall be made so that each holder of a
Right (other than an Acquiring Person) will for a 60 day period thereafter have
the right to receive upon exercise that number of 1/100 share of Series A
Preferred Stock equal to the number of shares of Charter One Common Stock having
a market value (immediately prior to the triggering of the Right) of two times
the exercise price of the Right, to the extent available, and then (after all
authorized and unreserved shares of Series A Preferred Stock have been issued)
an equal number of an equivalent security (such as another equity security with
at least the same economic value as 1/100 share of Series A Preferred Stock)
(such right being called the "Flip-In Right"). In addition, Charter One shall be
entitled (but not required) to deliver, upon exercise of the Flip-In Right, in
lieu of 1/100 share of Series A Preferred Stock, an equal number of shares of
common stock, to the extent they are available. For example, at an exercise
price of $40.00 per Right, each Right not owned by an Acquiring Person
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following an event set forth in this paragraph would entitle its holder to
purchase common stock with a market value immediately prior to the triggering of
the Right of $80.00 for $40.00.
In the event that, after the first date of public announcement by
Charter One or an Acquiring Person that an Acquiring Person has become such,
Charter One is involved in a merger or other business combination transaction in
which its common stock is exchanged or changed, or 50% or more of Charter One's
assets or earning power is sold (in one transaction or a series of
transactions), proper provision shall be made so that each holder of a Right
(other than the Acquiring Person) shall thereafter have the right to receive,
upon the exercise thereof at the then current exercise price of the Right, that
number of shares of common stock of the acquiring company (or, in the event
there is more than one acquiring company, the acquiring company receiving the
greatest portion of the assets or earning power transferred) which at the time
of such transaction would have a market value (immediately prior to the
triggering of the Right) of two times the exercise price of the Right (such
Right being called the "Flip-Over Right"). For example, at an exercise price of
$40.00 per Right, each Right not owned by an Acquiring Person following an event
set forth in this paragraph would entitle its holder to purchase common stock of
the acquiring company with a market value immediately prior to the triggering of
the Right of $80.00 (or, in the event there is more than one acquiring company,
the acquiring company receiving the greatest portion of the assets or earning
power transferred) for $40.00.
The holder of a Right will continue to have the Flip-Over Right whether
or not such holder exercises the Flip-In Right. Upon the occurrence of any of
the events giving rise to the exercisability of the Flip-Over Right or the
Flip-In Right, any Rights that are or were at any time owned by an Acquiring
Person engaging in any of such transactions or receiving the benefits thereof on
or after the time the Acquiring Person becomes such shall become void insofar as
they related to the Flip- Over Right or the Flip-In Right.
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractions of shares will be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the Common Stock
on the last trading date prior to the date of exercise.
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, Charter One may redeem
the Rights in whole, but not in part, at a price of $0.01 per Right (the
"Redemption Price"), which redemption shall be effective upon the action of the
Charter One Board. Additionally, Charter One may thereafter redeem the then
outstanding Rights in whole, but not in part, at the Redemption Price, provided
that such redemption is incidental to a merger or other business combination
transaction or series of transactions involving Charter One but not involving an
Acquiring Person or any person who was an Acquiring Person or following an event
giving rise to, and the expiration of the exercise period for, the Flip-In Right
if and for as long as no Acquiring Person beneficially owns securities
representing 20% or more of the voting power of Charter One's voting securities.
The redemption of Rights described in the preceding sentence shall be effective
only as of such time when the Flip-In Right is not exercisable, and in any
event, only after ten business days prior notice. Upon the effective date of the
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
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The Series A Preferred Stock purchasable upon exercise of the Rights
will be nonredeemable. Each share of Series A Preferred Stock will have a
preferential quarterly dividend in an amount equal to 100 times the dividend
declared on each share of Common Stock, but in no event less than $1.00. In the
event of liquidation, the holders of Series A Preferred Stock will receive a
preferred liquidation payment per 1/100 share thereof equal to the greater of
the issuance price thereof or the payment made per each share of Charter One
Common Stock.
Each share of Series A Preferred Stock will have 100 votes, voting
together with the shares of Charter One Common Stock.
In the event of any merger, consolidation or other transaction in which
shares of Charter One Common Stock are exchanged, each share of Series A
Preferred Stock will be entitled to receive 100 times the amount and type of
consideration received per share of common stock. The rights of the Series A
Preferred Stock as to dividends, liquidation and voting, and in the event of
mergers and consolidations, are protected by customary anti-dilution provisions.
Fractional shares of Series A Preferred Stock will be issuable; however, Charter
One may elect to distribute depository receipts in lieu of such fractional
shares. In lieu of fractional shares other than fractions that are multiples of
1/100 share, an adjustment in cash will be made based on the market price of the
Series A Preferred Stock on the last trading date prior to the date of exercise.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Charter One, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to Charter One, stockholders may, depending upon
the circumstances, recognize taxable income should the Rights become exercisable
or upon the occurrence of certain events thereafter.
Charter One and the Rights Agent may from time to time supplement or
amend the Rights Agreement without the consent of the holders of the Rights in
order to cure any ambiguity or to correct any defect or inconsistency contained
therein. In addition, prior to the Distribution Date, Charter One and the Rights
Agent may make such changes to the provisions of the Rights Agreement as Charter
One deems necessary or desirable. Following the Distribution Date, Charter One
and the Rights Agent may change or supplement the provisions of the Rights
Agreement in any manner which Charter One deems necessary or desirable and which
will not adversely affect the interests of the holders of the Rights.
Charter One currently has reserved 1,600,000 shares of Preferred Stock
(as adjusted for the Charter One Stock Split) for issuance upon exercise of the
Rights. As of August 15, 1998 there were 127,213,076 shares of Charter One
Common Stock, and therefore Rights with respect to approximately 1,272,131
shares of Series A Preferred Stock were then outstanding.
The Rights have certain anti-takeover effects. The Rights could cause
substantial dilution to a person or group that attempts to acquire Charter One
(other than pursuant to a Permitted Offer or with Charter One's prior approval)
without conditioning the offer on the Rights being redeemed or substantially all
of the Rights being acquired. However, the Rights should not interfere with any
merger or other business combination approved by Charter One with a person other
than an Acquiring Person because the Rights are redeemable under those
circumstances.
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CSFC has not issued any similar rights or entered into any similar
agreement with respect to its common stock.
LEGAL MATTERS
The validity of the shares of Charter One Common Stock offered hereby
will be passed upon for Charter One by Silver, Freedman & Taff, L.L.P. (a
limited liability partnership including professional corporations), Washington,
D.C. Certain other legal matters in connection with the Merger will be passed
upon for Charter One by Silver, Freedman & Taff, L.L.P., and for CSFC by Arter &
Hadden LLP, Cleveland, Ohio.
EXPERTS
The consolidated financial statements incorporated in this Proxy
Statement/Prospectus by reference from the 1997 Charter One 10-K have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report (which expresses an unqualified opinion and refers to the report of other
auditors on the consolidated financial statements of RCSB Financial, Inc. which
was merged with Charter One), 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 Charter One also rely in part
upon the financial statements of RCSB Financial, Inc. (which was merged into
Charter One in 1997) as audited by KPMG Peat Marwick LLP, in reliance upon their
authority as experts in accounting and auditing.
The consolidated financial statements of CS Financial Corporation and
subsidiary as of December 31, 1997 and 1996 and for the years then ended, and as
of December 31, 1996 and 1995 and for the years then ended, have been included
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors, and upon the authority of said firm as experts in accounting and
auditing. Representatives of KPMG Peat Marwick LLP are expected to attend the
Special Meeting and to be available to respond to appropriate questions and to
have the opportunity to make a statement if they so desire.
The Pro Forma Financial Statements included in this Proxy
Statement/Prospectus rely in part upon the financial statements of ALBANK
Financial Corporation as audited by KPMG Peat Marwick LLP in reliance upon their
authority as experts in accounting and auditing.
STOCKHOLDER PROPOSALS
CSFC will hold a 1999 Annual Meeting of Stockholders only if the Merger
is not consummated. If the Merger is consummated, stockholders of CSFC who
receive Charter One Common Stock in the Merger will become stockholders of
Charter One at the Effective Time. Under applicable regulations of the
Commission, all proposals of stockholders to be considered for inclusion in
Charter One's proxy statement for, and to be considered at, the 1999 annual
meeting of Charter One's stockholders must be received in writing at the offices
of Charter One, c/o Secretary, 1215 Superior Avenue, Cleveland, Ohio 44114 by
not later than November 25, 1998. The Charter One Bylaws also prescribe certain
time limitations on procedures regarding prior written notice to Charter One by
stockholders, which limitations and procedures must be complied with for
proposals
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from stockholders to be included in Charter One's proxy statement for, and to be
considered at, such annual meeting. Any stockholder who wishes to make such a
proposal should request a copy of the applicable provisions of the Charter One
Bylaws from the secretary of Charter One.
OTHER MATTERS
The CSFC Board is not aware of any business to come before the Special
Meeting other than those matters described above in this Proxy
Statement/Prospectus. However, if any other matter should properly come before
the Special Meeting, including proposals to adjourn the Special Meeting to
permit further solicitation of proxies in the event that there are not
sufficient votes to approve any proposal at the time of the Special Meeting, it
is intended that holders of the proxies will act in accordance with their best
judgment; provided, however, that no proxy that is voted against a proposal will
be voted in favor of adjournment to solicit further proxies for such proposal.
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INDEX TO FINANCIAL STATEMENTS OF CS FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
Unaudited Consolidated Balance Sheets
June 30, 1998 and December 31, 1997.................................. F-1-1
Unaudited Consolidated Statements of Operations
Six months ended June 30, 1998 and 1997.............................. F-1-2
Unaudited Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997............................. F-1-3
Unaudited Notes to Consolidated Financial Statements..................... F-1-4
Independent Auditors' Report............................................. F-2-1
Consolidated Balance Sheets
December 31, 1997 and 1996........................................... F-2-2
Consolidated Statements of Operations
Years ended December 31, 1997 and 1996............................... F-2-3
Consolidated Statements of Retained Earnings
Years ended December 31, 1997 and 1996............................... F-2-4
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996.............................. F-2-5
Notes to Consolidated Financial Statements
December 31, 1997 and 1996.......................................... F-2-6
Independent Auditors' Report............................................. F-3-1
Consolidated Balance Sheets
December 31, 1996 and 1995....................................... F-3-2
Consolidated Statements of Operations
Years ended December 31, 1996 and 1995.............................. F-3-3
Consolidated Statements of Retained Earnings
Years ended December 31, 1996 and 1995.............................. F-3-4
Consolidated Statements of Cash Flows
Years ended December 31, 1996 and 1995.............................. F-3-5
Notes to Consolidated Financial Statements
December 31, 1996 and 1995.......................................... F-3-6
</TABLE>
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CS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
----------------------- ------------------------
<S> <C> <C>
ASSETS:
Mortgage Loans..................................... $332,220,643 $333,594,835
Mortgage-Backed Securities......................... 760,068 940,156
Other Loans........................................ 1,901,709 1,897,596
Investment Securities.............................. 767,025 2,863,897
Stock in Federal Home Loan Bank of Cincinnati,
at Cost......................................... 3,419,300 3,299,700
Cash On Hand and in Financial Institutions......... 1,602,595 1,467,375
Short Term Cash Investments........................ 32,529,516 16,683,451
Real Estate Acquired in Settlement of Loans........ 155,685 85,500
Buildings, Office Property and Equipment, Net...... 15,295,517 14,196,864
Prepaid Expenses and Other Assets.................. 3,129,700 2,427,136
Deferred Federal Income Taxes...................... 575,180 695,010
Investment in Unconsolidated Subsidiary............ 519,746 498,184
-------------- ----------------
$392,876,684 $378,649,704
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits........................................... $342,747,885 326,713,421
Advances from the Federal Home Loan Bank........... 14,659,615 17,063,429
Advance Payments by Borrowers for Tax and
Insurance....................................... 2,317,343 2,450,106
Other Liabilities.................................. 2,556,328 3,128,271
------------- --------------
Total Liabilities................................ 362,281,171 349,355,227
Shareholders' Equity
Capital Stock, $5 Par Value; Authorized 500,000
Shares; Issued 52,990 Shares................... 264,950 264,950
Paid in Capital.................................. 90,000 90,000
Retained Earnings - Substantially Restricted..... 33,329,740 32,028,704
Less Cost of 19,355 Shares of Treasury Stock..... (3,089,177) (3,089,177)
-------------- ---------------
Total Shareholders' Equity..................... 30,595,513 29,294,477
------------- --------------
$392,876,684 $378,649,704
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-1-1
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
----------------------------------------------------------------------
June 30, 1998 June 30, 1997
-------------------------- ---------------------------------------
<S> <C> <C>
INTEREST INCOME:
Mortgage Loans and Mortgage-Backed Securities...... $ 13,311,739 $ 12,394,089
Investment Securities............................. 753,938 651,141
Other Loans....................................... 157,941 144,788
--------------- ---------------
Total Interest Income........................... 14,223,618 13,190,018
------------- -------------
INTEREST EXPENSE:
Deposits........................................... 8,209,136 7,533,180
Borrowings......................................... 481,309 618,577
------------- --------------
Total Interest Expense........................... 8,690,445 8,151,757
------------ -------------
Net Interest Income.............................. 5,533,173 5,038,261
Provision for Loan Losses.......................... 13,166 223,712
------------- --------------
Net Interest after Provision for Loan Losses..... 5,520,007 4,814,549
Loan Fees and Service Charges...................... 155,875 149,342
------------- ---------------
5,675,882 4,963,891
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, Payroll Taxes, and Fringe
Benefits......................................... 2,398,059 2,270,835
Marketing.......................................... 82,430 94,463
Office Occupancy and Equipment.................... 765,134 760,344
Federal Insurance Premium......................... 101,047 93,821
Ohio Taxes........................................ 192,396 173,550
Other Operating Expenses, Net..................... 712,816 408,435
-------------- --------------
Total General and Administrative Expenses....... 4,251,882 3,801,448
------------- -------------
1,424,000 1,162,443
NONOPERATING INCOME (EXPENSE), NET:
Building Rentals, Net.............................. 567,083 497,333
Equity in Net Earnings of Unconsolidated
Subsidiary....................................... 21,563 2,874
Other, Net......................................... 165,179 7,665
-------------- ----------------
753,825 507,872
-------------- --------------
Earnings Before Federal Income Taxes............. 2,177,825 1,670,315
FEDERAL INCOME TAX EXPENSE:
Current........................................... 622,420 685,200
Deferred.......................................... 119,830 (120,975)
--------------- ---------------
742,250 564,225
-------------- --------------
Net Earnings.................................... $ 1,435,575 $ 1,106,090
============= ===========
Net Earnings Per Share (Basic and Diluted)........... $ 42.68 $ 32.89
=============== ==============
Average Yield on Investments...................... 7.71% 7.62%
================ ================
Interest Expense to Average Deposits and
Borrowings..................................... 5.07% 5.03%
=============== ================
</TABLE>
See accompanying notes to the consolidated financial statements.
F-1-2
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
-----------------------------------------------------------------
June 30, 1998 June 30, 1997
--------------------------------- ----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings............................................. $ 1,435,575 $ 1,106,090
Adjustments to Reconcile Net Earnings to Net Cash
Provided by (Used In) Operating Activities:
REO Charitable Contribution........................... 18,512 ---
Deferred Loan Origination Fees and Other Income....... (280,939) (331,712)
Amortization of Premiums and Discounts on Loans,
Investment Securities, and Other Assets............ 32,160 28,044
Provision for Loan Losses............................. 13,166 223,712
Depreciation and Amortization of Office Properties
and Equipment....................................... 425,289 340,403
Federal Home Loan Bank Stock Dividend................. (119,600) (119,700)
Redemption of Federal Home Loan Bank Stock............ --- 548,400
Deferred Federal Income Tax Provision................. 119,830 (119,975)
Increase in Accrued Interest Receivable............... (151,768) (155,325)
Increase in Prepaid Expenses and Other Assets......... (725,700) (904)
Decrease in Other Liabilities......................... (229,562) (96,123)
Other, Net............................................ (106,330) (165,969)
----------------- ---------------
Net Cash Provided by (Used In) Operating
Activities........................................ 430,633 1,256,941
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan Originations..................................... (40,954,877) (39,918,109)
Principal Payments on Loans and Mortgage-
Backed Securities................................ 43,019,953 27,382,425
Proceeds from Maturities of Investment Securities..... 2,076,749 1,015,188
Investment in Real Estate Acquired.................... (90,115) (457,878)
Proceeds from Sales of Real Estate Acquired........... -- 198,590
Purchases of Office Properties and Equipment.......... (1,523,942) (196,153)
Other Loan Repayments, Net of Other Loans
Originated....................................... (4,113) (66,960)
----------------- ------------------
Net Cash Provided by (Used In) Investing Activities 2,523,655 (12,042,897)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Money Market Checking, Passbook,
and Liquid Asset Accounts.......................... (700,396) 3,745,004
Proceeds from Issuance of Certificates of Deposits.... 98,346,090 96,674,563
Payments for Maturing or Early Withdrawal of
Certificates of Deposit............................. (81,611,230) (75,998,527)
Advances from Federal Home Loan Bank.................. -- 9,225,000
Repayments of Advances from Federal Home
Loan Bank.......................................... (2,403,814) (17,412,226)
Decrease in Advance Payments by Borrowers
for Taxes and Insurance............................ (132,763) (180,988)
Cash Dividends Paid on Capital Stock.................. (470,890) (235,445)
--------------- ---------------
Net Cash Provided by Financing Activities........... 13,026,997 15,817,381
-------------- --------------
Net Increase in Cash and Cash Equivalents.................. 15,981,285 5,031,425
Cash and Cash Equivalents at Beginning of Period........... 18,150,826 12,965,013
------------- -------------
Cash and Cash Equivalents at End of Period................. $ 34,132,111 $ 17,996,438
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-1-3
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CSFC is a savings and loan holding company. Its wholly owned subsidiary, CSFC
Bank, and CSFC Bank's subsidiary are principally engaged in the business of
furnishing a convenient savings investment medium through the issuance of
passbook accounts, money market checking accounts, certificates of deposit, and
liquid asset accounts; and lending to customers primarily for the purchase,
construction, and improvement of real estate, principally residential, in
Northeast Ohio. CSFC Bank conducts its business from eight full-service offices
in Cuyahoga County and a loan office in Lake County. Management does not believe
it has significant concentrations of risk to any one group of borrowers given
its underwriting and collateral requirements. Summarized below are the
significant accounting policies of CSFC and subsidiary.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of CSFC and
CSFC Bank . The accounts of CSFC Bank have been consolidated with those
of its wholly owned subsidiary, Central Land Corporation ("CLC") and
its formerly wholly owned subsidiary, Cuyahoga Savings Management
Corporation ("CSMC"). CSMC was merged into CLC effective December 26,
1997. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CSFC accounts for Cuyahoga Financial Services Agency, Inc. ("CFSA") on
the equity basis. CSFC owns the nonvoting stock of CFSA, which is a
registered broker/dealer in securities and a licensed insurance agency.
(b) Use of Estimates
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.
(c) Loan Fees and Discounts
Loan origination and commitment fees and certain direct loan
origination costs are deferred, and the net fee or cost is amortized as
an adjustment to yield using the interest method over the contractual
life of the related loans subsequently adjusted for actual prepayments.
(d) Investment and Mortgage-Backed Securities
Debt and equity securities are classified into one of three categories:
held to maturity, available for sale, or held for trading. Securities
held to maturity are limited to debt securities that the holder has the
positive intent and the ability to hold to maturity and these
securities are reported at amortized cost. Securities held for trading
are limited to debt and equity securities that are bought and held
principally for the purpose of selling them in the near term. Trading
securities are reported at fair value, and unrealized losses are
reported in current earnings. Securities held as available for sale
consist of all other securities; these securities are reported at fair
value, and unrealized gains and losses are reported as a separate
component of shareholders' equity. Securities that could be sold in the
future because of changes in interest rates or other factors are not
classified as held to maturity.
At June 30, 1998 and December 31, 1997, all investment securities and
mortgage-backed securities are carried at amortized cost because of
management's positive intent and CSFC's ability to hold them to
maturity.
(e) Buildings, Office Properties and Equipment
Buildings, office properties and equipment are depreciated using a
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the shorter of the
estimated useful life of the asset or the term of the lease.
F-1-4
<PAGE>
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
(g) Allowance for Loan Losses
The adequacy of the allowance for loan losses is periodically evaluated
by CSFC Bank based upon the overall portfolio composition and general
market conditions. While management uses the best available information
to make these evaluations, future adjustments to the allowances may be
necessary if economic conditions change substantially from the
assumptions used in making the evaluations. Future adjustments to the
allowance may also be required by regulatory examiners based on their
judgments about information available to them at the time of their
examination.
For uncollectible interest on loans that are contractually 90 days or
more past due, an allowance is established. The allowance is
established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the
extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is
back to normal, in which case the loan is returned to accrual status.
At June 30, 1998 and December 31, 1997, loans which were contractually
90 days or more past-due and where an allowance was established,
approximated $2,885,000 and $3,530,000, respectively.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect
principal or interest due according to the contractual terms of the
loan. Since CSFC Bank's impaired loans are primarily
collateral-dependent, measurement of impairment is based on the fair
value of the collateral. The allowance for loan losses relating to
impaired loans was not significant at June 30, 1998 and December 31,
1997.
(h) Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans represents real estate
acquired through foreclosure, or deed in lieu of foreclosure, and is
initially recorded at the lower of cost (principal balance of the
former mortgage loan) or fair value less estimated selling costs.
(i) Earnings per Share
Earnings per share of capital stock is based on the weighted average
number of common shares outstanding during the respective periods.
(j) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, CSFC
considers cash on hand and in financial institutions, short-term cash
investments, and federal funds sold with original maturities of three
months or less to be cash equivalents.
(k) Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was issued in June 1997 and became effective on
January 1, 1998. This statement requires companies to report all items
that are recognized as components of comprehensive income under
accounting standards. While CSFC has adopted the statement as of
January 1, 1998, there is currently no effect on net income or CSFC's
financial statement presentation.
F-1-5
<PAGE>
(2) MORTGAGE LOANS, MORTGAGE-BACKED SECURITIES, AND OTHER LOANS
-----------------------------------------------------------------------
A summary of mortgage loans is as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Conventional loans (primarily secured
by one-to-four-family residences)
Adjustable Rate............................................. $195,031,092 $232,614,546
Fixed Rate.................................................. 141,819,509 106,743,302
Partially guaranteed by Veterans Administration or insured
by Federal Housing Administration............................ 74,094 95,901
------------ ------------
336,924,695 339,453,749
Accrued interest receivable, net of
interest paid in advance.................................... 766,382 529,065
Undisbursed portion of loans.................................. (3,243,803) (4,201,036)
Allowance for losses on loans................................. (1,148,292) (1,151,784)
Deferred loan fees............................................ (1,078,339) (1,035,159)
------------ ------------
$332,220,643 $333,594,835
============ ============
</TABLE>
At June 30, 1998 and December 31, 1997, CSFC Bank had approximately
$14,400,000 and $14,600,000, respectively, in apartment loans which are included
in conventional loans above.
F-1-6
<PAGE>
A summary of mortgage-backed securities held to maturity is as follows:
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
FHLMC Certificates.......................... $171,550 --- $(5,734) $165,816
GNMA Certificates........................... 233,507 $5,979 --- 239,486
Other....................................... 355,011 --- --- 355,011
$760,068 $5,979 $(5,734) $760,313
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
FHLMC Certificates.......................... $226,875 --- $(7,582) $219,293
GNMA Certificates........................... 292,124 $6,064 --- 298,188
Other....................................... 421,157 --- --- 421,157
--------- ------ -------- --------
$940,156 $6,064 $(7,582) $938,638
======== ====== ======= ========
</TABLE>
A summary of other loans is as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-----------------------------------------------------------
<S> <C> <C>
Commercial loans..................................... $ 468,996 $ 565,793
Credit card balances................................. 476,968 545,442
Other loans.......................................... 988,429 814,811
---------- -----------
1,934,393 1,926,046
Accrued interest receivable, net of interest
paid in advance.................................... 4,778 3,750
Allowance for loan losses............................ (37,462) (32,200)
---------- -----------
$1,901,709 $1,897,596
========== ==========
</TABLE>
F-1-7
<PAGE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Mortgage Other
Loans Loans Total
------------------ ---------------------- ----------------
<S> <C> <C> <C>
Balance as of December 31, 1996.............. $ 932,000 $ 31,000 $963,000
Provisions, net.............................. 219,395 12,175 231,570
(Charge-offs) recoveries, net................ 389 (10,975) (10,586)
------------- -------- ----------
Balance as of December 31, 1997.............. 1,151,784 32,200 1,183,984
Provisions, net.............................. --- 13,166 13,166
(Charge-offs) recoveries, net................ (3,492) (4,949) (8,441)
------------- ----------- -----------
Transfer in (out)............................ --- (2,955) (2,955)
Balance as of June 30, 1998.................. $1,148,292 $ 37,462 $1,185,754
========== ========== ==========
</TABLE>
At June 30, 1998, CSFC Bank had outstanding commitments to fund
mortgage loans totaling approximately $6,365,000, which management expects to
fund through operations. These commitments consist of $5,503,000 and $862,000 in
fixed and variable mortgages respectively. The Association's credit card
customers had unused lines of credit of approximately $5,078,000 at June 30,
1998.
(3) INVESTMENT SECURITIES
A summary of investment securities held to maturity at June 30, 1998 and
December 31, 1997, follows:
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
SBA pools.............................. $ 569,565 $ 165 $ --- $ 569,730
Municipal bonds........................ 185,235 --- --- 185,235
----------- -------- ----- -----------
754,800 $ 165 $ --- 754,965
====== =====
Accrued interest receivable............ 12,225 12,225
------------ ------------
$ 767,025 $ 767,190
========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SBA pools............................. $ 652,818 $ 190 $ --- $ 653,008
U.S. Treasury notes................... 2,000,000 3,750 --- 2,003,750
Municipal bonds....................... 185,297 --- --- 185,297
----------- ---------- ----- ------------
2,838,115 $3,940 $ --- 2,842,055
====== =====
Accrued interest receivable........... 25,782 25,782
------------ ------------
$2,863,897 $2,867,837
========== ==========
</TABLE>
F-1-8
<PAGE>
The following is a summary of the amortized cost and estimated market
value of investment securities at June 30, 1998, by remaining term to maturity:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
------------------------------------
<S> <C> <C> <C>
Due within 5 years................................... $115,076 $115,076
Due after 5 years through 10 years................... 70,159 70,159
Due after 10 years through 20 years.................. 382,178 382,289
Due after 20 years through 30 years.................. 187,387 187,441
-------- ---------
Total: $754,800 $754,965
======== ========
</TABLE>
(4) BUILDINGS, OFFICE PROPERTIES AND EQUIPMENT, NET
Buildings, office properties and equipment at June 30, 1998 and December
31, 1997, are summarized below:
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------------------
Accumulated
Depreciation and
Cost Amortization Net
---------------------------------------------------------------------------
<S> <C> <C> <C>
Land........................................ $ 3,591,340 $ --- $3,591,340
Office Buildings............................ 12,868,604 2,556,291 10,312,313
Building Improvements....................... 1,057,666 449,262 608,404
Furniture, fixtures and equipment........... 4,464,681 3,780,942 683,739
Projects in Progress........................ 99,721 --- 99,721
-------------- ---------------- ------------
$22,082,012 $6,786,495 $15,295,517
=========== ========== ===========
</TABLE>
F-1-9
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------------
Accumulated
Depreciation and
Cost Amortization Net
----------------------------------------------------------------------
<S> <C> <C> <C>
Land........................................ $ 3,591,340 $ --- $ 3,591,340
Office Buildings............................ 11,324,371 2,277,026 9,047,345
Building Improvements....................... 1,057,666 415,685 641,981
Furniture, fixtures and equipment........... 4,476,712 3,829,794 646,918
Projects in Progress........................ 269,280 --- 269,280
-------------- ---------------- -------------
$20,719,369 $6,522,505 $14,196,864
=========== ========== ===========
</TABLE>
CSFC Bank occupies approximately 25% of One Erieview Plaza/Lincoln
Building for its main office and leases the remaining portions of the two
buildings. The tenant leases very in length; the minimum future lease
commitments for all operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Future Minimum Lease Payments
------------------------ -----------------------------
<S> <C>
1998 $ 2,374,567
1999 2,310,359
2000 2,225,691
2001 2,196,306
2002 2,029,841
2003 and thereafter 11,022,724
-------------
$22,159,488
===========
</TABLE>
The income and related expenses as included in the accompanying
consolidated statements of operations, were as follows:
<TABLE>
<CAPTION>
For the Six Months For the Six Months
Ended June 30, 1998 Ended June 30, 1997
--------------------------- ---------------------------
<S> <C> <C>
Gross tenant rentals.......................... $2,097,739 $1,947,652
Less:
Operating Expenses.......................... 1,320,150 1,309,637
Depreciation of buildings, building
improvements, and other.................. 210,506 140,682
----------- ----------
Building rentals, net..................... $ 567,083 $497,333
=========== ========
</TABLE>
F-1-10
<PAGE>
(5) ADVANCES FROM THE FEDERAL HOME LOAN BANK
At June 30, 1998, CSFC Bank was obligated to the Federal Home Loan Bank
of Cincinnati (FHLB) for the following fixed rate secured notes:
<TABLE>
<CAPTION>
Year of Maturity Interest Rate Amount
---------------- ------------- ------
<S> <C> <C>
2002 6.85% $ 150,354
2003 5.50 1,058,959
2007 6.55 9,096,717
2007 6.75 456,916
2007 6.90 458,461
2007 7.00 229,744
2008 6.00 3,109,412
2011 4.05 20,267
2011 4.05 22,518
2016 1.71 56,267
-------------
$14,659,615
</TABLE>
CSFC Bank's mortgage portfolio is pledged as security under a blanket
mortgage collateral agreement for 150 percent of the notes payable to the FHLB.
In addition, stock in the FHLB is pledged for such advances.
(6) CURRENT REGULATORY ENVIRONMENT
The capital requirements mandated by the Financial Institutions Reform,
Recovery and Enforcement Act specify that a savings institution maintain
regulatory tangible capital of not less than 1.5% of tangible assets, minimum
core capital of not less than 3% of adjusted tangible assets, and risk-based
capital of not less than 8% of risk-weighted assets. In conjunction with the
risk-based capital requirement, the Office of Thrift Supervision (OTS) has
assigned risk- weighting factors to all of CSFC Bank's assets and certain
commitments which are to be utilized in computing the amount of required
capital. Since such regulations do not allow for the inclusion of certain items,
regulatory capital determinations do not correspond to the total assets or
retained earnings as reported in the accompanying consolidated balance sheets.
The prompt corrective action regulations of the Federal Deposit
Insurance Corporation Improvement Act define specific capital categories based
on an institution's capital ratios. The capital categories, in declining order,
are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the OTS
or by the Federal Deposit Insurance Corporation, including requirements to raise
additional capital, sell assets, or sell the entire institution. Once an
institution becomes "critically undercapitalized," it is generally placed in
receivership or conservatorship within 90 days.
To be considered "well capitalized," an institution must generally have
a leverage ratio of at least 5%, a Tier-1 risk-based capital ratio of at least
6%, and a total risk-based capital ratio of at least 10%. As of June 30, 1998
and December 31, 1997, the most recent notification from the OTS, categorized
CSFC Bank as "well capitalized" under the regulatory framework for prompt
corrective action. Management does not believe any conditions or events since
notification have changed CSFC Bank's category.
F-1-11
<PAGE>
At June 30, 1998 and December 31, 1997, CSFC Bank was in compliance with
regulatory capital requirements as set forth below (dollars in thousands):
<TABLE>
<CAPTION>
Core/ Tier-1 Total
Equity Tangible Leverage Risk-Based Risk-Based
Capital Capital Capital Capital Capital
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1998
Capital stock..................... $ 265 --- --- --- ---
Paid-in capital................... 90 --- --- --- ---
Retained earnings................. 28,721 --- --- --- ---
-------- ----------- ------------ ------------ -----------
Equity capital...................... 29,076 29,076 29,076 29,076 29,076
General loan valuation
allowances....................... --- --- --- 1,031
----------- ------------ ------------ ----------
Regulatory capital.................. 29,076 29,076 29,076 30,107
-------- -------- -------- --------
Total regulatory assets............. 392,906
--------
Adjusted total assets............... 392,906 392,906
--------- ---------
Risk-weighted assets................ 211,895 211,895
-------- --------
Capital ratio....................... 7.40% 7.40% 7.40% 13.72% 14.21%
Regulatory requirement.............. 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal to or
greater than................... 5.00% 6.00% 10.00%
</TABLE>
F-1-12
<PAGE>
<TABLE>
<CAPTION>
Core/ Tier-1 Total
Equity Tangible Leverage Risk-Based Risk-Based
Capital Capital Capital Capital Capital
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1997
Capital stock..................... $ 265 --- --- --- ---
Paid-in capital................... 90 --- --- --- ---
Retained earnings................. 27,958 --- --- --- ---
-------- ------ ------- -------- ------
Equity capital...................... 28,313 28,313 28,313 28,313 28,313
General loan valuation
allowances....................... --- --- --- 998
------ ------- -------- ------
Regulatory capital.................. 28,313 28,313 28,313 29,311
------ ------- -------- ------
Total regulatory assets............. 379,131
--------
Adjusted total assets............... 379,131 379,131
------- -------
Risk-weighted assets................ 207,569 207,569
-------- --------
Capital ratio....................... 7.47% 7.47% 7.47% 13.64% 14.12%
Regulatory requirement.............. 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal to or
greater than................... 5.00% 6.00% 10.00%
</TABLE>
F-1-13
<PAGE>
[KPMG PEAT MARWICK LLP]
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
CS Financial Corporation:
We have audited the accompanying consolidated balance sheets of CS Financial
Corporation and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, retained earnings, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CS
Financial Corporation and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information in
Schedules 1 and 2 is presented for purposes of additional analysis of the
consolidated financial statements rather than to present the financial position
and results of operations of the individual companies. The consolidating
information has been subjected to the auditing procedures applied in the audits
of the consolidated financial statements, and, in our opinion, is fairly stated
in all material respects in relation to the consolidated financial statements
taken as a whole.
/s/ KPMG Peat Marwick
LLP
February 13, 1998
F-2-1
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Mortgage loans (notes 2 and 6) $ 333,594,835 311,857,800
Mortgage-backed securities (estimated market value of
$938,638 in 1997 and $1,335,501 in 1996; note 2) 940,156 1,342,614
Other loans (note 2) 1,897,596 1,425,410
Investment securities (estimated market value of
$2,867,837 in 1997 and $3,970,584 in 1996; note 3) 2,863,897 3,949,426
Stock in the Federal Home Loan Bank of Cincinnati, at
cost (note 6) 3,299,700 3,611,100
Cash on hand and in financial institutions 1,467,375 1,207,861
Short-term cash investments 16,683,451 11,757,152
Real estate acquired in settlement of loans 85,500 225,103
Buildings, office properties and equipment, net (note 4) 14,196,864 13,279,406
Prepaid expenses and other assets 2,427,136 2,971,622
Deferred federal income taxes (note 7) 695,010 712,800
Investment in unconsolidated subsidiary 498,184 484,419
---------------- -----------
$ 378,649,704 352,824,713
================ ===========
Liabilities and Shareholders' Equity
Deposits (note 5) $ 326,713,421 293,593,414
Advances from the Federal Home Loan Bank (note 6) 17,063,429 25,950,182
Advance payments by borrowers for taxes and insurance 2,450,106 2,489,332
Other liabilities 3,128,271 3,500,558
---------------- -----------
Total liabilities 349,355,227 325,533,486
Shareholders' equity (note 10)
Capital stock, $5 par value; authorized 500,000 shares;
issued 52,990 shares 264,950 264,950
Paid-in capital 90,000 90,000
Retained earnings - substantially restricted (note 7) 32,028,704 30,025,454
Less cost of 19,355 shares of treasury stock (3,089,177) (3,089,177)
---------------- -----------
Total shareholders' equity 29,294,477 27,291,227
Commitments and contingencies (notes 2 and 8)
$ 378,649,704 352,824,713
================ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2-2
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Interest income
Mortgage loans and mortgage-backed securities $ 25,639,368 24,307,532
Investment securities 1,266,894 1,129,483
Other loans 327,235 397,673
------------ ------------
Total interest income 27,233,497 25,834,688
------------ ------------
Average yield on investments 7.75% 7.74%
============ ============
Interest expense
Deposits (note 5) 15,571,129 13,628,197
Borrowings 1,263,358 1,704,268
------------ ------------
Total interest expense 16,834,487 15,332,465
------------ ------------
Interest expense to average deposits and borrowings 5.05% 4.96%
============ ============
Net interest income 10,399,010 10,502,223
Provision for loan losses 231,570 159,673
------------ ------------
Net interest income after provision for loan losses 10,167,440 10,342,550
Loan fees and service charges 286,447 268,708
------------ ------------
10,453,887 10,611,258
General and administrative expenses
Compensation, payroll taxes, and fringe benefits (note 9) 4,612,394 4,650,598
Marketing 139,365 122,417
Office occupancy and equipment (note 8) 1,558,330 1,225,098
Federal insurance premium 193,382 602,079
Special SAIF assessment (note 11) -- 1,627,382
Ohio taxes 343,542 340,570
Other operating expenses, net 920,399 912,486
------------ ------------
Total general and administrative expenses 7,767,412 9,480,630
------------ ------------
2,686,475 1,130,628
Nonoperating income (expense), net
Building rentals, net (note 4) 1,134,393 352,189
Gains on sales of real estate, net 57,606 1,135
Equity in net earnings of unconsolidated subsidiary 13,764 16,068
Other, net (34,332) 75,001
------------ ------------
1,171,431 444,393
------------ ------------
Earnings before federal income taxes 3,857,906 1,575,021
Federal income tax expense (benefit) (note 7)
Current 1,278,525 806,200
Deferred 17,790 (289,500)
------------ ------------
1,296,315 516,700
------------ ------------
Net earnings $ 2,561,591 1,058,321
============ ============
Net earnings per share $ 76.16 31.46
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2-3
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Retained Earnings
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $ 29,303,483
Net earnings for the year ended December 31, 1996 1,058,321
Dividends on capital stock
Paid ($4.50 per share) (151,358)
Declared, payable January 1997 ($5.50 per share) (184,992)
---------------
Balance at December 31, 1996 30,025,454
Net earnings for the year ended December 31, 1997 2,561,591
Dividends on capital stock
Paid ($4.60 per share) (154,721)
Declared, payable January 1998 ($12.00 per share) (403,620)
---------------
Balance at December 31, 1997 $ 32,028,704
===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2-4
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 2,561,591 1,058,321
Adjustments to reconcile net earnings to net cash provided by
operating activities
Deferred loan origination fees and other income (284,679) (660,642)
Amortization of premiums and discounts on loans, investment
securities, and other assets 113,565 142,564
Provision for loan losses 231,570 159,673
Depreciation and amortization of office properties and equipment 698,926 1,395,790
Federal Home Loan Bank stock dividend (237,000) (241,900)
Redemption of Federal Home Loan Bank stock 548,400 --
Deferred federal income tax provision 17,790 (289,500)
Increase in accrued interest receivable (392,651) (118,789)
Decrease (increase) in prepaid expenses and other assets 498,213 (229,005)
(Decrease) increase in other liabilities (182,319) 824,520
Other, net (559,824) (180,544)
------------- -------------
Net cash provided by operating activities 3,013,582 1,860,488
------------- -------------
Cash flows from investing activities
Loan originations (74,140,342) (70,881,325)
Principal payments on loans and mortgage-backed securities 53,356,198 57,898,009
Proceeds from maturities of investment securities 1,005,000 1,030,000
Purchase of investment securities -- (2,001,172)
Investment in real estate acquired (529,795) (555,959)
Proceeds from sales of real estate acquired 728,386 354,476
Purchases of office properties and equipment (1,629,345) (656,405)
Purchases of buildings and land -- (1,100,000)
Reimbursement of tenant improvements -- 179,703
Other loan repayments, net of other loans originated (472,186) 1,167,918
------------- -------------
Net cash used in investing activities (21,682,084) (14,564,755)
------------- -------------
Cash flows from financing activities
Net increase (decrease) in money market checking, passbook, and
liquid asset accounts 11,841,869 (5,104,087)
Proceeds from issuance of certificates of deposit 196,268,538 182,236,896
Payments for maturing or early withdrawal of certificates of deposit (174,990,400) (158,563,959)
Advances from Federal Home Loan Bank 32,425,000 55,445,000
Repayments of advances from Federal Home Loan Bank (41,311,753) (65,827,558)
Decrease in advance payments by borrowers for taxes and insurance (39,226) (15,039)
Capital lease obligation payments -- (482,827)
Cash dividends paid on capital stock (339,713) (302,715)
------------- -------------
Net cash provided by financing activities 23,854,315 7,385,711
------------- -------------
Net increase (decrease) in cash and cash equivalents 5,185,813 (5,318,556)
Cash and cash equivalents at beginning of year 12,965,013 18,283,569
------------- -------------
Cash and cash equivalents at end of year $ 18,150,826 12,965,013
============= =============
Supplemental disclosure of cash flow information
Interest paid, including interest credited $ 16,874,772 15,193,963
Federal income taxes paid 1,641,000 589,000
============= =============
Noncash investing and financing activities
Buildings and land (net) obtained for capital lease (note 4) $ -- 5,315,904
Cancellation of capital lease obligation in exchange for buildings and
land (note 4) -- 3,447,003
Release of first mortgage loan in exchange for buildings and land (note 4) -- 7,658,305
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2-5
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
CS Financial Corporation (CS Financial) is a savings and loan holding
company. Its wholly owned subsidiary, The Cuyahoga Savings Association
(Association), and the Association's subsidiaries are principally engaged
in the business of furnishing a convenient savings investment medium
through the issuance of passbook accounts, money market checking accounts,
certificates of deposit, and liquid asset accounts; and lending to
customers primarily for the purchase, construction, and improvement of real
estate, principally residential, in Northeast Ohio. The Association
conducts its business from eight full-service offices in Cuyahoga County
and a loan office in Lake County. Management does not believe it has
significant concentrations of risk to any one group of borrowers given its
underwriting and collateral requirements. Summarized below are the
significant accounting policies of CS Financial and subsidiary.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of CS
Financial and the Association. The accounts of the Association have
been consolidated with those of its wholly owned subsidiaries, Central
Land Corporation (CLC) and Cuyahoga Savings Management Corporation
(CSMC). All significant intercompany accounts and transactions have
been eliminated in consolidation. CSMC was merged into CLC effective
December 26, 1997.
CS Financial accounts for Cuyahoga Financial Services Agency, Inc.
(Agency) on the equity basis. CS Financial owns the nonvoting stock of
Agency, which is a registered broker/dealer in securities and a
licensed insurance agency.
(b) Use of Estimates
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.
(c) Loan Fees and Discounts
Loan origination and commitment fees and certain direct loan
origination costs are deferred, and the net fee or cost is amortized
as an adjustment to yield using the interest method over the
contractual life of the related loans subsequently adjusted for actual
prepayments.
(Continued)
F-2-6
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(d) Investment and Mortgage-Backed Securities
Debt and equity securities are classified into one of three
categories: held to maturity, available for sale, or held for trading.
Securities held to maturity are limited to debt securities that the
holder has the positive intent and the ability to hold to maturity;
these securities are reported at amortized cost. Securities held for
trading are limited to debt and equity securities that are bought and
held principally for the purpose of selling them in the near term;
these securities are reported at fair value, and unrealized losses are
reported in current earnings. Securities held as available for sale
consist of all other securities; these securities are reported at fair
value, and unrealized gains and losses are reported as a separate
component of retained earnings. Securities that could be sold in the
future because of changes in interest rates or other factors are not
classified as held to maturity.
At December 31, 1997 and 1996, all investment securities and
mortgage-backed securities are carried at amortized cost because of
management's positive intent and CS Financial's ability to hold them
to maturity.
(e) Buildings, Office Properties and Equipment
Buildings, office properties and equipment are depreciated using a
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the shorter of the
estimated useful life of the asset or the term of the lease.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(g) Allowance for Loan Losses
The adequacy of the allowance for loan losses is periodically
evaluated by the Association based upon the overall portfolio
composition and general market conditions. While management uses the
best available information to make these evaluations, future
adjustments to the allowances may be necessary if economic conditions
change substantially from the assumptions used in making the
evaluations. Future adjustments to the allowance may also be required
by regulatory examiners based on their judgments about information
available to them at the time of their examination.
For uncollectible interest on loans that are contractually 90 days or
more past due, an allowance is established. The allowance is
established by a charge to interest
(Continued)
F-2-7
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
income equal to all interest previously accrued, and income is
subsequently recognized only to the extent cash payments are received
until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which
case the loan is returned to accrual status.
At December 31, 1997 and 1996, loans which were contractually 90 days
or more past-due and where an allowance was established approximated
$3,530,000 and $3,930,000, respectively.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect
principal or interest due according to the contractual terms of the
loan. Since the Association's impaired loans are primarily
collateral-dependent, measurement of impairment is based on the fair
value of the collateral. The allowance for loan losses relating to
impaired loans was not significant at December 31, 1997 and 1996.
(h) Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans represents real estate
acquired through foreclosure, or deed in lieu of foreclosure, and is
initially recorded at the lower of cost (principal balance of the
former mortgage loan) or fair value less estimated selling costs.
(i) Earnings per Share
Earnings per share of capital stock is based on the weighted average
number of common shares outstanding during the respective years.
(j) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, CS
Financial considers cash on hand and in financial institutions,
short-term cash investments, and federal funds sold with original
maturities of three months or less to be cash equivalents.
(Continued)
F-2-8
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) Mortgage Loans, Mortgage-Backed Securities, and Other Loans
A summary of mortgage loans at December 31, 1997 and 1996, follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Conventional loans (primarily secured by
one-to-four-family residences)
Adjustable rate $ 232,614,546 246,996,076
Fixed rate 106,743,302 68,854,879
Partially guaranteed by Veterans Adminis-
tration or insured by Federal Housing
Administration 95,901 116,977
--------------- --------------
339,453,749 315,967,932
Accrued interest receivable, net of interest
paid in advance 529,065 28,400
Undisbursed portion of loans (4,201,036) (2,245,966)
Allowance for losses on loans (1,151,784) (932,000)
Deferred loan fees (1,035,159) (960,566)
------------- --------------
$ 333,594,835 311,857,800
=========== ===========
</TABLE>
At December 31, 1997 and 1996, the Association had approximately
$14,600,000 and $8,300,000, respectively, in apartment loans which are
included in conventional loans above.
A summary of mortgage-backed securities held to maturity at December 31,
1997 and 1996, follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
FHLMC certificates $ 226,875 - (7,582) 219,293
GNMA certificates 292,124 6,064 - 298,188
Other 421,157 - - 421,157
---------- -------- -------- ----------
$ 940,156 6,064 (7,582) 938,638
========== ===== ===== ==========
<CAPTION>
1996
--------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
FHLMC certificates $ 339,530 - (5,697) 333,833
GNMA certificates 448,131 - (1,416) 446,715
Other 554,953 - - 554,953
---------- -------- -------- ----------
$ 1,342,614 - (7,113) 1,335,501
========= ======== ======== =========
</TABLE>
(Continued)
F-2-9
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of other loans at December 31, 1997 and 1996, follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------
<S> <C> <C>
Commercial loans $ 565,793 597,516
Credit card balances 545,442 567,812
Other loans 814,811 298,128
-------------- ---------
1,926,046 1,463,456
Accrued interest receivable, net of
interest paid in advance 3,750 (7,046)
Allowance for loan losses (32,200) (31,000)
-------------- ---------
$ 1,897,596 1,425,410
============== =========
<CAPTION>
Activity in the allowance for loan losses is summarized as follows:
Mortgage Other
Loans Loans Total
------------- ------ ---------
<S> <C> <C> <C>
Balance as of December 31, 1995 $ 853,000 57,000 910,000
Provisions, net 153,665 6,008 159,673
(Charge-offs) recoveries, net (74,665) (32,008) (106,673)
------------- ------ ---------
Balance as of December 31, 1996 932,000 31,000 963,000
Provisions, net 219,395 12,175 231,570
(Charge-offs) recoveries, net 389 (10,975) (10,586)
------------- ------ ---------
Balance as of December 31, 1997 $ 1,151,784 32,200 1,183,984
============= ====== =========
</TABLE>
At December 31, 1997, the Association had outstanding commitments to fund
mortgage loans totaling approximately $5,415,000, which management expects
to fund through operations. These commitments consist of $3,888,000 and
$1,527,000 in fixed and variable mortgages, respectively. The Association's
credit card customers had unused lines of credit of approximately
$5,022,000 at December 31, 1997.
(Continued)
F-2-10
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Investment Securities
A summary of investment securities held to maturity at December 31, 1997
and 1996, follows:
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SBA pools $ 652,818 190 - 653,008
U.S. Treasury notes 2,000,000 3,750 - 2,003,750
Municipal bonds 185,297 - - 185,297
------------- ---------- ---------- ---------
2,838,115 3,940 - 2,842,055
========== ==========
Accrued interest receivable 25,782 25,782
------------- ---------
$ 2,863,897 2,867,837
============= =========
<CAPTION>
1996
--------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SBA pools $ 692,074 16,405 - 708,479
U.S. Treasury notes 2,998,060 4,753 - 3,002,813
Municipal bonds 215,368 - - 215,368
------------- ---------- ---------- ---------
3,905,502 21,158 - 3,926,660
========== ==========
Accrued interest receivable 43,924 43,924
------------- ---------
$ 3,949,426 3,970,584
============= =========
</TABLE>
The following is a summary of the amortized cost and estimated market value
of investment securities at December 31, 1997, by remaining term to
maturity:
<TABLE>
<CAPTION>
Estimated
Amortized Cost Market Value
--------------- ------------
<S> <C> <C>
Due within 5 years $ 2,115,116 2,118,867
Due after 5 years through 10 years 70,180 70,180
Due after 10 years through 20 years 448,819 448,498
Due after 20 years through 30 years 204,000 204,510
--------------- ---------
Total $ 2,838,115 2,842,055
=============== =========
</TABLE>
(Continued)
F-2-11
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Buildings, Office Properties and Equipment, Net
Buildings, office properties and equipment at December 31, 1997 and 1996,
are summarized below:
<TABLE>
<CAPTION>
1997
-------------------------------------
Accumulated
Depreciation and
Cost Amortization Net
---- ------------ ---
<S> <C> <C> <C>
Land $ 3,591,340 - 3,591,340
Office buildings 11,324,371 2,277,026 9,047,345
Building improvements 1,057,666 415,685 641,981
Furniture, fixtures and equipment 4,476,712 3,829,794 646,918
Projects in progress 269,280 - 269,280
--------------- --------- ----------
$ 20,719,369 6,522,505 14,196,864
=============== ========= ==========
<CAPTION>
1996
-------------------------------------
Accumulated
Depreciation and
Cost Amortization Net
---- ------------ ---
<S> <C> <C> <C>
Land $ 3,591,340 - 3,591,340
Office buildings 10,171,309 1,831,463 8,339,846
Building improvements 1,009,634 349,319 660,315
Furniture, fixtures and equipment 4,253,218 3,646,463 606,755
Projects in progress 81,150 - 81,150
--------------- --------- ----------
$ 19,106,651 5,827,245 13,279,406
=============== ========= ==========
</TABLE>
On August 23, 1996 the Association entered into an agreement with Erieview
Associates, Ltd., a Limited Liability Company (Erieview), whereby the
Association purchased the real estate known as One Erieview Plaza and
Lincoln Building and garage. The Association had previously contracted with
Erieview for a sales-leaseback for the aforementioned properties.
The sales-leaseback was financed by a first mortgage loan with the
Association. As a result of the August 1996 agreement, the Association
purchased the property from Erieview for $1,100,000 cash and released the
remaining $7,658,305 first mortgage loan, thereby terminating the master
lease agreement with Erieview.
(Continued)
F-2-12
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Association continues to occupy approximately 25 percent of One
Erieview Plaza/Lincoln Building for its main office and leases the
remaining portions of the two buildings. The tenant leases vary in length;
the minimum future lease commitments for all operating leases are as
follows:
Year Ending December 31, Future Minimum Lease Payments
1998 $ 2,421,600
1999 2,361,669
2000 2,277,001
2001 2,184,474
2002 1,702,299
2003 and thereafter 10,586,000
----------
$ 21,533,043
Prior to August 1996, the master lease required minimum annual payments of
$1,150,000, with additional contingent rent payable to Erieview on the
basis of 50 percent of adjusted net cash flow from the operation of the
premises in excess of $1,250,000. The agreement also required that the
Association provide all building management; pay all taxes, maintenance,
insurance, and other operating expenses; and provide leasehold improvements
not paid by tenants. The transaction had been accounted for as a capital
lease. In accordance therewith, the present value of future minimum lease
payments was capitalized to office properties and was amortized using the
straight-line method over 25 years (the initial lease term). Additionally,
such present value had been recorded as a capital lease obligation of the
Association. The gain on the sale of the buildings, which amounted to
$1,171,142, was deferred and was amortized using the straight-line method
over 25 years.
The income and related expenses for the years ended December 31, 1997 and
1996, as included in the accompanying consolidated statements of
operations, were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Gross tenant rentals $4,085,942 3,945,993
Amortization of deferred gain on sale of buildings -- 213,230
Real estate tax refund, net -- 186,492
---------- ----------
4,085,942 4,345,715
Less
Operating expenses 2,652,387 2,707,510
Interest expense -- 283,840
Depreciation of
Capital lease and leasehold improvements -- 909,114
Buildings, building improvements, and other 299,162 93,062
---------- ----------
Building rentals, net $1,134,393 352,189
========== ==========
</TABLE>
The real estate tax refund for 1996 represents a rebate of real estate
taxes for the two-year period 1994 through 1995.
(Continued)
F-2-13
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Deposits
Deposit balances at December 31, 1997 and 1996, are summarized by interest
rate as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------
Rate Weighted
Offered at Average
December 31 Amount Rate
----------- ------ ----
<S> <C> <C> <C>
Money market checking accounts 1.49-1.98% $ 17,858,141 1.93%
Passbook accounts 2.27-5.45 41,404,220 2.96
Liquid asset accounts 2.47-4.97 18,621,626 4.97
------------
77,883,987
Certificates of deposit 4.88-5.83 248,829,434 5.61
------------
Total deposits $326,713,421
============
<CAPTION>
1996
-------------------------------------------
Rate Weighted
Offered at Average
December 31 Amount Rate
----------- ------ ----
<S> <C> <C> <C>
Money market checking accounts 1.49-1.98% $ 17,545,536 1.93%
Passbook accounts 2.27-5.45 48,496,582 2.54
------------
66,042,118
Certificates of deposit 4.84-5.83 227,551,296 5.55
-----------
Total deposits $293,593,414
============
</TABLE>
At December 31, 1997, certificates of deposit summarized by contractual
year of maturity are as follows:
<TABLE>
<CAPTION>
Amount Percent
------ -------
<S> <C> <C>
1998 $ 220,544,484 88.6%
1999 22,859,956 9.2
2000 4,246,837 1.7
2001 946,602 .4
2002 and thereafter 231,555 .1
--------------- -----
$ 248,829,434 100.0%
=============== =====
</TABLE>
(Continued)
F-2-14
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Interest expense on deposits for the years ended December 31, 1997 and
1996, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Money market checking accounts $ 360,769 346,430
Liquid asset accounts 375,766 -
Certificates of deposit and deposit accounts 14,834,594 13,281,767
-------------- ----------
$ 15,571,129 13,628,197
============== ==========
</TABLE>
At December 31, 1997, there were 223 customer deposits issued in amounts of
$100,000 or more, totaling $29,801,273.
(6) Advances from the Federal Home Loan Bank
At December 31, 1997, the Association was obligated to the Federal Home
Loan Bank of Cincinnati (FHLB) for the following fixed rate secured notes:
Year of Interest
Maturity Rate Amount
-------- ---- ------
2002 6.85% $ 187,897
2003 5.50 1,249,723
2007 6.55 10,628,434
2007 6.75 533,638
2007 6.90 535,283
2007 7.00 268,188
2008 6.00 3,557,937
2011 4.05 21,067
2011 4.05 23,395
2016 1.71 57,867
---------------
$ 17,063,429
===============
The Association's mortgage portfolio is pledged as security under a blanket
mortgage collateral agreement for 150 percent of the notes payable to the
FHLB. In addition, stock in the FHLB is pledged for such advances.
(Continued)
F-2-15
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) Retained Earnings and Federal Income Taxes
The accompanying consolidated financial statements reflect a provision for
federal income taxes differing from the amounts computed by applying the
U.S. federal income tax statutory rate to earnings before federal income
taxes. These differences are reconciled as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
Percent of Percent of
Pretax Pretax
Amount Earnings Amount Earnings
------ -------- ------ --------
<S> <C> <C> <C> <C>
Computed expected tax $ 1,350,267 35.0% 551,257 35.0%
Increase (decrease) in tax resulting from
Benefit of graduated rates (38,579) (1.0) (15,750) (1.0)
Equity in affiliate (4,680) (.1) (5,463) (.3)
Cash surrender value on officers'
life insurance (24,724) (.7) (40,453) (2.6)
Officers' life insurance premiums 17,823 .5 30,340 1.9
Other, net (3,792) (.1) (3,231) (.2)
----------- ---- ----------- ----
$ 1,296,315 33.6% 516,700 32.8%
=========== ==== =========== ====
</TABLE>
The net tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Depreciation $ 1,776,913 1,872,054
Loan loss and other reserves 427,721 306,240
Deferred compensation 259,711 238,378
Other 63,214 96,527
-------------- -------
Total gross deferred tax assets 2,527,559 2,513,199
-------------- -------
Deferred tax liabilities
FHLB stock dividend 800,159 849,576
Bad debt reserves over base year reserves 179,192 179,192
Deferred loan fees 816,317 751,072
Other 36,881 20,559
-------------- -------
Total gross deferred tax liabilities 1,832,549 1,800,399
-------------- -------
Net deferred tax asset $ 695,010 712,800
============== =======
</TABLE>
A valuation allowance is established to reduce the deferred tax asset if it
is more likely than not that the related tax benefit will not be realized.
In management's opinion, it is more likely than not that the tax benefits
will be realized; consequently, no valuation allowance has been established
as of December 31, 1997 and 1996.
(Continued)
F-2-16
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Retained earnings at December 31, 1997 includes approximately $14,001,000
for which no provision for federal income tax has been made. This amount
represents allocations of income during years prior to 1988 to bad debt
deductions for tax purposes only. These qualifying and nonqualifying base
year reserves and supplemental reserves will be recaptured into income in
the event of certain distributions and redemptions. Such recapture would
create income for tax purposes only, which would be subject to the then
current corporate income tax rate. Recapture would not occur upon the
reorganization, merger, or acquisition of the Association, nor if the
Association is merged or liquidated tax-free into a bank or undergoes a
charter change. If the Association fails to qualify as a bank or merges
into a nonbank entity, these reserves will be recaptured into income.
The favorable reserve method currently afforded to thrifts was repealed for
tax years beginning after December 31, 1995. Large thrifts were switched to
the specific charge-off method of section 166, while small thrifts, such as
the Association, were switched to the reserve method of section 585 (the
method used by small commercial banks). In general, a thrift is required to
recapture the excess of its qualifying and nonqualifying reserves in excess
of its qualifying and nonqualifying base year reserves. There is an
exception to the general recapture provision for small thrifts. A small
thrift is required to recapture the portion of its reserves that exceeds
the greater of (1) the experience method reserve computed as if the thrift
had always been a small bank, or (2) the lesser of the qualifying and
nonqualifying base year reserves or the contracted base year reserves. The
opening tax bad debt reserve for a small thrift for the first taxable year
beginning after December 31, 1995 is the greater of the two amounts
described in (1) and (2) above. A small thrift that switched to the section
585 experience method must make an annual addition to its reserve for bad
debts. Under section 593, a thrift was not required to make a minimum
addition to its reserve for any taxable year. As the Association has
previously provided deferred taxes on the recapture amount, no additional
financial statement tax expense will result from the recapture.
(8) Lease Commitments
The Association conducts its branch operations in a number of leased
facilities. The leases for these facilities are for terms ranging from 5 to
25 years and usually contain renewal options. At December 31, 1997, minimum
rental commitments under noncancelable leases are as follows:
Leases of
Year Ending December 31, Branch Facilities
1998 $ 154,708
1999 129,944
2000 115,098
2001 101,765
2002 101,965
Thereafter 494,565
--------------
$ 1,098,045
==============
The total rent expense for the years ended December 31, 1997 and 1996, was
$160,308 and $147,600, respectively.
(Continued)
F-2-17
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) Incentive Plan Trust and Supplemental Retirement Arrangement
The Association sponsors a defined contribution plan covering substantially
all of its employees and substantially all employees of its subsidiaries
and CS Financial; the plan contains a 401(k) provision. The consolidated
group makes discretionary annual contributions from earnings to the plan
based on the return on assets of CS Financial's consolidated earnings up to
15 percent of the total annual compensation of all participants. In
addition, the consolidated group matches 25 percent of the participants'
401(k) contributions, up to a maximum of 4 percent of the participants'
compensation. The amount charged to operations in 1997 and 1996 was
$324,100 and $295,018, respectively.
The Association has supplemental retirement arrangements with senior
management. These arrangements provide for payments to be deferred until
the individual retires, dies, or becomes disabled. The amount charged to
expense in 1997 and 1996 related to these arrangements was $108,725 and
$98,670, respectively. The Association holds life insurance contracts to
provide for payments on these retirement arrangements with combined cash
surrender values of $859,400 as of December 31, 1997.
(10) Current Regulatory Environment
The capital requirements mandated by the Financial Institutions Reform,
Recovery and Enforcement Act specify that a savings institution maintain
regulatory tangible capital of not less than 1.5 percent of tangible
assets, minimum core capital of not less than 3 percent of adjusted
tangible assets, and risk-based capital of not less than 8 percent of
risk-weighted assets. In conjunction with the risk-based capital
requirement, the Office of Thrift Supervision (OTS) has assigned
risk-weighting factors to all of the Association's assets and certain
commitments which are to be utilized in computing the amount of required
capital. Since such regulations do not allow for the inclusion of certain
items, regulatory capital determinations do not correspond to the total
assets or retained earnings as reported in the accompanying consolidated
balance sheets.
The prompt corrective action regulations of the Federal Deposit Insurance
Corporation Improvement Act define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order,
are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to
certain restrictions, including the requirement to file a capital plan with
the OTS, prohibitions on the payment of dividends and management fees,
restrictions on executive compensation, and increased supervisory
monitoring, among other things. Other restrictions may be imposed on the
institution either by the OTS or by the Federal Deposit Insurance
Corporation, including requirements to raise additional capital, sell
assets, or sell the entire institution. Once an institution becomes
"critically undercapitalized," it is generally placed in receivership or
conservatorship within 90 days.
To be considered "well capitalized," an institution must generally have a
leverage ratio of at least 5 percent, a Tier-1 risk-based capital ratio of
at least 6 percent, and a total risk-based capital ratio of at least 10
percent. As of December 31, 1997 and 1996, the most
(Continued)
F-2-18
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
recent notification from the OTS categorized the Association as "well
capitalized" under the regulatory framework for prompt corrective action.
Management does not believe any conditions or events since notification
have changed the Association's category.
At December 31, 1997 and 1996, the Association was in compliance with
regulatory capital requirements as set forth below (in thousands):
<TABLE>
<CAPTION>
Tier-1 Total
Core/ Risk- Risk-
Equity Tangible Leverage Based Based
Capital Capital Capital Capital Capital
<S> <C> <C> <C> <C> <C>
December 31, 1997
Capital stock $ 265 -- -- -- --
Paid-in capital 90 -- -- -- --
Retained earnings 27,958 -- -- -- --
-------- -------- --------- -------- ---------
Equity capital 28,313 28,313 28,313 28,313 28,313
General loan valuation allowances -- -- -- 998
-------- --------- -------- ---------
Regulatory capital 28,313 28,313 28,313 29,311
-------- --------- -------- ---------
Total regulatory assets 379,131
Adjusted total assets 379,131 379,131
-------- ---------
Risk-weighted assets 207,569 207,569
-------- ---------
Capital ratio 7.47% 7.47% 7.47% 13.64% 14.12%
Regulatory requirement 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal to
or greater than 5.00% 6.00% 10.00%
December 31, 1996
Capital stock $ 265 -- -- -- --
Paid-in capital 90 -- -- -- --
Retained earnings 25,799 -- -- -- --
-------- -------- --------- -------- ---------
Equity capital 26,154 26,154 26,154 26,154 26,154
General loan valuation allowances -- -- -- 813
-------- --------- -------- ---------
Regulatory capital 26,154 26,154 26,154 26,967
-------- --------- -------- ---------
Total regulatory assets 352,371
Adjusted total assets 352,350 352,350
-------- ---------
Risk-weighted assets 189,906 189,906
-------- ---------
Capital ratio 7.42% 7.42% 7.42% 13.77% 14.20%
Regulatory requirement 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal to
or greater than 5.00% 6.00% 10.00%
</TABLE>
(Continued)
F-2-19
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) Special SAIF Assessment
On September 30, 1996, the Omnibus Appropriations Bill was enacted which
imposed a special assessment on Savings Association Insurance Fund (SAIF)
deposits held as of March 31, 1995 to recapitalize the SAIF. Therefore, the
Association recorded a one-time charge of $1,627,382 representing the
special assessment of 65.7 basis points on the Association's deposits held
as of March 31, 1995. This assessment was deducted on the Association's
fiscal year 1996 federal income tax return.
(12) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, Disclosures About Fair Value of
Financial Instruments. The estimated fair value amounts have been
determined by the Association using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Association could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets
Mortgage loans $ 333,594,835 335,735,106 311,857,800 312,703,366
Mortgage-backed securities 940,156 938,638 1,342,614 1,335,501
Other loans 1,897,596 1,897,596 1,425,410 1,425,410
Investment securities 2,863,897 2,867,837 3,949,426 3,970,584
Stock in the Federal Home
Loan Bank of Cincinnati 3,299,700 3,299,700 3,611,100 3,611,000
Cash on hand and in financial
institutions 1,467,375 1,467,375 1,207,861 1,207,861
Short-term cash investments 16,683,451 16,683,451 11,757,152 11,757,152
Liabilities
Deposits 326,713,421 327,897,922 293,593,414 294,827,244
Advances from the Federal
Home Loan Bank 17,063,429 16,982,900 25,950,182 25,350,226
Off-balance sheet instruments
Credit card lines 5,022,000 5,022,000 5,560,000 5,560,000
Mortgage loan commitments 5,415,000 5,415,000 7,444,000 7,444,000
</TABLE>
Mortgage Loans. The fair value of most adjustable rate loans approximates
the carrying amount because of the limited period before repricing. The
fair value of the other loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
(Continued)
F-2-20
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Mortgage-Backed Securities. Fair value for mortgage-backed securities is
based on quoted market prices.
Other Loans. The fair value estimate for other loans is based on the value
of existing loans.
Investment Securities. Fair value for investment securities is based on
quoted market prices.
Stock in the Federal Home Loan Bank, Cash, and Short-Term Cash Investments.
The carrying amounts approximate fair value.
Deposits. The fair value of passbook accounts, certain money market
accounts, and the liquid asset accounts is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using rates currently offered for deposits of similar
remaining maturities.
Advances. The fair value of advances is estimated using the rates currently
available for advances with similar terms and remaining maturities.
Off-Balance Sheet Instruments. The fair value estimate for off-balance
sheet instruments is based on the value of existing off-balance sheet
commitments.
F-2-21
<PAGE>
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
CS Financial Corporation:
We have audited the accompanying consolidated balance sheets of CS Financial
Corporation and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, retained earnings, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CS
Financial Corporation and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation
adopted the provisions of the Financial Accounting Standards Board's Statements
of Financial Accounting Standards Nos. 114, Accounting by Creditors for
Impairment of a Loan, and 118, Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures, in 1995.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information in
Schedules 1 and 2 is presented for purposes of additional analysis of the
consolidated financial statements rather than to present the financial position
and results of operations of the individual companies. The consolidating
information has been subjected to the auditing procedures applied in the audits
of the consolidated financial statements, and, in our opinion, is fairly stated
in all material respects in relation to the consolidated financial statements
taken as a whole.
/s/ KPMG Peat Marwick LLP
February 12, 1997
F-3-1
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Mortgage loans (notes 2 and 6) $ 311,857,800 305,606,908
Mortgage-backed securities (estimated market value of
$1,335,501 in 1996 and $1,769,631 in 1995; note 2) 1,342,614 1,753,965
Other loans (note 2) 1,425,410 3,302,845
Investment securities (estimated market value of
$3,970,584 in 1996 and $3,150,642 in 1995; note 3) 3,949,426 3,112,414
Stock in the Federal Home Loan Bank of Cincinnati, at
cost (note 6) 3,611,100 3,369,200
Cash on hand and in financial institutions 1,207,861 1,094,335
Short-term cash investments 11,757,152 17,189,234
Real estate acquired in settlement of loans 225,103 85,798
Buildings, office properties and equipment, net (note 4) 13,279,406 8,882,590
Prepaid expenses and other assets 2,971,622 2,048,524
Deferred federal income taxes (note 7) 712,800 423,300
Investment in unconsolidated subsidiary 484,419 468,351
------------- -------------
$ 352,824,713 347,337,464
============= =============
Liabilities and Shareholders' Equity
Deposits (note 5) $ 293,593,414 275,024,564
Advances from the Federal Home Loan Bank (note 6) 25,950,182 36,332,740
Advance payments by borrowers for taxes and insurance 2,489,332 2,504,371
Other liabilities 3,500,558 2,976,703
Capital lease obligation (note 4) -- 3,929,830
------------- -------------
Total liabilities 325,533,486 320,768,208
Shareholders' equity (note 10)
Capital stock, $5 par value; authorized 500,000 shares;
issued 52,990 shares 264,950 264,950
Paid-in capital 90,000 90,000
Retained earnings - substantially restricted (note 7) 30,025,454 29,303,483
Less cost of 19,355 shares of treasury stock (3,089,177) (3,089,177)
------------- -------------
Total shareholders' equity 27,291,227 26,569,256
Commitments and contingencies (notes 4 and 8)
$ 352,824,713 347,337,464
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3-2
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income
Mortgage loans and mortgage-backed securities $ 24,307,532 21,683,404
Investment securities 1,129,483 1,154,428
Other loans 397,673 416,849
------------ ------------
Total interest income 25,834,688 23,254,681
------------ ------------
Average yield on investments 7.74% 7.33%
============ ============
Interest expense
Deposits (note 5) 13,628,197 12,618,014
Borrowings 1,704,268 2,017,935
------------ ------------
Total interest expense 15,332,465 14,635,949
------------ ------------
Interest expense to average deposits and borrowings 4.96% 5.01%
============ ============
Net interest income 10,502,223 8,618,732
Provision for loan losses 159,673 95,980
------------ ------------
Net interest income after provision for loan losses 10,342,550 8,522,752
Loan fees and service charges 268,708 294,011
------------ ------------
10,611,258 8,816,763
General and administrative expenses
Compensation, payroll taxes, and fringe benefits (note 9) 4,650,598 4,106,367
Marketing 122,417 145,356
Office occupancy and equipment 1,225,098 1,155,931
Federal insurance premium 602,079 572,387
Special SAIF assessment 1,627,382 --
Ohio taxes 340,570 312,748
Other operating expenses, net 912,486 746,469
------------ ------------
Total general and administrative expenses 9,480,630 7,039,258
------------ ------------
1,130,628 1,777,505
Nonoperating income (expense), net
Building rentals, net (note 4) 352,189 (700,073)
Gains on sales of real estate, net 1,135 33,630
Equity in net earnings of unconsolidated subsidiary 16,068 43,415
Other, net 75,001 80,310
------------ ------------
444,393 (542,718)
------------ ------------
Earnings before federal income taxes 1,575,021 1,234,787
Federal income tax expense (benefit) (note 7)
Current 806,200 259,600
Deferred (289,500) 137,800
------------ ------------
516,700 397,400
------------ ------------
Net earnings $ 1,058,321 837,387
============ ============
Net earnings per share $ 31.46 24.90
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3-3
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Retained Earnings
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $ 28,768,811
Net earnings for the year ended December 31, 1995 837,387
Dividends on capital stock
Paid ($4.50 per share) (151,358)
Declared, payable January 1996 ($4.50 per share) (151,357)
---------------
Balance at December 31, 1995 29,303,483
Net earnings for the year ended December 31, 1996 1,058,321
Dividends on capital stock
Paid ($4.50 per share) (151,358)
Declared, payable January 1997 ($5.50 per share) (184,992)
---------------
Balance at December 31, 1996 $ 30,025,454
===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3-4
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 1,058,321 837,387
Adjustments to reconcile net earnings to net cash provided by
operating activities
Deferred loan origination fees and other income (660,642) (827,275)
Amortization of premiums and discounts on loans, investment
securities, and other assets 142,564 129,405
Depreciation and amortization of office properties and equipment 1,395,790 1,824,527
Federal Home Loan Bank stock dividend (241,900) (220,000)
Deferred federal income tax provision (289,500) 137,800
Increase in accrued interest receivable (118,789) (53,965)
(Increase) decrease in prepaid expenses and other assets (229,005) 1,321,508
Increase (decrease) in other liabilities 824,520 (139,811)
Other, net (20,871) (77,429)
------------- -------------
Net cash provided by operating activities 1,860,488 2,932,147
------------- -------------
Cash flows from investing activities
Loan originations (70,881,325) (74,751,587)
Principal payments on loans and mortgage-backed securities 57,898,009 41,961,019
Proceeds from maturities of investment securities 1,030,000 30,000
Purchase of investment securities (2,001,172) (1,935,313)
Investment in real estate acquired (555,959) (501,229)
Proceeds from sales of real estate acquired 354,476 496,431
Purchases of office properties and equipment (656,405) (519,574)
Purchases of buildings and land (1,100,000) --
Proceeds from sales of office properties and equipment, net -- 101,725
Reimbursement of tenant improvements 179,703 --
Other loan repayments, net of other loans originated 1,167,918 (467,259)
------------- -------------
Net cash used in investing activities (14,564,755) (35,585,787)
------------- -------------
Cash flows from financing activities
Net decrease in money market checking and passbook accounts (5,104,087) (15,168,864)
Proceeds from issuance of certificates of deposit 182,236,896 180,744,762
Payments for maturing or early withdrawal of certificates of deposit (158,563,959) (131,646,554)
Advances from Federal Home Loan Bank 55,445,000 63,914,000
Repayments of advances from Federal Home Loan Bank (65,827,558) (61,393,550)
Increase (decrease) in advance payments by borrowers for taxes and
insurance (15,039) 310,414
Capital lease obligation payments (482,827) (651,960)
Cash dividends paid on capital stock (302,715) (403,621)
------------- -------------
Net cash provided by financing activities 7,385,711 35,704,627
------------- -------------
Net increase (decrease) in cash and cash equivalents (5,318,556) 3,050,987
Cash and cash equivalents at beginning of year 18,283,569 15,232,582
------------- -------------
Cash and cash equivalents at end of year $ 12,965,013 18,283,569
============= =============
Supplemental disclosure of cash flow information
Interest paid, including interest credited $ 13,628,197 12,618,014
Federal income taxes paid 589,000 50,000
============= =============
Noncash investing and financing activities
Buildings and land (net) obtained for capital lease (note 4) $ 5,315,904 --
Cancellation of capital lease obligation in exchange for buildings
and land (note 4) 3,447,003 --
Release of first mortgage loan in exchange for buildings and land
(note 4) 7,658,305 --
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3-5
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
CS Financial Corporation (CS Financial) is a savings and loan holding
company. Its wholly owned subsidiary, The Cuyahoga Savings Association
(Association), and the Association's subsidiaries are principally engaged
in the business of furnishing a convenient savings investment medium
through the issuance of checking accounts, money market savings accounts
and certificates of deposit; and lending to customers primarily for the
purchase, construction, and improvement of real estate, principally
residential in Northeast Ohio. The Association conducts its business from
eight full-service offices in Cuyahoga County and a loan office in Lake
County. Management does not believe it has significant concentrations of
risk to any one group of borrowers given its underwriting and collateral
requirements. Summarized below are the significant accounting policies of
CS Financial and subsidiary.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of CS
Financial and the Association. The accounts of the Association have
been consolidated with those of its wholly owned subsidiaries, Central
Land Corporation and Cuyahoga Savings Management Corporation. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
CS Financial accounts for Cuyahoga Financial Services Agency, Inc.
(Agency) on the equity basis. CS Financial owns the nonvoting stock of
Agency, which is a registered broker/dealer in securities and a
licensed insurance agency.
(b) Use of Estimates
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.
(c) Loan Fees and Discounts
Loan origination and commitment fees and certain direct loan
origination costs are deferred, and the net fee or cost is amortized
as an adjustment to yield using the interest method over the
contractual life of the related loans subsequently adjusted for actual
prepayments.
(d) Investment and Mortgage-Backed Securities
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, requires that debt and equity securities
be classified into one of three
(Continued)
F-3-6
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
categories: held to maturity, available for sale, or held for trading.
Securities held to maturity are limited to debt securities that the
holder has the positive intent and the ability to hold to maturity;
these securities are reported at amortized cost. Securities held for
trading are limited to debt and equity securities that are bought and
held principally for the purpose of selling them in the near term;
these securities are reported at fair value, and unrealized losses are
reported in current earnings. Securities held as available for sale
consist of all other securities; these securities are reported at fair
value, and unrealized gains and losses are reported as a separate
component of retained earnings. Under Statement 115, securities that
could be sold in the future because of changes in interest rates or
other factors may not be classified as held to maturity.
At December 31, 1996 and 1995, all investment securities and
mortgage-backed securities were carried at amortized cost because of
management's intention and CS Financial's ability to hold them to
maturity.
(e) Buildings, Office Properties and Equipment
Buildings, office properties and equipment are depreciated using a
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the shorter of the
estimated useful life of the asset or the term of the lease.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method,
in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(g) Allowance for Loan Losses
Provisions for estimated losses on specific loans are charged to
earnings when, in the opinion of management, the investment in such
assets exceeds their estimated net realizable value. In addition to
providing reserves on specific assets, the Association establishes
general provisions for losses based upon the overall portfolio
composition and general market conditions. While management uses the
best available information to make these evaluations, future
adjustments to the allowances may be necessary if economic conditions
change substantially from the assumptions used in making the
evaluations. Future adjustments to the allowance may also be required
by regulatory examiners based on their judgments about information
available to them at the time of their examination.
(Continued)
F-3-7
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Association provides an allowance for accrued interest deemed
uncollectible. The provision is accounted for as a reduction of
interest income, and the allowance is netted against accrued interest
receivable.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan, amended in October 1994 by Statement of Financial
Accounting Standards No. 118, Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures. Under Statement 114, a
loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect
principal or interest due according to the contractual terms of the
loan. Since the Association's impaired loans are primarily
collateral-dependent, measurement of impairment is based on the fair
value of the collateral. The Association adopted the provisions of
Statements 114 and 118 as of January 1, 1995.
The allowance for loan losses relating to impaired loans was not
significant at December 31, 1996 and 1995.
(h) Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans represents real estate
acquired through foreclosure, or deed in lieu of foreclosure, and is
initially recorded at the lower of cost (principal balance of the
former mortgage loan) or fair value less estimated selling costs.
(i) Earnings per Share
Earnings per share of capital stock is based on the weighted average
number of common shares outstanding during the respective years.
(j) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, CS
Financial considers cash on hand and in financial institutions,
short-term cash investments, and federal funds sold with original
maturities of three months or less to be cash equivalents.
(k) Reclassifications
Certain 1995 account balances have been reclassified to conform to the
1996 presentation.
(Continued)
F-3-8
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(2) Mortgage Loans, Mortgage-Backed Securities, and Other Loans
A summary of mortgage loans at December 31, 1996 and 1995, follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Conventional loans (primarily secured by
one-to-four-family residences)
Adjustable rate $ 246,996,076 257,572,689
Fixed rate 68,854,879 53,077,945
Partially guaranteed by Veterans Adminis-
tration or insured by Federal Housing
Administration 116,977 139,614
------------- -------------
315,967,932 310,790,248
Accrued interest receivable, net of interest
paid in advance 28,400 (65,477)
Undisbursed portion of loans (2,245,966) (3,130,197)
Allowance for losses on loans (932,000) (853,000)
Deferred loan fees (960,566) (1,134,666)
------------- -------------
$ 311,857,800 305,606,908
============= =============
</TABLE>
A summary of mortgage-backed securities held to maturity at December 31,
1996 and 1995, follows: 1996
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C>
FHLMC certificates $ 339,530 -- (5,697) 333,833
GNMA certificates 448,131 -- (1,416) 446,715
Other 554,953 -- -- 554,953
---------- ---------- ---------- ----------
$1,342,614 -- (7,113) 1,335,501
========== ========== ========== ==========
<CAPTION>
1995
--------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
--------------------------------------------------
Cost Gains Losses Value
<S> <C> <C> <C>
FHLMC certificates $ 480,073 1,413 -- 481,486
GNMA certificates 575,109 14,253 -- 589,362
Other 698,783 -- -- 698,783
---------- ---------- ---------- ----------
$1,753,965 15,666 -- 1,769,631
========== ========== ========== ==========
</TABLE>
(Continued)
F-3-9
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The scheduled maturities of mortgage-backed securities held to maturity at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
-------------- ---------
<S> <C> <C>
Due within five years $ 1,118,243 1,107,045
Due after five years through ten years 224,371 228,456
-------------- ---------
Total $ 1,342,614 1,335,501
============== =========
</TABLE>
A summary of other loans at December 31, 1996 and 1995, follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial loans $ 597,516 2,243,718
Credit card balances 567,812 719,902
Other loans 298,128 398,856
---------- ----------
1,463,456 3,362,476
Accrued interest receivable, net of
interest paid in advance (7,046) (2,631)
Allowance for loan losses (31,000) (57,000)
----------- -----------
$ 1,425,410 3,302,845
========= =========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Mortgage Other
Loans Loans Total
<S> <C> <C> <C>
Balance as of December 31, 1994 $ 731,000 60,000 791,000
Provisions, net 94,958 1,022 95,980
(Charge-offs) recoveries, net 27,042 (4,022) 23,020
-------- ------- --------
Balance as of December 31, 1995 853,000 57,000 910,000
Provisions, net 153,665 6,008 159,673
(Charge-offs) recoveries, net (74,665) (32,008) (106,673)
-------- ------ -------
Balance as of December 31, 1996 $ 932,000 31,000 963,000
======= ====== =======
</TABLE>
At December 31, 1996, the Association had outstanding commitments to fund
mortgage loans totaling approximately $7,444,000, which management expects
to fund through operations. The Association's credit card customers had
unused lines of credit of approximately $5,560,000 at December 31, 1996.
(Continued)
F-3-10
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) Investment Securities
A summary of investment securities held to maturity at December 31, 1996
and 1995, follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SBA pools $ 692,074 16,405 -- 708,479
U.S. Treasury notes 2,998,060 4,753 -- 3,002,813
Municipal bonds 215,368 -- -- 215,368
---------- ---------- ---------- ----------
3,905,502 21,158 -- 3,926,660
========== ==========
Accrued interest receivable 43,924 43,924
---------- ---------
$3,949,426 3,970,584
========== =========
<CAPTION>
1995
------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C>
SBA pools $ 842,262 6,271 -- 848,533
U.S. Treasury notes 1,967,731 31,957 -- 1,999,688
Municipal bonds 245,450 -- -- 245,450
---------- ---------- ---------- ----------
3,055,443 38,228 -- 3,093,671
========== ==========
Accrued interest receivable 56,971 56,971
---------- ---------
$3,112,414 3,150,642
========== =========
</TABLE>
The following is a summary of the amortized cost and estimated market value
of investment securities at December 31, 1996, by remaining term to
maturity:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
-------------- ---------
<S> <C> <C>
Due within 5 years $ 3,123,182 3,127,935
Due after 5 years through 10 years 85,178 85,178
Due after 10 years through 20 years 482,722 498,323
Due after 20 years through 30 years 214,420 215,224
-------------- ---------
Total $ 3,905,502 3,926,660
============== =========
</TABLE>
(Continued)
F-3-11
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Buildings, Office Properties and Equipment, Net
Buildings, office properties and equipment at December 31, 1996 and 1995,
are summarized below:
<TABLE>
<CAPTION>
1996
---------------------------------------
Accumulated
Depreciation and
Cost Amortization Net
---- ------------ ---
<S> <C> <C> <C>
Land $ 3,591,340 -- 3,591,340
Office buildings 10,171,309 1,831,463 8,339,846
Building improvements 1,090,784 349,319 741,465
Furniture, fixtures and equipment 4,253,218 3,646,463 606,755
----------- ----------- -----------
$19,106,651 5,827,245 13,279,406
=========== =========== ===========
<CAPTION>
1995
---------------------------------------
Accumulated
Depreciation and
Cost Amortization Net
---- ------------ ---
<S> <C> <C> <C>
Land $ 161,340 -- 161,340
Office buildings 2,448,437 1,620,453 827,984
Capital lease 9,777,783 8,017,775 1,760,008
Leasehold improvements
Operating offices 2,086,481 1,495,938 590,543
Capital lease 9,690,859 4,768,599 4,922,260
Furniture, fixtures and equipment 4,096,463 3,476,008 620,455
----------- ----------- -----------
$28,261,363 19,378,773 8,882,590
=========== =========== ===========
</TABLE>
On August 23, 1996 the Association entered into an agreement with Erieview
Associates, Ltd. a Limited Liability Company (Erieview), whereby the
Association purchased the real estate known as One Erieview Plaza and
Lincoln Building and garage. The Association had previously contracted with
Erieview for a sales-leaseback for the aforementioned properties.
The sales-leaseback was financed by a first mortgage loan with the
Association. As a result of the August 1996 agreement, the Association
purchased the property from Erieview for $1,100,000 cash and released the
remaining $7,658,305 first mortgage loan, thereby terminating the master
lease agreement with Erieview.
(Continued)
F-3-12
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Association continues to occupy approximately 25 percent of One
Erieview Plaza/Lincoln Building for its main office and leases the
remaining portions of the two buildings. The tenant leases vary in length;
the minimum future lease commitments for all operating leases are as
follows:
Year Ending December 31, Future Minimum Lease Payments
1997 $ 2,324,925
1998 2,388,001
1999 2,340,731
2000 2,258,231
2001 2,168,455
2002 and thereafter 12,287,139
---------------
$ 23,767,482
===============
Prior to August 1996, the master lease required minimum annual payments of
$1,150,000, with additional contingent rent payable to Erieview on the
basis of 50 percent of adjusted net cash flow from the operation of the
premises in excess of $1,250,000. The agreement also required that the
Association provide all building management; pay all taxes, maintenance,
insurance, and other operating expenses; and provide leasehold improvements
not paid by tenants. The transaction had been accounted for as a capital
lease. In accordance therewith, the present value of future minimum lease
payments has been capitalized to office properties and was amortized using
the straight-line method over 25 years (the initial lease term).
Additionally, such present value had been recorded as a capital lease
obligation of the Association. The gain on the sale of the buildings, which
amounted to $1,171,142, was deferred and was amortized using the
straight-line method over 25 years.
The income and related expenses for the years ended December 31, 1996 and
1995, as included in the accompanying consolidated statements of
operations, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross tenant rentals $3,945,993 4,008,736
Amortization of deferred gain on sale of buildings 213,230 46,846
Real estate tax refund, net 186,492 52,675
---------- ----------
4,345,715 4,108,257
Less
Operating expenses 2,707,510 2,946,602
Interest expense 283,840 498,040
Depreciation of
Capital lease and leasehold improvements 909,114 1,363,688
Buildings, building improvements, and other 93,062 --
Building rentals, net $ 352,189 (700,073)
========== ==========
</TABLE>
The real estate tax refund for 1996 represents a rebate of real estate
taxes for the two-year period 1994 through 1995. The real estate tax refund
for 1995 represents a rebate of real estate taxes for the three-year period
1991 through 1993.
(Continued)
F-3-13
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Deposits
Deposit balances at December 31, 1996 and 1995, are summarized by interest
rate as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
Rate Weighted
Offered at Average
December 31 Amount Rate
----------- ------ ----
<S> <C> <C> <C> <C>
Money market checking accounts 1.49-1.98% $ 17,545,536 1.93%
Money market passbook accounts 2.27-5.45 48,496,582 2.54
-------------
66,042,118
Certificates of deposit 4.84-5.83 227,551,296 5.55
-------------
Total deposits $ 293,593,414
=============
<CAPTION>
1995
--------------------------------------------
Rate Weighted
Offered at Average
December 31 Amount Rate
----------- ------ ----
Money market checking accounts 1.49-1.98% $ 17,863,064 1.93%
Money market passbook accounts 2.27-5.26 53,283,141 2.95
--------------
71,146,205
Certificates of deposit 4.98-5.45 203,878,359 5.72
--------------
Total deposits $ 275,024,564
==============
</TABLE>
At December 31, 1996, certificates of deposit summarized by contractual
year of maturity are as follows:
Amount Percent
------ -------
1997 $191,204,034 84.0%
1998 21,969,117 9.7
1999 12,514,408 5.5
2000 1,338,837 .6
2001 and thereafter 524,900 .2
------------ -----
$227,551,296 100.0%
============ =====
(Continued)
F-3-14
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Interest expense on deposits for the years ended December 31, 1996 and
1995, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Money market checking accounts $ 346,430 351,324
Certificates of deposit and money market
deposit accounts 13,281,767 12,266,690
---------- ----------
$ 13,628,197 12,618,014
========== ==========
</TABLE>
At December 31, 1996, there were 151 customer deposits issued in amounts of
$100,000 or more, totaling $19,541,812.
(6) Advances from the Federal Home Loan Bank
At December 31, 1996, the Association was obligated to the Federal Home
Loan Bank of Cincinnati (FHLB) for the following secured notes:
Year of Interest
Maturity Rate Amount
-------- ---- ------
1997 7.15% $ 5,050,000
" 7.40 750,000
2002 6.85 253,418
2003 5.50 1,435,859
2007 6.55 12,921,042
" 6.75 648,237
" 6.90 649,855
" 7.00 325,464
2008 6.00 3,807,423
2011 4.05 47,817
2016 1.71 61,067
---------------
$ 25,950,182
===============
The Association's mortgage portfolio is pledged as security under a blanket
mortgage collateral agreement for 150 percent of the notes payable to the
FHLB. In addition, stock in the FHLB is pledged for such advances.
(Continued)
F-3-15
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) Retained Earnings and Federal Income Taxes
The accompanying consolidated financial statements reflect a provision for
federal income taxes differing from the amounts computed by applying the
U.S. federal income tax statutory rate to earnings before federal income
taxes. These differences are reconciled as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- ----------------------
Percent of Percent of
Pretax Pretax
Amount Earnings Amount Earnings
------ -------- ------ --------
<S> <C> <C> <C> <C>
Computed expected tax $ 551,257 35.0% 432,175 35.0%
Increase (decrease) in tax resulting from
Benefit of graduated rates (15,750) (1.0) (12,348) (1.0)
Equity in affiliate (5,463) (.3) (14,761) (1.2)
Cash surrender value on officers'
life insurance (40,453) (2.6) (35,087) (2.8)
Officers' life insurance premiums 30,340 1.9 30,588 2.5
Other, net (3,231) (.2) (3,167) (.3)
--------- ---- ------- ----
$ 516,700 32.8% 397,400 32.2%
========= ==== ======= ====
</TABLE>
The net tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets
Capitalized lease, net of obligation $ -- 737,739
Depreciation 1,872,054 1,074,681
Loan loss and other reserves 306,240 248,650
Deferred compensation 238,378 219,963
Other 96,527 61,841
---------- ----------
Total gross deferred tax assets 2,513,199 2,342,874
---------- ----------
Deferred tax liabilities
FHLB stock dividend 849,576 767,330
Deferred gain - Erieview -- 328,143
Bad debt reserves over base year reserves 179,192 178,023
Deferred loan fees 751,072 618,168
Other 20,559 27,910
---------- ----------
Total gross deferred tax liabilities 1,800,399 1,919,574
---------- ----------
Net deferred tax asset $ 712,800 423,300
========== ==========
</TABLE>
Under Statement 109, a valuation allowance is established to reduce the
deferred tax asset if it is more likely than not that the related tax
benefit will not be realized. In management's opinion, it is more likely
than not that the tax benefits will be realized; consequently, no valuation
allowance has been established as of December 31, 1996 and 1995.
(Continued)
F-3-16
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Retained earnings at December 31, 1996 includes approximately $14,001,000
for which no provision for federal income tax has been made. This amount
represents allocations of income during years prior to 1988 to bad debt
deductions for tax purposes only. These qualifying and nonqualifying base
year reserves and supplemental reserves will be recaptured into income in
the event of certain distributions and redemptions. Such recapture would
create income for tax purposes only, which would be subject to the then
current corporate income tax rate. Recapture would not occur upon the
reorganization, merger, or acquisition of the Association, nor if the
Association is merged or liquidated tax-free into a bank or undergoes a
charter change. If the Association fails to qualify as a bank or merges
into a nonbank entity, these reserves will be recaptured into income.
The favorable reserve method currently afforded to thrifts is repealed for
tax years beginning after December 31, 1995. Large thrifts must switch to
the specific charge-off method of section 166, while small thrifts, such as
the Association, must switch to the reserve method of section 585 (the
method currently used by small commercial banks). In general, a thrift is
required to recapture the excess of its qualifying and nonqualifying
reserves in excess of its qualifying and nonqualifying base year reserves.
There is an exception to the general recapture provision for small thrifts.
A small thrift is required to recapture the portion of its reserves that
exceeds the greater of (1) the experience method reserve computed as if the
thrift had always been a small bank, or (2) the lesser of the qualifying
and nonqualifying base year reserves or the contracted base year reserves.
The opening tax bad debt reserve for a small thrift for the first taxable
year beginning after December 31, 1995 is the greater of the two amounts
described in (1) and (2) above. A small thrift that switches to the section
585 experience method must make an annual addition to its reserve for bad
debts. Under section 593, a thrift was not required to make a minimum
addition to its reserve for any taxable year. As the Association has
previously provided deferred taxes on the recapture amount, no additional
financial statement tax expense should result from this new legislation.
(8) Lease Commitments
The Association conducts its branch operations in a number of leased
facilities. The leases for these facilities are for terms ranging from 5 to
25 years and usually contain renewal options. At December 31, 1996, minimum
rental commitments under noncancelable leases are as follows:
Leases of
Year Ending December 31, Branch Facilities
1997 $ 156,808
1998 148,708
1999 123,592
2000 112,344
2001 101,761
Thereafter 596,520
---------------
$ 1,239,733
===============
The total rent expense for the years ended December 31, 1996 and 1995, was
$147,600 and $140,833, respectively.
(Continued)
F-3-17
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) Incentive Plan Trust and Supplemental Retirement Arrangement
The Association sponsors a defined contribution plan covering substantially
all of its employees and substantially all employees of its subsidiaries
and CS Financial. The plan contains a 401(k) provision. The consolidated
group makes discretionary annual contributions from earnings to the plan
based on the return on assets of CS Financial's consolidated earnings up to
15 percent of the total annual compensation of all participants. In
addition, the consolidated group matches 25 percent of the participants'
401(k) contributions, up to a maximum of 4 percent of the participants'
compensation. The amount charged to operations in 1996 and 1995 was
$295,018 and $128,541, respectively.
The Association has supplemental retirement arrangements with senior
management. These arrangements provide for payments to be deferred until
the individual retires, dies, or becomes disabled. The amount charged to
expense in 1996 and 1995 related to these arrangements was $98,670 and
$92,101, respectively. The Association holds life insurance contracts to
provide for payments on these retirement arrangements with combined cash
surrender values of $794,453 as of December 31, 1996.
(10) Current Regulatory Environment
The capital requirements mandated by the Financial Institutions Reform,
Recovery and Enforcement Act specify that a savings institution maintain
regulatory tangible capital of not less than 1.5 percent of tangible
assets, minimum core capital of not less than 3 percent of adjusted
tangible assets, and risk-based capital of not less than 8 percent of
risk-weighted assets. In conjunction with the risk-based capital
requirement, the Office of Thrift Supervision (OTS) has assigned
risk-weighting factors to all of the Association's assets and certain
commitments which are to be utilized in computing the amount of required
capital. Since such regulations do not allow for the inclusion of certain
items, regulatory capital determinations do not correspond to the total
assets or retained earnings as reported in the accompanying consolidated
balance sheets.
The prompt corrective action regulations of the Federal Deposit Insurance
Corporation Improvement Act define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order,
are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to
certain restrictions, including the requirement to file a capital plan with
the OTS, prohibitions on the payment of dividends and management fees,
restrictions on executive compensation, and increased supervisory
monitoring, among other things. Other restrictions may be imposed on the
institution either by the OTS or by the Federal Deposit Insurance
Corporation (FDIC), including requirements to raise additional capital,
sell assets, or sell the entire institution. Once an institution becomes
"critically undercapitalized," it is generally placed in receivership or
conservatorship within 90 days.
To be considered "well capitalized," an institution must generally have a
leverage ratio of at least 5 percent, a Tier-1 risk-based capital ratio of
at least 6 percent, and a total risk-based capital ratio of at least 10
percent. As of December 31, 1996 and 1995, the most recent notification
from the OTS categorized the Association as "well capitalized" under the
regulatory framework for prompt corrective action.
(Continued)
F-3-18
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 1996 and 1995, the Association was in compliance with
regulatory capital requirements as set forth below (in thousands):
<TABLE>
<CAPTION>
Tier-1 Total
Core/ Risk- Risk-
Equity Tangible Leverage Based Based
Capital Capital Capital Capital Capital
<S> <C> <C> <C> <C> <C>
December 31, 1996
Capital stock $ 265 -- -- -- --
Paid-in capital 90 -- -- -- --
Retained earnings 25,799 -- -- -- --
--------- --------- --------- --------- ---------
Equity capital 26,154 26,154 26,154 26,154 26,154
General loan valuation allowances -- -- -- 813
--------- --------- --------- ---------
Regulatory capital 26,154 26,154 26,154 26,967
--------- --------- --------- ---------
Total regulatory assets 352,371
---------
Adjusted total assets 352,350 352,350
--------- ---------
Risk-weighted assets 189,906 189,906
--------- ---------
Capital ratio 7.42% 7.42% 7.42% 13.77% 14.20%
Regulatory requirement 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal to
or greater than 5.00% 6.00% 10.00%
December 31, 1995
Capital stock $ 265 -- -- -- --
Paid-in capital 90 -- -- -- --
Retained earnings 24,987 -- -- -- --
--------- --------- --------- --------- ---------
Equity capital 25,342 25,342 25,342 25,342 25,342
Investments in and advances to sub-
sidiaries required to be deducted (8) (8) (8) (8)
General loan valuation allowances -- -- -- 749
--------- --------- --------- ---------
Regulatory capital 25,334 25,334 25,334 26,083
--------- --------- --------- ---------
Total regulatory assets 346,883
---------
Adjusted total assets 346,867 346,867
--------- ---------
Risk-weighted assets 184,003 184,003
--------- ---------
Capital ratio 7.31% 7.30% 7.30% 13.77% 14.18%
Regulatory requirement 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized - equal to
or greater than 5.00% 6.00% 10.00%
</TABLE>
(Continued)
F-3-19
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(11) Special SAIF Assessment
On September 30, 1996, the Omnibus Appropriations Bill was enacted which
imposed a special assessment on Savings Association Insurance Fund (SAIF)
deposits held as of March 31, 1995 to recapitalize the SAIF. Therefore, the
Association recorded a one-time charge of $1,627,382 representing the
special assessment of 65.7 basis points on the Association's deposits held
as of March 31, 1995. This assessment will be deductible for tax purposes
on the Association's fiscal year 1996 federal income tax return.
(12) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, Disclosures About Fair Value of
Financial Instruments. The estimated fair value amounts have been
determined by the Association using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Association could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets
Mortgage loans $ 311,857,800 312,703,366 305,606,908 307,110,074
Mortgage-backed securities 1,342,614 1,335,501 1,753,965 1,769,631
Other loans 1,425,410 1,425,410 3,302,845 3,302,845
Investment securities 3,949,426 3,970,584 3,112,414 3,150,642
Stock in the Federal Home
Loan Bank of Cincinnati 3,611,100 3,611,000 3,369,200 3,369,200
Cash on hand and in financial
institutions 1,207,861 1,207,861 1,094,335 1,094,335
Short-term cash investments 11,757,152 11,757,152 17,189,234 17,189,234
Liabilities
Deposits 293,593,414 294,827,244 275,024,564 276,139,785
Advances from the Federal
Home Loan Bank 25,950,182 25,350,226 36,332,740 36,203,293
Off-balance sheet instruments
Credit card lines 5,560,000 5,560,000 5,425,000 5,425,000
Mortgage loan commitments 7,444,000 7,444,000 7,056,000 7,056,000
</TABLE>
Mortgage Loans. The fair value of most adjustable rate loans approximates
the carrying amount because of the limited period before repricing. The
fair value of the other loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
(Continued)
F-3-20
<PAGE>
CS FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
Mortgage-Backed Securities. Fair value for mortgage-backed securities is
based on quoted market prices.
Other Loans. The fair value estimate for other loans is based on the value
of existing loans.
Investment Securities. Fair value for investment securities is based on
quoted market prices.
Stock in the Federal Home Loan Bank, Cash, and Short-Term Cash Investments.
The carrying amounts approximate fair value.
Deposits. The fair value of passbook accounts and certain money market
accounts is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using rates
currently offered for deposits of similar remaining maturities.
Advances. The fair value of advances is estimated using the rates currently
available for advances with similar terms and remaining maturities.
Off-Balance Sheet Instruments. The fair value estimate for off-balance
sheet instruments is based on the value of existing off-balance sheet
commitments.
F-3-21
<PAGE>
ANNEX A
-----------------------------------------------
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
CHARTER ONE FINANCIAL, INC.
CHARTER ONE BANK F.S.B.
CS FINANCIAL CORPORATION
AND
THE CUYAHOGA SAVINGS ASSOCIATION
-----------------------------------------------
----------------
April 23, 1998
----------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 Merger; Surviving Corporations and Resulting Institution..........2
1.2 Effective Time of the Merger......................................2
1.3 Company Merger....................................................3
1.4 Corporate Merger..................................................6
1.5 Bank Merger.......................................................7
1.6 Closing...........................................................8
1.7 Reservation of Right to Revise Transaction........................8
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF COFI AND CHARTER ONE BANK
2.1 Organization......................................................8
2.2 Authorization.....................................................9
2.3 Conflicts.........................................................9
2.4 Anti-takeover Provisions Inapplicable............................10
2.5 Capitalization...................................................10
2.6 COFI Financial Statements; Material Changes......................11
2.7 COFI Subsidiaries................................................11
2.8 COFI Filings.....................................................12
2.9 COFI Reports.....................................................12
2.10 Compliance with Laws.............................................12
2.11 Registration Statement; Proxy Statement.........................13
2.12 Litigation.......................................................13
2.13 Licenses.........................................................14
2.14 Taxes............................................................14
2.15 Insurance........................................................15
2.16 Loans; Investments...............................................15
2.17 Allowance for Possible Loan Losses...............................16
2.18 COFI Benefit Plans...............................................17
2.19 Compliance With Environmental Laws...............................18
2.20 Contracts and Commitments........................................19
2.21 Defaults.........................................................20
i
<PAGE>
2.22 Operations Since December 31, 1997...............................20
2.23 Undisclosed Liabilities..........................................20
2.24 Assets...........................................................21
2.25 Indemnification..................................................21
2.26 Insider Interests................................................22
2.27 Brokers and Finders..............................................22
2.28 Accuracy of Information..........................................22
2.29 Governmental Approvals and Other Conditions......................22
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CSFC AND CSFC BANK
3.1 Organization.....................................................22
3.2 Authorization....................................................23
3.3 Conflicts........................................................23
3.4 Anti-takeover Provisions Inapplicable............................23
3.5 Capitalization and Stockholders..................................24
3.6 CSFC Financial Statements; Material Changes......................24
3.7 CSFC Subsidiaries................................................25
3.8 CSFC Reports.....................................................26
3.9 Compliance With Laws.............................................26
3.10 Registration Statement: Prospectus...............................27
3.11 Litigation.......................................................27
3.12 Licenses.........................................................28
3.13 Taxes............................................................28
3.14 Insurance........................................................29
3.15 Loans; Investments...............................................29
3.16 Allowance for Possible Loan Losses...............................31
3.17 CSFC Benefit Plans...............................................32
3.18 Compliance with Environmental Laws...............................34
3.19 Contracts and Commitments........................................35
3.20 Defaults.........................................................38
3.21 Operations Since December 31, 1997...............................39
3.22 Corporate Records................................................41
3.23 Undisclosed Liabilities..........................................41
3.24 Assets...........................................................41
3.25 Stockholder Arrangements.........................................42
3.26 Indemnification..................................................42
3.27 Insider Interests................................................42
3.28 Registration Obligations.........................................43
3.29 Regulatory, Tax and Accounting Matters...........................43
3.30 Brokers and Finders..............................................43
ii
<PAGE>
3.31 Accuracy of Information..........................................43
3.32 Fairness Opinion.................................................43
3.33 Governmental Approvals and Other Conditions......................43
ARTICLE IV
COVENANTS OF CSFC
4.1 Business in Ordinary Course......................................44
4.2 Conforming Accounting and Reserve Policies;
Restructuring Expenses.........................................48
4.3 Certain Actions..................................................48
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Inspection of Records; Confidentiality...........................49
5.2 Registration Statement; Stockholder Approval.....................51
5.3 Agreements of Affiliates.........................................52
5.4 Expenses.........................................................52
5.5 Cooperation......................................................53
5.6 Regulatory Applications..........................................53
5.7 Financial Statements and Reports.................................53
5.8 Notice...........................................................53
5.9 Press Release....................................................54
5.10 Delivery of Supplements to Disclosure Schedules..................54
5.11 Litigation Matters...............................................54
5.12 Tax Opinion......................................................54
5.13 Benefits and Related Matters.....................................55
5.14 Nasdaq Listing...................................................57
5.15 Directors' and Officers' Indemnification Insurance...............57
5.16 Reports to the SEC...............................................57
5.17 Extraordinary COFI Dividends.....................................57
5.18 Environmental Reports............................................57
5.19 Merger Sub.......................................................59
5.20 Waiver of Rights Under Stockholder Arrangements..................59
iii
<PAGE>
ARTICLE VI
CONDITIONS
6.1 Conditions to the Obligations of COFI and Charter One Bank.......59
6.2 Conditions to the Obligations of CSFC and CSFC Bank..............60
6.3 Conditions to the Obligations of the Parties.....................61
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
7.1 Termination......................................................62
7.2 Liabilities and Remedies Break-Up Fee............................63
7.3 Survival of Agreements...........................................65
7.4 Amendment........................................................65
7.5 Waiver...........................................................65
ARTICLE VIII
GENERAL PROVISIONS
8.1 Survival.........................................................66
8.2 Notices..........................................................66
8.3 Applicable Law...................................................67
8.4 Headings, Etc....................................................67
8.5 Severability.....................................................67
8.6 Entire Agreement; Binding Effect; Non-Assignment; Counterparts...67
8.7 No Employment Solicitation.......................................68
EXHIBIT LIST (Exhibits Omitted)
Exhibit A - Voting Agreement List
Exhibit A-1 - Form of Voting Agreement
Exhibit B - Form of CSFC Affiliate Agreement
Exhibit C - Form of COFI Affiliate Agreement
Exhibit D - Directors of Resulting Institution
iv
<PAGE>
Exhibit E - Home and Other Offices of Resulting Institution
Exhibits F-1, F-2 and F-3 - Form of Employment Agreements
Exhibit G - Form of Arter & Hadden LLP Legal Opinion
Exhibit H - Form of Silver, Freedman & Taff, L.L.P. Legal Opinion
v
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement")
dated April 23, 1998, is by and among Charter One Financial, Inc., a Delaware
corporation ("COFI"),Charter One Bank F.S.B., a federally chartered savings bank
and a wholly owned indirect subsidiary of COFI ("Charter One Bank"),CS Financial
Corporation, an Ohio corporation ("CSFC"), and The Cuyahoga Savings Association,
an Ohio chartered savings and loan association and a wholly owned first-tier
subsidiary of CSFC ("CSFC Bank").
A. COFI, Charter One Bank, CSFC and CSFC Bank wish to provide for the
terms and conditions of the following described business combinations in which a
newly formed Ohio business corporation and first-tier subsidiary of COFI
("Merger Sub") will be merged with and into CSFC (the "Company Merger"),
followed immediately by the merger of CSFC into COFI (the "Corporate Merger")
and the merger of CSFC Bank with and into Charter One Bank (the "Bank Merger").
The Company Merger, the Corporate Merger and the Bank Merger are collectively
referred to herein as the "Merger."
B. For federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended ("Code"), and this Agreement shall
constitute a plan of reorganization pursuant to Section 368 of the Code.
C. For accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests.
D. The parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
E. Concurrently with the execution and delivery of this Agreement, and
as a condition to and inducement for COFI to enter into this Agreement, COFI and
each of the directors and executive officers of CSFC and certain other persons
listed on the attached Exhibit A have entered into a voting agreement in the
form attached hereto as Exhibit A-1 ("Voting Agreement").
F. Concurrently with the execution and delivery of this Agreement, and
as a condition to and inducement for COFI to enter into this Agreement, COFI and
each of the directors and executive officers of CSFC have entered into an
affiliate agreement in the form attached hereto as Exhibit B ("CSFC Affiliate
Agreement").
Accordingly, and in consideration of the representations, warranties,
covenants, agreements and conditions herein contained, the parties hereto agree
as follows:
1
<PAGE>
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 Merger; Surviving Corporations and Resulting Institution.
Subject to the terms and conditions of this Agreement, and pursuant to the
provisions of the Ohio General Corporation Law ("OGCL"), the Delaware General
Corporation Law ("DGCL"), the Federal Deposit Insurance Act ("FDIA"), the Home
Owners' Loan Act ("HOLA") and the rules and regulations promulgated under HOLA
("Thrift Regulations"), (a) at the Effective Time (as defined in Section 1.2
hereof), Merger Sub shall be merged with and into CSFC pursuant to the terms and
conditions set forth herein, and (b) immediately after the Effective Time (x)
CSFC shall be merged with and into COFI pursuant to the terms and conditions set
forth herein and (y) at the Bank Merger Effective Time (as defined in Section
1.2 hereof), CSFC Bank shall be merged with and into Charter One Bank pursuant
to the terms and conditions set forth herein. Upon the consummation of the
Company Merger, the separate corporate existence of Merger Sub shall cease and
CSFC shall continue as the surviving corporation under the laws of the State of
Ohio. Upon consummation of the Corporate Merger, the separate corporate
existence of CSFC shall cease and COFI shall continue as the surviving
corporation under the laws of the State of Delaware. Upon consummation of the
Bank Merger, the separate corporate existence of CSFC Bank shall cease and
Charter One Bank shall continue as the resulting institution under the laws of
the United States of America. The name of CSFC as the surviving corporation of
the Company Merger shall remain "CS Financial Corporation". From and after the
Effective Time, CSFC, as the surviving corporation of the Company Merger, shall
possess all of the properties and rights and be subject to all of the
liabilities and obligations of Merger Sub and CSFC, all as more fully described
in the OGCL. The name of COFI as the surviving corporation of the Corporate
Merger shall remain "Charter One Financial, Inc." From and after the effective
time of the Corporate Merger, COFI, as the surviving corporation of the
Corporate Merger, shall possess all of the properties and rights and be subject
to all of the liabilities and obligations of COFI and CSFC, all as more fully
described in the DGCL and OGCL. The name of Charter One Bank, as the resulting
institution of the Bank Merger, shall remain "Charter One Bank F.S.B.". From and
after the Bank Merger Effective Time, Charter One Bank, as the resulting
institution of the Bank Merger, shall possess all of the properties and rights
and be subject to all of the liabilities and obligations of Charter One Bank and
CSFC Bank.
1.2 Effective Time of the Merger. As soon as practicable after each
of the conditions set forth in Article VI hereof have been satisfied or waived,
the parties will file, or cause to be filed, with the Ohio Secretary of State,
the Delaware Secretary of State, the Office of Thrift Supervision ("OTS") and
the Ohio Superintendent of Financial Institutions such certificates of merger,
articles of combination and other documents as they may deem necessary or
appropriate for the Company Merger, the Corporate Merger and the Bank Merger,
which certificates of merger, articles of combination and other documents shall
in each case be in the form required by and executed in accordance with the
applicable provisions of the OGCL, DGCL and the Thrift Regulations. The Company
Merger shall become effective at the time the certificate of merger
2
<PAGE>
for such merger is filed with the Ohio Secretary of State ("Effective Time").
The Corporate Merger shall become effective at the time the certificate(s) of
merger for such merger are filed with the Ohio Secretary of State and the
Delaware Secretary of State. The Bank Merger shall become effective at the time
the articles of combination for such merger are endorsed by the Secretary of the
OTS pursuant to the Thrift Regulations, subject to any required filings with the
Ohio Secretary of State ("Bank Merger Effective Time"). The parties shall cause
the Company Merger to become effective immediately prior to the Corporate Merger
and the Bank Merger.
1.3 Company Merger.
(a) Conversion of CSFC Stock. At the Effective Time:
(i) Each share of common stock of CSFC, $5.00
par value per share (the "CSFC Common Stock"), issued and
outstanding immediately prior thereto (except for Dissenting
Shares, if applicable, as defined in Section 1.3(c) hereof)
shall, by virtue of the Company Merger and without any action
on the part of the holder thereof, but subject to Sections
1.3(a)(ii) and 1.3(e) hereof and any adjustment to the Merger
Consideration (as hereinafter defined) pursuant to Section
5.18(d) herein, be converted into the right to receive 30.1769
(the "Exchange Ratio") shares of common stock of COFI, par
value $.01 per share ("COFI Common Stock"), including the
corresponding number of rights associated with the COFI Common
Stock pursuant to the Rights Agreement dated November 20,
1989, as amended on May 26, 1995, between COFI and The First
National Bank of Boston as Rights Agent.
Notwithstanding any other provision of this
Agreement, any shares of CSFC Common Stock issued and
outstanding immediately prior to the Effective Time which are
then owned beneficially or of record by COFI, Charter One
Bank, CSFC, CSFC Bank or by any direct or indirect Subsidiary
(as hereinafter defined) of any of them or held in the
treasury of CSFC (other than any shares of CSFC Common Stock
held (A) directly or indirectly in trust accounts, managed
accounts and the like, or otherwise held in a fiduciary
capacity, that are beneficially owned by third parties or (B)
in respect of a debt previously contracted) shall, by virtue
of the Company Merger, be canceled without payment of any
consideration therefor and without any conversion thereof.
(ii) If, subsequent to the date of this Agreement
but prior to the Effective Time, the outstanding shares of
COFI Common Stock shall, through a reclassification,
recapitalization, stock dividend, stock split or reverse stock
split have been increased, decreased, changed into or
exchanged for a different number or kind of shares,
appropriate adjustment will be made to the Exchange Ratio, the
Floor Price (as defined in Section 7.1 (i) below) and the
calculation of the COFI Final Price (as defined in Section
7.1(i) below).
3
<PAGE>
(iii) Each share of Merger Sub common stock issued
and outstanding immediately prior to the Effective Time shall
be automatically converted into an identical number of issued
and outstanding shares of CSFC common stock after the
Effective Time.
(iv) The holders of certificates formerly
representing shares of CSFC Common Stock shall cease to have
any rights as stockholders of CSFC, except such rights, if
any, as they may have pursuant to the OGCL. Except as provided
above, until certificates representing shares of CSFC Common
Stock are surrendered for exchange, the certificates in the
aggregate of each holder shall, after the Effective Time,
represent for all purposes only the right to receive the
number of whole shares of COFI Common Stock into which such
shares of CSFC Common Stock shall have been converted by the
Company Merger as provided above and the right to receive the
cash value of any fraction of a share of COFI Common Stock as
provided below (collectively, the "Merger Consideration").
(b) Reservation of Shares. Prior to the Effective Time, the
Board of Directors of COFI shall reserve for issuance a sufficient
number of shares of COFI Common Stock for the purpose of issuing its
shares to the stockholders of CSFC in accordance herewith.
(c) Dissenting Shares. Any shares of CSFC Common Stock held by
a holder who dissents from the Company Merger in accordance with
Section 1701.85 of the OGCL shall be herein called "Dissenting Shares."
Notwithstanding any other provision of this Agreement, any Dissenting
Shares shall not, after the Effective Time, be entitled to vote for any
purpose or receive any dividends or other distributions and shall be
entitled only to such rights as are afforded in respect of Dissenting
Shares pursuant to the OGCL.
(d) Exchange of CSFC Common Stock Certificates.
(i) As soon as reasonably practicable (but not
later than five business days) after the Effective Time,
holders of record of certificates formerly representing shares
of CSFC Common Stock ("Certificates") shall be instructed to
tender such Certificates to an independent exchange agent to
be selected by COFI and reasonably acceptable to CSFC (the
"Exchange Agent") pursuant to a letter of transmittal that
COFI shall deliver or cause to be delivered to such holders.
Such letter of transmittal shall specify that risk of loss and
title to Certificates shall pass only upon acceptance of such
Certificates by COFI or the Exchange Agent.
(ii) After the Effective Time, each holder of a
Certificate that surrenders such Certificate to COFI or the
Exchange Agent will, upon acceptance thereof by COFI or the
Exchange Agent, be entitled to the Merger Consideration
payable in respect of the shares represented thereby.
4
<PAGE>
(iii) COFI or the Exchange Agent shall accept
Certificates upon compliance with such reasonable terms and
conditions as COFI or the Exchange Agent may impose to effect
an orderly exchange thereof in accordance with customary
exchange practices. Certificates shall be appropriately
endorsed or accompanied by such instruments of transfer as
COFI or the Exchange Agent may reasonably require.
(iv) Each outstanding Certificate, other than
those representing Dissenting Shares, shall until duly
surrendered to COFI or the Exchange Agent be deemed to
evidence the right to receive the Merger Consideration.
(v) After the Effective Time, holders of
Certificates shall cease to have rights with respect to the
CSFC Common Stock previously represented by such Certificates,
and their sole rights (other than the holders of Certificates
representing Dissenting Shares) shall be to exchange such
Certificates for the Merger Consideration. At the Effective
Time, CSFC shall deliver a certified copy of a list of its
stockholders to COFI or the Exchange Agent. After the
Effective Time, there shall be no further transfer on the
records of CSFC of Certificates, and if such Certificates are
presented to CSFC for transfer, they shall be canceled against
delivery of the Merger Consideration. COFI shall not be
obligated to deliver the Merger Consideration to any holder of
CSFC Common Stock until such holder surrenders the
Certificates as provided herein. No dividends declared will be
remitted to any person entitled to receive COFI Common Stock
under this Agreement until such person surrenders the
Certificate representing the right to receive such COFI Common
Stock, at which time such dividends on whole shares of COFI
Common Stock with a record date on or after the Effective Time
shall be remitted to such person, without interest and less
any withholding taxes that may have been imposed thereon.
Certificates surrendered for exchange by any person identified
by CSFC pursuant to Section 5.3 as an "affiliate" of CSFC for
purposes of Rule 145 under the Securities Act of 1933 and the
rules and regulations thereunder (the "Securities Act") or
pooling of interests accounting shall not be exchanged for
certificates representing COFI Common Stock until COFI has
received a written agreement from such person as specified in
Section 5.3. Neither the Exchange Agent nor any party to this
Agreement nor any affiliate thereof shall be liable to any
holder of CSFC Common Stock represented by any Certificate for
any consideration paid to a public official pursuant to
applicable abandoned property, escheat or similar laws. COFI
and the Exchange Agent shall be entitled to rely upon the
stock transfer books of CSFC to establish the identity of
those persons entitled to receive consideration specified in
this Agreement, which books shall be conclusive with respect
thereto. In the event of a dispute with respect to ownership
of stock represented by any Certificate, COFI or the Exchange
Agent shall be entitled to deposit any consideration in
respect thereof in
5
<PAGE>
escrow with an independent third party and thereafter be
relieved with respect to any claims thereto.
(vi) If the Merger Consideration is to be issued
to a person other than a person in whose name a surrendered
Certificate is registered, it shall be a condition of issuance
that the surrendered Certificate shall be properly endorsed or
otherwise in proper form for transfer and that the person
requesting such issuance shall pay to COFI or the Exchange
Agent any required transfer taxes or establish to the
satisfaction of COFI or the Exchange Agent that such tax has
been paid or is not applicable.
(vii) In the event any Certificate shall have been
lost, stolen or destroyed, the owner of such lost, stolen or
destroyed Certificate shall deliver to COFI or the Exchange
Agent an affidavit stating such fact, in form satisfactory to
COFI, and, at COFI's discretion, a bond in such reasonable sum
as COFI or the Exchange Agent may direct as indemnity against
any claim that may be made against COFI or CSFC or its
successor or any other party with respect to the Certificate
alleged to have been lost, stolen or destroyed. Upon such
delivery, the owner shall have the right to receive the Merger
Consideration with respect to the shares represented by the
lost, stolen or destroyed Certificate.
(e) No Fractional Shares. Notwithstanding any other
provision of this Agreement, neither certificates nor scrip for
fractional shares of COFI Common Stock shall be issued in the Company
Merger. Each holder who otherwise would have been entitled to a
fraction of a share of COFI Common Stock shall receive in lieu thereof
cash (without interest) in an amount determined by multiplying the
fractional share interest to which such holder would otherwise be
entitled by the COFI Share Price on the last trading day preceding the
Effective Time. The "COFI Share Price" shall mean the closing sale
price (rounded down to the nearest whole cent) of one share of COFI
Common Stock as reported on the Nasdaq National Market. No such holder
shall be entitled to dividends, voting rights or any other rights in
respect of any fractional share interest.
(f) Articles of Incorporation and Code of Regulations of
the Surviving Corporation. The Articles of Incorporation and Code of
Regulations of CSFC, as in effect immediately prior to the Effective
Time, shall be the Articles of Incorporation and Code of Regulations of
CSFC, as the surviving corporation of the Company Merger, until either
is thereafter amended in accordance with applicable law.
(g) Directors and Officers of the Surviving Corporation.
The directors and officers of Merger Sub immediately prior to the
Effective Time shall be the directors and officers of CSFC, as the
surviving corporation of the Company Merger, until their respective
successors shall be duly elected and qualified or otherwise duly
selected.
1.4 Corporate Merger.
(a) Cancellation of CSFC Common Stock. At the effective
time of the Corporate Merger, each share of common stock of CSFC issued
and outstanding immediately prior thereto (being the CSFC common stock
issued in the Company Merger to COFI in exchange for Merger Sub common
stock) shall, by virtue of the Corporate
6
<PAGE>
Merger, be canceled. No new shares of capital stock or other securities
or obligations of COFI shall be issued with respect to or in exchange
for such canceled shares, and such canceled shares of CSFC common stock
shall not be converted into capital stock or other securities or
obligations of COFI.
(b) Certificate of Incorporation and Bylaws of the
Surviving Corporation. The Certificate of Incorporation and Bylaws of
COFI, as in effect immediately prior to the Effective Time, shall be
the Certificate of Incorporation and Bylaws of COFI, as the surviving
corporation of the Corporate Merger, until either is thereafter amended
in accordance with applicable law.
(c) Directors and Officers of the Surviving Corporation.
The directors and officers of COFI immediately prior to the Effective
Time shall be the directors and officers of COFI, as the surviving
corporation of the Corporate Merger, until their respective successors
shall be duly elected and qualified or otherwise duly selected.
(d) Service of Process. At the effective time of the
Corporate Merger, COFI, as the surviving corporation of the Corporate
Merger, consents to be sued and served with process in the State of
Ohio and irrevocably appoints the Secretary of State of the State of
Ohio as its agent to accept service of process in any proceeding in the
State of Ohio to enforce against it any obligation of CSFC or to
enforce the right of the holders of Dissenting Shares.
1.5 Bank Merger.
(a) Cancellation of CSFC Bank Common Stock. At the Bank
Merger Effective Time, each share of common stock of CSFC Bank, $5.00
par value per share ("CSFC Bank Common Stock"), issued and outstanding
immediately prior thereto shall, by virtue of the Bank Merger, be
canceled. No new shares of capital stock or other securities or
obligations of Charter One Bank shall be issued with respect to or in
exchange for such canceled shares, and such canceled shares of CSFC
Bank Common Stock shall not be converted into capital stock or other
securities or obligations of Charter One Bank.
(b) Charter and Bylaws of the Resulting Institution. The
charter and bylaws of Charter One Bank, as in effect immediately prior
to the Bank Merger Effective Time, shall, without any change, be the
charter and bylaws of Charter One Bank, as the resulting institution of
the Bank Merger, until either is thereafter amended in accordance with
applicable law.
(c) Directors of the Resulting Institution. The directors
of Charter One Bank, as the resulting institution of the Bank Merger,
shall be those persons listed in Exhibit D to this Agreement. Such
directors shall continue in office until their successors are duly
elected and qualified or otherwise duly selected.
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(d) Offices of the Resulting Institution. The home and
other offices of Charter One Bank, as the resulting institution of the
Bank Merger, shall be as listed in Exhibit E to this Agreement.
(e) Additional Filing Requirements. At the time a
certificate of merger or articles of combination relating to the Bank
Merger is filed with the Ohio Secretary of State, if so required, it
shall be accompanied by the affidavits, receipts, certificates or other
evidence required by Division (H) of Section 1701.86 of the OGCL with
respect to CSFC.
1.6 Closing. Subject to the provisions of Article VI hereof, the
closing of the transactions contemplated by this Agreement (the "Closing") shall
take place as soon as practicable after satisfaction or waiver of all of the
conditions to Closing, but not later than fifteen (15) days thereafter, at 10:00
a.m. at the executive offices of COFI or at such other date, time and location
as is mutually agreed to by COFI and CSFC. The date on which the Closing
actually occurs is herein referred to as the "Closing Date".
1.7 Reservation of Right to Revise Transaction. After consultation
with CSFC, COFI shall have the unilateral right to change the method of
effecting the Merger (including without limitation the provisions of this
Article I), to the extent permitted by applicable law and to the extent it deems
such change to be desirable, provided, however, that no such change shall (a)
alter or change the amount or kind of the Merger Consideration or the conditions
for its issuance, (b) diminish the benefits to be received by the directors,
officers or employees of CSFC and CSFC Bank as set forth in this Agreement or in
any other agreements between the parties made in connection with this Agreement,
(c) materially impede or delay the consummation of the Company Merger or (d)
adversely affect the tax treatment of CSFC stockholders as a result of receiving
the Merger Consideration. COFI may exercise this right of revision by giving
written notice thereof in the manner provided in Section 8.2 of this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COFI AND CHARTER ONE BANK
COFI and Charter One Bank jointly and severally represent and warrant
to CSFC and CSFC Bank that:
2.1 Organization.
(a) COFI is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has
all requisite power and authority, corporate and otherwise, to own,
operate and lease its assets and properties and to carry on its
business substantially as it has been and is now being conducted. COFI
is duly qualified to do business and is in good standing in each
jurisdiction where the character of the assets or properties owned or
leased by it or the nature of the business transacted by it requires
that it be so qualified, except where the failure to so qualify would
not have a Material Adverse Effect (as defined in Section 2.1(b)
hereof)) on COFI or materially adversely affect its ability to
consummate the transactions contemplated
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herein. COFI has all requisite corporate power and authority to enter
into this Agreement and, subject to the receipt of all requisite
regulatory approvals and the expiration of applicable waiting periods,
to consummate the transactions contemplated hereby. COFI is duly
registered as a savings and loan holding company under HOLA.
(b) As used in this Agreement, the term "Material Adverse
Effect" with respect to COFI or CSFC means any condition, event, change
or occurrence that has or may reasonably be expected to have a material
adverse effect on the condition (financial or otherwise), properties,
business, operations, assets or deposit liabilities of such entity
taken together with its affiliated entities on a consolidated basis; it
being understood that a Material Adverse Effect shall not include: (i)
a change with respect to, or effect on, such entity and its
Subsidiaries resulting from a change in law, rule, regulation,
generally accepted accounting principles or regulatory accounting
principles, as such would apply to the financial statements of such
entity on a consolidated basis; (ii) a change with respect to, or
effect on, such entity and its Subsidiaries resulting from expenses
(such as legal, accounting and investment bankers' fees) incurred in
connection with this Agreement; (iii) a change with respect to, or
effect on, such entity and its Subsidiaries resulting from any other
matter affecting depository institutions generally including, without
limitation, changes in general economic conditions and changes in
prevailing interest and deposit rates; or (iv) in the case of CSFC, any
financial change resulting from adjustments taken pursuant to Section
4.2 hereof.
2.2 Authorization. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby have been
duly approved and authorized by the Boards of Directors of COFI and Charter One
Bank, and no other corporate action on their part is required to be taken. This
Agreement has been duly executed and delivered by COFI and Charter One Bank and
constitutes the valid and binding obligation of each of them and is enforceable
against each of them, except to the extent that enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws or equitable principles or doctrines.
2.3 Conflicts. Subject to the second sentence of this Section 2.3,
the execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated hereby will not, conflict with or result in any
violation, breach or termination of, or default or loss of a material benefit
under, or permit the acceleration of any obligation under, or result in the
creation of any material lien, charge or encumbrance on any of the property or
assets under, any provision of the Certificate of Incorporation or Bylaws of
COFI or similar documents of any COFI Subsidiary or any mortgage, indenture,
lease, agreement or other instrument, permit, concession, grant, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to COFI or any COFI Subsidiary or their respective properties, other
than any such conflicts, violations or defaults which (i) will be cured or
waived prior to the Effective Time; (ii) are not material to the conduct of
business or operations of COFI or any COFI Subsidiary and will not have a
Material Adverse Effect on COFI or (iii) are disclosed in Section 2.3 of that
certain confidential writing delivered by COFI to CSFC within two business days
prior to the date hereof (the "COFI Disclosure Schedule"). No consent, approval,
order or authorization of, or registration, declaration or filing with, any
federal or state governmental authority is required by or with respect to COFI
or Charter One Bank, in connection with the
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execution and delivery of this Agreement or the consummation by them of the
transactions contemplated hereby except for: (a) the filing of all required
regulatory applications by COFI, CSFC and/or their respective Subsidiaries for
approval of the transactions contemplated by this Agreement; (b) the filing by
COFI of the registration statement relating to the COFI Common Stock to be
issued pursuant to this Agreement ("Registration Statement") with the United
States Securities and Exchange Commission ("SEC") pursuant to the Securities
Act, which Registration Statement shall include the prospectus/proxy statement
("Prospectus") for use in connection with the CSFC stockholders' meeting to
approve the Company Merger ("CSFC Stockholders' Meeting"); (c) the filing of a
certificate of merger with respect to the Company Merger with the Ohio Secretary
of State; (d) the filing of the articles of combination with the OTS and, if
required, the filing of a certificate of merger with the Ohio Secretary of State
relating to the Bank Merger and the filing of additional documents with the
State of Ohio as described in Section 1.5(e); (e) any notice filings, with state
securities authorities; and (f) any anti-trust filings, consents, waivers or
approvals.
2.4 Anti-takeover Provisions Inapplicable. To the best knowledge
of COFI and Charter One Bank, no "business combination," "moratorium," "control
share" or other state anti-takeover statute or regulation (i) applies to the
Company Merger, (ii) prohibits or restricts the ability of COFI or Charter One
Bank to perform its obligations under this Agreement or its ability to
consummate the transactions contemplated hereby, (iii) would have the effect of
invalidating or voiding this Agreement or any provision hereof, or (iv) would
subject CSFC or CSFC Bank to any material impediment or condition in connection
with the exercise of any of its rights under this Agreement.
2.5 Capitalization.
(a) As of the date hereof, the authorized capital stock
of COFI consists of (i) 180,000,000 shares of COFI Common Stock, $0.01
par value per share, of which, as of March 31, 1998, 64,067,849 shares
were issued and outstanding and (ii) 20,000,000 shares of preferred
stock, $0.01 par value per share, of which none are issued and
outstanding. All of the issued and outstanding shares of COFI Common
Stock have been, and all of the shares of COFI Common Stock to be
issued in the Company Merger will be, at the Effective Time, duly and
validly authorized and issued, and are or will be, as the case may be,
fully paid and non-assessable. None of the outstanding shares of COFI
Common Stock has been issued in violation of any preemptive rights of
the current or past stockholders of COFI and none of the outstanding
shares of COFI Common Stock is or will be entitled to any preemptive
rights in respect of the Company Merger or any of the other
transactions contemplated by this Agreement.
(b) As of December 31, 1997, COFI did not have
outstanding any securities or rights convertible into or exchangeable
for COFI Common Stock or any commitments, contracts, understandings or
arrangements by which COFI is or may be bound to issue additional
shares of COFI Common Stock, except as previously disclosed in its Form
10- K annual report for the year ended December 31, 1997 (the "1997
10-K) pursuant to Section 13 of the Securities Exchange Act of 1934, as
amended (the "Securities Exchange Act") and its dividend reinvestment
plan.
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2.6 COFI Financial Statements; Material Changes. The COFI audited
consolidated financial statements for calendar years ended December 31, 1997 and
December 31, 1996 set forth in the 1997 10-K (together the "COFI Financial
Statements") (x) are true and correct in all material respects; (y) have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto); and (z) fairly present the consolidated financial position
of COFI as of the dates thereof and the consolidated results of its operations,
shareholders' equity, cash flows and changes in financial position for the
periods then ended. Since December 31, 1997 to the date hereof, COFI and the
COFI Subsidiaries have not undergone or suffered any changes in their respective
condition (financial or otherwise), properties, business or operations which
have been, in any case or in the aggregate, materially adverse to COFI on a
consolidated basis except as disclosed in Section 2.6 of the COFI Disclosure
Schedule. No facts or circumstances have been discovered from which it
reasonably appears that there is a significant risk and reasonable probability
that COFI will suffer or experience a Material Adverse Effect.
2.7 COFI Subsidiaries.
(a) Except as disclosed in Section 2.7 of the COFI
Disclosure Schedule, COFI owns directly or indirectly all of the issued
and outstanding shares of capital stock of the COFI Subsidiaries. No
capital stock of any of the COFI Subsidiaries is, or may become
required to be, issued (other than to COFI or another COFI Subsidiary)
by reason of any options, warrants, scrip, right to subscribe to,
calls, or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, shares of
the capital stock of any COFI Subsidiary. All of the shares of capital
stock of each COFI Subsidiary held by COFI or a COFI Subsidiary are
fully paid and non-assessable and are owned free and clear of any
claim, lien or encumbrance, except as disclosed in Section 2.7 of the
COFI Disclosure Schedule.
(b) Each COFI Subsidiary is either a savings bank, a
corporation or a partnership and is duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it is
incorporated or organized, and is duly qualified to do business and in
good standing in each jurisdiction where the character of the assets or
properties owned or leased by it or the nature of the business
transacted by it requires it to be so qualified, except where the
failure to so qualify, either individually or in the aggregate, would
not have a Material Adverse Effect on COFI or would materially
adversely affect the ability of COFI, Merger Sub or Charter One Bank to
consummate the transactions contemplated herein. Each COFI Subsidiary
has the corporate power and authority necessary for it to own, operate
or lease its assets and properties and to carry on its business as it
has been and is now being conducted.
(c) For purposes of this Agreement, a "COFI Subsidiary"
or a "Subsidiary" of COFI shall mean each corporation, savings bank and
other entity in which COFI owns or controls directly or indirectly 10%
or more of the outstanding equity securities; provided, however, there
shall not be included any such entity acquired in good faith through
foreclosure, or any such entity to the extent that the equity
securities of such entity are owned or controlled in a bona fide
fiduciary capacity.
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(d) Charter One Bank is a member in good standing of the
Federal Home Loan Bank ("FHLB") System. All eligible deposit accounts
issued by Charter One Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund to the full extent permitted under
applicable law. Charter One Bank is, and at all times since June 1,
1990 has been a "qualified thrift lender" as defined in Section 10(m)
of HOLA.
2.8 COFI Filings. COFI has previously made available, or will make
available prior to the Effective Time, to CSFC true and correct copies of its
(i) proxy statements relating to all meetings of its stockholders (whether
special or annual) during calendar years 1996, 1997 and 1998 and (ii) all other
reports, as amended, or filings, as amended, required to be filed under the
Securities Exchange Act by COFI with the SEC since January 1, 1996 including,
without limitation, on Forms 10-K, 10-Q and 8-K.
2.9 COFI Reports. Each of COFI and the COFI Subsidiaries has
filed, and will continue to file, all reports and statements, together with any
amendment required to be made with respect thereto, that it was, or will be
required to file with the SEC, the FDIC, the OTS, the National Association of
Securities Dealers ("NASD") and other applicable thrift, securities and
other regulatory authorities (except filings which are not material). As of
their respective dates (and without giving effect to any amendments or
modifications filed after the date of this Agreement with respect to reports and
documents filed before the date of this Agreement), each of such reports and
documents, including the financial statements, exhibits, and schedules thereto,
complied in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the authority with which they were filed
and did not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading. Other than
normal examinations conducted by the Internal Revenue Service (the "IRS"), state
and local taxing authorities, the OTS or the FDIC in the regular course of the
business of COFI or the COFI Subsidiaries, no federal, state or local
governmental agency, commission or other entity has initiated any proceeding or,
to the best knowledge of COFI and Charter One Bank, investigation into the
business or operations of COFI or the COFI Subsidiaries since December 31, 1995
except as set forth in Section 2.9 of the COFI Disclosure Schedule. There is no
unresolved violation, criticism or exception by the SEC, OTS, FDIC or other
agency, commission or entity with respect to any report or statement referred to
herein that is material to COFI or any COFI Subsidiary on a consolidated basis.
2.10 Compliance with Laws.
(a) Except as disclosed in Section 2.10 of the COFI
Disclosure Schedule, the businesses of COFI and the COFI Subsidiaries
are not being conducted in violation of any law, ordinance or
regulation of any governmental entity, including, without limitation,
any laws affecting financial institutions (including those pertaining
to the Bank Secrecy Act, the investment of funds, the lending of money,
the collection of interest and the extension of credit), federal and
state securities laws, laws and regulations relating to financial
statements and reports, truth-in-lending, truth-in-savings, usury, fair
credit reporting, consumer protection, occupational safety, fair
employment practices, fair labor standards and laws and regulations
relating to employees and employee benefits,
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and any statutes or ordinances relating to the properties occupied or
used by COFI or any COFI Subsidiary, except for possible violations
which either singly or in the aggregate do not and, insofar as
reasonably can be foreseen in the future, will not have a Material
Adverse Effect on COFI.
(b) Except as disclosed in Section 2.10 of the COFI
Disclosure Schedule, no investigation or review by any governmental
entity with respect to COFI or any COFI Subsidiary is pending or, to
the best knowledge of COFI and Charter One Bank, threatened, nor has
any governmental entity indicated to COFI or any COFI Subsidiary an
intention to conduct the same, other than normal thrift regulatory
examinations and those the outcome of which will not have a Material
Adverse Effect on COFI.
(c) COFI and each of the COFI Subsidiaries, where
applicable, is in substantial compliance with the applicable provisions
of the Community Reinvestment Act of 1977 (the "CRA") and the
regulations promulgated thereunder. As of the date of this Agreement,
neither COFI nor Charter One Bank has been advised of the existence of
any fact or circumstance or set of facts or circumstances which, if
true, would cause COFI or any of the COFI Subsidiaries to fail to be in
substantial compliance with such provisions. No COFI Subsidiary that is
a financial institution has received a rating from an applicable
regulatory authority which is less than "satisfactory."
2.11 Registration Statement; Proxy Statement. The information to
be supplied by COFI for inclusion in the Registration Statement will not, at the
time the Registration Statement is declared effective and at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, not misleading. The information to be supplied by COFI for inclusion in
the Prospectus will not, on the date the Prospectus (or any amendment thereof or
supplement thereto) is first mailed to CSFC's stockholders, at the time of the
CSFC Stockholders' Meeting, and at the Effective Time, contain any statement
that, in light of the circumstances under which it is made, is false or
misleading with respect to any material fact, omits to state any material fact
necessary in order to make the statements made therein not false or misleading,
or omits to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the CSFC
Stockholders' Meeting that has become false or misleading. If, at any time prior
to the Effective Time, any event relating to COFI or any of its affiliates,
officers, or directors is discovered by COFI that should be set forth in an
amendment to the Registration Statement or a supplement to the Prospectus, COFI
will promptly inform CSFC and such amendment or supplement will be promptly
filed with the SEC and, as required by law, disseminated to the stockholders of
CSFC. Notwithstanding the foregoing, COFI makes no representation or warranty
with respect to any information supplied by CSFC that is contained in any of the
Registration Statement or the Prospectus. The Prospectus and the Registration
Statement will (with respect to COFI) comply in all material respects as to form
and substance with the requirements of the Securities Exchange Act, the
Securities Act, and the rules and regulations thereunder.
2.12 Litigation. Except as disclosed in Section 2.12 of the COFI
Disclosure Schedule, there is no suit, action, investigation or proceeding,
legal, quasi-judicial, administrative or otherwise, pending or, to the best
knowledge of COFI and Charter One Bank threatened, against
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or affecting COFI or any COFI Subsidiary, or any of their respective officers,
directors, employees or agents, in their capacities as such, which if adversely
determined, would have a Material Adverse Effect on COFI or which would
materially affect the ability of COFI or Charter One Bank to consummate the
transactions contemplated herein or which is seeking to enjoin consummation of
the transactions provided for herein or to obtain other relief in connection
with this Agreement or the transactions contemplated hereby, nor is there any
judgment, decree, injunction, rule or order of any court, governmental
department, commission agency, instrumentality or arbitrator outstanding against
COFI or any COFI Subsidiary or any of their respective officers, directors,
employees or agents, in their capacities as such, having, or which, insofar as
reasonably can be foreseen in the future, would have any such effect.
2.13 Licenses. COFI and the COFI Subsidiaries hold all licenses,
certificates, permits, franchises and all patents, trademarks, service marks,
trade names, copyrights or rights thereto, and required authorizations,
approvals, consents, licenses, clearances and orders or registrations with all
appropriate federal, state or other authorities that are material to the conduct
of their respective businesses as now conducted and as presently proposed to be
conducted.
2.14 Taxes.
(a) Except as disclosed in Section 2.14 of the COFI
Disclosure Schedule, COFI and the COFI Subsidiaries have each timely
filed all tax and information returns required to be filed and have
paid (or COFI has paid on behalf of its Subsidiaries), or have accrued
on their respective books and set up an adequate reserve for the
payment of, all taxes reflected on such returns or required to be paid
in respect of the periods covered by such returns and have accrued on
their respective books and set up an adequate reserve for the payment
of all income and other taxes anticipated to be payable in respect of
periods through the end of the calendar month next preceding the date
hereof. Neither COFI nor any COFI Subsidiary is delinquent in the
payment of any tax, assessment or governmental charge. No deficiencies
for any taxes have been proposed, asserted or assessed against COFI or
any COFI Subsidiary that have not been resolved or settled, and no
requests for waivers of the time to assess any such tax are pending or
have been agreed to. Except as set forth in Section 2.14 of the COFI
Disclosure Schedule, neither COFI nor any COFI Subsidiary is currently
subject to audit or examination of any of its income tax returns by the
IRS or any state, municipal or other taxing authority. Neither COFI nor
any COFI Subsidiary is a party to any action or proceeding by any
governmental authority for the assessment or the collection of taxes.
Deferred taxes of COFI and the COFI Subsidiaries have been accounted
for in accordance with generally accepted accounting principles.
(b) COFI has not filed any consolidated federal income
tax return with an "affiliated group" (within the meaning of Section
1504 of the Code), where COFI was not the common parent of the group.
Neither COFI nor any COFI Subsidiary is, or has been a party to any tax
allocation agreement or arrangement pursuant to which it has any
contingent or outstanding liability to anyone other than COFI or a COFI
Subsidiary.
(c) COFI and the COFI Subsidiaries have each withheld
amounts from its employees, stockholders or holders of public deposit
accounts in compliance with the tax
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withholding provisions of applicable federal, state and local laws,
have filed all federal, state and local returns and reports for all
periods for which such returns or reports would be due with respect to
income tax withholding, social security, unemployment taxes, income and
other taxes and all payments or deposits with respect to such taxes
have been timely made and, except as set forth in Section 2.14 of the
COFI Disclosure Schedule have notified all employees, stockholders, and
holders of public deposit accounts of their obligations to file all
forms, statements and reports with it in accordance with applicable
federal, state and local tax laws and have taken reasonable steps to
insure that such employees, stockholders and holders of public deposit
accounts have filed all such forms, statements and reports with it.
(d) For the purposes of this Agreement, the terms "tax"
and "taxes" include without limitation, any federal, state, local or
foreign income, leasing, franchise, excise, gross receipts, sales, use,
occupational, employment, real property, ad valorem, tangible and
intangible personal property and state taxes, payments in lieu of
taxes, levies, duties, imposts, business, operations or financial
condition, assessments, fees, charges and withholdings of any nature
whatsoever, together with any related penalties, fines, additions to
tax or interest thereon.
2.15 Insurance. COFI and the COFI Subsidiaries maintain insurance
with insurers which in the best judgment of management of COFI are sound and
reputable on their respective assets and upon their respective businesses and
operations against loss or damage, risks, hazards and liabilities as in their
judgment they deem appropriate. COFI and the COFI Subsidiaries maintain in
effect all insurance required to be carried by law or by any agreement by which
they are bound. All material claims under all policies of insurance maintained
by COFI and the COFI Subsidiaries have been filed in due and timely fashion.
2.16 Loans; Investments.
(a) Except as otherwise disclosed in Section 2.16 of the
COFI Disclosure Schedule, each material loan reflected as an asset on
the COFI Financial Statements dated as of December 31, 1997 is
evidenced by appropriate and sufficient documentation and constitutes,
to the best knowledge of COFI and Charter One Bank, the legal, valid
and binding obligation of the obligor named therein, enforceable in
accordance with its terms, except to the extent that the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles or doctrines. Except
as set forth in Section 2.16 of the COFI Disclosure Schedule, all such
loans are, and at the Effective Time will be, free and clear of any
security interest, lien, encumbrance or other charge.
(b) All guarantees of indebtedness owed to COFI or any
COFI Subsidiary, including but not limited to those of the Federal
Housing Administration, the Small Business Administration, and other
state and federal agencies, are, to the best knowledge of COFI and
Charter One Bank, valid and enforceable, except to the extent
enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable
principles or doctrines and except as would not have a Material Adverse
Effect on COFI.
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(c) All interest rate swaps, caps, floors and option
agreements and other interest rate risk management arrangements to
which COFI or any COFI Subsidiary is a party or by which any of their
properties or assets may be bound were entered into in the ordinary
course of business and, to the best knowledge of COFI and Charter One
Bank, in accordance with then-customary practice and applicable rules,
regulations and policies of thrift regulatory authorities and with
counterparties believed to be financially responsible at the time and
are legal, valid and binding obligations and are in full force and
effect. COFI and the COFI Subsidiaries have duly performed in all
material respects all of their respective obligations thereunder to the
extent that such obligations to perform have accrued, and to the best
knowledge of COFI and Charter One Bank, there are no material breaches,
violations or defaults or allegations or assertions of such by any
party thereunder. None of the transactions contemplated by this
Agreement would permit (i) a counterparty under any interest rate swap,
cap, floor, option agreement or any other interest rate risk management
agreement or (ii) any party to any mortgage backed security financing
arrangement, to accelerate, discontinue, terminate, or otherwise modify
any such agreement or arrangement or would require COFI or any COFI
Subsidiary to recognize any gain or loss with respect to such
arrangement.
(d) Except as set forth in Section 2.16 of the COFI
Disclosure Schedule and except for pledges to secure public and trust
deposits, none of the investments reflected in the COFI Financial
Statements dated as of December 31, 1997 under the heading "Investment
Securities," and none of the investments made by COFI and the COFI
Subsidiaries since December 31, 1997, is subject to any restriction,
whether contractual or statutory, which materially impairs the ability
of COFI or any COFI Subsidiary to freely dispose of such investment at
any time, other than those restrictions imposed on securities held for
investment under generally accepted accounting principles. With respect
to all material repurchase agreements to which COFI or any COFI
Subsidiary is a party, COFI or such Subsidiary has a valid, perfected
first lien, or security interest in the government securities or other
collateral securing each such repurchase agreement, and the value of
the collateral securing each such repurchase agreement equals or
exceeds the amount of the debt secured by such collateral under such
agreement.
2.17 Allowance for Possible Loan Losses. The allowance for possible
loan losses shown on the COFI Financial Statements as of December 31, 1997 (and
as shown on any financial statements to be delivered by COFI to CSFC pursuant to
Section 5.7 hereof), to the best knowledge of COFI and Charter One Bank, as of
such date was (and will be as of such subsequent financial statement dates)
adequate in all respects to provide for possible or specific losses, net of
recoveries relating to loans previously charged off, on loans outstanding, and
contained (or will contain) an additional amount of unallocated reserves for
unanticipated future losses at a level considered adequate under the standards
applied by applicable federal regulatory authorities and based upon generally
accepted accounting principles applicable to Charter One Bank. To the best
knowledge of COFI and Charter One Bank, the aggregate principal amount of loans
contained (or that will be contained) in the loan portfolio of COFI and the COFI
Subsidiaries as of December 31, 1997 (and as of the dates of any financial
statements to be delivered by COFI to CSFC pursuant to Section 5.7 hereof), in
excess of such reserve, was (and will be) fully collectible.
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2.18 COFI Benefit Plans.
(a) The term "COFI Benefit Plans" as used herein refers
to each compensation, consulting, employment, termination or collective
bargaining agreement, and each stock option, stock purchase, stock
appreciation right, life, health, accident or other insurance, bonus,
deferred or incentive compensation, severance or separation agreement
or any agreement providing any payment or benefit resulting from a
change in control, profit sharing, retirement, or other employee
benefit plan, practice, policy or arrangement of any kind, oral or
written, covering any employee, former employee, director or former
director of COFI or any COFI Subsidiary or his or her beneficiaries,
including, but not limited to, any employee benefit plans within the
meaning of Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), which COFI or any COFI Subsidiary
maintains, to which COFI or any COFI Subsidiary contributes, or under
which any employee, former employee, director or former director of
COFI or any COFI Subsidiary is covered or has benefit rights and
pursuant to which any liability of COFI or any COFI Subsidiary exists
or is reasonably likely to occur, provided that the term "Plan or
"Plans" is used in this Agreement for convenience only and does not
constitute an acknowledgment that a particular arrangement is an
employee benefit plan within the meaning of Section 3(3) of ERISA. No
COFI Benefit Plan is a multi-employer plan within the meaning of
Section 3(37) of ERISA.
(b) Each of the COFI Benefit Plans that is intended to be
a pension, profit sharing, stock bonus, thrift, savings or employee
stock ownership plan that is qualified under Section 401(a) of the Code
("COFI Qualified Plans") has been determined by the IRS to qualify
under Section 401(a) of the Code, or an application for determination
of such qualification has been timely made to the IRS prior to the end
of the applicable remedial amendment period under Section 401(b) of the
Code, and, to the best of COFI's knowledge, there exist no
circumstances likely to adversely affect the qualified status of any
such COFI Qualified Plan. All such COFI Qualified Plans established or
maintained by COFI or any of the COFI Subsidiaries or to which COFI or
any of the COFI Subsidiaries contribute are in compliance in all
material respects with all applicable requirements of ERISA, and are in
compliance in all material respects with all applicable requirements
(including qualification and non-discrimination requirements) of the
Code for obtaining the tax benefits the Code thereupon permits with
respect to such COFI Qualified Plans. Neither COFI nor any COFI
Subsidiary maintains, sponsors or contributes to a Qualified Plan that
is a defined benefit pension plan subject to Title IV of ERISA. All
accrued contributions and other payments required to be made by COFI or
any COFI Subsidiary to any COFI Benefit Plan through December 31, 1997,
have been made or reserves adequate for such purposes as of December
31, 1997 have been set aside therefor and reflected in the COFI
Financial Statements dated as of December 31, 1997. Neither COFI nor
any COFI Subsidiary is in material default in performing any of its
respective contractual obligations under any of the COFI Benefit Plans
or any related trust agreement or insurance contract, and there are no
material outstanding liabilities of any such Plan other than
liabilities for benefits to be paid to participants in such Plan and
their beneficiaries in accordance with the terms of such Plan.
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(c) There is no pending or, to the best knowledge of COFI
and Charter One Bank, threatened litigation or pending claim (other
than benefit claims made in the ordinary course) by or on behalf of or
against any of the COFI Benefit Plans (or with respect to the
administration of any of such Plans) now or heretofore maintained by
COFI or any COFI Subsidiary which allege violations of applicable state
or federal law which are reasonably likely to result in a liability on
the part of COFI or any COFI Subsidiary or any such Plan.
(d) COFI and the COFI Subsidiaries and all other persons
having fiduciary or other responsibilities or duties with respect to
any COFI Benefit Plan are and have since the inception of each such
Plan been in substantial compliance with, and each such Plan is and has
been operated in substantial accordance with, its provisions and in
substantial compliance with the applicable laws, rules and regulations
governing such Plan, including, without limitation, the rules and
regulations promulgated by the Department of Labor, the Pension Benefit
Guaranty Corporation ("PBGC") and the IRS under ERISA, the Code or any
other applicable law. Notwithstanding the foregoing, no representation
is made with respect to compliance by a third party insurance company.
No "reportable event" (as defined in Section 4043(b) of ERISA) has
occurred with respect to any COFI Qualified Plan. Neither COFI, any
COFI Subsidiary nor any COFI Benefit Plan has incurred or is reasonably
likely to incur any liability for any "prohibited transactions" (as
defined in Section 406 of ERISA or Section 4975(a) of the Code), or any
material liability under Section 601 of ERISA or Section 4980 of the
Code.
(e) COFI and the COFI Subsidiaries have filed or caused
to be filed, and will continue to file or cause to be filed, in a
timely manner all filings pertaining to each COFI Benefit Plan with the
IRS, the PBGC, the Department of Labor, and as prescribed by the Code
or ERISA, or regulations issued thereunder. All such filings, as
amended, were complete and accurate in all material respects as of the
dates of such filings, and there were no misstatements or omissions in
any such filing which would be material to the financial condition of
COFI on a consolidated basis. Notwithstanding the foregoing, no
representation is made with respect to filings by a third party
insurance company.
2.19 Compliance With Environmental Laws.
(a) Except as set forth in Section 2.19 of the COFI
Disclosure Schedule: (i) to the best knowledge of COFI and Charter One
Bank, the operations of COFI and each of the COFI Subsidiaries comply
in all material respects with all applicable past and present
Environmental Laws (as defined below); (ii) to the best knowledge of
COFI and Charter One Bank, none of the operations of COFI or any COFI
Subsidiary, no assets presently or formerly owned or leased by COFI or
any COFI Subsidiary and no Mortgaged Premises or a Participating
Facility (as defined below) are subject to any judicial or
administrative proceedings alleging the violation of any past or
present Environmental Law, nor are they the subject of any claims
alleging damages to health or property, pursuant to which COFI, any
COFI Subsidiary or any owner of a Mortgaged Premises or a Participating
Facility would be liable in law or equity; (iii) none of the operations
of COFI or any COFI Subsidiary, no assets presently owned or, to the
best knowledge of COFI and Charter One Bank, formerly owned by COFI or
any COFI Subsidiary, and, to the best
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knowledge of COFI and Charter One Bank, no Mortgaged Premises or
Participating Facility are the subject of any federal, state or local
investigation evaluating whether any remedial action is needed to
respond to a release or threatened release of any Hazardous Substance
(as defined below), or any other substance into the environment, nor
has COFI or any COFI Subsidiary, or, to the best knowledge of COFI and
Charter One Bank, any owner of a Mortgaged Premises or Participating
Facility been directed to conduct such investigation, formally or
informally, by any governmental agency, nor have any of them agreed
with any governmental agency or private person to conduct any such
investigation; and (iv) neither COFI or any COFI Subsidiary, nor, to
the best knowledge of COFI and Charter One Bank, any owner of a
Mortgaged Premises or a Participating Facility has filed any notice
under any Environmental Law indicating past or present treatment,
storage or disposal of a Hazardous Substance or reporting a spill or
release of a Hazardous Substance, or any other substance into the
environment.
(b) For purposes of this Section, "Mortgaged Premises"
shall mean each (i) real property interest (including without
limitation any fee or leasehold interest) which is encumbered or
affected by any mortgage, deed of trust, deed to secure debt or other
similar document or instrument granting to any party hereto or any of
its Subsidiaries a lien on or security interest in such real property
interest and (ii) any other real property interest upon which is
situated assets or other property affected or encumbered by any
document or instrument granting to any party hereto or any of its
Subsidiaries a lien thereon or security interest therein; provided,
however, that the term "Mortgaged Premises" shall not include one- to
four-unit, single-family residences, and in the case of COFI and the
COFI Subsidiaries, any real property interest securing a loan with a
principal balance of less than one million dollars. For purposes of
this Section, "Participating Facility" means any property in which any
party hereto or any of its Subsidiaries participates in the management
of such property and, where the context requires, includes the owner or
operator of such property. For purposes of this Agreement, "Hazardous
Substance" has the meaning set forth in Section 9601 of the
Comprehensive Environmental Response Compensation and Liability Act of
1980, 42 U.S.C.A., Section 9601 et seq., and also includes any
substance now or hereafter regulated by or subject to any Environmental
Laws (as defined below) and any other pollutant, contaminant, or waste,
including without limitation, petroleum, asbestos, fiberglass, radon,
and polychlorinated biphenyls. For purposes of this Agreement,
"Environmental Laws" means all laws (civil or common), ordinances,
rules, regulations, guidelines, and orders that: (i) regulate air,
water, soil, and solid waste management, including the generation,
release, containment, storage, handling, transportation, disposition,
or management of any Hazardous Substance; (ii) regulate or prescribe
requirements for air, water, or soil quality; (iii) are intended to
protect public health or the environment; or (iv) establish liability
for the investigation, removal, or cleanup of, or damage caused by, any
Hazardous Substance.
2.20 Contracts and Commitments. Section 2.20 of the COFI Disclosure
Schedule contains, and shall be supplemented by COFI and Charter One Bank, as
required by Section 5.10 hereof, so as to contain at the Closing Date copies of
each of the following documents, certified by an officer of COFI to be true and
correct copies of such documents on the dates of such certificates.
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(a) The Certificate or Articles of Incorporation,
Charters and Bylaws of COFI and each COFI Subsidiary.
(b) All judgments, orders, injunctions, court decrees or
settlement agreements arising out of or relating to the labor and
employment practices or decisions of COFI or any COFI Subsidiary which,
by their terms, continue to bind or affect COFI or any COFI Subsidiary.
(c) All orders, decrees, memorandums, agreements or
understandings with regulatory agencies binding upon or affecting the
current operations of COFI or any COFI Subsidiary or any of their
directors or officers in their capacities as such.
2.21 Defaults. There has not been any default in any material
obligation to be performed by COFI or any COFI Subsidiary under any material
contract or commitment, and neither COFI nor any COFI Subsidiary has waived, any
material right under any material contract or commitment. To the best knowledge
of COFI and Charter One Bank, no other party to any material contract or
commitment is in default in any material obligation to be performed by such
party.
2.22 Operations Since December 31, 1997. Between December 31, 1997
and the date hereof, except as set forth in Section 2.22 of the COFI Disclosure
Schedule, there has not been:
(a) any creation or assumption of indebtedness (including
the extension or renewal of any existing indebtedness, or the increase
thereof) by COFI or any COFI Subsidiary for borrowed money, or
otherwise, other than in the ordinary course of business, none of which
is in default;
(b) any change in COFI's independent auditors, historic
methods of accounting (other than as required by generally accepted
accounting principles or regulatory accounting principles), or in its
system for maintaining its equipment and real estate; or
(c) any event or condition of any character (other than
changes in legal, economic or other conditions which are not specially
or uniquely applicable to COFI or any COFI Subsidiary) materially
adversely affecting the business, operations or financial condition of
COFI on a consolidated basis.
2.23 Undisclosed Liabilities. All of the obligations or liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise, whether due
or to become due, and regardless of when asserted) arising out of transactions
or events heretofore entered into, or any action or inaction, including taxes
with respect to or based upon transactions or events heretofore occurring, that
are required to be reflected, disclosed or reserved against in audited
consolidated financial statements in accordance with generally accepted
accounting principles ("Liabilities")
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have, in the case of COFI and the COFI Subsidiaries, been so reflected,
disclosed or reserved against in the COFI Financial Statements dated as of
December 31, 1997 or in the notes thereto, and COFI and the COFI Subsidiaries
have no other Liabilities except (a) Liabilities incurred since December 31,
1997 in the ordinary course of business or (b) as disclosed in Section 2.23 of
the COFI Disclosure Schedule.
2.24 Assets.
(a) COFI and the COFI Subsidiaries have good, and
marketable title to their real properties, including any leaseholds and
ground leases, and their other assets and properties, all as reflected
as owned or held by COFI or any COFI Subsidiary in the COFI Financial
Statements dated as of December 31, 1997, and those acquired since such
date, except for (i) assets and properties disposed of since such date
in the ordinary course of business and (ii) liens, none of which, in
the aggregate, except as set forth in the COFI Financial Statements
dated as of December 31, 1997 or in Section 2.24 of the COFI Disclosure
Schedule, are material to the assets of COFI on a consolidated basis.
All buildings, structures, fixtures and appurtenances comprising part
of the real properties of COFI and the COFI Subsidiaries (whether owned
or leased) are in good operating condition and have been well
maintained, reasonable wear and tear excepted. Title to all real
property owned by COFI and the COFI Subsidiaries is held in fee simple,
except as otherwise noted in the COFI Financial Statements as of
December 31, 1997 or as set forth in Section 2.24 of the COFI
Disclosure Schedule. COFI and the COFI Subsidiaries have title or other
rights to its assets sufficient in all material respects for the
conduct of their respective businesses as presently conducted, and
except as set forth in the COFI Financial Statements dated as of
December 31, 1997, or in Section 2.24 of the COFI Disclosure Schedule,
such assets are free, clear and discharged of and from any and all
liens, charges, encumbrances, security interests and/or equities which
are material to COFI or any COFI Subsidiary.
(b) All leases pursuant to which COFI or any COFI
Subsidiary, as lessee, leases real or personal property which are
material to the business of COFI on a consolidated basis are, to the
best knowledge of COFI and Charter One Bank, valid, effective, and
enforceable against the lessor in accordance with their respective
terms. There is not under any of such leases any existing default, or
any event which, with notice or lapse of time or both, would constitute
a default, with respect to COFI or any COFI Subsidiary, or to the best
knowledge of COFI and Charter One Bank, the other party.
2.25 Indemnification. To the best knowledge of COFI and Charter One
Bank, except as set forth in Section 2.25 of the COFI Disclosure Schedule, no
action or failure to take action by any director, officer, employee or agent of
COFI or any COFI Subsidiary has occurred which would give rise to a claim by any
such person for indemnification from COFI or any COFI Subsidiary under the
corporate indemnification provisions of such entity in effect on the date of
this Agreement.
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2.26 Insider Interests. All outstanding loans and other contractual
arrangements (including deposit relationships) between COFI or any COFI
Subsidiary and any of its officers, directors or employees conform to applicable
rules and regulations and requirements of all applicable regulatory agencies
which were in effect when such loans and other contractual arrangements were
entered into. Except as set forth in Section 2.26 of the COFI Disclosure
Schedule, no officer, director or employee of COFI or any COFI Subsidiary has
any material interest in any property, real or personal, tangible or intangible,
used in or pertaining to the business of COFI or any COFI Subsidiary.
2.27 Brokers and Finders. Neither COFI nor any COFI Subsidiary nor
any of their respective officers, directors or employees has employed any broker
or finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions or finders' fees, and no broker or finder has acted directly
or indirectly for COFI or any COFI Subsidiary, in connection with this Agreement
or the transactions contemplated hereby.
2.28 Accuracy of Information. The statements of COFI and Charter
One Bank contained in this Agreement, the Schedules hereto and in any other
written document executed and delivered by or on behalf of COFI or Charter One
Bank pursuant to the terms of this Agreement are true and correct in all
material respects.
2.29 Governmental Approvals and Other Conditions. To the best
knowledge of COFI and Charter One Bank, there is no reason relating specifically
to COFI or any COFI Subsidiary why (a) the approvals that are required to be
obtained from regulatory authorities having approval authority in connection
with the transactions contemplated hereby should not be granted, (b) such
regulatory approvals should be subject to a condition which would differ from
conditions customarily imposed by such regulatory authorities in orders
approving acquisitions of the type contemplated hereby or (c) any of the
conditions precedent as specified in Article VI hereof to the obligations of any
of the parties hereto to consummate the transactions contemplated hereby are
unlikely to be fulfilled within the applicable time period or periods required
for satisfaction of such condition or conditions.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CSFC AND CSFC BANK
CSFC and CSFC Bank jointly and severally represent and warrant to COFI
and Charter One Bank that:
3.1 Organization. CSFC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio and has all
requisite power and authority, corporate and otherwise, to own, operate and
lease its assets and properties and to carry on its business substantially as it
has been and is now being conducted. CSFC is duly qualified to do business and
is in good standing in each jurisdiction where the character of the assets or
properties owned or leased by it or the nature of the business transacted by it
requires that it be so qualified, except
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where the failure to so qualify would not have a Material Adverse Effect on CSFC
or materially adversely affect its ability to consummate the transactions
contemplated herein. CSFC has all requisite corporate power and authority to
enter into this Agreement and, subject to the approval of this Agreement and the
Company Merger by its stockholders and the receipt of all requisite regulatory
approvals and the expiration of any applicable waiting periods, to consummate
the transactions contemplated hereby. CSFC is duly registered as a savings and
loan holding company under HOLA.
3.2 Authorization. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby have been
duly approved and authorized by the Boards of Directors of CSFC and CSFC Bank,
and all necessary corporate action on the part of CSFC and CSFC Bank has been
taken, subject to the approval of this Agreement and the Company Merger by the
holders of a majority of the issued and outstanding CSFC Common Stock ("Required
Vote"). This Agreement has been duly executed and delivered by CSFC and CSFC
Bank and constitutes the valid and binding obligation of each of them and is
enforceable against each of them, except to the extent that enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles or doctrines.
3.3 Conflicts. Subject to the second sentence of this Section 3.3,
the execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated hereby will not, conflict with or result in any
violation, breach or termination of, or default or loss of a material benefit
under, or permit the acceleration of any obligation under, or result in the
creation of any material lien, charge or encumbrance on any property or assets
under, any provision of the Articles of Incorporation or Code of Regulations of
CSFC or similar documents of any CSFC Subsidiary (as defined in Section 3.7
hereof), or any mortgage, indenture, lease, agreement or other instrument,
permit, concession, grant, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to CSFC or any CSFC Subsidiary or
their respective properties, other than any such conflicts, violations or
defaults which (i) will be cured or waived prior to the Effective Time, or (ii)
are disclosed in Section 3.3 of that certain confidential writing delivered by
CSFC to COFI within two business days prior to the date hereof (the "CSFC
Disclosure Schedule"). No consent, approval, order or authorization of, or
registration, declaration or filing with, any federal or state governmental
authority or any third party is required by or with respect to CSFC or CSFC Bank
in connection with the execution and delivery of this Agreement or the
consummation by CSFC or CSFC Bank of the transactions contemplated hereby except
for the filings, approvals or waivers contemplated by Section 2.3 hereof.
3.4 Anti-takeover Provisions Inapplicable. To the best knowledge
of CSFC and CSFC Bank, no "business combination," "moratorium," "control share"
or other state anti-takeover statute or regulation, (i) applies to the Company
Merger or to the Voting Agreements, (ii) prohibits or restricts the ability of
CSFC or CSFC Bank to perform its obligations under this Agreement, or the
ability of CSFC to consummate the Company Merger or the ability of CSFC Bank to
consummate the Bank Merger, (iii) would have the effect of invalidating or
voiding this
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Agreement, any of the Voting Agreements, or any provision hereof or thereof, or
(iv) would subject COFI or Charter One Bank to any material impediment or
condition in connection with the exercise of any of its right under this
Agreement with respect to the Company Merger or any of the Voting Agreements.
3.5 Capitalization and Stockholders.
(a) As of the date hereof, the authorized capital stock
of CSFC consists of (i) 500,000 shares of CSFC Common Stock, $5.00 par
value, of which 33,635 shares are issued and outstanding. All of the
issued and outstanding shares of CSFC Common Stock have been duly and
validly authorized and issued, and are fully paid and non-assessable.
None of the outstanding shares of CSFC Common Stock has been issued in
violation of any preemptive rights of current or past stockholders or
are subject to any preemptive rights of the current or past
stockholders of CSFC. All of the issued and outstanding shares of CSFC
Common Stock will be entitled to vote to approve this Agreement and the
Company Merger.
(b) There are no shares of capital stock or other equity
securities of CSFC outstanding and no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character
whatsoever binding on CSFC relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of
CSFC, or contracts, commitments, understandings, or arrangements by
which CSFC is or may be bound to issue additional shares of its capital
stock or options, warrants, or rights to purchase or acquire any
additional shares of its capital stock.
3.6 CSFC Financial Statements; Material Changes. CSFC has
heretofore delivered to COFI its audited consolidated financial statements for
calendar years ended December 31, 1997 and December 31, 1996 (together the "CSFC
Financial Statements"). CSFC has also heretofore delivered the COFI its
unaudited unconsolidated financial statements of CSFC and the CSFC Subsidiaries
for the calendar quarter ended March 31, 1998 (the "Quarterly Statements"). The
CSFC Financial Statements and the Quarterly Statements (x) are true and correct
in all material respects; (y) have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto); and (z) fairly
present the consolidated (or in the case of the Quaterly Statements, the
unconsolidated) financial position of CSFC and the CSFC Subsidiaries as of the
dates thereof and the consolidated (or in the case of the Quarterly Statements,
the unconsolidated) results of its operations, stockholders' equity, cash flows
and changes in financial position for the periods then ended. Since December 31,
1997 to the date hereof, CSFC and the CSFC Subsidiaries have not undergone or
suffered any changes in their respective condition (financial or otherwise),
properties, business or operations which have been, in any case or in the
aggregate, materially adverse to CSFC on a consolidated basis except as
disclosed in Section 3.6 of the CSFC Disclosure Schedule. No facts or
circumstances have been discovered by any director or executive office of CSFC
from which it reasonably appears that
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there is a significant risk and reasonable probability that CSFC will suffer or
experience a Material Adverse Effect.
3.7 CSFC Subsidiaries.
(a) All of the CSFC Subsidiaries are listed in Section
3.7 of the CSFC Disclosure Schedule. Except as set forth in Section 3.7
of the CSFC Disclosure Schedule, CSFC owns directly or indirectly all
of the issued and outstanding shares of capital stock of the CSFC
Subsidiaries. Section 3.7 of the CSFC Disclosure Schedule sets forth
the number of shares of authorized and outstanding capital stock of the
CSFC Subsidiaries. Except for equity securities of the FHLB of
Cincinnati or as set forth in Section 3.7 of the CSFC Disclosure
Schedule, neither CSFC nor the CSFC Subsidiaries own directly or
indirectly any debt or equity securities, or other proprietary interest
in any other corporation, limited liability company, joint venture,
partnership, entity, association or other business. No capital stock of
any of the CSFC Subsidiaries is or may become required to be issued
(other than to CSFC) by reason of any options, warrants, scrip, rights
to subscribe to, calls, or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable
for, shares of the capital stock of any CSFC Subsidiary. Other than as
set forth in Section 3.7 of the CSFC Disclosure Schedule there are no
contracts, commitments, understandings or arrangements relating to the
rights of CSFC to vote or to dispose of shares of the capital stock of
any CSFC Subsidiary. All of the shares of capital stock of each CSFC
Subsidiary are fully paid and non-assessable and are owned by CSFC or
another CSFC Subsidiary free and clear of any claim, lien or
encumbrance, except as disclosed in Section 3.7 of the CSFC Disclosure
Schedule.
(b) Each CSFC Subsidiary is either a savings and loan
association or a corporation and is duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it is
incorporated or organized, and is duly qualified to do business and in
good standing in each jurisdiction where the character of the assets or
properties owned or leased by it or the nature of the business
transacted by it requires it to be so qualified, except where the
failure to so qualify, either individually or in the aggregate, would
not have a Material Adverse Effect on CSFC or would not materially
adversely affect the ability of CSFC or CSFC Bank to consummate the
transactions contemplated herein. Each CSFC Subsidiary has the
corporate power and authority necessary for it to own, operate or lease
its assets and properties and to carry on its business substantially as
it has been and is now being conducted.
(c) For purposes of this Agreement, a "CSFC Subsidiary"
or a "Subsidiary" of CSFC shall mean each corporation, savings bank,
and other entity in which CSFC owns or controls directly or indirectly
10% or more of the outstanding equity securities; provided, however,
there shall not be included any such entity acquired in good faith
through foreclosure, or any such entity to the extent that the equity
securities of such entity are owned or controlled in a bona fide
fiduciary capacity.
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(d) CSFC Bank is a member in good standing of the FHLB
System. All eligible deposit accounts issued by CSFC Bank are insured
by the FDIC through the SAIF to the full extent permitted under
applicable law. CSFC Bank is, and at all times since June 1, 1990 has
been a "qualified thrift lender" as defined in Section 10(m) of HOLA.
3.8 CSFC Reports. Each of CSFC and the CSFC Subsidiaries has
filed, and will continue to file, all reports and statements, together with any
amendment required to be made with respect thereto, that it has, or will be,
required to file with the FDIC, the OTS, the State of Ohio and other applicable
thrift, securities and other regulatory authorities (except filings which are
not material). As of their respective dates (and without giving effect to any
amendments or modifications filed after the date of this Agreement with respect
to reports and documents filed before the date of this Agreement), each of such
reports and documents, including the financial statements, exhibits, and
schedules thereto, complied in all material respects with all of the statutes,
rules and regulations enforced or promulgated by the authority with which they
were filed and did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. Other than normal examinations conducted by the IRS, state and local
taxing authorities, the OTS, the Ohio Director of Savings and Loan Associations
or the FDIC in the regular course of the business of CSFC or the CSFC
Subsidiaries, no federal, state or local governmental agency, commission or
other entity has initiated any proceeding or, to the best knowledge of CSFC and
CSFC Bank, investigation into the business or operations of CSFC or the CSFC
Subsidiaries since December 31, 1995 except as set forth in Section 3.8 of the
CSFC Disclosure Schedule. There is no unresolved violation, criticism or
exception by the OTS, FDIC, or the State of Ohio or other agency, commission or
entity with respect to any report or statement referred to herein that is
material to CSFC or any CSFC Subsidiary. CSFC has previously made available, or
will make available prior to the Effective Time, to COFI true and correct copies
of all OTS filings during calendar years 1996, 1997 and 1998.
3.9 Compliance With Laws.
(a) Except as disclosed in Section 3.9 of the CSFC
Disclosure Schedule, and for violations which are not material to CSFC
on a consolidated basis, the businesses of CSFC and the CSFC
Subsidiaries are being conducted, in all material respects, in
compliance with all laws, ordinances or regulations of governmental
authorities, including without limitation, laws affecting financial
institutions (including those pertaining to the Bank Secrecy Act, the
investment of funds, the lending of money, the collection of interest
and the extension of credit), federal and state securities laws, laws
and regulations relating to financial statements and reports,
truth-in-lending, truth-in-savings, usury, fair credit reporting,
consumer protection, occupational safety, fair employment practices,
fair labor standards and all other laws and regulations relating to
employees and employee benefits, and any statutes or ordinances
relating to the properties occupied or used by CSFC or any CSFC
Subsidiary.
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(b) Except as disclosed in Section 3.9 of the CSFC
Disclosure Schedule, no investigation or review by any governmental
entity with respect to CSFC or any CSFC Subsidiary is pending or, to
the best knowledge of CSFC and CSFC Bank, threatened, nor has any
governmental entity indicated to CSFC or any CSFC Subsidiary an
intention to conduct the same, other than normal thrift regulatory
examinations.
(c) CSFC and each of the CSFC Subsidiaries, where
applicable, is in substantial compliance with the applicable provisions
of the CRA and the regulations promulgated thereunder. As of the date
of this Agreement, neither CSFC nor CSFC Bank has been advised of the
existence of any fact or circumstance or set of facts or circumstances
which, if true, would cause CSFC or any of the CSFC Subsidiaries to
fail to be in substantial compliance with such provisions. CSFC Bank
has not received since December 31, 1993 a rating from an applicable
regulatory authority which is less than "satisfactory."
3.10 Registration Statement: Prospectus. The information to be
supplied by CSFC for inclusion in the Registration Statement will not, at the
time the Registration Statement is declared effective and at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, not misleading. The information to be supplied by CSFC for inclusion in
the Prospectus will not, on the date of the Prospectus (or any amendment thereof
or supplement thereto) is first mailed to CSFC's stockholders, at the time of
the CSFC Stockholders' Meeting, and at the Effective Time, contain any statement
that, in light of the circumstances under which it is made, is false or
misleading with respect to any material fact, omits to state any material fact
necessary in order to make the statements made therein not false or misleading,
or omits to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the CSFC
Stockholders' Meeting that has become false or misleading. If at any time prior
to the Effective Time, any event relating to CSFC or any of its affiliates,
officers or directors is discovered by CSFC that should be set forth in an
amendment to the Registration Statement or a supplement to the Prospectus, CSFC
will promptly inform COFI. Notwithstanding the foregoing, CSFC makes no
representation or warranty with respect to any information supplied by COFI that
is contained in the Registration Statement or the Prospectus.
3.11 Ligitation. Except as disclosed in Section 3.11 of the CSFC
Disclosure Schedule, there is no suit, action, investigation or proceeding,
legal, quasi-judicial, administrative or otherwise, pending or, to the best
knowledge of CSFC and CSFC Bank threatened, against or affecting CSFC or any
CSFC Subsidiary, or any of their respective officers, directors, employees or
agents, in their capacities as such, which is seeking equitable relief or
damages against CSFC, any CSFC Subsidiary, or any of their respective officers,
directors, employees or agents, in their capacities as such, in excess of
$25,000, or which would materially affect the ability of CSFC or CSFC Bank to
consummate the transactions contemplated herein or which is seeking to enjoin
consummation of the transactions provided for herein or to obtain other relief
in connection with this Agreement or the transactions contemplated hereby, nor
is there any judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality or arbitrator
outstanding against CSFC or any CSFC Subsidiary or any of their
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respective officers, directors, employees or agents, in their capacities as
such, having, or which, insofar as reasonably can be foreseen in the future,
would have any such effect.
3.12 Licenses. CSFC and the CSFC Subsidiaries hold all licenses,
certificates, permits, franchises and all patents, trademarks, service marks,
trade names, copyrights or right thereto, and required authorizations,
approvals, consents, licenses, clearances and orders or registrations with all
appropriate federal, state or other authorities that are material to the conduct
of their respective businesses as now conducted and as presently proposed to be
conducted.
3.13 Taxes.
(a) Except as disclosed in Section 3.13 of the CSFC
Disclosure Schedule, CSFC and the CSFC Subsidiaries have each timely
filed all tax and information returns required to be filed and have
paid (or CSFC has paid on behalf of its Subsidiaries), or have accrued
on their respective books and set up an adequate reserve for the
payment of, all taxes reflected on such returns as required to be paid
in respect of the periods covered by such returns and have accrued on
their respective books and set up an adequate reserve for the payment
of all income and other taxes anticipated to be payable in respect of
periods through the end of the calendar month next preceding the date
hereof. Neither CSFC nor any CSFC Subsidiary is delinquent in the
payment of any tax, assessment or governmental charge. No deficiencies
for any taxes have been proposed, asserted or assessed against CSFC or
any CSFC Subsidiary that have not been resolved or settled and no
requests for waivers of the time to assess any such tax are pending or
have been agreed to. The income tax returns of CSFC and CSFC
Subsidiaries have not been audited by the IRS, state, municipal or
other taxing authority after the 1991 tax year. Neither CSFC nor any
CSFC Subsidiary is a party to any action or proceeding by any
governmental authority for the assessment or the collection of taxes.
Deferred taxes of CSFC and the CSFC Subsidiaries have been accounted
for in accordance with generally accepted accounting principles.
(b) CSFC has not filed any consolidated federal income
tax return with an "affiliated group" (within the meaning of Section
1504 of the Code) where CSFC was not the common parent of the group.
Neither CSFC nor any CSFC Subsidiary is, or has been, a party to any
tax allocation agreement or arrangement pursuant to which it has any
contingent or outstanding liability to anyone other than CSFC or any
wholly-owned CSFC Subsidiary. Neither CSFC nor any CSFC Subsidiary is
required to include in income any adjustment pursuant to Section 481(a)
of the Code and no such adjustment has been proposed by the IRS.
Neither CSFC nor any CSFC Subsidiary has filed a consent pursuant to
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the
Code apply.
(c) CSFC and the CSFC Subsidiaries have each withheld
amounts from its employees, stockholders, or holders of public deposit
accounts in compliance with the tax withholding provisions of
applicable federal, state and local laws, have filed all federal, state
and local returns and reports for all periods for which such returns or
reports would
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be due with respect to income tax withholding, social security,
unemployment taxes, income and other taxes and all payments or deposits
with respect to such taxes have been timely made and except as set
forth in Section 3.13 of the CSFC Disclosure Schedule, have notified
all employees, stockholders and holders of deposit accounts of their
obligations to file all forms, statements or reports with it in
accordance with applicable federal, state and local tax laws and have
taken reasonable steps to insure that such employees, stockholders and
holders of deposit accounts have filed all such forms statements and
reports with it.
3.14 Insurance. CSFC and the CSFC Subsidiaries maintain insurance
with insurers which in the best judgment of management of CSFC are sound and
reputable on their respective assets and upon their respective businesses and
operations against loss or damage, risks, hazards and liabilities as in their
judgment they deem appropriate. CSFC and the CSFC Subsidiaries maintain in
effect all insurance required to be carried by law or by any agreement by which
they are bound. All material claims under all policies of insurance maintained
by CSFC and the CSFC Subsidiaries have been filed in due and timely fashion.
Each of CSFC and the CSFC Subsidiaries has taken or will timely take all
requisite action (including without limitation the making of claims and the
giving of notices) pursuant to its directors' and officers' liability insurance
policy or policies in order to preserve all rights thereunder with respect to
all matters (other than matters arising in connection with this Agreement and
the transactions contemplated hereby) occurring prior to the Effective Time.
Neither CSFC nor any of the CSFC Subsidiaries has, since December 31, 1995 had
an insurance policy canceled or been denied insurance coverage for which any of
such companies has applied.
3.15 Loans; Investments.
(a) Except as otherwise disclosed in Section 3.15 of the CSFC
Disclosure Schedule, each loan reflected as an asset on the CSFC
Financial Statement dated as of December 31, 1997, and each loan
originated or acquired after such date is evidenced by appropriate and
sufficient documentation and constitutes, to the best knowledge of CSFC
and CSFC Bank, the legal, valid and binding obligation of the obligor
named therein, enforceable in accordance with its terms, except to the
extent that the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable
principles or doctrines. Except as set forth in Section 3.15 of the
CSFC Disclosure Schedule, all such loans are, and at the Effective Time
will be, free and clear of any security interest, lien, encumbrance or
other charge and do not, and will not at the Effective Time, include
any provision for prepayment penalties in violation of any law or
regulation. Except as set forth in Section 3.15 of the CSFC Disclosure
Schedule, there is no loan or other asset of CSFC or of any CSFC
Subsidiary that has been classified by examiners or others as "Other
Loans of Concern," "Substandard," "Doubtful" or "Loss". Set forth in
Section 3.15 of the CSFC Disclosure Schedule is a complete list of the
real estate acquired through foreclosure, repossession or deed in lieu
thereof ("REO") of CSFC and the CSFC Subsidiaries as of March 31, 1998.
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(b) All guarantees of indebtedness owed to CSFC or any
CSFC Subsidiary, including but not limited to those of the Federal
Housing Administration, the Small Business Administration, and other
state and federal agencies, are, to the best knowledge of CSFC and CSFC
Bank, valid and enforceable, except to the extent enforceability
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles or
doctrines.
(c) All interest rate swaps, caps, floors and option
agreements and other interest rate risk management arrangements to
which CSFC or any CSFC Subsidiary is a party or by which any of their
properties or assets may be bound were entered into in the ordinary
course of business and in accordance with then-customary practice and
applicable rules, regulations and policies of thrift regulatory
authorities and with counterparties believed to be financially
responsible at the time and are legal, valid and binding obligations
and are in full force and effect. CSFC and the CSFC Subsidiaries have
duly performed in all material respects all of their respective
obligations thereunder to the extent that such obligations to perform
have accrued, and to the best knowledge of CSFC and CSFC Bank, there
are no material breaches, violations or defaults or allegations or
assertions of such by any party thereunder. None of the transactions
contemplated by this Agreement would permit: (i) a counterparty under
any interest rate swap, cap, floor and option agreement or any other
interest rate risk management agreement or (ii) any party to any
mortgage-backed security financing arrangement, to accelerate,
discontinue, terminate or otherwise modify any such agreement or
arrangement or would require CSFC or any CSFC Subsidiary to recognize
any gain or loss with respect to such arrangement.
(d) Except as set forth in Section 3.15 of the CSFC
Disclosure Schedule and except for pledges to secure public and trust
deposits, none of the investments reflected in the CSFC Financial
Statements dated as of December 31, 1997 under the heading "Investment
Securities, " and none of the investments made by CSFC and the CSFC
Subsidiaries since December 31, 1997, is subject to any restriction,
whether contractual or statutory, which materially impairs the ability
of CSFC or any CSFC Subsidiary to freely dispose of such investment at
any time, other than those restrictions imposed on securities held for
investment under generally accepted accounting principles. With respect
to all material repurchase agreements to which CSFC or any CSFC
Subsidiary is a party, CSFC or such Subsidiary has a valid, perfected
first lien or security interest in the government securities or other
collateral securing each such repurchase agreement, and the value of
the collateral securing each such repurchase agreement equals or
exceeds the amount of the debt secured by such collateral under such
agreement. Except as set forth in Section 3.15 of the CSFC Disclosure
Schedule and except in a transaction involving less than $50,000,
neither CSFC nor any CSFC Subsidiary has sold or otherwise disposed of
any assets in a transaction in which the acquiror of such assets or
other person has the right, either conditionally or absolutely, to
require CSFC or any CSFC Subsidiary to repurchase or otherwise
reacquire any such assets. Set forth in Section 3.15 of the CSFC
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Disclosure Schedule is a complete and accurate list of each investment
and debt security, mortgage-backed and related securities, marketable
equity securities and securities purchased under agreements to resell
owned by CSFC or any CSFC Subsidiary showing as of March 31, 1998 the
carrying values and estimated fair values of investment and debt
securities, the gross carrying value and estimated fair value of the
mortgage-backed and related securities and the estimated cost and
estimated fair value of the marketable equity securities.
(e) All United States Treasury securities, obligations of
other United States Government agencies and corporations, obligations
of States of United States and their political subdivisions, and other
investment securities classified as "held to maturity" and "available
for sale" held by CSFC and the CSFC Subsidiaries, as reflected in the
CSFC Financial Statements and the Quarterly Statement were classified
and accounted for in accordance with F.A.S.B. 115 and the intentions of
management.
3.16 Allowance for Possible Loan Losses.
(a) The allowance for possible loan losses shown on the
CSFC Financial Statements as of December 31, 1997 and the Quarterly
Statements (and as shown on any financial statements to be delivered by
CSFC to COFI pursuant to Section 5.7 hereof) as of such date was (and
will be as of such subsequent financial statement dates) adequate in
all respects to provide for possible or specific losses, net of
recoveries relating to loans previously charged off, on loans
outstanding, and contained (or will contain) an additional amount of
unallocated reserves for unanticipated future losses at a level
considered adequate under the standards applied by applicable federal
regulatory authorities and based upon generally accepted practices
applicable to CSFC Bank. To the best knowledge of CSFC and CSFC Bank,
the aggregate principal amount of loans contained (or that will be
contained) in the loan portfolio of CSFC and the CSFC Subsidiaries as
of March 31, 1998 (and as of the dates of any financial statements to
be delivered by CSFC to COFI pursuant to Section 5.7 hereof), in excess
of such reserve, was (and will be) fully collectible.
(b) The sum of the aggregate amount of all Nonperforming
Assets (as defined below) and all troubled debt restructurings (as
defined under generally accepted accounting principles) on the books of
CSFC and the CSFC Subsidiaries does not exceed 2% of total loans at the
date hereof. "Nonperforming Assets" shall mean (i) all loans and leases
(A) that are contractually past due 90 days or more in the payment of
principal and/or interest, (B) that are on nonaccrual status, (C) where
a reasonable doubt exists, in the reasonable judgment of CSFC Bank, as
to the timely future collectibility of principal and/or interest,
whether or not interest is still accruing or the loan is less than 90
days past due, (D) where the interest rate terms have been reduced
and/or the maturity dates have been extended subsequent to the
agreement under which the loan was originally created due to concerns
regarding the borrower's ability to pay in accordance with such initial
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terms, (E) where a specific reserve allocation exists in connection
therewith, or (F) that have been classified "Doubtful", "Loss" or the
equivalent thereof by any regulatory authority, and (ii) all assets
classified as REO and other assets acquired through foreclosure or
repossession.
3.17 CSFC Benefit Plans.
(a) Section 3.17 of the CSFC Disclosure Schedule contains
a list and a true and correct copy (or, a description with respect to
any oral employee benefit plan, practice, policy or arrangement),
including all amendments thereto, of each compensation, consulting,
employment, termination or collective bargaining agreement, and each
life, health, accident or other insurance, bonus, deferred or incentive
compensation, severance or separation agreement or any agreement
providing any payment or benefit resulting from a change in control,
profit sharing, retirement, or other employee benefit plan, practice,
policy or arrangement of any kind, oral or written, covering any
employee, former employee, director or former director of CSFC or any
CSFC Subsidiary or his or her beneficiaries, including, but not limited
to, any employee benefit plans within the meaning of Section 3(3) of
ERISA, which CSFC or any CSFC Subsidiary maintains, to which CSFC or
any CSFC Subsidiary contributes, or under which any employee, former
employee, director or former director of CSFC or any CSFC Subsidiary is
covered or has benefit rights and pursuant to which any liability of
CSFC or any CSFC Subsidiary exists or is reasonably likely to occur
(the "CSFC Benefit Plans"). Except as set forth in Section 3.17 of the
CSFC Disclosure Schedule, CSFC and the CSFC Subsidiaries neither
maintain nor have entered into any CSFC Benefit Plan or other document,
plan or agreement which contains any change in control provisions which
would cause an increase or acceleration of benefits or benefit
entitlements to employees or former employees of CSFC or any CSFC
Subsidiary or their respective beneficiaries, or other provisions,
which would cause an increase in the liability of CSFC or any CSFC
Subsidiary or to COFI or any COFI Subsidiary as a result of the
transactions contemplated by this Agreement or any related action
thereafter (a "Change in Control Benefit"). The term "CSFC Benefit
Plans" as used herein refers to all plans contemplated under the
preceding sentences of this Section 3.17, provided that the term "Plan"
or "Plans" is used in this Agreement for convenience only and does not
constitute an acknowledgment that a particular arrangement is an
employee benefit plan within the meaning of Section 3(3) of ERISA.
Except as disclosed in Section 3.17 of the CSFC Disclosure Schedule, no
Benefit Plan is a multi-employer plan within the meaning of Section
3(37) of ERISA.
(b) Each of the CSFC Benefit Plans that is intended to be
a pension, profit sharing, stock bonus, thrift or savings plan that is
qualified under Section 401(a) of the Code ("CSFC Qualified Plans") has
been determined by the IRS to qualify under Section 401(a) of the Code,
or an application for determination of such qualification has been
timely made to the IRS prior to the end of the applicable remedial
amendment period
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under Section 401(b) of the Code (a copy of each such determination
letter or pending application is included in Section 3.17 of the CSFC
Disclosure Schedule) and, to the best of CSFC's knowledge, there exist
no circumstances likely to adversely affect the qualified status of any
such CSFC Qualified Plan. All such CSFC Qualified Plans established or
maintained by CSFC or any of the CSFC Subsidiaries or to which CSFC or
any of the CSFC Subsidiaries contribute are in compliance in all
material respects with all applicable requirements of ERISA, and are in
compliance in all material respects with all applicable requirements
(including qualification and non-discrimination requirements ) of the
Code for obtaining the tax benefits the Code thereupon permits with
respect to such CSFC Qualified Plans. Neither CSFC nor any CSFC
Subsidiary maintains, sponsors or contributes to a Qualified Plan that
is a defined benefit pension plan subject to Title IV of ERISA. All
accrued contributions and other payments required to be made by CSFC or
any CSFC Subsidiary to any CSFC Benefit Plan through March 31, 1998,
have been made or reserves adequate for such purposes as of March 31,
1998, have been set aside therefor and are reflected in the Quarterly
Statement. Neither CSFC nor any CSFC Subsidiary is in material default
in performing any of its respective contractual obligations under any
of the CSFC Benefit Plans or any related trust agreement or insurance
contract, and there are no material outstanding liabilities of any such
Plan other than liabilities for benefits to be paid to participants in
such Plan and their beneficiaries in accordance with the terms of such
Plan.
(c) There is no pending or, to the best knowledge of CSFC
and CSFC Bank, threatened litigation or pending claim (other than
routine benefit claims made in the ordinary course) by or on behalf of
or against any of the CSFC Benefit Plans (or with respect to the
administration of any such Plans) now or heretofore maintained by CSFC
or any CSFC Subsidiary which allege violations of applicable state or
federal law which are reasonably likely to result in a liability on the
part of CSFC or any CSFC Subsidiary or any such Plan.
(d) CSFC and the CSFC Subsidiaries and all other persons
having fiduciary or other responsibilities or duties with respect to
any CSFC Benefit Plan are and have since the inception of each such
Plan been in substantial compliance with, and each such Plan is and has
been operated in substantial accordance with, its provisions and the
applicable laws, rules and regulations governing such Plan, including,
without limitation, the rules and regulations promulgated by the
Department of Labor, the PBGC and the IRS under ERISA, the Code or any
other applicable law. Notwithstanding the foregoing, no representation
is made with respect to compliance by a third party insurance company.
No "reportable event" (as defined in Section 4043(b) of ERISA) has
occurred with respect to any CSFC Qualified Benefit Plan. Except as
disclosed in Section 3.17 of the CSFC Disclosure Schedule, neither
CSFC, any CSFC Subsidiary nor any CSFC Benefit Plan has incurred or is
reasonably likely to incur any liability for any "prohibited
transactions" (as defined in Section 406 of ERISA or Section 4975 of
the Code), or any material liability under Section 601 of ERISA or
Section 4980 of the Code. All CSFC Benefit Plans that are group health
plans have been operated in substantial compliance
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with the group health plan continuation requirements of Section 4980B
of the Code and Section 601 of ERISA.
(e) Except as set forth in Section 3.17 of the CSFC
Disclosure Schedule, neither CSFC nor any CSFC Subsidiary has made any
payments, or is or has been a party to any agreement or any CSFC
Benefit Plan, that under any circumstances could obligate it or its
successor to make payments that are not or will not be deductible
because of Sections 162(m) or 280G of the Code.
(f) Section 3.17 of the CSFC Disclosure Schedule
describes any obligation that CSFC or any CSFC Subsidiary has to
provide health or welfare benefits to retirees or other former
employees, directors or their dependents (other than rights under
Section 4980B of the Code or Section 601 of ERISA), including
information as to the number of retirees, other former employees or
directors and dependents entitled to such coverage and their ages.
(g) Section 3.17 of the CSFC Disclosure Schedule lists:
each officer, employee and director of CSFC and any CSFC Subsidiary who
is eligible to receive a Change in Control Benefit, showing the amount
of each such Change in Control Benefit, the individual's participation
in any bonus or other employee benefit plan, and such individual's
compensation from CSFC and each CSFC Subsidiary for each of the
calendar years 1993 through 1997 as reported by CSFC and a CSFC
Subsidiary on Form W-2 or Form 1099.
(h) To the best knowledge of CSFC and CSFC Bank, CSFC and
the CSFC Subsidiaries have filed or caused to be filed, and will
continue to file or cause to be filed, in a timely manner all filings
pertaining to each CSFC Benefit Plan with the IRS, the Department of
Labor and the PBGC, as prescribed by the Code or ERISA, or regulations
issued thereunder. To the best knowledge of CSFC and CSFC Bank, all
such filings, as amended, were complete and accurate in all material
respects as of the dates of such filings. Notwithstanding the
foregoing, no representation is made with respect to filings by a third
party insurance company.
3.18 Compliance with Environmental Laws.
(a) Except as set forth in Section 3.18 of the CSFC
Disclosure Schedule: (i) to the best knowledge of CSFC and CSFC Bank,
the operations of CSFC and each of the CSFC Subsidiaries comply in all
material respects with all applicable past and present Environmental
Laws; (ii) to the best knowledge of CSFC and CSFC Bank, none of the
operations of CSFC or any CSFC Subsidiary, no assets presently or
formerly owned or leased by CSFC or any CSFC Subsidiary and no
Mortgaged Premises or Participating Facility are subject to any
judicial or administrative proceedings alleging the violation of any
past or present Environmental Law, nor are they the subject of any
claims alleging damages to health or property, pursuant to which CSFC,
any CSFC Subsidiary or any
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owner of a Mortgaged Premises or a Participating Facility would be
liable in law or equity; (iii) none of the operations of CSFC or any
CSFC Subsidiary, no assets presently owned or, to the best knowledge of
CSFC and CSFC Bank, formerly owned by CSFC or any CSFC Subsidiary, and
to the best knowledge of CSFC and CSFC Bank, no Mortgaged Premises or a
Participating Facility are the subject of any federal, state or local
investigation evaluating whether any remedial action is needed to
respond to a release or threatened release of any Hazardous Substance,
or any other substance into the environment, nor has CSFC or any CSFC
Subsidiary, or, to the best knowledge of CSFC and CSFC Bank, any owner
of a Mortgaged Premises or a Participating Facility been directed to
conduct such investigation, formally or informally, by any governmental
agency, nor have any of them agreed with any governmental agency or
private person to conduct any such investigation; and (iv) neither CSFC
nor any CSFC Subsidiary, nor, to the best knowledge of CSFC and CSFC
Bank, any owner of a Mortgaged Premises or a Participating Facility has
filed any notice under any Environmental Law indicating past or present
treatment, storage or disposal of a Hazardous Substance or reporting a
spill or release of a Hazardous Substance, or any other substance into
the environment.
(b) With respect to the real property currently owned or,
to the best knowledge of CSFC and CSFC Bank, formerly owned or
currently leased by CSFC or any CSFC Subsidiary ("CSFC Premises"): (x)
no part of the CSFC Premises has been used for the generation,
manufacture, handling, storage, or disposal of Hazardous Substances;
(y) except as disclosed in Section 3.18 of the CSFC Disclosure
Schedule, the CSFC Premises do not contain, and have never contained,
an underground storage tank; and (z) the CSFC Premises do not contain
and are not contaminated by any quantity of a Hazardous Substance from
any source. With respect to any underground storage tank listed in
Section 3.18 of the CSFC Disclosure Statement as an exception to the
foregoing, such underground storage tank has been removed in compliance
with the Environmental Laws, and has not been the source of any release
of a Hazardous Substance into the environment, unless otherwise set
forth in Section 3.18 of the CSFC Disclosure Schedule.
3.19 Contracts and Commitments. Section 3.19 of the CSFC Disclosure
Schedule contains, and shall be supplemented by CSFC and CSFC Bank, as required
by Section 5.10 hereof, so as to contain at the Closing Date copies of each of
the following documents, certified by an officer of CSFC to be true and correct
copies of such documents on the dates of such certificates:
(a) a list and description of each outstanding loan
agreement, mortgage, pledge agreement or other similar document or
commitment to extend credit to any executive officer or director of
CSFC or any CSFC Subsidiary, as well as a listing of all deposits or
deposit surrogates, including the amount, type and interest being paid
thereon, to which CSFC or any CSFC Subsidiary is a party under which it
may (contingently or otherwise) have any liability involving any
executive officer or director of CSFC or any CSFC Subsidiary;
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(b) a list and description of each outstanding letter of
credit and each commitment to issue a letter of credit in excess of
$25,000 to which CSFC or any CSFC Subsidiary is a party and/or under
which it may (contingently or otherwise) have any liability;
(c) a list and description of each contract or agreement
(not otherwise included in the CSFC Disclosure Schedule or specifically
excluded therefrom in accordance with the terms of this Agreement)
involving goods, services or occupancy and which (i) has a term of more
than six months; (ii) cannot be terminated on 30 days (or less) written
notice without penalty; and (iii) involves an annual expenditure by
CSFC or any CSFC Subsidiary in excess of $50,000;
(d) a list and description of each contract or commitment
(other than CSFC Permitted Liens as defined in Section 3.21(c)) hereof)
affecting ownership of, title to, use of, or any interest in real
property which is currently owned by CSFC or any CSFC Subsidiary, and a
list and description of all real property owned, leased or licensed by
CSFC or any CSFC Subsidiary;
(e) a list of all fees, salaries, bonuses and other forms
of compensation including but not limited to, country club memberships,
automobiles available for personal use, and credit cards available for
personal use, provided by CSFC or any CSFC Subsidiary to any employee,
officer, or director or former employee, officer or director of CSFC or
any CSFC Subsidiary who is expected to earn in salary and bonus in
excess of $100,000 during calendar year 1998;
(f) a list and description of each commitment made by
CSFC or any CSFC Subsidiary to or with any of its officers, directors
or employees extending for a period of more than six months from the
date hereof or providing for earlier termination only upon the payment
of a penalty or equivalent thereto;
(g) the Articles of Incorporation, Charters, Code of
Regulations, and Bylaws and specimen certificates of each type of
security issued by CSFC and each CSFC Subsidiary;
(h) a list and description of each other contract or
commitment providing for payment based in any manner upon outstanding
loans or profits of CSFC or any CSFC Subsidiary;
(i) a list and description of all powers of attorney
granted by CSFC or any CSFC Subsidiary which are currently in force;
(j) a list and description of all policies of insurance
currently maintained by CSFC or any CSFC Subsidiary and a list and
description of all unsettled or outstanding
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claims of CSFC or any CSFC Subsidiary which have been, or to the best
knowledge of CSFC and CSFC Bank, will be, filed with the companies
providing insurance coverage for CSFC or any CSFC Subsidiary (except
for routine claims for health benefits);
(k) each collective bargaining agreement to which CSFC or
any CSFC Subsidiary is a party and all affirmative action plans or
programs covering employees of CSFC or any CSFC Subsidiary, as well as
all employee handbooks, policy manuals, rules and standards of
employment promulgated by CSFC or any CSFC Subsidiary;
(l) each lease or license with respect to real or
personal property, whether as lessor, lessee, licensor or licensee,
with annual rental or other payments due thereunder in excess of
$50,000 to which CSFC or any CSFC Subsidiary is a party, which does not
expire within six months from the date hereof and cannot be terminated
upon thirty days (or less) written notice without penalty;
(m) all employment, consulting, financial advisory,
investment banking, and professional services contracts to which CSFC
or any CSFC Subsidiary is a party;
(n) all judgments, orders, injunctions, court decrees or
settlement agreements arising out of or relating to the labor and
employment practices or decisions of CSFC or any CSFC Subsidiary which,
by their terms, continue to bind or affect CSFC or any CSFC Subsidiary;
(o) all orders, decrees, memorandums, agreements or
understandings with regulatory agencies binding upon or affecting the
current operations of CSFC or any CSFC Subsidiary or any of their
directors or officers in their capacities as such;
(p) all trademarks, trade names, service marks, patents,
or copyrights, whether registered or the subject of an application for
registration, which are owned by CSFC or any CSFC Subsidiary or
licensed from a third party;
(q) all policies formally adopted by the Board of
Directors of CSFC or any CSFC Subsidiary as currently in effect with
respect to environmental matters and copies of all policies that have
been in effect during the last five years regarding the performance of
environmental investigations of properties accepted as collateral for
loans, including the effective dates of all such policies; and
(r) each other agreement to which CSFC or any CSFC
Subsidiary is a party (which does not expire within six months from the
date hereof and cannot be terminated upon thirty days (or less) written
notice without penalty) which individually during its term could commit
CSFC or any CSFC Subsidiary to an expenditure (either individually or
through a series of installments) in excess of $100,000 or which
creates a material right
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or benefit to receive payments, goods or services not referred to
elsewhere in this Section 3.20 including without limitation:
(i) each agreement of guaranty or indemnification
running to any person;
(ii) each agreement containing any covenant
limiting the right of CSFC or any CSFC Subsidiary to engage in
any line of business or to compete with any person;
(iii) each agreement with respect to any license,
permit and similar matter that is necessary to the operations
of CSFC or any CSFC Subsidiary;
(iv) each agreement that requires the consent or
approval of any other party in order to consummate the Merger;
(v) each agreement relating to the servicing of
loans and each mortgage forward commitment and similar
agreement pursuant to which CSFC or any CSFC Subsidiary sells
to others mortgages which it originates;
(vi) each contract relating to the purchase or
sale of financial or other futures, or any put or call option
relating to cash, securities or commodities and each interest
rate swap agreement or other agreement relating to the hedging
of interest rate risks and each agreement or arrangement
described in Section 3.16(d) hereof; and
(vii) each contract or agreement (with the
exception of the Federal National Mortgage Association or
Federal Home Loan Mortgage Corporation Seller's Guide),
including but not limited to each contract or agreement
pursuant to which CSFC or any CSFC Subsidiary has sold,
transferred, assigned or agreed to service any loan, which
provides for any recourse or indemnification obligation on the
part of CSFC or any CSFC Subsidiary; the name and address of
each person which might or could be entitled to recourse
against or indemnification from CSFC or any CSFC Subsidiary;
and the monetary amount of each actual or potential recourse
or indemnification obligation under each such contract or
agreement.
3.20 Defaults. There has not been any default in any material
obligation to be performed by CSFC or any CSFC Subsidiary under any contract or
commitment, and neither CSFC nor or any CSFC Subsidiary has waived, and will not
waive prior to the Effective Time, any material right under any contract or
commitment. To the best knowledge of CSFC and CSFC Bank, no other party to any
contract or commitment is in default in any material obligation to be performed
by such party.
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3.21 Operations Since December 31, 1997. Since December 31, 1997,
except as set forth in Section 3.21 of the CSFC Disclosure Schedule or as
specifically contemplated by this Agreement, there has not been:
(a) any increase in the compensation payable or to become
payable by CSFC or any CSFC Subsidiary to any employee, officer or
director, other than routine annual increases to rank and file
employees consistent with past practices;
(b) any payment of dividends or other distributions by
CSFC to its stockholders or any redemption by CSFC of its capital
stock;
(c) any mortgage, pledge or subjection to lien, charge or
encumbrance of any kind of or on any asset, tangible or intangible, of
CSFC or any CSFC Subsidiary, except the following (each of which,
whether arising before or after the date hereof, is herein referred to
as a "CSFC Permitted Lien"): (i) liens arising out of judgments or
awards in respect of which CSFC or any CSFC Subsidiary is in good faith
prosecuting an appeal or proceeding for review and in respect of which
it has secured a subsisting stay of execution pending such appeal of
proceeding; (ii) liens for taxes, assessments, and other governmental
charges or levies, the payment of which is not past due, or as to which
CSFC or any CSFC Subsidiary is diligently contesting in good faith and
by appropriate proceeding either the amount thereof or the liability
therefor or both; (iii) deposits, liens or pledges to secure payments
of worker's compensation, unemployment insurance, pensions, or other
social security obligations, or the performance of bids, tenders,
leases, contracts (other than contracts for the payment of money),
public or statutory obligations, surety, stay or appeal bonds, or
similar obligations arising in the ordinary course of business; (iv)
zoning restrictions, easements, licenses and other restrictions on the
use of real property or any interest therein, or minor irregularities
in title thereto, which do not materially impair the use of such
property or the merchantability or the value of such property or
interest therein; (v) purchase money mortgages or other purchase money
or vendor's liens or security interests (including, without limitation,
finance leases), provided that no such mortgage, lien or security
interest shall extend to or cover any other property of CSFC or any
CSFC Subsidiary other than that so purchased; and (vi) pledges and
liens given to secure deposits and other liabilities of CSFC or any
CSFC Subsidiary arising in the ordinary course of business;
(d) any creation or assumption of indebtedness (including
the extension or renewal of any existing indebtedness, or the increase
thereof) by CSFC or any CSFC Subsidiary for borrowed money, or
otherwise, other than in the ordinary course of business, none of which
is in default;
(e) the establishment of any new, modification of or
amendment to, or increase in the formula for contributions to or
benefits under, any CSFC Benefit Plan by CSFC or any CSFC Subsidiary;
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(f) any action by CSFC or any CSFC Subsidiary seeking any
cancellation of, or decrease in the insured limit under, or increase in
the deductible amount or the insured's retention (whether pursuant to
coinsurance or otherwise) of or under, any policy of insurance
maintained directly or indirectly by CSFC or any CSFC Subsidiary on any
of their respective assets or businesses, including but not by way of
limitation, fire and other hazard insurance on its assets, automobile
liability insurance, general public liability insurance, and directors'
and officers' liability insurance; and if an insurer takes any such
action, CSFC shall promptly notify COFI;
(g) any change in CSFC's independent auditors, historic
methods of accounting (other than as required by generally accepted
accounting principles or regulatory accounting principles), or in its
system for maintaining its equipment and real estate;
(h) any purchase, whether for cash or secured or
unsecured obligations (including finance leases) by CSFC or any CSFC
Subsidiary of any fixed asset which either (i) has a purchase price
individually or in the aggregate in excess of $50,000 or (ii) is
outside of the ordinary course of business;
(i) any sale or transfer of any asset in excess of
$50,000 of CSFC or any CSFC Subsidiary or outside of the ordinary
course of business with the exception of loans and marketable
securities that are held for sale and sold in the ordinary course of
business at market prices;
(j) any cancellation or compromise of any debt to, claim
by or right of, CSFC or any CSFC Subsidiary except in the ordinary
course of business;
(k) any amendment or termination of any contract or
commitment to which CSFC or any CSFC Subsidiary is a party, other than
in the ordinary course of business;
(l) any material damage or destruction to any assets or
property of CSFC or any CSFC Subsidiary whether or not covered by
insurance;
(m) any change in the loan underwriting policies or
practices of any CSFC Subsidiary;
(n) any transaction of business or activity undertaken by
CSFC or any CSFC Subsidiary outside the ordinary course of business
consistent with past practices;
(o) any agreement or commitment to do any of the
foregoing; or
(p) any event or condition of any character (other than
changes in legal, economic or other conditions which are not specially
or uniquely applicable to CSFC or
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any CSFC Subsidiary) adversely affecting the business, operations or
financial condition of CSFC on a consolidated basis.
3.22 Corporate Records. The corporate record books, transfer books
and stock ledgers of CSFC and each CSFC Subsidiary are complete and accurate in
all material respects and reflect all meetings, consents and other material
actions of the organizers, incorporators, stockholders, Boards of Directors and
committees of the Boards of Directors of CSFC and each such Subsidiary, and all
transactions in their respective capital stocks, since their respective
inceptions. CSFC has previously made available, or will make available prior to
the Effective Time, to COFI true and correct copies of the minutes of all Board
of Directors and Shareholders meetings (and consents in lieu of meetings) for
the calendar years 1996, 1997 and 1998 for CSFC and each CSFC Subsidiary.
3.23 Undisclosed Liabilities. All of the Liabilities have, in the
case of CSFC and the CSFC Subsidiaries, been reflected, disclosed or reserved
against in the CSFC Financial Statements as of December 31, 1997 or in the notes
thereto, and CSFC and the CSFC Subsidiaries have no other Liabilities except (a)
Liabilities incurred since December 31, 1997 in the ordinary course of business
or (b) as disclosed in Section 3.23 of the CSFC Disclosure Schedule.
3.24 Assets.
(a) CSFC and the CSFC Subsidiaries have good and
marketable title to their real properties, including any leaseholds and
ground leases, and their other assets and properties, all as reflected
as owned or held by CSFC or any CSFC Subsidiary in the CSFC Financial
Statements dated as of December 31, 1997, and those acquired since such
date, except for (i) assets and properties disposed of since such date
in the ordinary course of business and (ii) CSFC Permitted Liens none
of which, in the aggregate, except as set forth in the CSFC Financial
Statements dated December 31, 1997 or in Section 3.24 of the CSFC
Disclosure Schedule, are material to the assets of CSFC on a
consolidated basis. All buildings, structures, fixtures and
appurtenances comprising part of the real properties of CSFC and the
CSFC Subsidiaries (whether owned or leased) are, in the opinion of
management of CSFC and CSFC Bank, in good operating condition and have
been well maintained, reasonable wear and tear excepted. Title to all
real property owned by CSFC and the CSFC Subsidiaries is held in fee
simple, except as otherwise noted in the CSFC Financial Statements as
of December 31, 1997 or as set forth in Section 3.24 of the CSFC
Disclosure Schedule. CSFC and the CSFC Subsidiaries have title or other
rights to its assets sufficient in all material respects for the
conduct of their respective businesses as presently conducted, and
except as set forth in the CSFC Financial Statements dated as of
December 31, 1997 or in Section 3.24 of the CSFC Disclosure Schedule,
such assets are free, clear and discharged of and from any and all
liens, charges, encumbrances, security interests and/or equities which
are material to CSFC or any CSFC Subsidiary.
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(b) All leases pursuant to which CSFC or any CSFC
Subsidiary, as lessee, leases real or personal property are, to the
best knowledge of CSFC and CSFC Bank, valid, effective, and enforceable
against the lessor in accordance with their respective terms. There is
not under any of such leases any existing default, or any event which
with notice or lapse of time or both would constitute a default, with
respect to either CSFC or any CSFC Subsidiary, or to the best knowledge
of CSFC and CSFC Bank, the other party. Except as disclosed in Section
3.24 of the CSFC Disclosure Schedule, none of such leases contains a
prohibition against assignment by CSFC or any CSFC Subsidiary, by
operation of law or otherwise, or any other provision which would
preclude the surviving corporation or resulting institution or any CSFC
Subsidiary from possessing and using the leased premises for the same
purposes and upon the same rental and other terms upon the consummation
of the Merger as are applicable to the use by CSFC or any CSFC
Subsidiary as of the date of this Agreement.
3.25 Stockholder Arrangements. Except for an Agreement dated
September 21, 1973 between CSFC and Clarence P. Bryan (the "Registration
Agreement"), an Agreement dated March 23, 1977 between William R. Bryan, Betsy
B. Hegyes and Nancy B. Fischer (the "1977 Shareholders Agreement"), and an
Agreement among Shareholders dated December 23, 1992 by and among Mary Elizabeth
Bryan, William Reid Bryan, Jeffrey Jason Bryan, Tracy Ann Bryan, Heidi Kathleen
Bryan, Nancy Irene Bryan, and Rebecca Conaway Bryan (by her custodian, Tracy Ann
Bryan) (the "1992 Shareholders Agreement"), there are no other agreements known
to executive officers of CSFC that would affect the ability of any person
identified on Exhibit A to transfer shares of CSFC Common Stock. Neither the
Registration Agreement, the 1973 Shareholders Agreement, nor the 1992
Shareholders Agreement will (a) restrict the ability of any holder of CSFC
Common Stock to exchange such shares for COFI Common Stock pursuant to this
Agreement or (b) will survive the Effective Time.
3.26 Indemnification. To the best knowledge of CSFC and CSFC Bank,
except as set forth in Section 3.26 of the CSFC Disclosure Schedule, no action
or failure to take action by any director, officer, employee or agent of CSFC or
any CSFC Subsidiary has occurred which would give rise to a claim by any such
person for indemnification from CSFC or any CSFC Subsidiary under the corporate
indemnification provisions of CSFC or any CSFC Subsidiary in effect on the date
of this Agreement.
3.27 Insider Interests. All outstanding loans and other contractual
arrangements (including deposit relationships) between CSFC or any CSFC
Subsidiary and any officer, director or employee of CSFC or any CSFC Subsidiary
conform to the applicable rules and regulations and requirements of all
applicable regulatory agencies which were in effect when such loans and other
contractual arrangements were entered into. Except as set forth in Section 3.27
of the CSFC Disclosure Schedule, no officer, director or employee of CSFC or any
CSFC Subsidiary has any material interest in any property, real or personal,
tangible or intangible, used in or pertaining to the business of CSFC or any
CSFC Subsidiary.
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3.28 Registration Obligations. Neither CSFC nor any CSFC Subsidiary
is under any obligation, contingent or otherwise, which will survive the
Effective Time by reason of any agreement to register any of its securities
under the Securities Act or other federal or state securities laws or
regulations.
3.29 Regulatory, Tax and Accounting Matters. CSFC and CSFC Bank
have not taken or agreed to take any action, nor does it have knowledge of any
fact or circumstance, that would (i) materially impede or delay the consummation
of the transactions contemplated by this Agreement or the ability of the parties
to obtain any approval of any regulatory authority required for the transactions
contemplated by this Agreement or to perform their covenants and agreements
under this Agreement or (ii) prevent the Merger from qualifying as a pooling of
interests for accounting purposes or the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
3.30 Brokers and Finders. Except as set forth in the agreement with
McDonald & Company Securities, Inc. ("McDonald") dated February 25, 1998 (which
agreement has not been amended since such date), a copy of which has previously
been provided to COFI, neither CSFC nor any CSFC Subsidiary nor any of their
respective officers, directors or employees has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions or finders' fees, and no other broker or finder has acted directly
or indirectly for CSFC or any CSFC Subsidiary in connection with this Agreement
or the transactions contemplated hereby.
3.31 Accuracy of Information. The statements of CSFC and CSFC Bank
contained in this Agreement, the Schedules hereto and in any other written
document executed and delivered by or on behalf of CSFC or CSFC Bank pursuant to
the terms of this Agreement are true and correct in all material respects.
3.32 Fairness Opinion. CSFC has received from McDonald a fairness
opinion, dated as of the date of this Agreement, to the effect that the Exchange
Ratio is fair to the holders of CSFC Common Stock from a financial point of
view.
3.33 Governmental Approvals and Other Conditions. To the best
knowledge of CSFC and CSFC Bank, there is no reason relating specifically to
CSFC or any of its Subsidiaries why (a) the approvals that are required to be
obtained from regulatory authorities having approval authority in connection
with the transactions contemplated hereby should not be granted, (b) such
regulatory approvals should be subject to a condition which would differ from
conditions customarily imposed by such regulatory authorities in orders
approving acquisitions of the type contemplated hereby or (c) any of the
conditions precedent as specified in Article VI hereof to the obligations of any
of the parties hereto to consummate the transactions contemplated hereby are
unlikely to be fulfilled within the applicable time period or periods required
for satisfaction of such condition or conditions.
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ARTICLE IV
COVENANTS OF CSFC
4.1 Business in Ordinary Course.
(a) After the date of this Agreement, CSFC shall not
declare or pay any dividend or make any other distribution with respect
to its capital stock whether in cash, stock or other property except it
may declare and pay (x) its regular quarterly cash dividend of not more
than $2.00 per share on CSFC Common Stock with record and payment dates
consistent with past practice; provided the declaration of the last
regular quarterly dividend by CSFC prior to consummation of the Company
Merger and the payment thereof shall be coordinated with, and subject
to the approval of COFI, so as to preclude any duplication of dividend
benefit; and (y) a special cash dividend consistent with past practice
in an amount not to exceed the product of (A) $8.00 multiplied by (B)
the fraction of which the denominator is 12 and the numerator is the
number of full calendar months of 1998 (and any partial month
consisting of at least 15 calendar days in 1998) prior to the Effective
Time. The special dividend shall be payable on or about the Closing
Date.
(b) CSFC and the CSFC Subsidiaries shall continue to
carry on, after the date hereof, their respective businesses and the
discharge or incurring of obligations and liabilities, only in the
usual, regular and ordinary course of business, as heretofore
conducted, except as specifically contemplated by this Agreement and by
way of amplification and not limitation, CSFC and each of the CSFC
Subsidiaries will not, without the prior written consent of COFI (which
consent in the case of subparts (xi), (xiv) and (xvii) below shall not
be unreasonably withheld or delayed):
(i) issue any capital stock or any options,
warrants, or other rights to subscribe for or purchase capital
stock or any securities convertible into or exchangeable for
any capital stock.
(ii) directly or indirectly redeem, purchase or
otherwise acquire any capital stock or ownership interests of
CSFC or any of the CSFC Subsidiaries;
(iii) effect a reclassification, recapitalization,
split-up, exchange of shares, readjustment or other similar
change in or to any capital stock or otherwise reorganize or
recapitalize;
(iv) change its Charter, Articles of
Incorporation, Code of Regulations or Bylaws;
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(v) enter into or modify any employment
agreement, severance agreement, change of control agreement,
or plan relative to the foregoing; or grant any increase
(other than ordinary and normal increases to rank and file
employees consistent with past practices) in the compensation
payable or to become payable to directors, officers or
employees except as required by law, pay or agree to pay any
bonus, or adopt or make any change in any bonus, insurance,
pension, or other CSFC Benefit Plan and provided further that
CSFC and CSFC Bank shall be permitted, consistent with past
practices, to make contributions to the 401(k) plan of CSFC,
pursuant to its existing program for such contributions, which
shall accrue from the date hereof to the Closing Date;
(vi) except for the short-term renewal of FHLB
advances outstanding at the date of this Agreement, raising
short-term funds against its existing line of credit with the
FHLB and deposit-taking in the ordinary course of its
business, borrow or agree to borrow any funds, including but
not limited to repurchase transactions, or indirectly
guarantee or agree to guarantee any obligations of others;
(vii) make or commit to make any new loan or
letter of credit, or any new or additional discretionary
advance under any existing loan or line of credit, or
restructure any existing loan or line of credit, (x) in the
case of a consumer loan or extension of credit, in a principal
amount in excess of $10,000 or that would increase the
aggregate credit outstanding in this category to any one
borrower (or group of affiliated borrowers) to more than
$10,000, (y) in the case of a loan secured by an owner
occupied single-family principal residence, in a principal
amount in excess of $500,000, or (z) in the case of a
commercial loan or mortgage in a principal amount in excess of
$500,000 or that would increase the aggregate credit
outstanding in this category to any one borrower (or group of
affiliated borrowers) to more than $500,000, without the prior
written consent of COFI acting through its Chief Executive
Officer in a written notice to CSFC, which approval or
rejection shall be given on a timely basis after delivery by
CSFC to such officer of COFI of the complete loan package;
(viii) make any material changes in its policies
concerning loan underwriting or which persons may approve
loans;
(ix) enter into any securities transaction for
its own account or purchase or otherwise acquire any
investment security for its own account other than U.S.
Treasury obligations with maturities of less than one year and
deposits in an overnight account at the FHLB of Cincinnati,
and overnight investment in Fed Funds at National City Bank
and Key Bank, provided COFI's consent shall not be
unreasonably withheld or delayed relating to the purchase of
other readily marketable investment securities;
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(x) increase or decrease the rate of interest
paid on time deposits or on certificates of deposit, except in
a manner and pursuant to policies consistent with past
practices;
(xi) enter into, modify or extend any agreement,
contract or commitment out of the ordinary course of business
or having a term in excess of six months and involving an
expenditure in excess of $10,000, other than letters of
credit, loan agreements, deposit agreements, and other
lending, credit and deposit documents made in the ordinary
course of business;
(xii) except in the ordinary course of business,
place on any of its assets or properties any mortgage, pledge,
lien, charge, or other encumbrance;
(xiii) cancel any material indebtedness owing to it
or any claims which it may possess or waive any rights of
material value except as set forth in Section 4.1(b)(xiii) of
the CSFC Disclosure Schedule;
(xiv) sell or otherwise dispose of any real
property or any material amount of tangible or intangible
personal property other than (a) properties acquired in
foreclosure or otherwise in the ordinary collection of
indebtedness owed to CSFC Bank, (b) student loans or (c) loans
which are held for sale by CSFC Bank and are sold in the
secondary market within sixty (60) days of origination;
(xv) foreclose upon or otherwise take title to or
possession or control of any real property without first
obtaining a phase one environmental report thereon; provided,
however, that CSFC Bank and its Subsidiaries shall not be
required to obtain such a report with respect to single
family, non-agricultural residential property of five acres or
less to be foreclosed upon unless it has reason to believe
that such property might contain Hazardous Substances;
(xvi) knowingly or willfully commit any act or
fail to commit any act which will cause a material breach of
any agreement, contract or commitment;
(xvii) purchase any real or personal property or
make any capital expenditure where the amount paid or
committed therefor is in excess of $25,000, except for
outstanding commitments set forth in Section 3.19 of the CSFC
Disclosure Schedule;
(xviii) in the case of CSFC Bank, voluntarily make
any material changes in or to its asset and deposit mix;
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(xix) engage in any activity or transaction
outside the ordinary course of business;
(xx) enter into or acquire any derivatives
contract or structured note;
(xxi) enter into any new, or modify, amend or
extend the terms of any existing contracts relating to the
purchase or sale of financial or other futures, or any put or
call option relating to cash, securities or commodities or any
interest rate swap agreements or other agreements relating to
the hedging of interest rate risk;
(xxii) take any action that would (A) materially
impede or delay the consummation of the transactions
contemplated by this Agreement or the ability of the parties
hereto to obtain any approval of any regulatory authority
required for the transactions contemplated by this Agreement
or to perform its covenants and agreements under this
Agreement or (B) prevent the Merger from qualifying as a
pooling of interests for accounting purposes or as a
reorganization within the meaning of Section 368(a) of the
Code; or
(xxiii) agree in writing or otherwise to take any of
the foregoing actions or engage in any of the foregoing
activities.
(c) CSFC and the CSFC Subsidiaries shall not, without the
prior written consent of COFI, engage in any transaction or take any
action that would render untrue any of the representations and
warranties of CSFC contained in Article III hereof, if such
representations and warranties were given as of the date of such
transaction or action.
(d) CSFC will, and will cause the CSFC Subsidiaries to,
use their best efforts to maintain their respective properties and
assets in their present state of repair, order and condition,
reasonable wear and tear excepted, and to maintain and keep in full
force and effect all policies of insurance presently in effect,
including insurance of accounts with the FDIC. CSFC will, and will
cause the CSFC Subsidiaries to, take all requisite action (including
without limitation the making of claims and the giving of notices)
pursuant to its directors' and officers' liability insurance policy or
policies in order to preserve all rights thereunder with respect to all
matters which could reasonably give rise to a claim prior to the
Effective Time.
(e) CSFC shall promptly notify COFI in writing of the
occurrence of any matter or event known to and directly involving CSFC
or any CSFC Subsidiary that is reasonably likely to result in a
Material Adverse Effect on CSFC or impair the ability of CSFC or CSFC
Bank to consummate the transactions contemplated herein.
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(f) CSFC shall provide to COFI such reports on litigation
involving CSFC and each of the CSFC Subsidiaries as COFI shall
reasonably request, provided that CSFC shall not be required to divulge
information to the extent that, in the good faith opinion of its
counsel, by doing so, it would risk waiver of the attorney-client
privilege to its detriment.
(g) CSFC will, and will cause the CSFC Subsidiaries to,
use best efforts to cause each share of voting capital stock of CSFC
Financial Services Agency, Inc. ("CSFC Financial") to be transferred at
the Closing to persons designated in writing by COFI without additional
consideration therefor and in accordance with the OGCL.
4.2 Conforming Accounting and Reserve Policies; Restructuring
Expenses. At the request of COFI, CSFC Bank agrees immediately prior to Closing
and after satisfaction or waiver of the conditions to Closing set forth in
Article VI hereof, to establish and take such reserves and accruals as COFI
reasonably shall request to conform CSFC Bank's loan, accrual, reserve and other
accounting policies to the policies of Charter One Bank, provided however, such
requested conforming adjustments shall not be taken into account in determining
whether CSFC has experienced a Material Adverse Effect.
4.3 Certain Actions.
(a) Neither CSFC (nor any of its Subsidiaries) (i) shall
solicit, initiate, participate in discussions of, or encourage or take
any other action to facilitate (including by way of the disclosing or
furnishing of any information that it is not legally obligated to
disclose or furnish) any inquiry or the making of any proposal relating
to any Acquisition Proposal (as defined below) with respect to itself
or any of its Subsidiaries or (ii) shall (A) solicit, initiate,
participate in discussions of, or encourage or take any other action to
facilitate any inquiry or proposal, or (B) enter into any agreement,
arrangement, or understanding (whether written or oral) regarding any
proposal or transaction providing for or requiring it to abandon,
terminate or fail to consummate this Agreement, or compensating it or
any of its Subsidiaries under any of the instances described in this
clause. CSFC and CSFC Bank shall immediately instruct and cause their
directors, officers, employees, agents, advisors (including, without
limitation, any investment banker, attorney, or accountant retained by
it or any of its Subsidiaries), consultants and other representatives
to comply with such prohibitions. CSFC and CSFC Bank shall immediately
cease and cause to be terminated any existing activities, discussions,
or negotiations with any parties conducted heretofore with respect to
such activities. CSFC shall promptly notify COFI orally and in writing
in the event it receives any such inquiry or proposal and shall provide
reasonable detail of all relevant facts relating to such inquiries.
This Section shall not prohibit accurate disclosure by CSFC in any
document (including the Prospectus and the Registration Statement) or
other disclosure under applicable law if in the opinion of the Board of
Directors of CSFC, disclosure is appropriate under applicable law.
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(b) "Acquisition Proposal" shall, with respect to CSFC,
mean any of the following (other than the Merger): (i) a merger or
consolidation, or any similar transaction of any company with either
CSFC or any Subsidiary of CSFC, (ii) a purchase lease or other
acquisition of a material portion of the assets of CSFC or CSFC Bank,
(iii) a purchase or other acquisition of "beneficial ownership" by any
"person" or "group" (as such terms are defined in Section 13(d)(3) of
the Securities Exchange Act) (including by way of merger,
consolidation, share exchange, or otherwise) which would cause such
person or group to become the beneficial owner of securities
representing 25% or more of the voting power of either CSFC or any
Subsidiary of CSFC, (iv) a tender or exchange offer to acquire
securities representing 25% or more of the voting power of CSFC, (v) a
public proxy or consent solicitation made to stockholders of CSFC
seeking proxies in opposition to any proposal relating to any of the
transactions contemplated by this Agreement, (vi) the filing of an
application or notice with the OTS or any other federal or state
regulatory authority (which application has been accepted for
processing) seeking approval to engage in one or more of the
transactions referenced in clauses (i) through (iv) above, or (vii) the
making of a bona fide offer to the Board of Directors CSFC or CSFC Bank
by written communication, that is or becomes the subject of public
disclosure, to engage in one or more of the transactions referenced in
clauses (i) through (v) above.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Inspection of Records; Confidentiality.
(a) COFI and CSFC shall each afford to the other and to
the other's accountants, counsel and other representatives (and their
Subsidiaries) full access during normal business hours during the
period prior to the Effective Time to all of their respective
properties, books, contracts, commitments and records, including all
attorneys' responses to auditors' requests for information, and
accountants' work papers, developed by either of them or their
respective Subsidiaries or their respective accountants or attorneys,
and will permit each other and their respective representatives to
discuss such information directly with each other's officers,
directors, employees, attorneys and accountants. COFI and CSFC shall
each use their best efforts to furnish to the other all other
information concerning its business, properties and personnel as such
other party may reasonably request; however, such access may be limited
by the party from whom access is sought so as to avoid unreasonable
disruption or interference with such party's business operations, as
such party may reasonably determine. Any failure to comply with this
covenant shall be disregarded if promptly corrected without material
adverse consequences to the other party. The availability or actual
delivery of information shall not affect the representations,
warranties, covenants, and agreements of the party
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providing such information that are contained in this Agreement or in
any certificates or other documents delivered pursuant hereto.
(b) All information disclosed by or on behalf of any
party to any other party to this Agreement, whether prior to, on or
subsequent to the date of this Agreement including, without limitation,
any information obtained pursuant to this Section 5.1, shall be kept
confidential by such other party and shall not be used by such other
party otherwise than as herein contemplated. In the event that this
Agreement is terminated, each party shall return all documents
furnished by one or more of the other parties, shall destroy all other
documents or portions thereof that contain (or are based on or derived
from) information furnished by one or more of the other parties hereto
and, in any event, shall hold all information confidential unless or
until such information is or becomes a matter of public knowledge other
than as a result of a disclosure in violation of this section or in
violation of any other confidentiality obligation. In the event that
any party or its officers, directors, advisors or representatives are
requested or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or
similar process) to disclose any information that is confidential under
this Section 5.1, such party will provide the appropriate other party
with immediate notice of the existence, terms and circumstances
surrounding such request or requirement so that such other party may
seek any appropriate protective order and/or by mutual agreement waive
compliance with the provisions hereof. In the absence of a protective
order or the receipt of a waiver hereunder, if any party or its
directors, officers, employees, advisors or representatives are
nonetheless, in the opinion of such party's counsel, compelled to
disclose information that is confidential under this Section 5.1 to any
tribunal or else become subject to judicial contempt proceedings or
suffer other censure, penalty or liability, such party or such
director, officer, employee advisor or reprsentative may disclose such
information (but only to the extent required to be disclosed) to such
tribunal without liability hereunder unless such disclosure was caused
by or resulted from a previous disclosure by such party or any of its
directors, officers, employees, advisors or representatives which was
not permitted by this Section 5.1, and provided that such party
exercises its best efforts to obtain an order or other reliable
assurance that confidential treatment will be accorded to such portion
of the information which the appropriate other party so designates.
(c) In the event this Agreement is terminated pursuant to
the provisions of Section 7.1 hereof:
(1) each party and its respective officers,
directors, employees, agents and controlling persons agree
that for the period through March 12, 2000, such party and
such officers, directors, employees, agents and controlling
persons shall not, without the prior approval of the
appropriate other party, (i) in any manner, acquire, attempt
to acquire or make a proposal to acquire, directly or
indirectly, any securities or property of such other party or
any of its subsidiaries, (ii)
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propose to enter into, directly or indirectly, any merger or
business combination involving such other party or any of its
subisidiaries or to purchase, directly or indirectly, a
material portion of the assets of such other party or any of
its subsidiaries, (iii) make, or in any way participate,
directly or indirectly, in any "solicitation" of "proxies" (as
such terms are used in the proxy rules of the SEC) to vote, or
seek to advise or influence any person with respect to the
voting of any voting securities of such other party, (iv)
form, join or otherwise participate in a "group" (within the
meaning of Section 13(d)(3) of the Securities Exchange Act)
with respect to any voting securities of such other party, (v)
otherwise act, alone or in concert with others, to seek to
control or influence the management, Board of Directors or
policies of such other party, (vi) disclose any intention,
plan or arrangement consistent with the foregoing unless
required by law, or (vii) adivse, assist or encourage any
other person in connection with any of the foregoing.
(2) each party also agrees during such period not
to (i) request the other parties (or their respective
directors, officers, employees or agents), directly or
indirectly, to amend or waive any provision of this subsection
(including this sentence) or (ii) take any action which might
require any of such other parties to make a public
announcement regarding the possibility of a business
combination or merger or other acquisition transaction; and
(3) each party and its officers, directors,
employees, agents and controlling persons agree not to
initiate or maintain contact (except for those contracts made
in the ordinary course of business) with any officer,
director, or employee of the other parties regarding the
business, operation, prospects, or finances of the other
parties or employment of any such officer, director, or
employee with whom such party had contact during the
negotiation of the transactions contemplated by this
Agreement, except with express permission of the other
appropriate party.
(d) The parties agree that (i) the aggrieved parties
shall be entitled to equitable relief, including injunction and
specific performance, in the event of any breach of the provisions of
subsections (b) and (c) of this Section 5.1, in addition to all other
remedies available to the aggrieved parties at law or in equity, and
(ii) no failure or delay in exercising any right, power, or privilege
under this section shall operate as a waiver thereof, nor shall any
single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any right, power, or privilege
hereunder.
5.2 Registration Statement; Stockholder Approval. As soon as
practicable after the date hereof, COFI shall file the Registration Statement
with the SEC, and CSFC and COFI shall use their best efforts to cause the
Registration Statement to become effective under the Securities Act. COFI will
take any action required to be taken under the applicable blue sky or securities
laws in connection with the issuance of the shares of COFI Common Stock in the
Company
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Merger. Each party shall furnish all information concerning it and the holders
of its capital stock as the other party may reasonably request in connection
with such action. CSFC shall call the CSFC Stockholders' Meeting as soon as
reasonably practicable after the date of this Agreement for the purpose of
voting upon this Agreement and the Company Merger. In connection with the CSFC
Stockholders' Meeting, (i) COFI and CSFC shall jointly prepare the Prospectus as
part of the Registration Statement and CSFC shall mail the Prospectus to its
stockholders and (ii) the Board of Directors of CSFC shall recommend to its
stockholders the approval of this Agreement and the Company Merger; provided,
however, that such recommendation may be withdrawn, modified, or amended, or not
made at all, after the receipt by CSFC of an offer to effect an Acquisition
Proposal (as defined in Section 4.3 hereof) with CSFC to the extent the Board of
Directors of CSFC reasonably determines that, in the exercise of its fiduciary
obligations after consultation with counsel, it has a duty to do so.
5.3 Agreements of Affiliates. As soon as practicable after the
date of this Agreement, CSFC shall deliver to COFI a letter, reviewed by its
counsel, identifying all persons whom CSFC believes to be "affiliates" of CSFC
for purposes of Rule 145 under the Securities Act or for purposes of qualifying
for pooling of interests accounting treatment for the Merger. CSFC shall use its
best efforts to cause each person who is so identified as an "affiliate" to
deliver to COFI, as soon as practicable thereafter, a CSFC Affiliate Agreement,
providing that each such person will agree not to sell, pledge, transfer or
otherwise dispose of, or reduce risk with respect to, any shares of stock of
CSFC held by such person or any shares of COFI Common Stock to be received by
such person in the Company Merger (i) during the period commencing on the date
hereof and ending at the time of publication of financial results covering at
least 30 days of combined operations after the Company Merger and (ii) at any
time, except in compliance with the applicable provisions of the Securities Act
and other applicable laws and regulations. Prior to the Effective Time, CSFC
shall amend and supplement such letter and use its best efforts to cause each
additional person who is identified as an "affiliate" to execute a written
agreement as set forth in this Section 5.3. COFI shall use all reasonable
efforts to cause each director, executive officer, and other person who is an
"affiliate" (for qualifying the Merger for pooling-of-interests accounting
treatment) of COFI, as soon as practicable after the date of this Agreement, to
execute and deliver a written agreement, in the form of Exhibit C (a "COFI
Affiliate Agreement"), under which such affiliate agrees not to sell, pledge,
transfer, or otherwise dispose of, or reduce risk with respect to, his or her
COFI Common Stock during any period that any such action would, under general
accepted accounting principles or the rules, regulations, or interpretations of
the SEC or its staff, disqualify the Company Merger for pooling-of-interests for
accounting purposes.
5.4 Expenses. Each party hereto shall bear its own expenses
incident to preparing, entering into and carrying out this Agreement and to
consummating the Merger. COFI shall bear all third party printing costs incurred
with respect to the Registration Statement and Prospectus in preliminary and
final form. The printer shall be Bowne or such other printer selected by COFI.
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5.5 Cooperation. Each party covenants that it will use its best
efforts to bring about the transactions contemplated by this Agreement as soon
as practicable, unless this Agreement is terminated as provided herein. Subject
to the terms and conditions herein provided, each of the parties hereto agrees
to use all reasonable efforts to take, or cause to be taken, all action, and to
do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement at the earliest practicable time.
All third party costs and expenses incurred by CSFC Bank at the direction of
COFI in connection with making available to CSFC Bank's customers materials
relative to the combination of CSFC Bank and Charter One Bank, shall be paid by
COFI or Charter One Bank. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and/or directors of the parties, shall take all
such necessary action. Each party shall use its reasonable best efforts to
preserve for itself and the other parties hereto each available legal privilege
with respect to the confidentiality of their negotiations and related
communications, including the attorney-client privilege.
5.6 Regulatory Applications. The parties shall, as soon as
practicable after the date of this Agreement, file all necessary applications
with all applicable regulatory authorities, and shall use their best efforts to
respond as promptly as practicable to all inquiries received concerning said
applications. In the event the Merger is challenged or opposed by any
administrative or legal proceeding, whether by the United States Department of
Justice or otherwise, the determination of whether and to what extent to seek
appeal or review, administrative or otherwise, or other appropriate remedies
shall be made by COFI after consultation with CSFC. The party filing an
application shall deliver a copy thereof to the other parties hereto in advance
of filing and copies of all responses from or written communications from
regulatory authorities relating to the Merger or this Agreement (to the extent
permitted by law), and the filing party shall also deliver a final copy of each
regulatory application to the other parties promptly after it is filed with the
appropriate regulatory authority. Each party shall advise the other parties
periodically of the status of each regulatory application.
5.7 Financial Statements and Reports. From the date of this
Agreement and prior to the Effective Time: (a) CSFC shall deliver to COFI not
later than 30 days after the end of any fiscal quarter, the Report of Condition
and Income filed by CSFC Bank with the OTS and the unaudited interim
unconsolidated financial statements of CSFC and the CSFC Subsidiaries for such
quarter; (b) COFI shall deliver to CSFC not later than 45 days after the end of
each quarter, its Report on Form 10-Q for such quarter as filed with the SEC,
which shall be prepared in conformity with generally accepted accounting
principles and the rules and regulations of the SEC; and (c) each party will
deliver to the others any and all other material reports filed with the SEC, the
FDIC, the OTS, or any other regulatory agency within five business days of the
filing of any such report.
5.8 Notice. At all times prior to the Effective Time, each party
shall promptly notify the other in writing of the occurrence of any event known
to it which will or may result in the
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failure to satisfy any of the conditions specified in Sections 6.1 or 6.2
hereof. In the event that any party becomes aware of (i) any fact or
circumstance not previously known to it that results in or may result in a
breach by it of any representation or warranty herein in any material respect or
(ii) the occurrence or impending occurrence of any event which would constitute
or cause a breach by it of any of its representations and warranties, covenants
or agreements herein in any material respect or would have constituted or caused
a breach by it of its representations and warranties, covenants or agreements
herein in any respect had such an event occurred or been known prior to the date
hereof, said party shall immediately give detailed and written notice thereof to
the other parties, and shall, unless the same has been waived in writing by the
other parties, use its reasonable efforts to remedy the same within 30 days,
provided that such efforts, if not successful, shall not be deemed to satisfy
any condition precedent to the Merger.
5.9 Press Release. Except as otherwise reasonably determined by a
party to be necessary to comply with its legal obligations, at all times prior
to the Effective Time, the parties shall mutually agree to the issuance of any
press release or other information to the press or any third party for general
circulation with respect to this Agreement or the transactions contemplated
hereby. If a party reasonably determines that a public announcement is required,
it shall give the other parties a reasonable opportunity to review any proposed
announcement. In no event will any party issue a press release which includes
the deal value, directly or indirectly, without the prior written consent of the
other parties, which consent shall not be unreasonably withheld or delayed.
5.10 Delivery of Supplements to Disclosure Schedules. Five business
days prior to the Effective Time, each party will supplement or amend its
Disclosure Schedule with respect to any matter hereafter arising which, if
existing or occurring at or prior to the date of this Agreement, would have been
required to be set forth or described in such Disclosure Schedule or which is
necessary to correct any information in the Disclosure Schedule or in any
representation and warranty made by the disclosing party which has been rendered
inaccurate thereby. For purposes of determining the accuracy of the
representations and warranties of COFI, Charter One Bank, CSFC and CSFC Bank
contained, respectively, in Articles II and III hereof in order to determine the
fulfillment of the conditions set forth in Section 6.1(a) and 6.2(a) hereof as
of the date of this Agreement, the Disclosure Schedule of each party shall be
deemed to include only that information contained therein on the date it is
initially delivered to the other party in other than draft form.
5.11 Litigation Matters. CSFC and CSFC Bank will consult with COFI
about any proposed settlement, or any disposition of, any litigation involving
amounts in excess of $10,000.
5.12 Tax Opinion. COFI agrees to obtain a written opinion of
Silver, Freedman & Taff, L.L.P., addressed to COFI and CSFC, dated the Closing
Date, subject to the representations and assumptions referred to therein, and
substantially to the effect that (i) the Company Merger will constitute a
tax-free reorganization within the meaning of Section 368(a) of the Code and
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that COFI and CSFC will each be a party to a reorganization; (ii) that no gain
or loss would be recognized by any stockholder of CSFC upon the exchange of CSFC
Common Stock solely for COFI Common Stock in the Company Merger, and that the
basis of the COFI Common Stock received by each stockholder of CSFC who
exchanges CSFC Common Stock solely for COFI Common Stock in the Company Merger
will be the same as the basis of the CSFC Common Stock surrendered and exchanged
therefor (subject to any adjustments required as the result of receipt of cash
in lieu of a fractional share of COFI Common Stock); (iii) the holding period of
the COFI Common Stock received by a stockholder of CSFC in the Company Merger
will include the holding period of the CSFC Common Stock surrendered and
exchanged therefor, provided that such shares of CSFC Common Stock were held as
a capital asset by such stockholder at the Effective Time; and (iv) that cash
received by a CSFC stockholder in lieu of a fractional share interest of COFI
Common Stock as part of the Company Merger will be treated as having been
received as a distribution in full payment in exchange for the fractional share
interest of COFI Common Stock which such stockholder would otherwise be entitled
to receive and will qualify as a capital gain or loss (assuming the CSFC Common
Stock was a capital asset in such stockholder's hands at the Effective Time).
5.13 Benefits and Related Matters.
(a) Supplemental Retirement Agreements and Executive Life
Insurance Plans. COFI or Charter One Bank shall honor the supplemental
retirement agreements of each of William R. Bryan, Sandra L. Myers, and
David Y. Wilcox, each dated December 18, 1987 without any amendments or
modifications thereto, by making a lump sum cash payment to each named
individual within five (5) business days after the Effective Time in an
amount equal to the present value of such indivudual's benefits
thereunder as of the Closing Date (but not in excess of the accrued
liability with respect thereto in the CSFC Financial Statements as of
December 31, 1997 plus additional accruals made by CSFC or CSFC Bank in
the ordinary course of business consistent with past practice during
calendar year 1998 through the end of the calendar month next preceding
the Closing Date). As a condition of such payment, each named
individual will be required to execute a release of all rights under
his or her supplemental retirement agreement. COFI or Charter One Bank
shall honor and assume the supplemental retirement agreement of Chet T.
Kermode, dated December 18, 1987 as amended by a First Modification
dated December 20, 1993. It is acknowledged by the parties that Chet T.
Kermode is currently in pay status. COFI or Charter One Bank will
assume the Executive Life Insurance Plan of each of William R. Bryan,
Sandra L. Myers and David Y. Wilcox, each dated December 1, 1984 as
amended by a First Modification dated December 20, 1993. Nothing herein
shall preclude COFI or Charter One Bank from exercising any rights of
CSFC Bank, in its capacity as successor in interest, under the
Executive Life Insurance Plans and the First Modification thereto.
(b) Employment Agreements. Charter One Bank shall offer
employment agreements to William R. Bryan, Sandra L. Myers and David Y.
Wilcox, the three senior
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executive officers of CSFC Bank, upon the terms and conditions set
forth in the written employment agreements attached as exhibits F-1,
F-2 and F-3 hereto.
(c) General Severance. Each person employed as a full
time employee by the CSFC Subsidiaries as of March 31, 1998 who is
employed as a full time employee by the CSFC Subsidiaries immediately
prior to the Effective Time (other than a person named in subsection
(b) above) will be entitled to receive (in lieu of any other form of
severance) the severance package described below if such person's
employment is terminated without cause within one year after the
Effective Time. In addition, any such employee of the CSFC Subsidiaries
who voluntarily resigns after being notified by COFI that, as a
condition of employment, such employee must work at a location outside
of the Cleveland MSA or that such employee's base salary will be
decreased, in any case within one year after the Effective Time, will
be entitled to the severance package described below. The severance
package shall consist of (i) three weeks base pay for every year of
full time service with the CSFC Subsidiaries prior to the Effective
Time, up to a maximum of one year of base pay, and (ii) continued
health insurance coverage for a period of 90 days after separation of
service with Charter One Bank paying the employer's portion (50%) of
the health insurance premium. At the request of a severed employee who
is entitled to the aforesaid severance package, outplacement services
will be provided by Charter One Bank.
(d) Continuing Employees. To the extent permitted by
applicable law, the former employees of CSFC Bank (but specifically
excluding any person named in subsection (a) above) who become
employees of Charter One Bank or any other COFI Subsidiary (the
"Continuing Employees") shall continue to participate in the CSFC
Benefit Plans, except where any such Plan is terminated at the request
of COFI at the Effective Time. COFI or any COFI Subsidiary may adopt,
amend, merge or terminate any CSFC Benefit Plan at any time after the
Effective Time, on such terms and conditions as COFI may determine in
its sole discretion and in accordance with applicable law, at any time
after the Effective Time. Whenever a Continuing Employee becomes a
participant in an COFI Benefit Plan, such Continuing Employee shall
receive full credit for his past service with CSFC Bank for purposes of
determining eligibility to participate in and the vesting benefits of
such COFI Benefit Plan (but not for the purpose of accrual of benefits
thereunder). Continuing Employees will not be subject to any exclusion
or penalty for pre-existing conditions that were covered under the CSFC
Bank health plan immediately prior to the Effective Time or any waiting
period relating to coverage under the COFI health plan. COFI and
Charter One Bank will assume, or will arrange for a qualified person or
entity to assume, administrative responsibility for all employee
benefit plans of CSFC or CSFC Bank as of the Effective Time.
(e) Clarence P. Bryan COFI will assume and honor the
obligation of CSFC to pay in cash to Mr. Clarence P. Bryan a monthly
fee of $1,700 until his death.
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5.14 Nasdaq Listing. COFI shall use all reasonable efforts to cause
the shares of COFI Common Stock to be issued in the Company Merger to be
approved for listing on the Nasdaq Stock Market (or such other national
securities exchange or stock market on which the COFI Common Stock shall then be
traded), subject to official notice of issuance, prior to or as of the Closing.
5.15 Directors' and Officers' Indemnification Insurance. COFI
agrees that the Merger shall not affect or diminish any of CSFC's or CSFC Bank's
duties and obligations of indemnification existing immediately prior to the
Effective Time in favor of the directors, officers, employees and agents of CSFC
or CSFC Bank arising by virtue of the Articles of Incorporation, Charter , Code
of Regulations or Bylaws of CSFC or CSFC Bank in the form in effect at the date
of this Agreement or arising by operation of law, and such duties and
obligations shall continue in full force and effect for so long as they would
(but for the Merger) otherwise survive and continue in full force and effect.
All provisions for indemnification and limitation of liability now existing in
favor of the employees, agents, directors or officers of CSFC, CSFC Bank or CSFC
Subsidiaries, as provided by law or regulation or in their respective Articles
of Incorporation or Codes of Regulation shall survive the Merger, shall be
assumed by COFI and shall continue in full force and effect with respect to acts
or omissions occurring prior to the Effective Time for a period of three years
thereafter or in the case of matters occurring prior to the Effective Time which
have not been resolved prior to the third anniversary of the Effective Time,
until such matters are finally resolved. To the extent permitted by law, COFI or
Charter One Bank, respectively, shall advance expenses in connection with the
foregoing indemnification. The indemnified persons under this Section 5.15 shall
be third party beneficiaries of the provisions of this Section 5.15.
5.16 Reports to the SEC. On or after the Effective Time, COFI shall
continue to file all reports and data with the SEC necessary to permit
stockholders of CSFC who may be deemed affiliates of CSFC within the meaning of
Rule 145 under the Securities Act to sell COFI Common Stock held or received by
them in connection with the Merger pursuant to Rules 144 and 145 under the
Securities Act if they would otherwise be so entitled.
5.17 Extraordinary COFI Dividends. Between the date of this
Agreement and the Effective Time or the termination of this Agreement (whichever
occurs first), COFI shall not declare, set aside or pay any extraordinary cash
dividend or make any other extraordinary cash distribution with respect to COFI
Stock.
5.18 Environmental Reports.
(a) COFI desires to cause a Phase I Environmental
Assessment (each a "Phase I" and collectively "Phase I's") to be
conducted by an environmental consulting firm (the "Consultant") that
is reasonably acceptable to CSFC, for all real property owned, leased
or operated by CSFC or any of the CSFC Subsidiaries as of the date
hereof (but excluding the properties known as IMG Center and the
Lincoln Building and property
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held in trust or in a fiduciary capacity and space in retail or similar
establishments leased by CSFC or any of the CSFC Subsidiaries for
automatic teller machines or bank branch facilities where the space
leased comprises less than 20% of the total space leased to all tenants
of such property) (the "Properties").
(b) CSFC shall cooperate with COFI and with the
Consultant in connection with the Phase I's. The Phase I's shall be
conducted at the sole expense of COFI. The Consultant shall conduct the
Phase I's pursuant to a contract between COFI and the Consultant which
is reasonably acceptable to CSFC and provides, among other things, that
the Consultant shall specifically conclude in its written report
whether or not any Phase II investigatory work is, in its professional
opinion, required and, if it is, will specifically recommend and
describe the nature, scope and extent of such Phase II work. The
Consultant's Phase I reports shall be delivered to COFI (with a copy to
CSFC) on or before 60 days after the date hereof.
(c) If, based on the Consultant's recommendation for
Phase II work on one or more of the Properties, COFI elects to conduct
such Phase II work, such work shall be conducted by the Consultant at
COFI's sole expense. CSFC shall cooperate with the Consultant in
connection with such Phase II work. Such Phase II work shall be
conducted pursuant to a contract between COFI and the Consultant, which
contract shall be reasonably acceptable to CSFC and shall provide,
among other things, that the Consultant shall (i) confirm the presence
or absence of each contaminant (the "Contaminant") suspected to exist
as a result of the Phase I and if the Contaminant is found not to exist
will indicate so in its report; (ii) if the Contaminant is discovered
to exist, characterize its concentration and establish its horizontal
and vertical extent; (iii) conclude whether the Contaminant must or
should, under applicable laws or prevailing commercial practices, be
remediated (which terms shall include physical remediation and/or risk
assessment); and (iv) if remediation is appropriate, provide an
estimated cost for remediating the Contaminant.
(d) COFI shall compute the after-tax cost (based on the
highest federal marginal tax rate) of the Consultant's estimated
remediation costs for all of the Properties for which the Consultant
issues a Phase II report containing an estimate of remediation cost. If
such aggregate costs (the "Estimated After-Tax Costs") are $200,000 or
less, there shall be no adjustment in the Merger Consideration. If and
to the extent the Estimated After-Tax Costs are more than $200,000, the
amount of same which exceeds $200,000 shall be deducted from the Merger
Consideration to be delivered by COFI pursuant to this Agreement
valuing the Merger Consideration based upon the Final COFI Share Price
(as defined in Section 7.1(i)); provided that in the event the
deduction from the Merger Consideration as a result of this subsection
exceeds $1,000,000, CSFC shall have the right, pursuant to Section
7.1(g) hereof to terminate this Agreement.
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(e) Anytime prior to Closing, COFI shall be entitled, at
its expense, to conduct air quality testing at and in the IMG Center
and the Lincoln Building. The firm selected by COFI to conduct such
testing shall be reasonably acceptable to CSFC. If such testing
produces air quality results that are either (i) above the permissible
exposure limit or (ii) above the level agreed upon by CSFC and COFI on
the date hereof, then in any such event COFI shall have the right,
pursuant to Section 7.1(h) hereof, to terminate this Agreement.
(f) Nothing in this Section 5.18 shall limit any other
right or remedy given to COFI elsewhere in this Agreement.
5.19 Merger Sub. In order to consummate the Company Merger, Merger
Sub and CSFC shall enter into a short form plan of merger satisfying the
requirements of the OGCL, which plan of merger shall, if required, be attached
to the certificate of merger to be filed with the Ohio Secretary of State. If
requested by CSFC, Merger Sub shall become a party to this Agreement by
executing a written instrument to such effect
5.20 Waiver of Rights Under Stockholder Arrangements. Within 15
business days after the date hereof, CSFC shall cause the parties to and
beneficiaries under the Registration Agreement, the 1973 Shareholders Agreement
and the 1992 Shareholders Agreement to execute written waiver agreements, in
form and substance reasonably acceptable to COFI, exempting the Company Merger
and the other transactions contemplated by this Agreement from the referenced
agreements.
ARTICLE VI
CONDITIONS
6.1 Conditions to the Obligations of COFI and Charter One Bank.
Notwithstanding any other provision of this Agreement, the obligations of COFI
and Charter One Bank to consummate the Merger are subject to the following
conditions precedent (except as to those which COFI may chose to waive):
(a) subject to the cure provisions set forth in Section
5.8, all of the representations and warranties made by CSFC and CSFC
Bank in this Agreement and in any documents or certificates provided by
CSFC and CSFC Bank shall have been true and correct in all material
respects as of the date of this Agreement and as of the Effective Time
as though made on and as of the Effective Time;
(b) subject to the cure provisions set forth in Section
5.8, CSFC and CSFC Bank shall have performed in all material respects
all obligations and shall have complied in all material respects with
all agreements and covenants required by this Agreement to be performed
or complied with by them prior to or at the Effective Time;
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(c) there shall not have been any action taken or any
statute, rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Merger by any federal or state government or
governmental agency or instrumentality or court, which would compel
COFI or Charter One Bank to dispose of any material assets as a result
of this Agreement;
(d) no regulatory authority shall impose any non-standard
or unduly burdensome condition relating to the Merger as determined in
the reasonable judgment of COFI;
(e) since the date hereof, CSFC shall not have suffered a
Material Adverse Effect;
(f) COFI shall have received the opinion of Arter &
Hadden LLP, counsel to CSFC, in the form of the attached Exhibit G;
(g) COFI shall have received a certificate signed by the
President and Chief Executive Officer of CSFC and CSFC Bank, dated as
of the Effective Time, certifying that based upon his best knowledge,
the conditions set forth in Sections 6.1(a), (b), and (e) hereof have
been satisfied.
(h) simultaneous with the execution and delivery of this
Agreement, the directors and executive officers of CSFC who are
stockholders of CSFC and certain other stockholders designated by COFI
shall have executed and delivered to COFI Voting Agreements in the form
attached hereto as Exhibit A-1;
(i) COFI shall have received the written affiliates'
agreements described in Section 5.3 hereof; and
(j) Dissenting Shares shall not exceed 7% of the issued
and outstanding CSFC Common Stock.
(k) COFI shall have received from Deloitte & Touche LLP,
COFI's independent auditors, letters, dated the date of or shortly
prior to each of the mailing date of the Prospectus and the Closing
Date, stating its opinion that the Merger shall qualify for
pooling-of-interests accounting treatment.
(l) At the Closing, each share of voting capital stock of
CSFC Financial shall have been transferred to one or more individuals
designated by COFI without any additional consideration therefor and in
accordance with the OGCL.
6.2 Conditions to the Obligations of CSFC and CSFC Bank.
Notwithstanding any other provision of this Agreement, the obligations of CSFC
and CSFC Bank to consummate the
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Merger are subject to the following conditions precedent (except as to those
which CSFC may chose to waive):
(a) subject to the cure provisions set forth in Section
5.8, all of the representations and warranties made by COFI in this
Agreement and in any documents or certificates provided by COFI shall
have been true and correct in all material respects as of the date of
this Agreement and as of the Effective Time as though made on and as of
the Effective Time;
(b) subject to the cure provisions set forth in Section
5.8, COFI shall have performed in all material respects all obligations
and shall have complied in all material respects with all agreements
and covenants required by this Agreement to be performed or complied
with by it prior to or at the Effective Time;
(c) since the date hereof, COFI shall not have suffered a
Material Adverse Effect;
(d) CSFC shall have received the opinion of Silver,
Freedman & Taff, L.L.P., counsel to COFI, in the form attached hereto
as Exhibit H; and
(e) CSFC shall have received a certificate signed by the
President and Chief Executive Officer of COFI, dated as of the
Effective Time, that based upon his best knowledge, the conditions set
forth in Sections 6.2(a), (b) and (c) have been satisfied.
6.3 Conditions to the Obligations of the Parties. Notwithstanding
any other provision of this Agreement, the obligations of COFI and Charter One
Bank on the one hand, and CSFC and CSFC Bank on the other hand, to consummate
the Merger are subject to the following conditions precedent (except as to those
which COFI and CSFC may chose to waive):
(a) no preliminary or permanent injunction or other order
by any federal or state court which prevents the consummation of the
Merger shall have been issued and shall remain in effect; nor shall
there be any third party proceeding pending to prevent the consummation
of the Merger;
(b) there shall not have been any action taken or any
statute, rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Merger by any federal or state government or
governmental agency or instrumentality or record, which would prohibit
ownership or operation of all or a portion of the business or assets of
CSFC or any CSFC Subsidiary by COFI or Charter One Bank, or which would
render any party hereto unable to consummate the transactions
contemplated by this Agreement;
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(c) the parties shall have received all applicable
regulatory approvals and consents to consummate the transactions
contemplated in this Agreement and all required waiting periods shall
have expired;
(d) the Registration Statement shall have been declared
effective under the Securities Act and no stop orders shall be in
effect and no proceedings for such purpose shall be pending or
threatened by the SEC and, if the offering for sale of the COFI Common
Stock in the Company Merger pursuant to this Agreement is subject to
the securities laws of any state, the Registration Statement shall not
be subject to a stop order of any state securities authority;
(e) each party shall have received the tax opinion
addressed to it referred to in Section 5.12 of this Agreement; and
(f) the COFI Common Stock to be issued to holders of CSFC
Common Stock shall have been approved for listing on the Nasdaq
National Market subject to official notice of issuance.
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time:
(a) By the mutual written consent of the Boards of
Directors of COFI and CSFC;
(b) By COFI or CSFC if there shall have been a final
judicial or regulatory determination (as to which all periods for
appeal shall have expired and no appeal shall be pending) that any
material provision of this Agreement is illegal, invalid or
unenforceable (unless the enforcement thereof is waived by the affected
party) or denying any regulatory application the approval of which is a
condition precedent to a party's obligations hereunder;
(c) By COFI or CSFC before the date specified in 7.1(f)
hereof, in the event that any of the conditions precedent to the
obligations of the other party to the Merger are rendered impossible to
be satisfied or fulfilled by said date (other than by reason of a
breach by the party seeking to terminate);
(d) By COFI or CSFC at any time after the stockholders of
CSFC fail to approve this Agreement and the Company Merger by the
Required Vote at the CSFC Stockholders' Meeting;
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(e) By COFI or CSFC, in the event of a material breach by
the other party of any representation, warranty, covenant or agreement
contained herein or in any schedule or document delivered pursuant
hereto, which breach would result in the failure to satisfy the closing
condition set forth in Section 6.1(a) or 6.1(b) in the case of COFI, or
Section 6.2(a) or 6.2(b) in the case of CSFC, and which breach cannot
be or is not cured within thirty (30) days after written notice of such
breach is given by the non-breaching party to the party committing such
breach;
(f) By COFI or CSFC on or after December 31, 1998, in the
event the Company Merger has not been consummated by such date
(provided, however, that the right to terminate under this Section
7.1(f) shall not be available to any party whose failure to perform an
obligation hereunder has been the cause of, or has resulted in, the
failure of the Company Merger to occur on or before such date).
(g) By CSFC pursuant to and in accordance with the
provisions of the last sentence of Section 5.18(d);
(h) By COFI pursuant to and in accordance with the
provisions of Section 5.18(e); or
(i) By CSFC if the Final COFI Share Price (as defined
herein) is less than $53.60 (the "Floor Price"). The "Final COFI Share
Price" means the average of the closing prices per share of COFI Common
Stock (rounded down to the nearest whole cent) reported on the Nasdaq
National Market during the twenty consecutive trading days ending on
the fifth business day prior to the date of the scheduled Closing (the
"Pricing Period").
In the event a party elects to effect any termination pursuant
to Section 7.1(b) through 7.1(i) above, it shall give written notice to
the other party hereto specifying the basis for such termination and
certifying that such termination has been approved by the vote of a
majority of the members of its Board of Directors.
7.2 Liabilities and Remedies Break-Up Fee.
(a) In the event that this Agreement is terminated by a
party (the "Aggrieved Party") solely by reason of the material breach
by the other party ("Breaching Party") of any of its representations,
warranties, covenants or agreements contained herein then the Aggrieved
Party shall be entitled to such remedies and relief against the
Breaching Party as are available at law or in equity. Moreover, the
Aggrieved Party without terminating this Agreement shall be entitled to
specifically enforce the terms hereof against the Breaching Party in
order to cause the Merger to be consummated. Each party acknowledges
that there is not an adequate remedy at law to compensate the other
parties relating to the non-consummation of the Merger. To this end,
each party, to the extent
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permitted by law, irrevocably waives any defense it might have based on
the adequacy of a remedy at law which might be asserted as a bar to
specific performance, injunctive relief or other equitable relief.
(b) In the event that the CSFC Stockholder's Meeting does
not take place, the Board of Directors of CSFC fails to recommend
approval of this Agreement and the Company Merger to the stockholders
of CSFC, or such Board of Directors shall adversely alter or modify its
favorable recommendation of this Agreement and the Company Merger to
the stockholders of CSFC, and this Agreement and the Company Merger is
not approved by the stockholders of CSFC by the Required Vote, and
neither COFI nor Charter One Bank is, as of the date of such event, in
material breach of this Agreement, then, upon termination of this
Agreement, CSFC and CSFC Bank shall jointly and severally reimburse
COFI and Charter One Bank for their third party expenses relating to
this Agreement and the transactions contemplated hereby in an amount up
to $200,000 and pay COFI in immediately available funds an additional
cash amount of $2,500,000 as an agreed upon break up fee and as the
sole and exclusive remedy of COFI and Charter One Bank. In order to
obtain the benefit of the expense reimbursement and break-up fees
provided in this Section 7.2(b), COFI and Charter One Bank shall be
required to execute a waiver of their rights under Section 7.2(a)
above, and shall not have taken any action to enforce any right that
they might have under Section 7.2(a) hereof.
(c) In the event that an Acquisition Proposal occurs
between the date hereof and the time of the CSFC Stockholders' Meeting
and the stockholders of CSFC fail to approve this Agreement and the
Company Merger under circumstances where the Board of Directors of CSFC
continuously maintained its favorable recommendation of this Agreement
and the Company Merger, and neither COFI nor Charter One Bank was, as
of the date of such action, in material breach of this Agreement, then
if a definitive agreement relating to an Acquisition Proposal is
executed by CSFC or any CSFC Subsidiary, or an Acquisition Proposal is
consummated, in either case within 15 months after the termination of
this Agreement, then upon the happening of such event CSFC and CSFC
Bank shall be jointly and severally obligated to pay COFI a cash amount
of $2,500,000 as an agreed upon break up fee and as the sole and
exclusive remedy of COFI and Charter One Bank. There shall be no
duplication of remedy under this Section 7.2(c) and 7.2(b). In order to
obtain the benefit of the break-up fees provided in this Section
7.2(c), COFI and Charter One Bank shall be required to execute a waiver
of their rights under Section 7.2(a) above, and shall not have taken
any action to enforce any right that they might have under Section
7.2(a) hereof.
(d) In the event that all of the conditions precedent to
the consummation of the Merger in Article VI have been satisfied or
would be satisfied by the delivery of documents which are under the
control of COFI and COFI in material breach of this Agreement refuses
to consummate the Company Merger, or if COFI otherwise willfully
abandons the Company Merger in material breach of this Agreement, then
in either case,
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COFI and Charter One Bank shall jointly and severally pay CSFC and CSFC
Bank liquidated damages in the cash amount of $2,700,000 as their sole
and exclusive remedy against COFI, Merger Sub and Charter One Bank. In
order to pursue the liquidated damage remedy provided in this
subsection, CSFC and CSFC Bank shall be required to execute a waiver of
their rights under Section 7.2(a) hereof and shall have not have taken
any action to enforce any right that they might have under Section
7.2(a) hereof.
7.3 Survival of Agreements. In the event of termination of this
Agreement by either COFI or CSFC as provided in Section 7.1, this Agreement
shall forthwith become void and have no effect except that the agreements
contained in Sections 5.1(b), (c) and (d), 5.4, and 7.2 hereof shall survive the
termination hereof.
7.4 Amendment. This Agreement may be amended by the parties hereto
by action taken by their respective Boards of Directors at any time before or
after approval hereof by the stockholders of CSFC but, after such approval, no
amendment shall be made which changes the form of consideration or the value of
the consideration to be received by the stockholders of CSFC without the
approval of the stockholders of CSFC or otherwise amend this Agreement in a
manner not permitted by Ohio Revised Code Section 1701.78(G). This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto. The parties may, without approval of their respective Boards
of Directors, make such technical changes to this Agreement, not inconsistent
with the purposes hereof as may be required to effect or facilitate any
regulatory approval or acceptance of the Merger or of this Agreement or to
effect or facilitate any regulatory or governmental filing or recording required
for the consummation of any of the transactions contemplated hereby.
7.5 Waiver. Any term, provision or condition of this Agreement
(other than the requirement of CSFC stockholder approval) may be waived in
writing at any time by the party which is entitled to the benefits hereof. Each
and every right granted to any party hereunder, or under any other document
delivered in connection herewith or therewith, and each and every right allowed
it by law or equity, shall be cumulative and may be exercised from time to time.
The failure of a party at any time or times to require performance of any
provision hereof shall in no manner affect such party's right at a later time to
enforce the same. No waiver by any party of a condition or of the breach of any
term, covenant, representation or warranty contained in this Agreement, whether
by conduct or otherwise, in any one or more instances shall be deemed to be or
construed as a further or continuing waiver of any such condition or breach or a
waiver of any other condition or of the breach of any other term, covenant,
representation or warranty of this Agreement. No investigation, review or audit
by a party of another party prior to or after the date hereof shall stop or
prevent such party from exercising any right hereunder or be deemed to be a
waiver of any such right.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 Survival. All representations, warranties, covenants and
agreements of the parties in this Agreement or in any instrument delivered by
the parties pursuant to this Agreement (other than the agreements, covenants and
obligations set forth herein which are contemplated to be performed after the
Effective Time) shall not survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, by facsimile
transmission or by registered or certified mail to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice) and shall be deemed to be delivered on the date so delivered:
(a) if to COFI or Charter One Bank:
Mr. Charles J. Koch
Chief Executive Officer
Charter One Financial, Inc.
1215 Superior Avenue
Cleveland, OH 44114
copy to:
Mr. Robert J. Vana
Chief Corporate Counsel
Charter One Financial, Inc.
1215 Superior Avenue
Cleveland, OH 44114
and
Barry P. Taff, P.C.
Christopher R. Kelly, P.C.
Silver, Freedman & Taff L.L.P.
ll00 New York Ave., N.W.
Washington, D.C. 20005
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(b) if to CSFC or CSFC Bank:
Mr. William R. Bryan
Chief Executive Officer
CS Financial Corporation
1360 East Ninth Street
Cleveland, OH 44114
copy to:
Glenn E. Morrical
Arter & Hadden LLP
1100 Huntington Building
925 Euclid Avenue
Cleveland, OH 44115
8.3 Applicable Law. This Agreement shall be construed and
interpreted according to the laws of the State of Ohio without regard to
conflicts of laws principles thereof, except to the extent that the federal laws
of the United States apply.
8.4 Headings, Etc. The article headings and section headings
contained in this Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of this Agreement.
8.5 Severability. If any term, provision, covenant, or restriction
contained in this Agreement is held by a final and unappealable order of a court
of competent jurisdiction to be invalid, void, or unenforceable, then the
remainder of the terms, provisions, covenants, and restrictions contained in
this Agreement shall remain in full force and effect, and shall in no way be
affected, impaired, or invalidated unless the effect would be to cause this
Agreement to not achieve its essential purposes.
8.6 Entire Agreement; Binding Effect; Non-Assignment;
Counterparts. Except as otherwise expressly provided herein, this Agreement
(including the documents and instruments referred to herein) (a) constitutes the
entire agreement between the parties hereto and supersedes all other prior
agreements and undertakings, both written and oral, between the parties, with
respect to the subject matter hereof; and (b) is not intended to confer upon any
other person any rights or remedies hereunder except as specifically provided
herein. This Agreement shall be binding upon and inure to the benefit of the
parties named herein and their respective successors. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
party hereto without the prior written consent of the other party hereto. This
Agreement may be executed in two or more counterparts which together shall
constitute a single agreement.
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8.7 No Employment Solicitation. Prior to the receipt of OTS and
the Ohio Superintendent of Financial Institutions approval of the Merger, COFI
and the COFI Subsidiaries shall not knowingly, actively solicit the employment
of any current director, officer or full time employee of CSFC or the CSFC
Subsidiaries.
The undersigned have caused this Agreement to be executed as of the day
and year first above written.
CHARTER ONE FINANCIAL, INC.
By /s/ Robert J. Vana
-------------------------------
Robert J. Vana
Secretary
CHARTER ONE BANK F.S.B.
By /s/ Robert J. Vana
-------------------------------
Robert J. Vana
Secretary
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CS FINANCIAL CORPORATION
By /s/ William R. Bryan
------------------------------
William R. Bryan
Chief Executive Officer
THE CUYAHOGA SAVINGS
ASSOCIATION
By /s/ William R. Bryan
-----------------------------
William R. Bryan
Chief Executive Officer
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ANNEX B
[MCDONALD & COMPANY SECURITIES, INC. LETTERHEAD]
MEMBER NEW YORK STOCK EXCHANGE
McDONALD INVESTMENT CENTER
800 SUPERIOR AVENUE
CLEVELAND, OHIO 44114-2603
216-443-2100
April 23, 1998
Board of Directors
CS Financial Corporation
1360 East Ninth Street
Cleveland OH 44114-6172
Gentlemen:
You have requested our opinion with respect to the fairness, from a
financial point of view, as of the date hereof, to the holders of common stock,
par value $5.00 per share ("CS Financial Common Stock"), of CS Financial
Corporation ("CS Financial") of the exchange ratio as set forth in Section l.3
(a) of the Agreement and Plan of Merger and Reorganization dated April 23, 1998,
by and among Charter One Financial, Inc. ("Charter One"), Charter One Bank
F.S.B., CS Financial and The Cuyahoga Savings Association (the "Agreement").
The Agreement provides for the merger (the "Merger") of a newly formed Ohio
business corporation and first tier subsidiary of Charter One into CS Financial,
pursuant to which, among other things, at the Effective Time (as defined in the
Agreement), outstanding shares of CS Financial Common Stock will be exchanged
for 30.1769 shares of common stock, par value $.Ol per share ("Charter One
Common Stock") of Charter One, as set forth in Section 1.3(a) of the Agreement,
and subject to adjustment as provided in the Agreement (the "Exchange Ratio").
The terms and conditions of the Merger are more fully set forth in the
Agreement.
McDonald & Company Securities, INC., as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
<PAGE>
Board of Directors
April 23, 1998
Page 2
We have acted as CS Financial's financial advisor in connection with, and
have participated in certain negotiations leading to, the execution of the
Agreement. In connection with rendering our opinion set forth herein, we have
among other things:
(i) Reviewed CS Financial's audited financial statements for each of
the years ended December 31, 1997, December 31, 1996, and December
31, 1995;
(ii) Reviewed Charter One's Annual Reports to Shareholders and Annual
Reports on Form 10-K for each of the years ended December 31,
1997, December 31, 1996 and December 31, 1995, including the
audited financial statements contained therein;
(iii) Reviewed Charter One's news release dated April 22, 1998
reflecting among other things, detailed financial data with
respect to the results of operations for the quarter ended March
31, 1998 and financial condition as of such date,
(iv) Reviewed certain other public and non-public information,
primarily financial in nature, relating to the respective
businesses, earnings, assets and prospects of CS Financial and
Charter One provided to us or publicly available;
(v) Participated in meetings and telephone conferences with members of
senior management of CS Financial and Charter One concerning the
financial condition, business, assets, financial forecasts and
prospects of the respective companies, as well as other matters we
believed relevant to our inquiry;
(vi) Reviewed certain stock market information for CS Financial Common
Stock and Charter One Common Stock, and compared it with similar
information for certain companies, the securities of which are
publicly traded;
(vii) Compared the results of operations and financial condition of CS
Financial and Charter One with that of certain comparues which we
deemed to be relevant for purposes of this opinion;
(viii) Reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions which we deemed to be relevant
for purposes of this opinion;
(ix) Reviewed the Agreement and its schedules and exhibits and certain
related doctunents; and
(x) Performed such other reviews and analyses as we have deemed
appropriate.
B-2
<PAGE>
Board of Directors
April 20 , 1998
Page 3
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information reviewed by us and have relied upon the accuracy and completeness of
the representations, warranties and covenants of CS Financial and Charter One
contained in the Agreement. We have not been engaged to undertake, and have not
assumed any responsibility for, nor have we conducted, an independent
investigation or verification of such matters. We have not been engaged to and
we have not conducted a physical inspection of any of the assets, properties or
facilities of either CS Financial or Charter One nor have we made or obtained or
been furnished with any independent valuation or appraisal of any of such
assets, properties or facilities or any of the liabilities of either CS
Financial or Charter One. With respect to financial forecasts used in our
analysis, we have assumed that such forecasts have been reasonably prepared by
management of CS Financial and Charter One, as the case may be, on a basis
reflecting the best currently available estimates and judgments of the
management of CS Financial and Charter One, as to the future performance of CS
Financial, Charter One and CS Financial and Charter One combined, as the case
may be. We have not been engaged to assess the reasonableness or achievability
of such financial forecasts or the assumptions on which they are based, and we
express no view as to such financial forecasts or assumptions. We have also
assumed that all of the conditions to the consummation of the Merger, as set
forth in the Agreement, including the tax-free nature of the reorganization for
federal income tax purposes, would be satisfied and that the Merger would be
consummated on a timely basis in the manner contemplated by the Agreement.
We will receive a fee for our services as financial advisor to CS
Financial, a substantial portion of which is contingent upon closing of the
Merger. We will also receive a fee for our services in rendering this opinion.
In the ordinary course of business, we may actively trade securities of CS
Financial or Charter One for our own account and for the accounts of customers
and, accordingly, we may at any time hold a long or short position in such
securities.
This opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date
hereof. In addition, our opinion is, in any event, limited to the fairness, as
of the date hereof, from a financial point of view, of the Exchange Ratio to the
holders of CS Financial Common Stock, and does not address the underlying
business decision by CS Financial's Board of Directors to effect the Merger,
does not compare or discuss the relative merits of any competing proposal or any
other terms of the Merger, and does not constitute a recommendation to any CS
Financial shareholder as to how such shareholder should vote with respect to the
Merger. This opinion does not represent an opinion as to what the value of CS
Financial Common Stock or Charter One Common Stock may be at the Effective Time
of the Merger or as to the prospects of CS Financial's business or Charter One's
business.
B-3
<PAGE>
Board of Directors
April 23, 1998
Page 4
This opinion is directed to the Board of Directors of CS Financial. This
opinion shall not be reproduced, summarized, described or referred to or given
to any other person without our prior written consent. Notwithstanding the
foregoing, this opinion may be included in the prospectus to be mailed to the
holders of CS Financial Common Stock in connection with the Merger, provided
that this opinion will be reproduced in such prospectus in full, and any
description of or reference to us or our actions, or any summary of the opinion
in such proxy statement, will be in a form acceptable to us and our counsel.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to the holders of CS Financial Common
Stock from a financial point of view,
Very truly yours,
/s/ McDONALD & COMPANY SECURITIES, INC
--------------------------------------
McDONALD & COMPANY SECURITIES, INC.
B-4
<PAGE>
ANNEX C
OHIO GENERAL CORPORATION LAW
1701.85 RELIEF FOR DISSENTING SHAREHOLDER; QUALIFICATION;
PROCEDURES.--(A)(1) A shareholder of a domestic corporation is entitled to
relief as a dissenting shareholder in respect of the proposals described in
sections 1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance
with this section.
(2) If the proposal must be submitted to the shareholders of
the corporation involved, the dissenting shareholder shall be a record holder of
the shares of the corporation as to which he seeks relief as of the date fixed
for the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under
division (C) of section 1701.84 of the Revised Code in the case of a merger
pursuant to section 1701.80 of the Revised Code and a dissenting shareholder
entitled to relief under division (E) of section 1701.84 of the Revised Code in
the case of a merger pursuant to section 1701.801 of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 of the Revised Code, the dissenting shareholder
shall deliver to the corporation a written demand for payment with the same
information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served
on the constituent corporation involved constitutes service on the surviving or
the new entity, whether the demand is served before, on, or after the effective
date of the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at
the address specified in his demand, a request for the certificates representing
the shares as to which he seeks relief, the dissenting shareholder, within
fifteen days from the date of the sending of such request, shall deliver to the
corporation the certificates requested so that the corporation may forthwith
endorse on them a legend to the effect that demand for the fair cash value of
such shares has been made. The corporation promptly shall return such endorsed
certificates to the dissenting shareholder. A dissenting shareholder's failure
to deliver such certificates terminates his rights as a dissenting shareholder,
at the option of the corporation, exercised by written notice sent to the
dissenting shareholding within twenty days after the lapse of the fifteen-day
period, unless a court for good cause shown otherwise directs. If shares
represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has been
made, acquires only such rights in the corporation as the original dissenting
holder of such shares had immediately after the service of a demand for payment
of the fair cash value of the shares. A request under this paragraph, by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to
an agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in the case of a merger or consolidation may be the surviving
or new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was
adopted by the shareholders of the corporation, or, if the proposal was not
required to be submitted to the
<PAGE>
shareholders, was approved by the directors. Other dissenting shareholders,
within that three month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or approportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined as
of the day prior to the day on which the vote by the shareholders was taken,
and, in the case of a merger pursuant to section 1701.80 or 1701.801 of the
Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller who is under no compulsion to sell would be willing to
accept and that a willing buyer who is under no compulsion to purchase would be
willing to pay, but in no event shall the fair cash value of a share exceed the
amount specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting from
the proposal submitted to the directors or to the shareholders shall be
excluded.
(D) (1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind their
adoption, of the action involved;
(c) The dissenting shareholder withdraws his demand, with the
consent of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to
an agreement as to the fair cash value per share, and neither the shareholder
nor the corporation filed or joined in a complaint under division (B) of this
section within the period provided in that division.
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(2) For purposes of division (D)(1) of this section, if the
merger or consolidation has become effective and the surviving or new entity is
not a corporation, action required to be taken by the directors of the
corporation shall be taken by the general partners of a surviving or new
partnership or the comparable representatives of any other surviving or new
entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
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