-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TND8Rzj8lq+G/H5tNnSUaZcFx9iIPRluCfWJ3taMab21Ik6Qy0GV/PDGvjLNNKu3 GAp5dCOhYRlwniJOBUbA2A== 0000950152-98-008889.txt : 19981202 0000950152-98-008889.hdr.sgml : 19981202 ACCESSION NUMBER: 0000950152-98-008889 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTMERIT CORP /OH/ CENTRAL INDEX KEY: 0000354869 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 341339938 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10161 FILM NUMBER: 98747522 BUSINESS ADDRESS: STREET 1: 111 CASCADE PLAZA STREET 2: 7TH FLOOR CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 3303848000 FORMER COMPANY: FORMER CONFORMED NAME: FIRSTMERIT CORP DATE OF NAME CHANGE: 19941219 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANCORPORATION OF OHIO /OH/ DATE OF NAME CHANGE: 19941219 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANCORPORATION OF OHIO DATE OF NAME CHANGE: 19920703 10-Q 1 FIRSTMERIT CORPORATION 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 0-10161 FIRSTMERIT CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 34-1339938 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER) III CASCADE PLAZA, 7TH FLOOR, AKRON, OHIO 44308-1103 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (330) 996-6300 (TELEPHONE NUMBER) OUTSTANDING SHARES OF COMMON STOCK, AS OF SEPTEMBER 30, 1998 66,614,903 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO 2 FIRSTMERIT CORPORATION PART I - FINANCIAL STATEMENTS ITEM 1. FINANCIAL STATEMENTS - - ----------------------------- The following statements included in the quarterly unaudited report to shareholders are incorporated by reference: Consolidated Balance Sheets as of September 30, 1998, December 31, 1997 and September 30, 1997 Consolidated Statements of Income for the three-month and nine-month periods ended September 30, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity for the year ended December 31, 1997 and for the nine months ended September 30, 1998 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 Notes to Consolidated Financial Statements as of September 30, 1998, December 31, 1997, and September 30, 1997 Management's Discussion and Analysis of Financial Conditions as of September 30, 1998, December 31, 1997 and September 30, 1997 and Results of Operations for the quarter and nine months ended September 30, 1998 and 1997 and for the year ended December 31, 1997. 3 FIRSTMERIT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - - ---------------------------------------
(In thousands) ----------------------------------------------- (Unaudited) (Unaudited) September 30 December 31 September 30 ----------------------------------------------- 1998 1997 1997 - - ------------------------------------------------------------------------------------------------------------- ASSETS Investment securities $ 1,305,137 1,116,787 1,062,998 Trading assets 2,636 Federal funds sold 21,564 33,100 35,092 Commercial loans 1,944,896 1,553,707 1,511,747 Mortgage loans 898,176 852,482 835,206 Installment loans 1,031,550 922,227 948,301 Home equity loans 285,666 250,513 241,780 Bankcard loans 93,872 103,041 92,715 Tax-free loans 8,738 8,947 12,334 Leases 149,577 143,958 147,301 -------------------------------------------- Loans less unearned income 4,412,475 3,834,875 3,789,384 Less allowance for possible loan losses 65,151 53,774 52,400 -------------------------------------------- Net loans 4,347,324 3,781,101 3,736,984 -------------------------------------------- Total earning assets 5,676,661 4,930,988 4,835,074 Cash and due from banks 196,785 166,742 188,773 Premises and equipment, net 109,474 99,765 100,108 Accrued interest receivable and other assets 275,688 109,966 113,888 -------------------------------------------- $ 6,258,608 5,307,461 5,237,843 ============================================ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand-non-interest bearing $ 848,853 769,187 736,020 Demand-interest bearing 527,950 470,601 440,913 Savings 1,452,517 1,278,933 1,270,439 Certificates and other time deposits 1,989,423 1,736,490 1,739,215 -------------------------------------------- Total deposits 4,818,743 4,255,211 4,186,587 Securities sold under agreements to repurchase and other borrowings 656,931 441,755 446,271 -------------------------------------------- Total funds 5,475,674 4,696,966 4,632,858 Accrued taxes, expenses, and other liabilities 87,940 80,159 84,624 -------------------------------------------- Total liabilities 5,563,614 4,777,125 4,717,482 Shareholders' equity: Series preferred stock, without par value: authorized and unissued 7,000,000 shares -- -- -- Common stock, without par value: authorized 160,000,000 shares; issued 68,142,671 68,127,314 and 67,989,020 shares, respectively 110,197 110,069 109,937 Capital surplus 32,437 -- -- Accumulated other comprehensive income 9,312 3,246 1,459 Retained earnings 565,664 525,755 511,872 Treasury stock, 1,527,768, 6,159,845 and 5,895,322 shares, respectively (22,616) (108,734) (102,907) -------------------------------------------- Total shareholders' equity 694,994 530,336 520,361 -------------------------------------------- $ 6,258,608 5,307,461 5,237,843 ============================================
See accompanying notes to consolidated financial statements. 4 FIRSTMERIT CORPORATION AND SUBSIDIARIES AVERAGE CONSOLIDATED BALANCE SHEETS LATEST SIX QUARTERS - - ---------------------------------------
(Dollars in thousands) (Unaudited) ------------------------------------ ------------------------------------ 1998 1997 ------------------------------------ ------------------------------------ 3rd 2nd 1st 4th 3rd 2nd - - ----------------------------------------------------------------------------------------------------------------- ASSETS Investment securities $1,333,760 1,232,309 1,128,798 1,072,571 1,070,448 1,091,932 Federal funds sold 33,420 10,524 3,479 136,589 18,417 17,686 Trading assets 583 Commercial loans 1,905,937 1,738,644 1,580,524 1,534,687 1,509,609 1,485,582 Mortgage loans 904,884 847,178 849,138 850,065 892,428 934,125 Installment loans 1,010,725 967,810 918,595 929,092 948,031 925,216 Home Equity loans 282,734 253,849 249,277 246,329 236,532 219,711 Credit card loans 94,074 93,169 96,613 94,244 88,954 87,108 Tax free loans 9,575 9,306 8,798 10,430 12,593 13,891 Leases 144,667 144,309 141,999 144,661 147,722 152,745 ------------------------------------ ------------------------------------ Loans less unearned income 4,352,596 4,054,265 3,844,944 3,809,508 3,835,869 3,818,378 Less allowance for possible loan losses 66,398 59,933 55,428 52,910 51,530 50,471 ------------------------------------ ------------------------------------ Net loans 4,286,198 3,994,332 3,789,516 3,756,598 3,784,339 3,767,907 Cash and due from banks 213,150 195,902 173,618 180,071 178,440 179,243 Premises and equipment, net 117,839 107,975 100,268 99,659 100,495 100,487 Accrued interest receivable and other assets 275,576 177,661 112,969 112,944 111,536 101,854 ------------------------------------ ------------------------------------ Total Assets $6,260,526 5,718,703 5,308,648 5,358,432 5,263,675 5,259,109 ==================================== =================================== LIABILITIES Deposits: Demand-non-interest bearing $ 885,338 821,827 745,761 756,838 741,827 738,417 Demand-interest bearing 543,738 511,625 466,334 452,685 447,256 447,398 Savings 1,455,952 1,374,759 1,284,677 1,275,827 1,273,592 1,283,787 Certificates and other time deposits 1,989,215 1,822,837 1,731,546 1,733,328 1,728,686 1,696,932 ------------------------------------ ------------------------------------ Total deposits 4,874,243 4,531,048 4,228,318 4,218,678 4,191,361 4,166,534 Securities sold under agreements to repurchase and other borrowings 621,551 524,924 456,187 502,553 466,525 495,178 ------------------------------------ ------------------------------------ Total funds 5,495,794 5,055,972 4,684,505 4,721,231 4,657,886 4,661,712 Accrued taxes, expenses and other liabilities 105,501 94,284 92,164 111,439 89,185 85,395 ------------------------------------ ------------------------------------ Total liabilities 5,601,295 5,150,256 4,776,669 4,832,670 4,747,071 4,747,107 SHAREHOLDERS' EQUITY 659,231 568,447 531,979 525,762 516,604 512,002 ------------------------------------ ------------------------------------ Total Liabilities and Equity $6,260,526 5,718,703 5,308,648 5,358,432 5,263,675 5,259,109 ==================================== ===================================
5 FIRSTMERIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - - ---------------------------------------
(Unaudited) (In thousands except per share data) --------------------------------------------------------- Quarters Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 96,531 85,422 271,647 251,187 Interest and dividends on securities: Taxable 18,932 15,829 53,031 48,503 Exempt from Federal income taxes 1,309 1,036 3,498 3,279 Interest on Federal funds sold 339 223 643 318 --------------------------- --------------------------- Total interest income 117,111 102,510 328,819 303,287 --------------------------- --------------------------- Interest expense: Interest on deposits: Demand-interest bearing 1,674 1,535 4,688 4,983 Savings 9,435 7,872 26,219 22,784 Certificates and other time deposits 26,589 23,460 73,872 67,795 Interest on securities sold under agreements to repurchase and other borrowings 7,768 5,848 20,108 17,185 --------------------------- --------------------------- Total interest expense 45,466 38,715 124,887 112,747 --------------------------- --------------------------- Net interest income 71,645 63,795 203,932 190,540 Provision for possible loan losses 5,151 6,182 16,057 15,376 --------------------------- --------------------------- Net interest income after provision for possible loan losses 66,494 57,613 187,875 175,164 --------------------------- --------------------------- Other income: Trust department income 3,968 3,290 11,534 9,689 Service charges on depositors' accounts 7,842 6,451 21,922 19,381 Credit card fees 5,464 3,836 14,265 10,429 Service fees - other 2,752 1,774 7,527 5,597 Securities gains (losses) 1,788 885 5,111 1,825 Gain on sales of loans, net 1,557 2,311 5,016 4,315 Other operating income 3,828 3,992 12,031 10,697 --------------------------- --------------------------- Total other income 27,199 22,539 77,406 61,933 --------------------------- --------------------------- 93,693 80,152 265,281 237,097 Other expenses: Salaries, wages, pension and employee benefits 26,863 23,082 75,936 69,552 Net occupancy expense 4,333 4,118 12,221 12,749 Equipment expense 3,788 2,854 10,437 9,568 Other operating expense 21,615 18,266 62,978 51,777 --------------------------- --------------------------- Total other expenses 56,599 48,320 161,572 143,646 --------------------------- --------------------------- Income before Federal income taxes 37,094 31,832 103,709 93,451 Federal income taxes 11,519 9,819 32,024 29,886 --------------------------- --------------------------- Net income $ 25,575 22,013 71,685 63,565 =========================== =========================== Other comprehensive income, net of tax Unrealized gain (losses) on available- for-sale securities 6,253 3,602 6,066 3,676 --------------------------- --------------------------- Comprehensive Income $ 31,828 25,615 77,751 67,241 =========================== =========================== Per share data based on average number of shares outstanding: Net Income - basic $ 0.39 0.35 1.13 1.01 =========================== =========================== Net Income - diluted $ 0.39 0.35 1.12 1.00 =========================== =========================== Dividends paid $ 0.16 0.145 0.48 0.45 Weighted-average shares outstanding - basic 65,418,593 62,229,074 63,339,086 62,936,930 Weighted-average shares outstanding - diluted 66,201,945 62,896,217 64,220,321 63,509,188
See accompanying notes to consolidated financial statements. 6 FIRSTMERIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - - ---------------------------------------------------------- Year Ended December 31, 1997 and Nine Months Ended September 30, 1998
(In Thousands) --------------------------------------------------------------------------------- Accumulated Other Total Common Capital Comprehensive Retained Treasury Shareholders' Stock Surplus Income Earnings Stock Equity ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 $ 107,343 -- (2,217) 477,839 (59,258) 523,707 Net Income -- -- -- 86,363 -- 86,363 Cash dividends ($0.61 per share) -- -- -- (38,447) -- (38,447) Stock options exercised 2,726 -- -- -- -- 2,726 Treasury shares purchased -- -- -- -- (49,476) (49,476) Market adjustment investment securities -- -- 5,463 -- -- 5,463 ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 $ 110,069 0 3,246 525,755 (108,734) 530,336 ========== ========== ========== ========== ========== ========== Net Income -- -- -- 71,685 -- 71,685 Cash dividends ($0.48 per share) -- -- -- (31,776) -- (31,776) Stock options exercised 128 -- -- -- -- 128 Treasury shares reissued - acquisition -- 25,919 -- -- 89,286 115,205 Treasury shares reissued - public offering -- 6,518 -- -- 20,806 27,324 Treasury shares reissued - stock options -- -- -- -- 2,564 2,564 Treasury shares purchased -- -- -- -- (26,538) (26,538) Market adjustment investment securities -- -- 6,066 -- -- 6,066 ---------- ---------- ---------- ---------- ---------- ---------- Balance at September 30, 1998 - Unaudited $ 110,197 32,437 9,312 565,664 (22,616) 694,994 ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 7 FIRSTMERIT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 - - ---------------------------------------------
(in thousands) ------- ------ 1998 1997 ------- ------ Operating Activities - - -------------------- Net income $71,685 63,565 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 16,057 15,376 Provision for depreciation and amortization 8,418 7,799 Amortization of investment securities premiums, net 1,020 2,328 Amortization of income for lease financing (8,482) (10,105) Gains on sales of investment securities, net (5,111) (1,825) Increase (decrease) deferred federal income taxes (7,518) 9,624 Increase in interest receivable (5,437) (1,354) Increase in interest payable 1,215 118 Amortization of values ascribed to acquired intangibles 1,067 1,408 Other increases (150,486) (22,802) -------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (77,572) 64,132 -------- -------- Investing Activities - - -------------------- Dispositions of investment securities: Available-for-sale -- sales 516,832 199,931 Available-for-sale -- maturities 206,456 155,786 Purchases of investment securities available-for-sale (900,899) (226,032) Net (increase) decrease in federal funds sold 11,536 (19,542) Net increase in loans and leases, except sales (573,798) (181,244) Sales of loans 0 45,651 Purchases of premises and equipment (19,594) (8,386) Sales of premises and equipment 1,467 2,618 -------- -------- NET CASH USED BY INVESTING ACTIVITIES (758,000) (31,218) -------- -------- Financing Activities - - -------------------- Net increase (decrease) in demand, NOW and savings deposits 310,599 (111,861) Net increase in time deposits 252,933 93,573 Net increase in securities sold under repurchase agreements and other borrowings 215,176 22,570 Cash dividends (31,776) (29,532) Purchase of treasury shares (26,538) (43,649) Treasury shares reissued -- acquisition 115,205 -- Treasury shares reissued 29,888 -- Proceeds from exercise of stock options 128 2,594 -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 865,615 (66,305) Increase (decrease) in cash and cash equivalents 30,043 (33,391) Cash and cash equivalents at beginning of year 166,742 222,164 -------- -------- Cash and cash equivalents at end of year $196,785 188,773 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: ================================================== Cash paid during the year for: Interest, net of amounts capitalized $66,452 58,700 Income taxes $47,406 31,745 ======== ========
See accompanying notes to consolidated financial statements. 8 FIRSTMERIT CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1998, December 31, 1997 and September 30, 1997 1. Organization - FirstMerit Corporation ("Corporation"), is a bank holding company whose principal assets are the common stock of its wholly owned subsidiary, FirstMerit Bank, N. A. In addition FirstMerit Corporation owns all of the common stock of Citizens Investment Corporation, Citizens Savings Corporation of Stark County, FirstMerit Community Development Corporation, FirstMerit Credit Life Insurance Company, and SF Development Corp. 2. Acquisitions - On May 22, 1998, the acquisition of CoBancorp Inc., a bank holding company headquartered in Elyria, Ohio with consolidated assets of approximately $644 million was completed. The merger, accounted for as a purchase, provides the Corporation with the leading deposit market share in Lorain County and provides access into the growing Columbus, Ohio market. At the time of the merger the value of the transaction was $174.1 million. In connection with the merger, the Corporation issued 3.897 million shares of its common stock (valued at $29.375/share), paid $50.0 million in cash, and assumed merger-related liabilities of approximately $9.6 million. The transaction created goodwill of approximately $136.5 million that will be amortized primarily over 25 years. The following table provides pro forma results of the previously separate operations as well as the operations on a combined basis. For the nine months ended September 30, 1998, CoBancorp results are presented separately through May 21, 1998, but included in FirstMerit's results from the date of purchase through September 30, 1998. Pro forma combined shares were calculated using the exchange rate of 1.586 shares for every share of CoBancorp and assumed 70% of CoBancorp shareholders received common stock. The following pro forma information is not necessarily indicative of the results which actually would have been obtained if the merger had been consummated in the past or which may be obtained in the future.
---------------------------------------- ------------------ ------------------ ----------------- ----------------- FirstMerit Pro Forma Pro Forma Corporation CoBancorp Adjustments Combined ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Year ended December 31, 1997: ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Interest income $407,825 48,141 1,415 457,381 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Net interest income 255,456 29,054 -4,604 279,906 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Net income 86,363 5,524 -7,650 84,237 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Weighted average diluted shares 63,537,328 3,497,150 67,419,864 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Earnings per diluted share $1.36 $1.58 $1.25 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Nine months ended September 30, 1998: ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Interest income $328,819 18,634 1,061 348,514 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Net interest income 203,932 11,380 -3,453 211,859 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Net income $71,685 2,035 -5,738 67,982 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Weighted average diluted shares 64,220,321 3,535,828 68,145,797 ---------------------------------------- ------------------ ------------------ ----------------- ----------------- Earnings per diluted share $1.12 0.58 $0.98 ---------------------------------------- ------------------ ------------------ ----------------- -----------------
9 On August 10, 1998, the Corporation signed a definitive agreement to acquire Signal Corp, a $1.9 billion bank holding company headquartered in Wooster, Ohio. Principal subsidiaries of Signal Corp include Signal Bank, N. A., Summit Bank, N. A., First Federal Savings Bank of New Castle (Pennsylvania), and Mobile Consultants, Inc. The merger will allow the Corporation to increase its market share in several key Northeast Ohio communities and marks the Corporation's entrance into Western Pennsylvania. Under the terms of the agreement, the fixed exchange ratio is 1.32 shares of FirstMerit common stock for each share of Signal and an exchange ratio of one share of FirstMerit preferred stock for each share of Signal preferred stock. Based on the Corporation's August 10, 1998 closing price of $28.19 per share, the transaction, which will be accounted for as a pooling of interests, is valued at $37.21 per share or $470 million. The merger has been approved by the Boards of Directors of both the Corporation and Signal and is subject to approval by the Corporation's and Signal's shareholders and regulatory authorities as well as customary conditions of closing. The transaction is expected to close in the first quarter 1999. On September 14, 1998, FirstMerit closed on the secondary underwritten public offering of 1.38 million shares of FirstMerit Common Stock. The reissuance of these shares was necessary to allow FirstMerit to treat the Security First Merger as a pooling of interests for accounting purposes. On October 23, 1998, the Corporation completed the acquisition of Security First Corp., a $678 million holding company headquartered in Mayfield Heights, Ohio. Subsidiaries of Security First Corp. included Security Federal Savings & Loan Association of Cleveland and First Federal Savings Bank of Kent were merged with and into FirstMerit Bank, N. A.. Under terms of the merger agreement, Security First Corp. was merged with and into the Corporation. The transaction was structured as a tax-free exchange at a fixed exchange ratio of 0.8855 shares of FirstMerit common stock for each share of Security First Corp. At the time of the merger, the transaction was valued at $22.58 per share, for a total value of $199 million. The acquisition was accounted for as a pooling of interests. The following pro forma information is not necessarily indicative of the results which actually would have been obtained if the merger had been consummated in the past or which may be obtained in the future.
------------------------------------------ ---------------------------- ------------------ ------------------ Pro Forma FirstMerit Corporation including Pro Forma CoBancorp Security First Combined ------------------------------------------ ---------------------------- ------------------ ------------------ Year ended December 31, 1997: ------------------------------------------ ---------------------------- ------------------ ------------------ Interest income $457,381 55,715 513,096 ------------------------------------------ ---------------------------- ------------------ ------------------ Net interest income 279,906 26,149 306,055 ------------------------------------------ ---------------------------- ------------------ ------------------ Net income 84,237 9,311 93,548 ------------------------------------------ ---------------------------- ------------------ ------------------ Weighted average diluted shares 67,419,864 8,718,437 75,140,040 ------------------------------------------ ---------------------------- ------------------ ------------------ Earnings per diluted share $1.25 1.11 1.24 ------------------------------------------ ---------------------------- ------------------ ------------------ ------------------------------------------ ---------------------------- ------------------ ------------------ Nine months ended September 30, 1998: ------------------------------------------ ---------------------------- ------------------ ------------------ Interest income 348,514 43,163 391,677 ------------------------------------------ ---------------------------- ------------------ ------------------ Net interest income 211,859 20,765 232,624 ------------------------------------------ ---------------------------- ------------------ ------------------ Net income 67,982 7,820 75,802 ------------------------------------------ ---------------------------- ------------------ ------------------ Weighted average diluted shares 68,145,797 8,665,867 75,819,422 ------------------------------------------ ---------------------------- ------------------ ------------------ Earnings per diluted share $0.98 0.92 1.00 ------------------------------------------ ---------------------------- ------------------ ------------------
The Corporation's previously announced stock repurchase programs have been suspended as of April 6, 1998. 10 3. Earnings per Share - The reconciliation of the numerator and denominator of basic earnings per share ("EPS") with that of diluted EPS is presented as follows:
Income Shares (Numerator) (Denominator) Per Share Amount THREE MONTHS ENDED SEPTEMBER 30, 1998: Basic EPS: Net income $25,575 65,418,593 $0.39 Effect of dilutive stock options 783,352 Diluted EPS: Net income plus assumed exercising of options $25,575 66,201,945 $0.39 NINE MONTHS ENDED SEPTEMBER 30, 1998: Basic EPS: Net income $71,685 63,339,086 $1.13 Effect of dilutive stock options 881,235 Diluted EPS: Net income plus assumed exercising of options $71,685 64,220,321 $1.12 THREE MONTHS ENDED SEPTEMBER 30, 1997: Basic EPS: Net income $22,013 62,229,074 $0.35 Effect of dilutive stock options 667,143 Diluted EPS: Net income plus assumed exercising of options $22,013 62,896,217 $0.35 NINE MONTHS ENDED SEPTEMBER 30, 1997: Basic EPS: Net income $63,565 62,936,930 $1.01 Effect of dilutive stock options 572,258 Diluted EPS: Net income plus assumed exercising of options $63,565 63,509,188 $1.00
11 4. Comprehensive Income - As of January 1, 1998, the Corporation adopted Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes new rules for reporting and display of comprehensive income and its components; however, the adoption of Statement No. 130 has no effect on the Corporation's net income, shareholders' equity, or earnings per share. Statement No. 130 requires unrealized gains or losses on available-for-sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in "other comprehensive income." Prior period financial information has been restated to reflect implementation of Statement No. 130. 5. New Accounting Standards - In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997, but is not required to be applied to interim period financial statements in the year of adoption. Statement No. 131 changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. In February 1998, the FASB issued Statement No. 132, "Employer's Disclosures about Pensions and Other Post Retirement Benefits." Statement No. 132 revises employer's disclosures about pension and other post retirement benefit plans but does not change the measure of recognition of those plans. The statement standardizes the disclosure requirements to the extent practicable, requires additional information on changes in the benefit obligations and the fair value of plan assets that will aid financial analysis, and eliminates certain disclosures that are no longer useful. Statement No. 132 is effective for fiscal years beginning after December 15, 1997. Interim period application in the year of adoption is not required. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 establishes accounting and reporting standards for derivative instruments and requires an entity to recognize all derivatives as either assets or liabilities in the Balance Sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge to various exposures. The accounting for changes in the fair value of a derivative (i.e., gains and losses) depends on the intended use of the derivative and its resulting designation. This statement shall be effective for all fiscal quarters beginning after June 15, 1999 (third quarter 1999 for the Corporation). 6. Management believes the interim consolidated financial statements reflect all adjustments consisting only of normal recurring accruals, necessary for fair presentation of the September 30, 1998 and 1997 statements of condition and the results of operations for the quarters and nine-month periods ended September 30, 1998 and 1997. 7. The Corporation cautions that any forward looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Corporation, involve risks and uncertainties and are subject to change based upon various factors. Actual results could differ materially from those expressed or implied. Reference is made to the section titled "Forward-looking Statements" in the Corporation's Form 10-K for the period ended December 31, 1997. 12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Average Consolidated Balance Sheet, Fully-tax Equivalent Interest Rates and Interest Differential (Dollars in thousands)
Three Months ended Three Months ended September 30, Year ended December 31, September 30, 1998 1997 1997 ----------------------------- ---------------------------- --------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ----------------------------- ---------------------------- --------------------------- ASSETS Investment securities $1,334,343 21,233 6.31% 1,095,505 71,126 6.49% 1,070,448 17,515 6.49% Federal funds sold 33,420 339 4.02% 41,636 2,250 5.40% 18,417 223 4.80% Loans, net of unearned income 4,352,596 96,669 8.81% 3,789,231 337,661 8.91% 3,835,869 85,541 8.85% Less allowance for possible loan losses 66,398 51,155 51,530 ---------- -------- ---------- ------- ---------- ------- Net loans 4,286,198 96,669 -- 3,738,076 337,661 -- 3,784,339 85,541 -- Cash and due from banks 213,150 -- -- 176,697 -- -- 178,440 -- -- Other assets 393,415 -- -- 201,871 -- -- 212,031 -- -- ---------- -------- ---------- ------- ---------- ------- Total assets $6,260,526 118,241 -- 5,253,785 411,037 -- 5,263,675 103,279 -- ========== ======== ========== ======= ========== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand- non-interest bearing $ 885,338 -- -- 733,394 -- -- 741,827 -- -- Demand- interest bearing 543,738 1,674 1.22% 448,976 6,467 1.44% 447,256 1,535 1.36% Savings 1,455,952 9,435 2.57% 1,279,859 30,839 2.41% 1,273,592 7,872 2.45% Certificates and other time deposits 1,989,215 26,589 5.30% 1,701,886 91,406 5.37% 1,728,686 23,460 5.38% ---------- -------- ---------- ------- ---------- ------- Total deposits 4,874,243 37,698 3.07% 4,164,115 128,712 3.09% 4,191,361 32,867 3.11% Federal funds purchased, securities sold under agreements to repurchase and 621,551 7,768 4.96% 477,454 23,657 4.95% 466,525 5,848 4.97% other borrowings Other liabilities 105,501 -- 92,598 -- 89,185 -- Shareholders' equity 659,231 -- 519,618 -- 516,604 -- ---------- -------- ---------- ------- ---------- ------- Total liabilities and shareholders' equity $6,260,526 45,466 -- 5,253,785 152,369 -- 5,263,675 38,715 -- ========== ======= ========== ======= ========== ======= Total earning assets $5,720,359 118,241 8.20% 4,926,372 411,037 8.34% 4,924,734 103,279 8.32% ========== ======= ========== ======= ========== ======= Total interest bearing liabilities $4,610,456 45,466 3.91% 3,908,175 152,369 3.90% 3,916,059 38,715 3.92% ========== ======= ========== ======= ========== ======= Net yield on earning assets 72,775 5.05% 258,668 5.25% 64,564 5.20% ======= ===== ======= ===== ======= ===== Interest rate spread 4.29% 4.44% 4.40% ===== ===== ===== *Interest income on tax-exempt securities and loans have been adjusted to a fully taxable equivalent basis. *Non-accrual loans have been included in the average balances.
13 RESULTS OF OPERATIONS FirstMerit Corporation's net income for the quarter ended September 30, 1998 was $25.6 million, a gain of 16.2 percent above third quarter 1997. Earnings per share on a diluted basis were $0.39, up 11.4 percent above prior year. For the third quarter, return on average equity (ROE) and return on average assets (ROA) were 15.4 percent and 1.62 percent, respectively. This compares to third quarter 1997 levels of 16.9 percent and 1.66 percent. For the nine-month period ended September 30, 1998, net income was $71.7 million, up 12.8 percent above prior year. On a diluted basis, earnings per share were $1.12, a gain of 12.0 percent above nine-month 1997 levels. ROE and ROA for the current nine-month period were 16.33 percent and 1.66 percent, respectively. The comparable ratios for the 1997 period were 16.35 percent and 1.63 percent. Net revenue on a fully tax-equivalent basis reached $98.2 million in the third quarter of 1998, compared with $86.2 million for the prior year period, a gain of 13.9 percent. Revenue growth was fueled by strong gains in both fee income and net interest income. For the nine-months year-to-date, net revenue was $278.8 million compared with $253.1 million the prior year, an increase of 10.2 percent. Net interest income on a fully tax-equivalent basis was $72.8 million for the third quarter of 1998, a gain of 12.7 percent above the level reported for the same 1997 period. Growth in average earning assets was 16.1 percent above third quarter 1997, reaching $5.7 billion. This growth more than offset a 2.9 percent, or 15 basis point, decline in net interest margin, from 5.20 percent in the third quarter of 1997 to 5.05 percent for the comparable 1998 period. Margins were lowered by falling interest rates that caused a larger decline in asset yields than in cost of funds. For the first nine months of 1998, net interest income rose 7.0 percent. For the same nine-month period, net interest margin was 5.17 percent compared to 5.27 percent in 1997. Excluding securities gains/losses from each quarter, non-interest income was $25.4 million compared to $21.7 million the prior year, an improvement of 17.4 percent. Major gains were reported for trust income, up 20.6 percent, credit card fees, up 42.4 percent, and other service fees, including ATM revenue, up 55.1 percent. For the nine-month period, non-interest income was up 20.3 percent above 1997 levels, accounting for 26.0 percent of net revenue compared to 23.0 percent of net revenue for the prior year period. Operating expenses were $56.6 million for the third quarter of 1998, an increase of 17.2 percent above the prior year level of $48.3 million. Of the $8.3 million increase, over 90 percent can be attributed to four categories: salaries and wages, up $3.3 million, or 18.4 percent, partially due to the development and implementation of certain teller initiatives; bankcard and loan processing costs, up $1.8 million, or 42.9 percent, 14 consistent with fee income increases in those categories; equipment expense, up $0.9 million, or 32.7 percent, related to the CoBancorp integration; and amortization of intangibles, up $1.6 million, or 330 percent, reflecting the amortization of CoBancorp goodwill for the full quarter. For the first nine months of 1998, operating expenses were $161.6 million versus $143.6 million in 1997, an increase of 12.5 percent. The third quarter and nine-months year-to-date efficiency ratios were 55.6 percent and 56.6 percent, respectively, compared to 55.5 percent and 56.2 percent in 1997. Assets exceeded the $6.2 billion level at quarter end, with earning assets comprising 91.7 percent of the total. At period end, total loans, net of unearned interest, were $4.3 billion, a gain of 16.4 percent above 1997 quarter-end levels. On an average basis, total loans were $4.4 billion, 13.5 percent above 1997 third quarter average levels. Commercial loans grew 26 percent to account for 43.8 percent of the portfolio, up from 39.3 percent, reflecting the impact of CoBancorp's strong commercial lending focus. Because of FirstMerit's continued shift to commercial and consumer loans, as well as opportunities in the secondary market, mortgage loans grew only 1.4 percent, and now comprise 20.8 percent of the portfolio, down from 23.3 percent the prior year. At September 30, 1998, non-performing assets were $19.3 million, or 0.44 percent of total loans and other real estate compared to $11.7 million, or 0.31 percent, for the same quarter last year. The quarterly increase in other real estate resulted from CoBancorp branch closures. The loan loss allowance as a percent of non performing loans was 417.61 percent compared to 478.58 percent at September 30, 1997. The 1997 asset quality results do not include CoBancorp totals. Total deposits grew 15.1 percent, ending the quarter at $4.8 billion. On an average basis, deposits were $4.9 billion for the third quarter, up 16.3 percent from year earlier levels. Improvement was recorded across-the-board. Total shareholders' equity grew $175 million, or 33.6 percent, from year earlier levels, reaching $695 million at third quarter end. The reduction in capital resulting from the $32.4 million of common shares repurchased during the last twelve months was more than offset by several items including: retained earnings of $53.8 million, net of cash dividends paid to shareholders; $115.2 million reduction in treasury shares in connection with the CoBancorp acquisition in the second quarter; and $27.3 million of additional capital from the secondary public offering in the third quarter in connection with the Security First acquisition. FirstMerit suspended its stock repurchase program on April 6, 1998 in connection with the Security First acquisition. At quarter end, there were 66.6 million shares outstanding compared with 62.1 million at the end of the prior year quarter. Diluted earnings per share for the third quarter were $0.39, an increase of 11.4% over last year's quarterly earnings of $0.35. For the nine months ended September 30, 1998, diluted earnings per share were $1.12, 12% higher than the $1.00 recorded for three quarters of 1997. The components of change in per share income for the 15 quarters and nine months ended September 30, 1998 and 1997 are summarized in the following table: CHANGES IN EARNINGS PER SHARE -----------------------------
Three months ended Nine months ended September 30, September 30, 1998/1997 1998/1997 ---------------------------------------------------------- Diluted net income per share September 30, 1997 $0.35 $1.00 Increases (decreases) due to: Net interest income - taxable equivalent 0.12 0.21 Provision for possible loan losses 0.02 -0.01 Other income 0.07 0.24 Other expenses -0.12 -0.28 Federal income taxes - taxable equivalent -0.03 -0.03 Change in share base -0.02 -0.01 ---------------------------------------------------------- Net change in diluted net income per share 0.12 0.04 ---------------------------------------------------------- Diluted net income per share September 30, 1998 $0.39 $1.12 ==========================================================
NET INTEREST INCOME Net interest income, the Corporation's principal source of earnings, is the difference between the interest income generated by earning assets (primarily loans and investment securities) and the total interest paid on interest bearing funds (namely deposits and other borrowings). For the purpose of this discussion, net interest income is presented on a fully-taxable equivalent ("FTE") basis, to provide a comparison among types of interest earning assets. That is, interest on tax-free securities and tax-exempt loans has been restated as if such interest were taxed at the statutory Federal income tax rate of 35%, adjusted for the non-deductible portion of interest expense incurred to acquire the tax-free assets. 16 Net interest income FTE for the quarter ended September 30, 1998 was $72.8 million compared to $64.6 million for the same period one year ago, an increase of $8.2 million. The 1998 results include the activity from the purchase acquisition of CoBancorp on May 22, 1998. The rise in net interest income occurred because higher interest income outpaced an increase in the interest paid on customer deposits and other bank borrowings. Higher interest income was a result of earning asset growth over the past twelve months. Specifically, an upsurge in loan and investment outstandings added $11.5 million and $4.2 million, respectively, to third quarter interest income when compared to the same 1997 period. The average loan yield for the 1998 third quarter was 8.81%, down 4 basis points from 8.85% earned for the same 1997 period. Lower earning asset yields resulted in $865 thousand of less interest income compared to the same prior year quarter. Similar to the situation with earning assets, the entire increase in interest expense was volume driven. Average balances in all customer deposit and wholesale borrowings increased over the 1997 third quarter. Higher certificate of deposit (CD) balances added $3.5 million of interest expense; increased savings/money market deposits and interest-bearing checking added $1.5 million; and borrowings on the wholesale market contributed $1.9 million more to quarter-to-quarter interest expense. The trends in interest income and expense noted for the quarters also existed for the year-to-date periods. That is, the increase in net interest income of $13.5 million was due to the rise in interest income ($25.6 million) being greater than the gain in interest expense ($12.1 million). Also, the increases in both interest income and interest expense were driven by volume as changes in asset and deposit rates had little effect. The following schedule illustrates in more detail the change in net interest income FTE by rate and volume components for both interest earning assets and interest bearing liabilities. 17 CHANGES IN NET INTEREST DIFFERENTIAL - FULLY-TAX EQUIVALENT RATE/VOLUME ANALYSIS (DOLLARS IN THOUSANDS)
Quarters ended Nine Months Ended September 30, September 30, 1998 and 1997 1998 and 1997 ------------- ------------- Increase (Decrease) Increase(Decrease) Interest Income/Expense Interest Income/Expense ----------------------- ----------------------- Volume Yield Rate Total Volume Yield Rate Total ---------------------------------------------------------------------------- INTEREST INCOME Investment Securities $4,199 -481 3,718 6,165 -1,298 4,867 Loans 11,476 -348 11,128 20,523 -65 20,458 Federal funds sold 152 -36 116 376 -51 325 ---------------------------------------------------------------------------- Total interest income $15,827 -865 14,962 27,064 -1,414 25,650 INTEREST EXPENSE Interest on deposits: Demand-interest bearing $297 -158 139 355 -650 -295 Savings 1,182 381 1,563 614 2,821 3,435 Certificates and other time deposits 3,482 -353 3,129 6,475 -398 6,077 Federal Funds Purchased, REPOs & other borrowings 1,937 -17 1,920 2,559 364 2,923 ---------------------------------------------------------------------------- Total interest expense 6,898 -147 6,751 10,003 2,137 12,140 ---------------------------------------------------------------------------- Net interest income $8,929 -718 8,211 17,061 -3,551 13,510 ============================================================================
NET INTEREST MARGIN The net interest margin, net interest income FTE divided by average earning assets, is affected by changes in the level of earning assets, the proportion of earning assets funded by non-interest bearing liabilities, the interest rate spread, and changes in the corporate tax rates. A meaningful comparison of the net interest margin requires an adjustment for the changes in the statutory Federal income tax rate noted above. The schedule below shows the relationship of the tax equivalent adjustment and the net interest margin. 18 NET INTEREST MARGIN (DOLLARS IN THOUSANDS)
Quarters Ended Nine Months Ended September 30, September 30, ---------------------------------------------------------------------- 1998 1997 1998 1997 --------------------------------- ----------------------------------- Net interest income per financial statements $71,645 63,795 203,932 190,540 Tax equivalent adjustment 1,130 769 2,567 2,449 --------------------------------- ----------------------------------- Net interest income - FTE $72,775 64,564 206,499 192,989 ================================= =================================== Average earning assets $5,720,359 4,924,734 5,340,665 4,892,853 ================================= =================================== Net interest margin 5.05% 5.20% 5.17% 5.27% ======================================================================
Average loans outstanding for the quarter ended September 30, 1998 were $4.353 billion, up $516.7 million or 13.5%, from $3.836 billion for the same quarter last year. Outstanding loans of CoBancorp at the acquisition date of May 22, 1998 approximated $400 million. The most notable increases occurred in commercial loans, up $396.3 million or 26.3%; installment loans, up $62.7 million or 6.6%; home equity loans up $46.2 million or 19.5% and credit card outstandings up $5.1 million or 5.8%. Similarly, for three quarters of 1998, average loan outstandings totaled $4.091 billion, up $308.7 million or 8.2% from $3.783 billion for the prior year. Average outstanding loans for the quarter and nine-month periods equaled 76.1% and 76.6% of average earning assets, respectively. Average total deposits were $4.874 billion during the 1998 third quarter, up $682.9 million over the same period last year. Outstanding deposits of CoBancorp at the acquisition date were approximately $560 million. The mix of deposits and borrowed funds changed very little from third quarter 1997 to third quarter this year. Average CDs totaled $1.989 billion at September 30, 1998, up 15.1% from $1.729 billion at September 30, 1997. On a percentage basis, average CDs were 43% and 44% of total interest bearing funds at September 30, 1998 and 1997, respectively; average savings deposits, including money market accounts, were approximately 32% and 33% of interest bearing funds at September 30, 1998 and 1997, respectively; interest-bearing demand deposits made up 11% of total interest bearing funds at both September 30, 1998 and 1997; and wholesale borrowings made up approximately 13% of total interest-bearing deposits at September 30, 1998 and 12% at September 30, 1997. During both third quarter periods, interest bearing liabilities funded approximately 80% of average earning assets. 19 In summary, including the effect of the CoBancorp acquisition, on a percentage basis, loan growth over the past year continues to occur mainly in higher yielding consumer and commercial credits resulting in a lower concentration of mortgage loan outstandings. Some of the decline in mortgage balances is also attributable to the Corporation's practice of securitizing and selling mortgage loans when favorable conditions exist. The funding mix feeding the loan growth, has remained constant between borrowing categories. OTHER INCOME Other income for the quarter ended September 30, 1998 was $27.2 million, an increase of $4.7 million, or 21%, over the $22.5 million earned during the same period last year. Excluding securities sales, the increase in other income was $3.8 million, or 17%. The securities being sold are predominantly mortgage-backed securities where prepayments, in management's opinion, are occurring at a too rapid pace. As a result, the MBS' are sold for a gain and the proceeds are redeployed in commercial and non-mortgage consumer credits where prepayment rates are lower. For the nine-month period, other income totaled $77.4 million compared to $61.9 million a year ago. The results of CoBancorp from May 22, 1998 to August 31, 1998 contributed $1.3 million to total other income. Results from September 1, 1998 to September 30, 1998 for CoBancorp are intermingled with results of FirstMerit and are not tracked separately. Trust department income for the third quarter was $4.0 million, up $0.7 million from the $3.3 million earned one year ago. Service charges on depositors' accounts increased 21.6% to $7.8 million from $6.5 million for last year's second quarter. Credit card fees, including merchant services, increased 42.4% to $5.5 million for the quarter compared to $3.8 million for the three months ended September 30, 1997. Other service fees, including Automated Teller Machine (ATM) revenue, rose from $1.8 million during the 1997 third quarter to $2.8 million for same 1998 period. In banking, other income (fee income) is an important complement to net interest income as it provides a source of revenues not sensitive to the interest rate environment. OTHER EXPENSES Other expenses were $56.6 million for the third quarter, an increase of $8.3 million, or 17.1%, over the $48.3 million recorded during the same quarter last year. Operating expenses incurred by CoBancorp from May 22, 1998 through August 31, 1998 are responsible for $6.5 million of the increase. 20 The "lower-is-better" efficiency ratio for the quarter was 55.58% compared to 55.49% a year ago. For the three-quarter periods, the efficiency ratios were 56.59% and 56.20% for 1998 and 1997, respectively. The third quarter efficiency ratio indicates that it took 55.58 cents to make one dollar's profit. Excluding CoBancorp results from July 1, 1998 through August 31, 1998, salaries, wages, pension and employee benefits, the largest component of other expenses, increased 10% during the quarter to $25.4 million. For the nine-month period, excluding CoBancorp results from the acquisition date of May 22, 1998 through August 31, 1998, salaries, wages, pension and employee benefits rose 6% to $73.5 million. The Corporation's annual salary increases contributed significantly to the overall rise in personnel costs. Equipment expense for the quarter was $3.8 million compared to $2.9 million for the same 1997 quarter. The increase in equipment expense is due to operating leases on computer hardware and storage upgrades. Other operating expenses were $21.6 million including CoBancorp., up $3.3 million from third quarter last year. The largest increases were in processing fees, up $1.8 million and amortization of intangibles, up $1.6 million. Three quarters' results with CoBancorp produced other operating costs of $63.0 million versus $51.8 million last year. The largest increases in the year-to-date periods occurred in processing fees, up $5.6 million, professional services, up $2.1 million, telecommunication expenses up $0.8 million and amortization of intangibles, up $2.4 million. 21 FINANCIAL CONDITIONS INVESTMENT SECURITIES All investment securities of the Corporation are classified as available for sale. The available for sale classification provides the Corporation with more flexibility to respond, through the portfolio, to changes in market interest rates, or to increases in loan demand or deposit withdrawals. The book value and market value of investment securities classified as available for sale are as follows:
September 30, 1998 ------------------ Gross Gross Book Unrealized Unrealized Market Value Gains Losses Value ---------------- ---------------- ---------------- ---------------- U.S. Treasury securities and U.S. Government agency $ 630,490 7,599 601 637,488 obligations Obligations of state and political subdivisions 110,532 1,058 1 111,589 Mortgage-backed securities 379,190 6,886 39 386,037 Other securities 170,594 1,511 2,082 170,023 ---------------- ---------------- ---------------- ---------------- $ 1,290,806 17,054 2,723 1,305,137 ================ ================ ================ ================ Book Value Market Value ---------------- ---------------- Due in one year or less $ 83,636 84,042 Due after one year through five years 240,657 244,419 Due after five years through ten years 216,586 220,010 Due after ten years 749,927 756,666 ---------------- ---------------- $ 1,290,806 1,305,137 ================ ================
The book value and market value of investment securities including mortgage-backed securities and derivatives at September 30, 1998, by contractual maturity, are shown above. Expected maturities will differ from contractual maturities based on the issuers' right to call or prepay obligations with or without call or prepayment penalties. The carrying value of investment securities pledged to secure trust and public deposits and for purposes required or permitted by law amounted to approximately $1,011.2 22 million at September 30, 1998, $830.0 million at December 31, 1997 and $791.3 million at September 30, 1997. Securities with remaining maturities over five years reflected in the foregoing schedule consist of mortgage and asset backed securities. These securities are purchased within an overall strategy to maximize future earnings taking into account an acceptable level of interest rate risk. While the maturities of these mortgage and asset backed securities are beyond five years, these instruments provide periodic principal payments and include securities with adjustable interest rates, reducing the interest rate risk associated with longer term investments. LOANS Total loans outstanding at September 30, 1998 amounted to $4.413 billion compared to $3.835 billion at December 31, 1997 and $3.789 billion at September 30, 1997. The purchase of CoBancorp on May 22, 1998 added $391.1 million to total loans. Including CoBancorp loans outstandings, commercial loans were $1.945 billion, or 28.7% higher than last year's September 30 total; mortgage loans were $898.2 million, up 7.5%; and installment, home equity, bankcard, tax-free, and leases, (on a combined basis) were $1.569 billion, up 8.8%. Through securitization and sales of single-family mortgages and sales of pools of unsecuritized mortgage loans, the Corporation continues to change its loan mix from lower yielding mortgage loans to higher earning commercial and non-mortgage consumer credits. ASSET QUALITY Total nonperforming assets (non-accrual loans, restructured loans, and other real estate) amounted to $19.3 million at September 30, 1998 or 0.44% of total outstanding loans and other real estate. At December 31, 1997, nonperforming assets totaled $13.6 million or 0.35% of outstanding loans and other real estate compared to $11.7 million or 0.31% of outstanding loans and other real estate at September 30, 1997. Impaired loans are loans for which, based on current information or events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans must be valued based on the present value of the loans' expected future cash flows at the loans' effective interest rates, at the loans' observable market prices, or the fair value of the underlying collateral. Under the Corporation's credit policies and practices, and in conjunction with provisions within Statements No. 114 and No. 118, all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans, meet the definition of impaired loans. 23
(Dollars in thousands) September 30, December 31, September 30, 1998 1997 1997 ------------------ ---------------------- ------------------- Impaired Loans: Non-accrual $13,441 11,185 6,753 Restructured 86 89 90 --------------------------------------------------------------------------------------------------------------- Total impaired loans 13,527 11,274 6,843 ------------------ ---------------------- ------------------- Other Loans: Non-accrual 2,074 1,434 4,106 Restructured 0 0 0 --------------------------------------------------------------------------------------------------------------- Total other nonperforming loans 2,074 1,434 4,106 --------------------------------------------------------------------------------------------------------------- Total nonperforming loans 15,601 12,708 10,949 --------------------------------------------------------------------------------------------------------------- Other real estate (ORE) 3,664 908 772 ------------------ ---------------------- ------------------- Total nonperforming assets 19,265 13,616 11,721 =============================================================================================================== Loans past due 90 days or more $14,258 11,166 8,641 accruing interest =============================================================================================================== Total nonperforming assets as a 0.44% 0.35% 0.31% percent of total loans and ORE ===============================================================================================================
N/A = Not Available There is no concentration of loans in any particular industry or group of industries. Most of the Corporation's business activity is with customers located within the state of Ohio. 24 ALLOWANCE FOR LOAN LOSSES The allowance for possible loan losses at June 30, 1998 totaled $65.7 million, or 1.53% of total loans outstanding compared to $53.8 million, or 1.40% and $50.9 million, or 1.31% at December 31, 1997 and June 30, 1997, respectively.
Nine months ended Year ended Nine months ended Dollars in thousands September 30, December 31, September 30, 1998 1997 1997 --------------------- ----------------------- --------------------- Allowance - beginning of period $53,774 49,336 49,336 Add: allowance from CoBancorp purchase 8,215 Loans charged off: Commercial, financial, agricultural 3,431 1,618 1,274 Installment to individuals 16,429 23,779 17,747 Real estate 827 574 444 Lease financing 940 1,290 795 Total charge-offs 21,627 27,261 20,260 Recoveries: Commercial, financial, agricultural 1,172 1,121 1,033 Installment to individuals 6,481 8,386 6,418 Real estate 735 123 157 Lease financing 344 476 340 Total recoveries 8,732 10,106 7,948 Net charge-offs 12,895 17,155 12,312 Provision for possible loan losses 16,057 21,593 15,376 --------------------- ----------------------- --------------------- Allowance - end of period $65,151 53,774 52,400 ===================== ======================= ===================== Annualized net charge offs as a percent of average loans 0.42% 0.45% 0.44% Allowance for possible loan losses: As a % of loans outstanding at end of period 1.48% 1.40% 1.38% As a multiple of annualized net charge offs 3.78X 3.13X 3.18X
25 The Corporation's Credit Policy Division manages credit risk by establishing common credit policies for its subsidiary banks, participating in approval of their largest loans, conducting reviews of their loan portfolios, providing them with centralized consumer underwriting, collections and loan operation services, and overseeing their loan workouts. The Corporation's objective is to minimize losses from its commercial lending activities and to maintain consumer losses at acceptable levels that are stable and consistent with growth and profitability objectives. 26 DEPOSITS The following schedule illustrates the change in composition of the average balances of deposits and average rates paid for the noted periods.
(Dollars in Thousands) Three months and year ended -------------------------------------------------------------------------------- September 30, 1998 December 31, 1997 September 30, 1997 Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------------------------- ------------------------- ------------------------- Demand Deposits - non-interest bearing $885,338 - 733,394 - 724,767 - Demand Deposits - interest bearing 543,738 1.22% 448,976 1.44% 447,183 1.49% Savings Deposits 1,455,952 2.57% 1,279,859 2.41% 1,281,763 2.38% Certificates and other time deposits 1,989,215 5.30% 1,701,886 5.37% 1,691,288 5.36% --------------- -------------- -------------- $4,874,243 3.07% 4,164,115 3.09% 4,145,001 3.08% =============== ============== ==============
The following table summarizes the certificates and other time deposits in amounts of $100,000 or more as of September 30, 1998 by time remaining until maturity.
(Dollars in Thousands) Amount Maturing in: Under 3 months $303,753 3 to 12 months 147,973 Over 12 months 40,103 ----------------- $491,829 =================
27 CAPITAL RESOURCES Shareholders' equity at September 30, 1998 totaled $695.0 million compared to $530.3 million at December 31, 1997 and $520.4 million at September 30, 1997. The significant increase from last year periods was primarily due to the second quarter 1998 acquisition of CoBancorp, Inc. The following table reflects the various measures of capital:
As of As of As of September 30, December 31, September 30, 1998 1997 1997 (In thousands) Total equity $ 694,994 11.11% 530,336 9.99% 520,361 9.93% Common equity 694,994 11.11% 530,336 9.99% 520,361 9.93% Tangible common equity (a) 685,682 10.96% 527,771 9.95% 517,551 9.88% Tier 1 capital (b) 533,879 10.25% 516,388 12.30% 508,247 11.53% Total risk-based capital (c) 599,007 11.50% 568,886 13.55% 560,647 12.72% Leverage (d) 533,879 8.74% 516,388 9.66% 508,247 9.68%
(a) Common equity less all intangibles; computed as a ratio to total assets less intangible assets. (b) Shareholders' equity minus net unrealized holding gains on equity securities, plus or minus net unrealized holding losses or gains on available for sale debt securities, less goodwill; computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines. (c) Tier 1 capital plus qualifying loan loss allowance, computed as a ratio to risk-adjusted assets, as defined in the 1992 risk-based capital guidelines. (d) Tier 1 capital; computed as a ratio to the latest quarter's average assets less goodwill. The risk-based capital guidelines issued by the Federal Reserve Bank in 1988 require banks to maintain capital equal to 8% of risk-adjusted assets effective December 31, 1993. At September 30, 1998 the Corporation's risk-based capital equaled 11.50% of risk adjusted assets, exceeding minimum guidelines. The cash dividend of $0.16 paid in the third quarter has an indicated annual rate of $0.64 per share. 28 YEAR 2000 READINESS The Year 2000 issue is the result of computer programs being written using two digits rather than four to define an applicable year. Any of a company's hardware, date-driven automated equipment, or computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This faulty recognition could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. FirstMerit has based its plans on regulatory guidelines published by the Federal Financial Institutions Examination Council (FFIEC). The FFIEC considers five general phases: Awareness, Assessment, Renovation, Validation and Implementation. The five phases are explained below along with FirstMerit's status at September 30, 1998: Awareness: The Awareness phase defines the Year 2000 problem, gains executive level support and establishes an overall strategy. FirstMerit began working on the Year 2000 issue in 1996 with identification of major vendors and their compliance status. Significant progress has been made in the implementation of the strategy for Year 2000 compliance. Executive Management has been proactive in the management of the project and contracted with consultants to assist in performing the assessment and formulating a strategy. The awareness phase has expanded to include a widespread customer awareness program to help educate customers on the Year 2000 issue and allow monitoring of FirstMerit's progress. Assessment: The Assessment phase defines the size and complexity of the problem and the magnitude of the effort to address Year 2000 issues. FirstMerit completed the assessment phase for all mainframe and microcomputer systems during the first quarter of 1998. FirstMerit has 82 mainframe applications of which 30 are considered "mission critical." The majority of the applications are vendor packages. The "mission critical" applications are given priority and all 30 are on schedule to be Year 2000 ready by December 31, 1998 or earlier. Significant microcomputer software and hardware upgrades for Year 2000 compliance are substantially completed. The assessment of non-information systems such as security systems, elevators, etc. was completed during the second quarter 1998. Renovation: The purpose of the Renovation phase is to ensure all date routines have been corrected to properly address Year 2000 dates. FirstMerit has completed the majority of the renovation for the in-house written code and the installation of vendor-supplied upgrades for the "mission critical" applications. Renovation and vendor software implementation is in process for the "non-mission critical" applications. Either renovation of in-house code or installation of Year 2000 compliant software is substantially complete for 26 of 30 mission critical applications. Of the remaining four applications, three are small in scope and the one was delayed until we received the Year 2000 compliant version of the vendor software. The renovation of the remaining 29 mission critical applications as well as non-mission critical applications is still on target to be completed before year-end 1998. Validation: The Validation phase consists of significant testing. FirstMerit has started the extensive testing of both in-house and vendor written systems as well as the various connections to other systems (internal and external). Non-information systems such as vaults and security systems are also in the process of being tested. Testing guidelines have been issued to ensure consistency and completeness throughout the organization. Integrated testing is in process to ensure the applications will work together. Core systems such as Certificates of Deposit, Demand Deposit, Installment Loan and Savings have been tested with various different future dates and are Year 2000 compliant. Of the 30 mission critical applications, 21 have been successfully tested or are in the process of being tested, as are many of the non-mission critical systems. Implementation: During the Implementation phase, systems are certified as Year 2000 compliant and placed into production. FirstMerit has been placing systems, once renovated and validated, into production throughout 1998. The majority of the mainframe systems continue to be on schedule to be renovated, validated and implemented into production during 1998. Some of the non-mission critical applications will be tested and implemented by March 31, 1999. Another area of concern mentioned by the FFIEC is the area of contingency planning where alternative measures are enacted throughout the organization in event of a Year 2000 caused problem. Business areas have reviewed departmental Year 2000 risks and are incorporating changes to their contingency plans. "Drop dead dates" which have been developed will act as a trigger for use of alternate vendors, suppliers, outside resources, etc., if necessary. Vendors for mission critical applications have been closely monitored throughout the project to identify any potential areas of concern. Offsite Integrated Testing - During the weekend of October 10 - 11, 1998, the Corporation performed an offsite Year 2000 test at our "hotsite" location. This integrated test provided the opportunity to verify various mission critical pieces of operating software as well as twelve mission critical business applications. Year 2000 aged data was used in an integrated environment without affecting normal production activities (the reason for using the offsite location). The test was successful and all major objectives were met. Integrated testing will be performed during the fourth quarter 1998 and througout 1999 to ensure Year 2000 compliance. The Corporation continues to work very hard to ensure Year 2000 does not affect our customers. The majority of Project Year 2000 remains on schedule to be completed during 1998, allowing 1999 for additional testing and follow-up. We do not anticipate any interruptions in normal business activities. 30 The Corporation's total Year 2000 readiness project costs and estimates to complete include the estimated costs and time associated with the impact of a third party vendor's Year 2000 issues and are based on presently available information. There can be no guarantees, however, that the systems and applications of other companies on which the Corporation's systems and applications rely will be timely converted or that a failure to convert by another company, or a conversion that is incompatible with the Corporation's systems and applications, would not have material adverse effect on the Corporation. The total remaining cost of the Year 2000 readiness project is estimated at $3.6 million and is being funded through operating cash flows, which will be expensed as incurred over the next two years, and is not expected to have a material adverse effect on the Corporation's results of operations. As of September 30, 1998, the Corporation has incurred and expensed approximately $2.1 million related to the assessment of, and preliminary efforts in connection with, the Year 2000 readiness project and development of a remediation plan. The costs of the Year 2000 readiness project and the date on which the Corporation plans to complete Year 2000 remediation are based on management's best estimates, which were derived utilizing assumptions of future events including the continued availability of certain resources, third party vendor remediation plans and other factors. There can be no guarantee, however, that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of trained programming personnel, the ability to locate and correct all relevant computer coding, and similar uncertainties. 31 PART II. - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2(a) Agreement of Affiliation and Plan of Merger dated August 10, 1998 by and between FirstMerit Corporation and Signal Corp (incorporated by reference from Exhibit 2(a) to the Form 8-K filed by the registrant on August 18, 1998) 2(b) Signal Corp Stock Purchase Option dated August 11, 1998 (incorporated by reference from Exhibit 2(b) to the Form 8-K filed by the registrant on August 18, 1998) 3(a) Amended and Restated Articles of Incorporation of FirstMerit Corporation (Incorporated by reference from Exhibit 3(a) to the Form 8-K filed by the registrant on April 9, 1998) 3(b) Amended and Restated Code of Regulations of FirstMerit Corporation (incorporated by reference from Exhibit 3(b) to the Form 8-K filed by the registrant on April 9, 1998) 4(a) Shareholders Rights Agreement dated October 21, 1993, between FirstMerit Corporation and FirstMerit Bank, N.A., as amended and restated May 20, 1998 (incorporated by reference from Exhibit 4 to the Form 8-A/A filed by the registrant on June 22, 1998) 4(b) Instrument of Assumption of Indenture between FirstMerit Corporation and NBD Bank, as Trustee, dated October 23, 1998 regarding FirstMerit Corporation's 6 1/4% Convertible Subordinated Debentures, due May 1, 2008 10(a) Employment Agreement dated October 23, 1998 for Charles F. Valentine 10(b) SERP Agreement dated October 23, 1998 for Charles F. Valentine 10(c) Employment Agreement dated October 23, 1998 for Austin J. Mulhern 10(d) SERP Agreement dated October 23, 1998 for Austin J. Mulhern 10(e) The Security First 1987 Stock Option and Incentive Plan (incorporated by reference from Exhibit 4.2 to Form S-8 filed with the Securities and Exchange Commission on October 26, 1998) 10(f) The Security First 1996 Stock Option and Incentive Plan (incorporated by reference from Exhibit 4.3 to Form S-8 filed with the Securities and Exchange Commission on October 26, 1998) 10(g) The First Kent Financial Corporation 1994 Stock Option Plan (incorporated by reference from Exhibit 4.4 to Form S-8 filed with the Securities and Exchange Commission on October 26, 1998) 21 Subsidiaries of FirstMerit Corporation 27 Financial Data Schedule 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTMERIT CORPORATION By: /s/AUSTIN J. MULHERN ---------------------------------------- Austin J. Mulhern, Senior Vice President and Chief Financial Officer DATE: November 13, 1998 EX-4.B 2 EXHIBIT 4(B) 1 EXHIBIT 4(b) INSTRUMENT OF ASSUMPTION OF INDENTURE KNOW ALL MEN BY THESE PRESENTS THAT: WHEREAS, Security First Corp., a Delaware corporation ("Security"), and NBD Bank, a Michigan banking corporation (formerly known as NBD Bank, National Association), Trustee ("NBD") are parties to that certain Indenture dated as of May 5, 1993 ("Indenture"), relating to creation and disposition of those certain 6 1/4% Convertible Subordinated Debentures due May 1, 2008 ("Securities"); and WHEREAS, FirstMerit Corporation, an Ohio corporation ("FirstMerit"), and Security are parties to a certain Agreement of Affiliation and Plan of Merger dated April 5, 1998 (the "Agreement"), pursuant to which for the consideration and upon other terms and conditions therein prescribed, Security is this day merging with and into FirstMerit (the "Merger"); and WHEREAS, in connection with the Merger, FirstMerit shall as a matter of corporate law, assume and agree to pay, perform and discharge all liabilities and duties of Security, including all of its obligations under the Indenture and the Securities; and WHEREAS, the Indenture requires that in connection with a permitted merger of Security, the successor entity of Security in such a merger is required to expressly assume all of Security's obligations under the Indenture and the Securities; NOW, THEREFORE, in consideration of the premises and in accordance with the provisions of the Agreement, and for other good and valuable consideration, the receipt of which is hereby acknowledged: 1. FirstMerit hereby assumes and agrees to perform and discharge all of Security's obligations and duties under the Indenture and the Securities to the fullest extent required of Security thereunder. 2. FirstMerit hereby acknowledges that the Holder of a Security may hereafter convert such Security into the kind and amount of FirstMerit shares of common stock and cash in lieu of fractional shares, as such Holder would have owned immediately after the Merger in accordance with the terms and conditions of the Agreement, had the Holder converted the Security immediately before the effective date of the Merger. FirstMerit hereby expressly agrees to make such adjustments with respect to Securities as are provided in Article 11 of the Indenture, to the extent applicable to circumstances of FirstMerit occurring after the Merger. 3. Security hereby assigns, transfers and hereby delivers to FirstMerit all of its rights, books and records pertaining to the Indenture and the Securities. 2 IN WITNESS WHEREOF, FirstMerit has caused this instrument to be executed on its behalf by duly authorized officer, this 23rd day of October, 1998.
ATTEST: FIRSTMERIT CORPORATION /s/ Terry E. Patton By:/s/ Gary J. Elek - - ------------------------------------ --------------------------------- Terry E. Patton, Secretary Title: Senior Vice President ------------------------------
ACCEPTANCE AND ACKNOWLEDGMENT: NBD Bank, as Trustee under that certain Indenture dated as of May 5, 1993 ("Indenture"), hereby acknowledges receipt of the Instrument of Assumption of Indenture executed and delivered by FirstMerit Corporation the date hereof ("Assumption"), and hereby accepts the Assumption as being compliant with the requirements and conditions of the Indenture relating to a merger of Security First Corp. with any person, as of this 23rd day of October, 1998.
ATTEST: NBD BANK, TRUSTEE /s/ Monica M. Barbour By:/s/ Alexis M. Johnson - - ------------------------------------ --------------------------------- First Vice president and Legal Counsel Title: Ass't Vice President ------------------------------
3 ================================================================================ SECURITY FIRST CORP. AND NBD BANK, NATIONAL ASSOCIATION, TRUSTEE ______________________ Indenture Dated as of May 5, 1993 ______________________ $9,775,000 6 1/4% Convertible Subordinated Debentures due May 1, 2008 ================================================================================ 4 TABLE OF CONTENTS
Article Section Heading Page - - ------- ------- ------- ---- PARTIES ................................................ 1 RECITALS ............................................... 1 1 DEFINITIONS, INCORPORATION BY REFERENCE AND RULES OF CONSTRUCTION ........................................... 1 1.01 Definitions ............................................ 1 1.02 Other Definitions ...................................... 3 1.03 Incorporation by Reference of Trust Indenture Act ...... 3 1.04 Rules of Construction .................................. 4 2 THE SECURITIES ......................................... 4 2.01 Form and Dating of Securities .......................... 4 2.02 Execution and Authentication ........................... 4 2.03 Registrar, Paying Agent and Conversion Agent ........... 5 2.04 Paying Agent to Hold Money in Trust .................... 5 2.05 Holder Lists ........................................... 6 2.06 Transfer and Exchange .................................. 6 2.07 Replacement Securities ................................. 6 2.08 Outstanding Securities ................................. 7 2.09 Securities Held by the Company or an Affiliate ......... 7 2.10 Temporary Securities ................................... 7 2.11 Cancellation ........................................... 7 2.12 Defaulted Interest ..................................... 8 3 REDEMPTION ............................................. 8 3.01 Right of Redemption .................................... 8 3.02 Notices to Trustee ..................................... 8 3.03 Selection of Securities to be Redeemed ................. 9 3.04 Notice of Redemption ................................... 9 3.05 Effect of Notice of Redemption ......................... 10 3.06 Deposit of Redemption Price ............................ 10 3.07 Securities Redeemed in Part ............................ 10 3.08 Conversion Arrangement on Call for Redemption .......... 10 4 SINKING FUND ........................................... 11 4.01 Sinking Fund Payments .................................. 11 4.02 Satisfaction of Sinking Fund Payments with Securities .. 11 4.03 Redemption of Securities for Sinking Fund .............. 12
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Article Section Heading Page - - ------- ------- ------- ---- 5 COVENANTS .............................................. 12 5.01 Payment of Securities .................................. 12 5.02 SEC Reports ............................................ 12 5.03 Compliance Certificate ................................. 13 5.04 Limitation on Disposition of Voting Stock of Security Federal ................................................ 13 5.05 Existence .............................................. 14 5.06 Maintenance of Properties .............................. 14 5.07 Payment of Taxes and Other Claims ...................... 15 6 SUCCESSORS ............................................. 15 6.01 When Company May Merge, etc ............................ 15 7 DEFAULTS AND REMEDIES .................................. 16 7.01 Events of Default ...................................... 15 7.02 Acceleration ........................................... 17 7.03 Other Remedies ......................................... 18 7.04 Waiver of Past Defaults ................................ 18 7.05 Control by Majority .................................... 18 7.06 Limitation on Suits .................................... 18 7.07 Rights of Holders to Receive Payment ................... 19 7.08 Collection Suit by Trustee ............................. 19 7.09 Trustee May File Proofs of Claim ....................... 19 7.10 Priorities ............................................. 20 7.11 Undertaking for Costs .................................. 20 8 TRUSTEE ................................................ 20 8.01 Duties of Trustee ...................................... 20 8.02 Rights of Trustee ...................................... 21 8.03 Individual Rights of Trustee ........................... 22 8.04 Trustee's Disclaimer ................................... 22 8.05 Notice of Defaults ..................................... 22 8.06 Reports by Trustee to Holders .......................... 22 8.07 Compensation and Indemnity ............................. 23 8.08 Replacement of Trustee ................................. 23 8.09 Successor Trustee by Merger, etc ....................... 24 8.10 Eligibility, Disqualification .......................... 25 8.11 Preferential Collection of Claims Against Company ...... 25 9 DISCHARGE OF INDENTURE ................................. 25 9.01 Termination of Company's Obligations ................... 25 9.02 Application of Trust Money ............................. 26 9.03 Repayment to Company ................................... 26
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Article Section Heading Page - - ------- ------- ------- ---- 10 AMENDMENTS ............................................. 26 10.01 Without Consent of Holders ............................. 26 10.02 With Consent of Holders ................................ 27 10.03 Supplemental Indenture ................................. 27 10.04 Revocation and Effect of Consents ...................... 28 10.05 Notation on or Exchange of Securities .................. 28 10.06 Trustee Protected ...................................... 28 11 CONVERSION ............................................. 28 11.01 Conversion Privilege ................................... 28 11.02 Conversion Procedure ................................... 29 11.03 Fractional Common Shares ............................... 29 11.04 Taxes on Conversion .................................... 30 11.05 Company to Provide Common Shares ....................... 30 11.06 Adjustment for Change in Capital Shares ................ 30 11.07 Adjustment for Rights Issue ............................ 31 11.08 Adjustment for Other Distributions ..................... 32 11.09 Current Market Price ................................... 32 11.10 When Adjustment May Be Deferred ........................ 33 11.11 When No Adjustment Required ............................ 33 11.12 Notice of Adjustment ................................... 33 11.13 Voluntary Reduction .................................... 33 11.14 Notice of Certain Transactions ......................... 34 11.15 Reorganization of the Company .......................... 34 11.16 Company Determination Final ............................ 35 11.17 Trustee's Disclaimer ................................... 35 12 SUBORDINATION .......................................... 35 12.01 Agreement to Subordinate ............................... 35 12.02 Certain Definitions .................................... 35 12.03 Liquidation; Dissolution; Bankruptcy ................... 36 12.04 Default on Senior Debt ................................. 36 12.05 Acceleration of Securities ............................. 37 12.06 When Distribution Must by Paid Over .................... 37 12.07 Notice by Company ...................................... 37 12.08 Subrogation ............................................ 37 12.09 Relative Rights ........................................ 38 12.10 Subordination May Not Be Impaired by Company ........... 38 12.11 Distribution or Notice to Representative ............... 38 12.12 Rights of Trustee and Paying Agent ..................... 38
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Article Section Heading Page - - ------- ------- ------- ---- 13 MISCELLANEOUS .......................................... 39 13.01 Governing Law .......................................... 39 13.02 Notices ................................................ 39 13.03 Communication by Holders with Other Holders ............ 39 13.04 Paying Agent, Registrar and Conversion Agent ........... 40 13.05 Certificate and Opinion as to Conditions Precedent ..... 40 13.06 Statements Required in Certificate or Opinion .......... 40 13.07 Rules by Trustee and Agents ............................ 41 13.08 Legal Holidays ......................................... 41 13.09 No Recourse Against Others ............................. 41 13.10 Duplicate Originals .................................... 41 13.11 Variable Provisions .................................... 41 14 REPURCHASE OF SECURITIES BY THE COMPANY UPON CHANGE OF CONTROL ................................................ 42 14.01 Right to Require Repurchase ............................ 42 14.02 Notice; Method of Exercising Repurchase Right .......... 42 14.03 Definition of Change of Control ........................ 43 SIGNATURES ............................................. 44 EXHIBIT A - FORM OF SECURITY
-iv- 8 INDENTURE, dated as of May 5, 1993 between SECURITY FIRST CORP., a corporation organized and existing under the laws of the State of Delaware ("Company"), and NBD Bank, National Association, a national banking association organized and existing under the laws of the United States of America, as trustee ("Trustee"). W I T N E S S E T H: ------------------- WHEREAS, the Company has duly authorized the creation of an issue of its 6 1/4% Convertible Subordinated Debentures due May 1, 2008 ("Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, all things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid obligation of the Company, in accordance with their and its terms, have been done; NOW, THEREFORE, For and in consideration of the premises and the purchase of the Securities by the Holders thereof, the parties hereto, intending to be legally bound hereby, mutually covenant and agree, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE 1 DEFINITIONS, INCORPORATION BY REFERENCE AND RULES OF CONSTRUCTION SECTION 1.01. Definitions. - - -------------------------- For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: "Affiliate" means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. "Agent" means any Registrar, Paying Agent, Conversion Agent or co-registrar. "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board. "Business Day" means a day that is not a Legal Holiday (as defined in Section 13.08 hereof). 9 "Common Shares" means shares of common stock, par value $.01 per share, of the Company as the same exist on the date of this Indenture as originally signed. "Company" means the party named as such above until a successor replaces it and thereafter means the successor. "Default" means any event which is, or after notice or passage of time, or both, would be, an Event of Default. "Holder" or "Securityholder" means a person in whose name a Security is registered. "Indenture" means this Indenture as amended from time to time. "Officer" means the Chairman of the Board, the President, a Vice-President, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice President of the Company. See Sections 13.05 and 13.06. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be counsel to the Company or the Trustee. See Sections 13.05 and 13.06. "Principal" of a debt security means the principal of the security plus the premium, if any, on the security. "SEC" means the Securities and Exchange Commission. "Securities" means the Securities described above issued under this Indenture. "Security Federal" means Security Federal Savings and Loan Association of Cleveland a federally chartered capital stock savings and loan association and wholly-owned subsidiary of the Company. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbb) as in effect on the date shown above. "Trustee" means the party named as such above until a successor replaces it and thereafter means the successor. -2- 10 "Trust Officer" means the Chairman of the Board, the president, Vice President, Assistant Vice President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. SECTION 1.02. Other Definitions. - - --------------------------------
Term Defined in Section ---- ------------------ "Bankruptcy Law"............................................ 7.01 "Change of Control" ........................................ 14.03 "Conversion Agent" ......................................... 2.03 "Custodian" ................................................ 7.01 "Event of Default" ......................................... 7.01 "Legal Holiday" ............................................ 13.08 "Paying Agent" ............................................. 2.03 "Quoted Price" ............................................. 13.11 "Registrar" ................................................ 2.03 "Representative" ........................................... 12.02 "Repurchase Date" .......................................... 14.01 "Senior Debt" .............................................. 12.02 "Trading Day" .............................................. 11.09 "U.S. Government Obligations" .............................. 9.01
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. - - ---------------------------------------------------------------- Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. Whenever this Indenture incorporates by reference a provision in TIA Sections 310-318(a) containing the statement "the indenture to be qualified" followed by the words "shall" or "may", in turn followed (not always immediately) by the words "require", "provide" or "contain", each such provision, including related definitions and rules of construction, is hereby adopted as a provision of this Indenture. If this Indenture is qualified under the TIA and any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Sections 310-317, such imposed duties shall control. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities. "indenture security holder" means a Securityholder or Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the "Trustee". -3- 11 "obligor" on the indenture securities means the Company. All other terms used in this Indenture that are defined by the TIA, defined by TIA referenced to another statute or defined by SEC rule under the TIA have the meaning assigned to them. SECTION 1.04. Rules of Construction. - - ------------------------------------ Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles; (3) "or" is not exclusive; (4) words in the singular include the plural and in the plural include the singular; and (5) provisions apply to successive events and transactions. ARTICLE 2 THE SECURITIES SECTION 2.01. Form and Dating of Securities. - - -------------------------------------------- The Securities shall be substantially in the Form of Exhibit A, which is part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Security shall be dated the date of its authentication. SECTION 2.02. Execution and Authentication. - - ------------------------------------------- Two Officers shall sign the Securities for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Securities. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. -4- 12 A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Securities for original issue up to the aggregate principal amount stated in paragraph 4 of Exhibit A upon a written order of the Company signed by two Officers. The aggregate principal amount of Securities outstanding at any time may not exceed that amount except as provided in Section 2.08. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. SECTION 2.03. Registrar, Paying Agent and Conversion Agent. - - ----------------------------------------------------------- The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Securities may be presented for payment ("Paying Agent") and an office or agency where Securities may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may appoint one or more co-registrars, one or more additional paying agents and one or more additional conversion agents. The term "Paying Agent" includes any additional paying agent; the term "Conversion Agent" includes any additional conversion agent. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to maintain a Registrar, Paying Agent or Conversion Agent, the Trustee shall act as such. SECTION 2.04. Paying Agent to Hold Money in Trust. - - -------------------------------------------------- The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal or interest on the Securities, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent shall have no further liability for the money. If the Company or -5- 13 an Affiliate acts as Paying Agent, it shall segregate and hold as a separate trust fund all money held by it as Paying Agent. SECTION 2.05. Holder Lists. - - --------------------------- The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders. If this Indenture is qualified under the TIA, the Company shall also furnish or cause to be furnished to the Trustee any additional information, and at the times, required by Section 312(a) of the TIA. SECTION 2.06. Transfer and Exchange. - - ------------------------------------ Where Securities are presented to the Registrar or a co-registrar with a request to register the transfer or to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met. To permit registrations of transfer and exchanges, the Trustee shall authenticate Securities at the Registrar's request. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer, registration of transfer or exchange of Securities, other than exchanges pursuant to Section 2.10, 3.07, 10.05 or 11.02 not involving any transfer. SECTION 2.07. Replacement Securities. - - ------------------------------------- If the Holder claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall, at the written direction of the Company, authenticate a replacement Security if the Company receives evidence reasonably satisfactory to it of the loss, destruction or theft of such a Security. In addition, if required by the Trustee or the Company, an indemnity bond must be provided in an amount sufficient in the judgment of both to protect the Company, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any reasonable expenses (including the fees and expenses of the Trustee) connected therewith. -6- 14 Every replacement Security is an additional obligation of the Company. SECTION 2.08. Outstanding Securities. - - ------------------------------------- The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it, or a court holds, that the replaced Security is held by a bona fide purchaser. If Securities are considered paid under Section 4.01, they cease to be outstanding and interest on them ceases to accrue. A Security does not cease to be outstanding because the Company or an Affiliate holds the Security. SECTION 2.09. Securities Held by the Company or an Affiliate. - - ------------------------------------------------------------- In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or an Affiliate shall be disregarded, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities of which the Trustee has actual knowledge are so owned shall be so disregarded. SECTION 2.10. Temporary Securities. - - ----------------------------------- Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. SECTION 2.11. Cancellation. - - --------------------------- The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar, Paying Agent and Conversion Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange, payment or conversion. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange, payment, -7- 15 conversion or cancellation and shall destroy cancelled Securities and deliver a certificate of such destruction to the Company. The Company may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation or that any Holder has converted pursuant to Article 10. SECTION 2.12. Defaulted Interest. - - --------------------------------- If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest in any lawful manner. It may pay the defaulted interest, plus any interest payable on the defaulted interest, to the persons who are Holders on a subsequent special record date. The Company shall fix the record date and payment date. At least 15 days before the special record date, the Company shall mail to Holders a notice that states the special record date, payment date, and amount of interest to be paid. ARTICLE 3 REDEMPTION SECTION 3.01. Right of Redemption. - - ---------------------------------- The Securities may be redeemed otherwise than through operation of the sinking fund provided in Article 4 at the election of the Company, as a whole or from time to time in part, at any time on or after May 1, 1996, at the redemption prices specified in paragraph 5 of the Securities, together with accrued interest to the redemption date. SECTION 3.02. Notices to Trustee. - - --------------------------------- If the Company wants to redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee of the redemption date and the principal amount of Securities to be redeemed. The Company's notice shall specify the paragraph of the Securities pursuant to which it wants to redeem Securities. If the Company wants to credit against any redemption required by Section 4.01 Securities it has not previously delivered to the Trustee for cancellation, it shall deliver the Securities with the notice. The Company shall give the notices provided for in this Section at least 60 days before the redemption date. -8- 16 SECTION 3.03. Selection of Securities to be Redeemed. - - ----------------------------------------------------- If less than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed in such manner as it deems fair and appropriate. The Trustee shall make the selection not less than 45 days before the redemption date from Securities outstanding not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger then $1,000. Securities and portions of them it selects shall be in amounts of $1,000 or whole multiples of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. SECTION 3.04. Notice of Redemption. - - ----------------------------------- At least 30 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption to each Holder whose Securities are to be redeemed. The notice shall identify the Securities and the principal amount thereof to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) the conversion price; (4) the name and address of the Paying Agent and Conversion Agent; (5) that Securities called for redemption may be converted at any time before the close of business on the redemption date; (6) that Holders who want to convert Securities must satisfy the requirements in paragraph 8 of the Securities; (7) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; and (8) that interest on Securities called for redemption ceases to accrue on and after the redemption date. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense. -9- 17 SECTION 3.05. Effect of Notice of Redemption. - - --------------------------------------------- Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date at the redemption price, and on and after such date (unless the Company shall default in the payment of the redemption price) such Securities shall cease to bear interest. SECTION 3.06. Deposit of Redemption Price. - - ------------------------------------------ On or before the redemption date, the Company shall deposit with the Paying Agent money in funds immediately available on the redemption date sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date other than any Securities called for redemption on that date which have been converted prior to the date of such deposit. The Paying Agent shall return to the Company money not required for that purpose because of conversion of Securities. SECTION 3.07. Securities Redeemed in Part. - - ------------------------------------------ Upon surrender of a Security that is redeemed in part, the Trustee shall authenticate for the Holder a new Security equal in principal amount to the unredeemed portion of the Security surrendered. If any Security selected for partial redemption is converted in part, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. SECTION 3.08. Conversion Arrangement on Call for Redemption. - - ------------------------------------------------------------ In connection with any redemption of Securities, the Company may arrange for the purchase and conversion of any Securities by an agreement with one or more investment bankers or other purchasers to purchase such Securities by paying to the Trustee in trust for the Holders, on or before the close of business on the date fixed for redemption, an amount not less than the applicable redemption price, together with interest accrued to the date fixed for redemption, of such Securities. Notwithstanding anything to the contrary contained in this Article 3, the obligation of the Company to pay the redemption price of such Securities, together with interest accrued to the date fixed for redemption, shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, any Securities not duly surrendered for conversion by the holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such holders and (notwithstanding anything to the contrary contained in Article 11) surrendered by such purchasers for conversion, all as -10- 18 of immediately prior to the close of business on the date fixed for redemption, subject to payment of the above amount as aforesaid. The Trustee shall hold and dispose of any such amount paid to it in the same manner as it would moneys deposited with it by the Company for the redemption of Securities. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Securities shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and the Company agrees to indemnify the Trustee from, and hold it harmless against, any loss, liability or expense arising out of or in connection with any such arrangement for the purchase and conversion of any Securities between the Company and such purchasers to which the Trustee has not consented in writing, including the costs and expenses incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture. ARTICLE 4 SINKING FUND SECTION 4.01. Sinking Fund Payments. - - ------------------------------------ As and for a sinking fund for the retirement of the Securities, the Company will, until all Securities are paid or payment thereof provided for, deposit in accordance with Section 3.06, prior to May 1 in each year, commencing with the year 2004 and ending in 2007, an amount in cash sufficient to redeem on such May 1 a principal amount of Securities equal to twenty percent (20%) of the aggregate amount of Securities issued at the redemption price specified in the form of Security hereinbefore set forth for redemption through operation of the sinking fund. The cash amount of any sinking fund payment is subject to reduction as provided in Section 4.02. Each sinking fund payment shall be applied to the redemption of Securities on such May 1 as herein provided. SECTION 4.02. Satisfaction of Sinking Fund Payments with Securities. - - -------------------------------------------------------------------- The Company (1) may deliver outstanding Securities (other than any previously called for redemption) and (2) may apply as a credit Securities which have been converted pursuant to Article 11 or which have been redeemed at the election of the Company pursuant to Section 3.01, in each case in satisfaction of all or any part of any sinking fund payment required to be made pursuant to Section 4.01, provided that such Securities have not been previously so credited. Each such Security shall be -11- 19 received and credited for such purpose by the Trustee at the redemption price specified in the form of Security hereinbefore set forth for redemption through operation of the sinking fund, and the amount of such sinking fund payment shall be reduced accordingly. SECTION 4.03. Redemption of Securities for Sinking Fund. - - -------------------------------------------------------- On or before March 1 in each year commencing with the year 2004 and ending in 2007, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment pursuant to Section 4.01; the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities pursuant to Section 4.02 and will also deliver to the Trustee any Securities to be so delivered. Before March 17 in each such year, the Trustee shall select the Securities to be redeemed upon the next ensuing May 1 in the manner specified in Section 3.02 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 3.04. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 3.05 and 3.07. ARTICLE 5 COVENANTS SECTION 5.01. Payment of Securities. - - ------------------------------------ The Company shall pay the principal of, premium, if any, on, and interest on the Securities on the dates and in the manner provided in the Securities. Principal, premium and interest shall be considered paid on the date due if the Paying Agent holds on that date money sufficient to pay all principal, premium and interest then due. The Company shall pay interest on overdue principal at the rate borne by the Securities; it shall pay interest on overdue installments of interest at the same rate to the extent lawful. SECTION 5.02. SEC Reports. - - -------------------------- The Company shall (i) file with the Trustee within 15 days after it files them with the SEC copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the -12- 20 Securities Exchange Act of 1934; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the SEC, in accordance with rules and regulations prescribed by the SEC, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934, in respect of a security listed and registered on a national securities exchange as may be prescribed in such rules and regulations (ii) file with the Trustee and the SEC, in accordance with rules and regulations prescribed by the SEC, such additional information, documents, and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture, as may be required by such rules and regulations, and (iii) transmit by mail to the Holders, as their names and addresses appear upon the registration books of the Company, such summaries of any information, documents and reports to be filed by the Company pursuant to items (i) and (ii) of this Section as may be required by rules and regulations prescribed by the SEC. SECTION 5.03. Compliance Certificate. - - ------------------------------------- The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not the signers, to the best of their knowledge, are aware of (i) any Default that occurred during the fiscal year. If the signers are aware of any Default, the Officers' Certificate shall describe the Default and its status. The Officers' Certificate need not comply with Section 13.06. See Section 13.11. If this Indenture is qualified under the TIA, the Company shall furnish to the Trustee, not less than annually, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under the Indenture; for purposes of this Section, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. SECTION 5.04. Limitation on Disposition of Voting Stock of Security Federal. - - ---------------------------------------------------------------------------- So long as any Securities are outstanding, but subject to the provisions of Article 6, the Company shall not sell, assign, transfer, grant a security interest in or otherwise dispose of any shares of, or securities convertible into, or options, warrants or rights to subscribe for or purchase shares of, voting stock of Security Federal, nor will it permit Security Federal to issue any shares of or securities convertible into, or options, warrants or rights to subscribe for or purchase shares of, voting stock of Security Federal, or permit Security Federal to sell, transfer or lease all or substantially all of its -13- 21 properties and assets, except that (a) the Company may make any such sale, assignment, transfer, grant of a security interest or other disposition of Security Federal voting stock if (i) such transaction is made for fair market value as determined by the Board of Directors, and (ii) in each such case, the Company will own at least 80% of the issued and outstanding voting stock of Security Federal free and clear of any security interest after giving effect to such transaction and (b) with respect to a sale, transfer or lease of property and assets of Security Federal, the Company may permit Security Federal to make any such transfer if it is made in the ordinary course of business of Security Federal as heretofore conducted. Notwithstanding the foregoing, Security Federal may be merged into or consolidated with another person organized under the laws of the United States of America, any state thereof or the District of Columbia, if, after giving effect to such merger or consolidation, the Company owns at least 80% of the voting stock of such other person then issued and outstanding free and clear of any security interest and if, immediately after giving effect thereto and treating any such resulting person thereafter as Security Federal and as a subsidiary for purposes of this Indenture, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing. SECTION 5.05. Existence. - - ------------------------ Subject to Article 6, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its and its subsidiaries' existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 5.06. Maintenance of Properties. - - ---------------------------------------- The Company will cause all properties used or useful in the conduct of its business or the business of any subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its -14- 22 business or the business of any subsidiary and not disadvantageous in any material respect to the Holders. SECTION 5.07. Payment of Taxes and Other Claims. - - ------------------------------------------------ The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all material taxes, assessments and governmental charges levied or imposed upon the Company or any subsidiary or upon the income, profits or property of the Company or any subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any subsidiary and which are material in amount; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. ARTICLE 6 SUCCESSORS SECTION 6.01. When Company May Merge. etc. - - ------------------------------------------ The Company shall not consolidate with or merge into, or transfer or lease all or substantially all of its assets (including any disposition of the voting stock of Security Federal that is prohibited by Section 5.04 of this Indenture) in one or a series of related transactions to, any person unless: (1) the person is a corporation; (2) the person assumes by supplemental indenture all the obligations of the Company under the Securities and this Indenture, except that it need not assume the obligations of the Company as to the conversion of the Securities if pursuant to Section 11.15 the Company or another person enters into a supplemental indenture obligating it to deliver securities, cash or other assets upon conversion of Securities; (3) immediately after the transaction no Default exists; and (4) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. -15- 23 The surviving, transferee or lessee corporation shall be the successor Company, but the predecessor Company in the case of a lease shall not be released from the obligation to pay the principal of and interest on the Securities. ARTICLE 7 DEFAULTS AND REMEDIES SECTION 7.01. Events of Default. - - -------------------------------- An "Event of Default" occurs if: (1) the Company defaults in the payment of interest on any Security when the same becomes due and payable and the Default continues for a period of 30 days; (2) the Company defaults in the payment of the principal of or premium, if any, on any Security when the same becomes due and payable at maturity, upon redemption (mandatory or optional) or otherwise; (3) the Company defaults in the deposit of any sinking fund payment, when and as due by the terms of Article 4, and the Default continues for a period of 30 days; (4) the Company fails to comply with any of its other agreements in the Securities or this Indenture and the Default continues for the period and after the notice specified below in this Section; (5) the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for any substantial part of its property, or (D) makes a general assignment for the benefit of its creditors; (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company in an involuntary case, -16- 24 (B) appoints a Custodian of the Company or for any substantial part of its property, or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 60 days; or (7) the Company defaults under any bond, debenture, note or other evidence of indebtedness for money borrowed by the Company with a principal amount then outstanding in excess of $5,000,000 or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company with a principal amount then outstanding in excess of $5,000,000 whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay any portion of the principal of such indebtedness when due and payable after the expiration of any applicable grace period with respect thereto or shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, and the Default continues for the period and after the notice specified below in this Section. The term "Bankruptcy Law" means Title 11 of the U.S. Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. A Default under clause (4) or (7) is not an Event of Default until the Trustee or the Holders of at least 20% in principal amount of the outstanding Securities notify the Company of the Default and the Company does not cure the Default under clause (4) within 60 days, and under clause (7) within 10 days, after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default". SECTION 7.02. Acceleration. - - --------------------------- If an Event of Default occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the outstanding Securities by notice to the Company and the Trustee, may declare the principal of and accrued interest on all the Securities to be due and payable. Upon such declaration the principal and interest shall be due and payable immediately. The Holders of a majority in principal amount of the outstanding Securities by notice to the Trustee may rescind any such declaration and its consequences if the -17- 25 rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of such declaration. SECTION 7.03. Other Remedies. - - ----------------------------- If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 7.04. Waiver of Past Defaults. - - -------------------------------------- Subject to and in accordance with the terms of Section 10.02, the Holders of a majority in principal amount of the outstanding Securities by notice to the Trustee may waive an existing Default and its consequences, except a Default in the payment of, principal of, premium, if any, on, or interest on the Securities. SECTION 7.05. Control by Majority. - - ---------------------------------- The Holders of a majority in principal amount of the outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Holders, or would involve the Trustee in personal liability. SECTION 7.06. Limitation on Suits. - - ---------------------------------- A Holder may pursue a remedy with respect to this Indenture or the Securities only if: (1) the Holder gives to the Trustee notice of a continuing Event of Default; (2) the Holders of at least 25% in principal amount of the outstanding Securities make a request to the Trustee to pursue the remedy; -18- 26 (3) such Holder or Holders offer to the Trustee indemnity reasonably satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holders of a majority in principal amount of the outstanding Securities do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 7.07. Rights of Holders to Receive Payment. - - --------------------------------------------------- Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. Notwithstanding any other provision of this Indenture, the right of any Holder to bring suit for the enforcement of the right to convert the Security shall not be impaired or affected without the consent of the Holder. SECTION 7.08. Collection Suit by Trustee. - - ----------------------------------------- If an Event of Default specified in Section 7.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid. SECTION 7.09. Trustee May File Proofs of Claim. - - ----------------------------------------------- The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders allowed in any judicial proceedings relative to the Company, its creditors or its property. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights -19- 27 of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 7.10. Priorities. - - ------------------------- If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 8.07; Second: to holders of Senior Debt to the extent required by Article 12; Third: to Holders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and Fourth: to the Company. The Trustee may fix a record date and payment date for any payment to Holders. SECTION 7.11. Undertaking for Costs. - - ------------------------------------ In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorney's fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 7.07, or a suit by Holders of more than 10% in principal amount of the Securities. ARTICLE 8 TRUSTEE SECTION 8.01. Duties of Trustee. - - -------------------------------- (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. -20- 28 (b) Except during the continuance of an Event of Default: (1) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 7.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 8.02. Rights of Trustee. - - -------------------------------- (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper -21- 29 person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. SECTION 8.03. Individual Rights of Trustee. - - ------------------------------------------- The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 8.10 and 8.11. SECTION 8.04. Trustee's Disclaimer. - - ----------------------------------- The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in the Securities other than its authentication. SECTION 8.05. Notice of Defaults. - - --------------------------------- If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Holders a notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of, premium, if any, on and interest on any Security, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders. For purposes of this Section, the Trustee shall be deemed to have knowledge of a Default in payment of principal of, premium, if any, on and interest on any Security. SECTION 8.06. Reports by Trustee to Holders. - - -------------------------------------------- If the Indenture is qualified under the TIA, within 60 days after the reporting date stated in Section 13.11, the Trustee shall mail to such Holders as required by TIA Section 313(c), a brief report dated as of such reporting date that -22- 30 complies with Section 313(a). If the Indenture is qualified under the TIA, the Trustee also shall comply with TIA Section 313(b) (2). A copy of each report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange on which the Securities are listed. The Company shall notify the Trustee when the Securities are listed on any stock exchange. SECTION 8.07. Compensation and Indemnity. - - ----------------------------------------- The Company shall pay to the Trustee reasonable compensation for its services upon receipt of a written request from the Trustee. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses shall include the reasonable compensation and out-of-pocket expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any loss or liability incurred by it. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 7.01(4) or (5) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 8.08. Replacement of Trustee. - - ------------------------------------- A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. -23- 31 The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the outstanding Securities may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 8.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or public officer takes charge of the Trustee or its property; or (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 8.10, any Holder who has been a bona fide Holder for at least six months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 8.07. SECTION 8.09. Successor Trustee by Merger. etc. - - ----------------------------------------------- If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to another corporation, the successor corporation without any further act shall be the successor Trustee. -24- 32 SECTION 8.10. Eligibility; Disqualification. - - -------------------------------------------- This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a) (1). The Trustee shall always have a combined capital and surplus as stated in Section 13.11. If this Indenture is qualified under the TIA, the Trustee is subject to TIA Section 310(b). Neither the Company nor any person directly or indirectly controlling, controlled by, or under common control with the Company shall serve as Trustee. SECTION 8.11. Preferential Collection of Claims Against Company. - - ---------------------------------------------------------------- If the Indenture is qualified under the TIA, the Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). If the Indenture is qualified under the TIA, a Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. ARTICLE 9 DISCHARGE OF INDENTURE SECTION 9.01. Termination of Company's Obligations. - - --------------------------------------------------- The Company may terminate all of its obligations under this Indenture if: (1) the Securities mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption; and (2) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations sufficient to pay principal and interest on the Securities to maturity or redemption, as the case may be. The Company may make the deposit only during the one-year period and only if Article 12 permits it. However, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 5.01, 8.07, 8.08 and 9.03, and in Article 11, shall survive until the Securities are no longer outstanding. Thereafter the Company's obligations in Sections 8.07 and 9.03 shall survive. After a deposit, the Trustee, upon request, shall acknowledge in writing the discharge of the Company's obligations under this Indenture except for those surviving obligations specified above. -25- 33 In order to have money available on a payment date to pay principal or interest on the Securities, the U.S. Government Obligations shall be payable as to principal or interest on or before such payment date in such amounts as will provide the necessary money. U.S. Government Obligations shall not be callable at the issuer's option. "U.S. Government Obligations" means obligations issued or guaranteed as to payment by the United States of America for the payment of which the full faith and credit of the United States of America is pledged. SECTION 9.02. Application of Trust Money. - - ----------------------------------------- The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 9.01. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal and interest on the Securities. Money and securities so held in trust are not subject to Article 12. SECTION 9.03. Repayment to Company. - - ----------------------------------- The Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years. After payment to the Company, Holders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person. ARTICLE 10 AMENDMENTS SECTION 10.01. Without Consent of Holders. - - ------------------------------------------ The Company and the Trustee may amend this Indenture or the Securities without the consent of any Holder: (1) to comply with Sections 6.01, 11.15 and 12.01; (2) to provide for uncertificated Securities in addition to certificated Securities; or -26- 34 (3) to cure any ambiguity, defect, or inconsistency and to make any other change, provided that such cure or change does not adversely affect the rights of any Holder. SECTION 10.02. With Consent of Holders. - - --------------------------------------- The Company and the Trustee may amend this Indenture or the Securities with the written consent of the Holders of at least 66 2/3% in principal amount of the outstanding Securities. However, without the consent of each Holder affected, an amendment under this Section may not: (1) reduce the amount of Securities whose Holders must consent to an amendment; (2) reduce the rate of or change the time for payment of interest on any Security; (3) reduce the principal or premium of or change the fixed maturity of any Security; (4) make any Security payable in money other than that stated in the Security; (5) make any change in Section 7.04, Section 7.07 or Section 10.02 (second sentence); (6) make any change that adversely affects the right to convert any Security; or (7) make any change in Article 12 that adversely affects the rights of any Holder. An amendment under this Section may not make any change that adversely affects the rights under Article 12 of any holder of an issue of Senior Debt unless the holders of the issue pursuant to its terms consent to the change. Promptly after an amendment under this Section becomes effective, the Company shall mail to Holders a notice briefly describing the amendment. SECTION 10.03. Supplemental Indenture. - - -------------------------------------- Every amendment to this Indenture or the Securities shall be set forth in a supplemental indenture. Every such supplemental indenture shall conform to the applicable requirements of the TIA as then in effect. -27- 35 SECTION 10.04. Revocation and Effect of Consents. - - ------------------------------------------------- Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of a Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 10.05. Notation on or Exchange of Securities. - - ----------------------------------------------------- The Trustee may place an appropriate notation about an amendment or waiver on any Security thereafter authenticated. The Company in exchange for all Securities may issue and the Trustee shall authenticate new Securities that reflect the amendment or waiver. SECTION 10.06. Trustee Protected. - - --------------------------------- The Trustee need not sign any supplemental indenture that adversely affects its rights. ARTICLE 11 CONVERSION SECTION 11.01. Conversion Privilege. - - ------------------------------------ Subject to and upon compliance with the provisions of this Indenture, a Holder may convert a Security into Common Shares at any time during the period stated in paragraph 8 of the Securities. The number of Common Shares issuable upon conversion of a Security is determined as follows: Divide the principal amount to be converted by the conversion price in effect on the conversion date. Round the result to the nearest 1/100th of a share. The initial conversion price is stated in paragraph 8 of the Securities. The conversion price is subject to adjustment. A Holder may convert a portion of a Security if the portion is $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to conversion of all of a Security also apply to conversion of a portion of it. -28- 36 SECTION 11.02. Conversion Procedure. - - ------------------------------------ To convert a Security a Holder must satisfy the requirements in paragraph 8 of the Securities. The date on which the Holder satisfies all those requirements is the conversion date. As soon as practical, the Company shall deliver through the Conversion Agent a certificate for the number of full shares of Common Shares issuable upon the conversion and a check for any fractional share. The person in whose name the certificate is registered shall be treated as a stockholder of record on and after the conversion date. No payment or adjustment will be made for accrued interest on a converted Security. Securities having a conversion date which falls during the period from the close of business on a record date preceding an interest payment date to the opening of business on such interest payment date shall (unless any such Securities or the portion thereof being converted shall have been called for redemption on a date after such record date and before such interest payment date) also be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest payable on such interest payment date on the principal amount of such Securities then being converted; provided, however, that no such payment need be made if there shall exist, at the conversion date, a default in the payment of interest on the Securities. If a Holder converts more than one Security at the same time, the number of Common Shares issuable upon the conversion shall be based on the total principal amount of the Securities converted. Upon surrender of a Security that is converted in part, the Trustee shall authenticate for the Holder a new Security equal in principal amount to the unconverted portion of the Security surrendered. If the last day on which a Security may be converted is a Legal Holiday in a place where a Conversion Agent is located, the Security may be surrendered to that Conversion Agent on the next succeeding day that is not a Legal Holiday. SECTION 11.03. Fractional Common Shares. - - ---------------------------------------- The Company will not issue a fractional Common Share upon conversion of a Security. Instead, the Company will deliver its check for the current market value of the fractional Common Share. The current market value of a fraction of a Common Share is determined as follows: multiply the current market price of a full Common Share by the fraction and round the result to the nearest cent. -29- 37 The current market price of a Common Share is the Quoted Price of the Common Shares on the last Trading Day prior to the conversion date. In the absence of such a quotation, the Company shall determine the current market price on the basis of such quotations as it considers appropriate. SECTION 11.04. Taxes on Conversion. - - ----------------------------------- If a Holder converts a Security, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of Common Shares upon the conversion. However, the Holder shall pay any such tax which is due because the Common Shares are issued in a name other than the Holder's name. SECTION 11.05. Company to Provide Common Shares. - - ------------------------------------------------ The Company shall reserve and keep available and free of preemptive rights out of its authorized but unissued Common Shares or its Common Shares held in treasury enough Common Shares to permit the conversion of the Securities. All Common Shares which may be issued upon the conversion of the Securities shall, when issued, be duly authorized and validly issued, fully paid and non-assessable. The Company will endeavor to comply with all securities laws regulating the offer and delivery of Common Shares upon conversion of Securities and will endeavor to list such Common Shares on each national securities exchange on which the Common Shares are listed. SECTION 11.06. Adjustment for Change in Capital Shares. - - ------------------------------------------------------- If the Company: (1) pays a dividend or makes a distribution on its Common Shares of its Common Shares; (2) subdivides its outstanding Common Shares into a greater number of shares; (3) combines its outstanding Common Shares into a smaller number of shares; (4) makes a distribution on its Common Shares in shares other than Common Shares; or (5) issues by reclassification of its Common Shares any of its shares, then the conversion privilege and the conversion price in effect immediately prior to such action shall be adjusted so that the -30- 38 Holder of a Security thereafter converted may receive the number of shares of the Company which he would have owned immediately following such action if he had converted the Security immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. If after an adjustment a Holder upon conversion of a Security may receive shares of two or more classes, the Company shall determine the allocation of the adjusted conversion price between the classes of shares. After such allocation, the conversion privilege and the conversion price of each class of shares shall thereafter be subject to adjustment on terms comparable to those applicable to Common Shares in this Article. SECTION 11.07. Adjustment for Rights Issue. - - ------------------------------------------- If the Company distributes any rights or warrants to all holders of its Common Shares entitling them for a period expiring within 60 days after the record date mentioned below to purchase Common Shares at a price per share less than the current market value on that record date, the conversion price shall be adjusted in accordance with the formula: N x P ----- 0 + M ------- C' = C x 0 + N where: C' = the adjusted conversion price. C = the current conversion price. 0 = the number of Common Shares outstanding on the record date. N = the number of additional Common Shares offered. P = the offering price per share of the additional Common Shares. M = the current market price per Common Share on the record date. The adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive the rights or warrants. -31- 39 SECTION 11.08. Adjustment for Other Distributions. - - -------------------------------------------------- If the Company distributes to all holders of its Common Shares any of its assets or debt securities or any rights or warrants to purchase securities of the Company, the conversion price shall be adjusted in accordance with the formula: M - F ------- C' = C x M where: C' = the adjusted conversion price. C = the current conversion price. M = the current market price per Common Share on the record date mentioned below. F = the fair market value on the record date of the assets, securities, rights or warrants being distributed which are applicable to one Common Share. The Company shall determine the fair market value. The adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive the distribution. This Section does not apply to cash dividends or cash distributions paid out of consolidated current or retained earnings as shown on the books of the Company. Also, this Section does not apply to rights or warrants referred to in Section 11.07. SECTION 11.09. Current Market Price. - - ------------------------------------ In Sections 11.07 and 11.08 the current market price per Common Share on any date is the average of the Quoted Prices of the Common Shares for 30 consecutive Trading Days commencing on the 45th Trading Day before the date in question. If quotations occur on five or less of the 30 consecutive Trading Days, the current market price shall be the average of the Quoted Prices of the Common Stock for 90 consecutive Trading Days commencing on the 105th Trading Day before the date in question. If quotations occur on five or less of the 90 consecutive Trading Days, the current market price shall be determined on the basis of an independent appraisal by a regionally or nationally recognized appraiser with experience in appraising banking -32- 40 entities. For the purpose of Section 11.03 and this Section, a "Trading Day" is a day other than a Legal Holiday. SECTION 11.10. When Adjustment May be Deferred. - - ----------------------------------------------- No adjustment in the conversion price need be made unless the adjustment would require an increase or decrease of at least 1% in the conversion price. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. SECTION 11.11. When No Adjustment Required. - - ------------------------------------------- No adjustment need be made for a transaction referred to in Section 11.06, 11.07 or 11.08 if Holders are to participate in the transaction on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Shares participate in the transaction. No adjustment need be made for rights to purchase Common Shares pursuant to a Company plan for reinvestment of dividends or interest. No adjustment need be made for a change in the par value or no par value of the Common Shares. To the extent the Securities become convertible into cash, no adjustment need be made thereafter as to the cash. Interest will not accrue on the cash. SECTION 11.12. Notice of Adjustment. - - ------------------------------------ Whenever the conversion price is adjusted, the Company shall promptly mail to Holders a notice of the adjustment. The Company shall file with the Trustee a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence that the adjustment is correct. SECTION 11.13. Voluntary Reduction. - - ----------------------------------- The Company from time to time may reduce the conversion price by any amount for any period of time if the period is at least 20 days and if the reduction is irrevocable during the period. -33- 41 Whenever the conversion price is reduced, the Company shall mail to Holders a notice of the reduction. The Company shall mail the notice at least 15 days before the date the reduced conversion price takes effect. The notice shall state the reduced conversion price and the period it will be in effect. A reduction of the conversion price does not change or adjust the conversion price otherwise in effect for purposes of Sections 11.06 through 11.08. SECTION 11.14. Notice of Certain Transactions. - - ---------------------------------------------- If: (1) the Company takes any action that would require an adjustment in the conversion price pursuant to Sections 11.06, 11.07 or 11.08 and if the Company does not let Holders participate pursuant to Section 11.11; or (2) the Company takes any action that would require a supplemental indenture pursuant to Section 11.15; or (3) there is a liquidation or dissolution of the Company, the Company shall mail to Holders a notice stating the proposed record date for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, transfer, lease, liquidation or dissolution. The Company shall mail the notice at least 15 days before such date. Failure to mail the notice or any defect in it shall not affect the validity of the transaction. SECTION 11.15. Reorganization of the Company. - - --------------------------------------------- If the Company is a party to a transaction subject to Section 6.01 or a merger which reclassifies or changes its outstanding Common Shares, the person obligated to deliver securities, cash or other assets upon conversion of Securities shall enter into a supplemental indenture. If the issuer of securities deliverable upon conversion of Securities is an affiliate of the surviving, transferee or lessee corporation, that issuer shall join in the supplemental indenture. The supplemental indenture shall provide that the Holder of a Security may convert it into the kind and amount of securities, cash or other assets which he would have owned immediately after the consolidation, merger, transfer or lease if he had converted the Security immediately before the effective -34- 42 date of the transaction. The supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Article. The successor Company shall mail to Securityholders a notice briefly describing the supplemental indenture. If this Section applies, Section 11.06 does not apply. SECTION 11.16. Company Determination Final. - - ------------------------------------------- Any determination that the Company or the Board of Directors must make pursuant to Section 11.03, 11.06, 11.08, 11.09 or 11.11 is conclusive. SECTION 11.17. Trustee's Disclaimer. - - ------------------------------------ The Trustee has no duty to determine when an adjustment under this Article should be made, how it should be made or what it should be. The Trustee has no duty to determine whether any provisions of a supplemental indenture under Section 11.15 are correct. The Trustee makes no representation as to the validity or value of any securities or assets issued upon conversion of Securities. The Trustee shall not be responsible for the Company's failure to comply with this Article. Each Conversion Agent other than the Company shall have the same protection under this Section as the Trustee. ARTICLE 12 SUBORDINATION SECTION 12.01. Agreement to Subordinate. - - ---------------------------------------- The Company agrees, and each Holder by accepting a Security agrees, that the indebtedness evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Debt, and that the subordination is for the benefit of the holders of Senior Debt. SECTION 12.02. Certain Definitions. - - ----------------------------------- "Senior Debt" means the principal of and interest on (a) all indebtedness of the Company (including indebtedness of others guaranteed by the Company) other than the Securities, whether outstanding on the date of this Indenture or thereafter created, incurred or assumed, which is (i) for money borrowed or (ii) evidenced by a note or similar instrument given in connection with the acquisition of any businesses, properties or assets of any kind other than in the ordinary course of the Company's business as heretofore conducted, (b) obligations of -35- 43 the Company as lessee under leases required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles and leases of property or assets made as part of any sale and lease-back transaction to which the Company is a party and (c) amendments, renewals, extensions, modifications and refunding of any such indebtedness or obligation, unless in any case in the instrument creating or evidencing any such indebtedness or obligation, or pursuant to which the same is outstanding, it is provided that such indebtedness or obligation is not superior in right of payment to the Securities or is made subordinate to any other indebtedness or obligation of the Company to substantially the same extent as the Securities are made subordinate. "Representative" means the indenture trustee or other trustee, agent or representative for an issue of Senior Debt. A distribution may consist of cash, securities or other property. SECTION 12.03. Liquidation; Dissolution; Bankruptcy. - - ---------------------------------------------------- Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property: (1) holders of Senior Debt shall be entitled to receive payment in full in cash of the principal of and interest (including interest accruing after the commencement of any such proceeding) to the date of payment on the Senior Debt before Holders shall be entitled to receive any payment of principal of, premium on, or interest on Securities; and (2) until the Senior Debt is paid in full in cash, any distribution to which Holders would be entitled but for this Article shall be made to holders of Senior Debt as their interests may appear, except that Holders may receive securities that are subordinated to Senior Debt to at least the same extent as the Securities. SECTION 12.04. Default on Senior Debt. - - -------------------------------------- The Company may not pay principal, premium, if any, or interest on the Securities and may not acquire any Securities for cash or property other than capital shares of the Company if: (1) a default on Senior Debt occurs and is continuing that permits holders of such Senior Debt to accelerate its maturity, and -36- 44 (2) the default is the subject of judicial proceedings or the Company receives a notice of the default from a person who may give it pursuant to Section 12.12. If the Company receives any such notice, a similar notice received within nine months thereafter relating to the same default on the same issue of Senior Debt shall not be effective for purposes of this Section. The Company may resume payments on the Securities and may acquire them when: (a) the default is cured or waived, or (b) 120 days pass after the notice is given if the default is not the subject of judicial proceedings, if this Article otherwise permits the payment or acquisition at that time. SECTION 12.05. Acceleration of Securities. - - ------------------------------------------ If payment of the Securities is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the acceleration. The Company may pay the Securities when 120 days pass after the acceleration occurs if this Article permits the payment at that time. SECTION 12.06. When Distribution Must be Paid Over. - - --------------------------------------------------- If a distribution is made to Holders that because of this Article should not have been made to them, the Holders who receive the distribution shall hold it in trust for holders of Senior Debt and pay it over to them as their interests may appear. SECTION 12.07. Notice by Company. - - --------------------------------- The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of principal of, premium, if any, or interest on Securities to violate this Article. SECTION 12.08. Subrogation. - - --------------------------- After all Senior Debt is paid in full and until the Securities are paid in full, Holders shall be subrogated to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Debt. A distribution made under this Article to -37- 45 holders of Senior Debt which otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on Senior Debt. SECTION 12.09. Relative Rights. - - ------------------------------- This Article defines the relative rights of Holders and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Company and the Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of, premium, if any, and interest on the Securities in accordance with their terms; (2) affect the relative rights of Holders and creditors of the Company other than holders of Senior Debt; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default, subject to the rights of holders of Senior Debt to receive distributions otherwise payable to Holders. If the Company fails because of this Article to pay principal of or interest on a Security on the due date, the failure is still a Default. SECTION 12.10. Subordination May Not Be Impaired by Company. - - ------------------------------------------------------------ No right of any holder of Senior Debt to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or by its failure to comply with this Indenture. SECTION 12.11. Distribution or Notice to Representative. - - -------------------------------------------------------- Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. SECTION 12.12. Rights of Trustee and Paying Agent. - - -------------------------------------------------- The Trustee or Paying Agent may continue to make payments on the Securities until it receives notice of facts that would cause a payment of principal of, premium, if any, or interest on the Securities to violate this Article. Only the Company, a Representative or a holder of an issue of Senior Debt that has no Representative may give the notice. -38- 46 The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. ARTICLE 13 MISCELLANEOUS SECTION 13.01. Governing Law. - - ----------------------------- The laws of the State of Ohio shall govern this Indenture and the Securities. SECTION 13.02. Notices. - - ----------------------- Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person or mailed by first-class mail to the other's address stated in Section 13.11. The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Holder shall be mailed by first-class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. All other notices or communications shall be in writing. SECTION 13.03. Communication by Holders with Other Holders. - - ----------------------------------------------------------- Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). -39- 47 SECTION 13.04. Paying Agent, Registrar and Conversion Agent. - - ------------------------------------------------------------ The Company initially appoints NBD BANK, NATIONAL ASSOCIATION, as the Paying Agent, Registrar and Conversion Agent. SECTION 13.05. Certificate and Opinion as to Conditions Precedent. - - ------------------------------------------------------------------ Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. The author or authors of an Officers' Certificate or an Opinion of Counsel may (if so stated) rely, respectively, upon an Opinion of Counsel as to legal matters and an Officers' Certificate as to factual matters, if such author or authors reasonably and in good faith believe in the accuracy of the document relied upon. If this Indenture is qualified under the TIA, the Company shall also comply with any other additional requirements of Section 314(c) of the TIA. SECTION 13.06. Statements Required in Certificate or Opinion. - - ------------------------------------------------------------- Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed -40- 48 opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 13.07. Rules by Trustee and Agents. - - ------------------------------------------- The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar, Paying Agent or Conversion Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 13.08. Legal Holidays. - - ------------------------------ A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment may be made at the place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. SECTION 13.09. No Recourse Against Others. - - ------------------------------------------ All liability described in the Securities of any director, officer, employee or shareholder, as such, of the Company is hereby waived and released. SECTION 13.10. Duplicate Originals. - - ----------------------------------- The parties may execute any number of copies of this Indenture. One executed copy is enough to prove this Indenture. SECTION 13.11. Variable Provisions. - - ----------------------------------- The first certificate pursuant to Section 5.03 shall be for the fiscal year ending on March 31, 1994. The reporting date for Section 8.06 is May 15 of each year. The Trustee shall always have a combined capital and surplus of at least $50,000,000 (which shall not be less than $150,000) as set forth in its most recent published annual report of condition. In Sections 11.03 and 11.09, the "Quoted Price" of the Common Shares is the last reported bid price of the Common Shares by securities dealers or, if quotations of the Common Shares are so reported, the last reported sales price of the Common Shares as reported on the National Association of Securities Dealers -41- 49 Automated Quotation System or its successor, or if the Common Shares are listed on one or more securities exchanges, the last reported sale price on such securities exchange as the Company may designate. The Company's address is: Security First Corp. 1413 Golden Gate Boulevard Mayfield Heights, Ohio 44124 The Trustee's address is: NBD Bank, National Association Attention: Corporate Trust Administration 611 Woodward Avenue Detroit, Michigan 48226 ARTICLE 14 REPURCHASE OF SECURITIES BY THE COMPANY UPON CHANGE OF CONTROL SECTION 14.01. Right to Require Repurchase. - - ------------------------------------------- Subject to the provisions of Article 12 hereof, in the event of any Change of Control, each Holder shall have the right, at such Holder's option, to require the Company to purchase, and upon the exercise of such right the Company shall purchase, all of such Holder's Securities or any portion of such Holder's Securities having a principal amount of $1,000 or integral multiples thereof on the date (the "Repurchase Date") that is 90 days after the date of such Change of Control, at 100% of the principal amount, plus accrued interest to the Repurchase Date. SECTION 14.02. Notice; Method of Exercising Repurchase Right. - - ------------------------------------------------------------- (a) On or before the 30th day after the date of any Change of Control, the Company, or at the request of the Company, the Trustee, shall give notice of a Change of Control and of the repurchase right set forth herein arising as a result thereof by first-class mail, postage prepaid, to each Holder of Securities. The Company shall also cause a copy of such notice of a repurchase right to be published in a newspaper of general circulation in Cuyahoga County, Ohio. Each notice of a repurchase right shall state: (1) the Repurchase Date, (2) the date by which the repurchase right must be exercised, -42- 50 (3) the price at which the repurchase is to be made, it the repurchase right is exercised, and (4) a description of the procedure which a Holder must follow to exercise a repurchase right. No failure of the Company to give the foregoing notice shall limit any Holder's right to exercise a repurchase right. (b) To exercise a repurchase right, a Holder shall deliver to the Company (or an agent designated by the Company for such purpose in the notice referred to in (a) above) on or before the 90th day after the Change of Control (i) written notice of the Holder's exercise of such right, which notice shall set forth the name of the Holder, the principal amount of the Security or Securities (or portion of a Security) to be repurchased, and a statement that the option to exercise the repurchase right is being made thereby, and (ii) the Securities with respect to which the repurchase right is being exercised, duly endorsed for transfer to the Company. Such written notice shall be irrevocable. (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid the price payable with respect to the Security or Securities as to which the repurchase right has been exercised in cash to the Holder of such Security or Securities, on the Repurchase Date. In the event that a repurchase right is exercised with respect to less than the entire principal amount of a surrendered Security, the Company shall execute and deliver to the Trustee and the Trustee shall authenticate for issuance in the name of the Holder a new Security or Securities in the aggregate principal amount of the unrepurchased portion of such surrendered Security. SECTION 14.03. Definition of Change of Control. - - ----------------------------------------------- As used in this Article 14, a "Change of Control" of the Company shall be deemed to have occurred on the date on which any person becomes the beneficial owner, directly or indirectly, of 50% or more of the outstanding Common Shares of the Company. -43- 51 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. SECURITY FIRST CORP. [Corporate Seal] By /s/ Charles F. Valentine ------------------------------- Charles F. Valentine, Chairman of the Board and Chief Executive Officer Attest: /s/ Jeffrey J. Calabrese - - --------------------------- Jeffrey J. Calabrese Secretary NBD BANK, NATIONAL ASSOCIATION [Corporate Seal] By /s/ W. Harrison Smith --------------------------------- W. Harrison Smith Second Vice President Attest: /s/ Richard J. McCullen - - -------------------------------- Richard J. McCullen Vice President & Deputy Cashier -44- 52 STATE OF OHIO ) ss. COUNTY OF CUYAHOGA ) On this 4th day of May, 1993, before me appeared Charles F. Valentine, to me personally known, who, being by me duly sworn, did say that he resides at Mayfield Heights, Ohio, that he is the Chairman of the Board and Chief Executive Officer of Security First Corp., one of the corporations described in and which executed the above instrument, and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Charles F. Valentine acknowledged said instrument to be the free act and deed of said corporation. /s/ Peggy L. Poznako --------------------------- Notary Public STATE OF MICHIGAN) ss. COUNTY OF WAYNE ) On this 3rd day of May, 1993, before me personally came W. Harrison Smith, to me known, who, being by me duly sworn, did say that he resides at Detroit, Michigan, that he is an authorized signer of NBD Bank, National Association, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of such corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed pursuant to authority of the Board of Directors of such corporation; and that he signed his name thereto pursuant to like authority. /s/ Diana M. Jordan --------------------------- Notary Public -45- EX-10.A 3 EXHIBIT 10(A) 1 EXHIBIT 10(a) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") entered into this 23rd day of October, 1998, between and among FirstMerit Corporation, an Ohio corporation ("FirstMerit"), FirstMerit Bank, N.A., a national banking association ("FirstMerit Bank") (collectively sometimes "FirstMerit"), and Charles F. Valentine ("Executive"). R E C I T A L S : FirstMerit and FirstMerit Bank desire to employ Executive for a period certain, subject, however, to the terms and conditions of this Agreement. IN CONSIDERATION OF THE FOREGOING, the mutual covenants contained herein, and other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT FirstMerit hereby employs Executive, and Executive hereby accepts employment, according to the terms and conditions set forth in this Agreement and for the period specified in Section 3 of this Agreement. 2. DUTIES During the Term (as defined in Section 3), Executive shall serve FirstMerit and FirstMerit Bank as its Executive Vice President of FirstMerit and President of the Construction Financing Division of FirstMerit Bank in accordance with directions from the Chief Executive Officer. During the Employment Period, Executive shall devote Executive's exclusive business time, energies, attention and ability to the business of FirstMerit, and shall faithfully and diligently perform the duties of Executive's employment with FirstMerit and of any office or offices held by Executive in FirstMerit, provided that there shall be no set time or minimum time during which Executive shall perform such services. It is understood and agreed that, without prior written approval from the Board of Directors of FirstMerit (the "Board") (which approval shall not be unreasonably withheld to the extent such activities do not materially interfere with Executive's duties), Executive may not engage in any other business activities during the period of Executive's employment by FirstMerit, whether or not for profit or other pecuniary advantage. Notwithstanding the foregoing, (a) nothing contained in this Section 2 shall preclude Executive from any investment or activity that existed at the time of this Agreement, which were disclosed by Executive to FirstMerit and do not materially interfere with -1- 2 Executive's duties; (b) Executive may make personal financial investments after the date of this Agreement which do not involve any active participation on Executive's part, (c) Executive may engage in charitable, educational, religious, civic, trade associations and similar types of activities, and (d) Executive may serve on the board of directors of such other entities as may be approved by the Board; provided, however, that any such activities described in item (c) above must be approved in advance by the Board, and any such activities described in items (c) and (d) above (i) must not interfere with the business or the performance of the Executive's duties under this Agreement, and (ii) must not conflict with policies concerning conflicts of interest. Any director's or other fees received by the Executive related to activities described in (a) and (d) above may be retained by Executive. 3. TERM OF EMPLOYMENT The term of this Agreement (the "Term") shall commence as of October 23, 1998 (the "Commencement Date"), and shall continue for a period of three (3) years ending at 11:59 pm Cleveland time on October 22, 2001 (the "Expiration Date"), unless this Agreement has been earlier terminated in accordance with the provisions of Section 6 hereof. Following the Expiration Date, Executive's employment status will be "at will." 4. COMPENSATION 4.1 BASE SALARY. While employed under this Agreement, Executive will receive as his compensation for the performance of his duties and obligations to FirstMerit under this Agreement a base salary of Two Hundred Nineteen Thousand Dollars ($219,000.00) per year, which will be payable in semi-monthly installments, and which will be subject to annual increase by the Compensation Committee as approved by the Board (the base salary, as it may be increased from time to time, is referred to herein as the "Base Salary"). 4.2 BONUS. In addition to the Base Salary, Executive will be eligible to receive with respect to each calendar year a bonus of 40%-70% of Base Salary in accordance with FirstMerit's Incentive Compensation Plan ("ICP"), a copy of which has been delivered to Executive, as it may be amended from time to time. Bonuses will be determined by FirstMerit's Compensation Committee in accordance with the terms of the ICP, subject to approval by the Board, will be calculated based upon the formula for determining bonuses under the ICP that is in effect on the Commencement Date unless the formula for determining bonuses under the ICP that is in effect on the date of determination of the amount of the bonus would produce a bonus of greater amount, and ordinarily will be paid during the first quarter of the year following the year to which the bonus relates. 4.3 EMPLOYMENT PAYMENT. At the time that Executive accepts employment by executing this Agreement, FirstMerit will pay to Executive in cash the sum of One Hundred Fifty Thousand Dollars ($150,000.00). -2- 3 4.4 WITHHOLDING. All compensation payable to Executive pursuant to this Section 4 shall be paid net of amounts withheld for federal, state, municipal or local income taxes, Executive's share, if any, of any payroll taxes, and such other federal, state, municipal or local taxes as may be applicable to amounts paid by an employer to its employee or to the employer/employee relationship. 5. OTHER BENEFITS OF EMPLOYMENT 5.1 RETIREMENT BENEFITS (A) PENSION PLAN. Executive will participate in the Pension Plan for Employees of FirstMerit Corporation and Subsidiaries (the "Pension Plan"), a copy of the summary plan description of which has been provided to Executive, in accordance with the provisions of the Plan, as amended from time to time. (B) EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN. Executive will be entitled to participate in the FirstMerit Corporation and Subsidiaries Employees' Salary Savings Retirement Plan (the "401(k) Plan"), a copy of the summary plan description of which has been provided to Executive, in accordance with the provisions of the Plan, as amended from time to time. (C) SERP. Executive will participate in the FirstMerit Corporation Executive Supplemental Retirement Plan ("Plan") in accordance with the provisions of the Plan (as may be amended from time to time) and the provisions of the Membership Agreement entered into by FirstMerit and Executive in connection with the Plan (the Plan and Membership Agreement collectively known as the "SERP"). A copy of the SERP has been provided to Executive. The Membership Agreement provides that Executive may receive a lump sum cash payment as his benefit under the SERP in the amount of the greater of (i) the Actuarial Equivalent (as defined in the SERP) of the Monthly Retirement Income (also as defined in the SERP) to which Executive is entitled under the terms of the SERP, or (ii) One Million Four Hundred Twenty Six Thousand Seven Hundred Sixty Nine Dollars ($1,426,769.00), provided in either case that Executive is employed under this Agreement on the Expiration Date. Such amounts payable under the SERP to the Executive, pursuant to the terms of the SERP, shall be reduced by amounts paid to Executive as provided in the SERP. (D) TOP HAT PLAN. Executive will be entitled to participate in the FirstMerit Corporation Unfunded Supplemental Benefits Plan (the "Top Hat Plan"), a copy of which has been provided to Executive, in accordance with the provisions of the Plan, as amended from time to time. Executive's benefits under the Top Hat Plan shall be calculated for all purposes based upon Executive's continuous employment at least through the Expiration Date, unless Executive's employment is terminated prior thereto under circumstances described in Section 6.2. -3- 4 5.2 COMPENSATORY SEVERANCE BENEFIT. In the event that Executive's employment shall terminate for any reason prior to the Expiration Date, FirstMerit shall pay to Executive or his estate in a lump sum in cash, within 25 days after the Termination Date, an amount equal to Nine Hundred Eighty-Five Thousand Dollars ($985,000.00). 5.3 CHANGE OF CONTROL SEVERANCE BENEFIT. In the event that Executive's employment shall terminate following a Change of Control, which termination occurs after the first anniversary of this Agreement but before the Expiration Date, and under any circumstance other than as described in Section 6.2 or Executive's Death, FirstMerit shall cause the acquiror to pay to Executive in a lump sum in cash, within 25 days after the later of the date of such Change of Control or the Termination Date, an amount equal to 200% of Executive's "base amount" as determined under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), less the aggregate present value of the payments or benefits, if any, in the nature of compensation for the benefit of Executive, arising under any plan or arrangement between FirstMerit and Executive, which constitute "parachute payments" under Section 280G of the Code. 5.4 DISABILITY. Executive will be entitled to participate in FirstMerit's Long-Term Disability Plan applicable to executive level employees of FirstMerit, and in FirstMerit's Short-Term Illness Program, all in accordance with the provisions of such programs as may be amended from time to time. 5.5 MISCELLANEOUS BENEFITS. Executive will be entitled to participate in such hospitalization, life insurance, and other employee benefit plans and programs, if any, as may be adopted by FirstMerit from time to time, in accordance with the provisions of such plans and programs and on the same basis as other full-time salaried employees of FirstMerit who participate in such employee benefit plans (except to the extent that the benefits provided under any of such plans or programs are expressly offset by any of the benefits provided under or pursuant to this Agreement). 5.6 STOCK OPTIONS AND GRANTS. On the Commencement Date, FirstMerit will make an award to Executive under and pursuant to the terms of the FirstMerit 1997 Stock Plan, a copy of which has been provided to Executive, of non-qualified stock options ("NQSOs") for Twenty-two Thousand Five Hundred (22,500) shares of FirstMerit Corporation common stock. The award will be made pursuant to a Stock Option Agreement in the form and subject to the terms customarily used by FirstMerit, but the terms of which will include the following: the NQSOs will be issued at fair market value on the date of grant; will be exercisable with respect to 5,000 shares on and after the first anniversary of the Commencement Date, an additional 5,000 shares on and after the second anniversary of the Commencement Date, and an additional 12,500 shares on and after the Expiration Date. Notwithstanding the foregoing, all NQSOs under this grant shall vest and become immediately exercisable if Executive's employment is terminated for any reason other than any circumstance described in Section 6.2. Once vested, the NQSOs will remain exercisable for a period ten (10) years from the Commencement Date, notwithstanding that Executive's employment terminates for any reason prior to the end of such period. -4- 5 5.7 INCOME TAX PREPARATION. For calendar years beginning with 1998, FirstMerit will reimburse Executive for fees incurred in connection with personal income tax preparation in an amount not to exceed Seven Hundred Fifty Dollars ($750) per year. 5.8 TAXES AND WITHHOLDING. Executive shall be responsible for paying all federal, state, municipal or local taxes payable by him with respect to any benefits provided under this Section 5, and FirstMerit will, when required by law or when otherwise appropriate or customary, withhold from the benefits or other compensation amounts sufficient to satisfy such taxes. 5.9 EXECUTIVE PHYSICAL EXAMINATION. Approximately every two (2) years, Executive will undergo an executive physical examination by physicians (not including any physicians who have performed or are then performing medical services for Executive) of the Cleveland Clinic or comparable facility. The expenses of the physical examinations required under this Section (but not any treatment in connection therewith), which are not otherwise covered by FirstMerit-sponsored medical plans, will be borne by FirstMerit. 5.10 VACATION. Executive shall be entitled to four (4) weeks paid vacation and ten (10) bank holidays per year. 5.11 REIMBURSEMENTS. Executive shall be entitled to reimbursement privileges with respect to reasonable business expenses in accordance with FirstMerit's standard reimbursement policy for executive employees of FirstMerit. 5.12 COUNTRY CLUB DUES; AUTOMOBILE. FirstMerit shall pay on a timely basis for the dues and reasonable expenses of Executive's membership and participation in the country clubs that the Executive is a member as of April 5, 1998. The amounts that FirstMerit shall pay pursuant to this Section 5.12 shall not substantially exceed the amounts that were paid for such benefits during the twelve month period ending March 31, 1998 by Security First Corp. FirstMerit agrees to buyout the lease for the automobile which as of April 5, 1998 is being utilized by Executive for business and transfer the ownership of such automobile to Executive. 5.13 BOARD OF DIRECTORS. The Board of Directors will appoint Executive to the Board of Directors of FirstMerit, effective as of the Commencement Date. Once Executive has become a Director, FirstMerit will agree to nominate Executive at such times as necessary so that Executive remains a director of FirstMerit during his employment by FirstMerit. Executive agrees, if asked by the Board, to tender his resignation in the event he is no longer an employee for any reason. Nothing in this Section shall require FirstMerit or its Board to decline to nominate an existing Director at the expiration of such Director's term. 6. TERMINATION -5- 6 6.1 DEFINITIONS (A) "CHANGE OF CONTROL" means a change in control of a nature that would be required to be reported by persons or entities subject to the reporting requirements of Section 14(a) of the Securities Exchange Act of 1934 in response to item 5(f) of Schedule 14A of Regulation 14(A) as in effect on the date hereof, or successor provisions thereto, provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any unaffiliated "person," "entity," or "group" (as defined in Rule 13(d)-3 issued under the Securities Exchange Act of 1934) directly or indirectly becomes the owner of securities of FirstMerit representing thirty percent (30%) or more of the combined voting power of FirstMerit's then outstanding securities or (ii) at any time during any period of two (2) consecutive calendar years individuals, who at the beginning of such period constitute the Board of Directors of FirstMerit, cease for any reason to constitute at least the majority of such Board unless the election, or the nomination for election, by FirstMerit's shareholders of each new director was approved by a vote of at least two-thirds of the directors still in office who were directors of FirstMerit at the beginning of such two (2)-year period. (B) "TERMINATION DATE" means the date on which Executive's employment with FirstMerit terminates for any reason. (C) "TERMINATION OF EMPLOYMENT FOR CAUSE" means the termination of Executive's employment by FirstMerit on account of (i) intentional misconduct and/or gross negligence by Executive that has a material adverse effect on FirstMerit, monetarily or otherwise, (ii) Executive's personal dishonesty, (iii) incompetence, (iv) breach of a fiduciary duty involving personal profit, (v) intentional failure to perform stated duties, (vi) willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and- desist order, or (ii) material breach of any provision of this Agreement by Executive. No act by Executive shall be considered intentional unless Executive acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of FirstMerit. Notwithstanding the foregoing, there shall not be deemed to have been a Termination of Employment for Cause unless and until there shall have been delivered to Executive a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board stating that the Board believes the Executive has engaged in conduct described in the preceding sentence. (D) "TERMINATION OF EMPLOYMENT FOR GOOD REASON" means the voluntary termination of Executive's employment by Executive for any of the following reasons: (i) Executive is required to move to a new principal work location that is more than 25 miles from Executive's work location while with his prior employer; (ii) Executive's duties under this Agreement are subject to a substantial reduction; (iii) the material breach of this Agreement by FirstMerit, but only if such breach is not corrected within 30-days after written notice to FirstMerit detailing the breach; (iv) there is a substantial reduction in the cash compensation, perquisites or vacation provided to Executive by FirstMerit; (v) significant reduction in Executive's responsibilities and status within the FirstMerit organization, or a change in his title or office without prior written consent of Executive; or (vi) involuntary discontinuance of Executive's participation in any employee benefit plans -6- 7 maintained by FirstMerit unless such plans are discontinued by reason of law or loss of tax deductibility to FirstMerit with respect to contributions to such plans, or are discontinued as a matter of FirstMerit policy applied equally to all participants in such plans. 6.2 TERMINATION OF EMPLOYMENT UPON RESIGNATION OR FOR CAUSE. If Executive's employment is terminated as a result of Executive's voluntary resignation (other than Termination of Employment for Good Reason) or Termination of Employment for Cause, Executive shall be entitled to receive only Executive's Base Salary to which he was entitled through the Termination Date, any unpaid bonus due with respect to the year prior to the year in which the termination occurred, and such other payments and benefits to which he is entitled under the terms of this Agreement and as may be available to him through FirstMerit's benefit plans and policies. 6.3 TERMINATION UNDER OTHER CIRCUMSTANCES. (A) If Executive's employment is terminated under circumstances other than as described in Section 6.2, and the Termination Date is prior to the Expiration Date, Executive's Base Salary and bonus as calculated through the Expiration Date shall be payable in a lump sum in cash within 25 days after the Termination Date, and all other benefits and entitlements described in Sections 5.1, 5.2, 5.3, 5.4, 5.5 and 5.6 (including credit for Years of Service under the Pension Plan, 401(k) Plan and the Top Hat Plan) shall continue at FirstMerit's expense through the Expiration Date. (B) If Executive's employment is terminated after the Expiration Date, Executive shall be entitled to receive his Base Salary and bonus to which he was entitled through the Termination Date and such other payments and benefits to which he is entitled under the terms of this Agreement and as may otherwise be available to him through FirstMerit's benefit plans and policies. 6.4 EFFECT OF TERMINATION. Upon termination of Executive's employment, the obligations of each of the parties under this Agreement shall expire as of the Termination Date, including, without limitation, the obligations of FirstMerit to pay any compensation to Executive, except to the extent otherwise specifically provided in this Agreement. Notwithstanding the foregoing, the obligations contained in Section 7 of this Agreement and the provisions hereof relating to the obligations of FirstMerit described in the preceding sentence, shall survive the termination or expiration of this Agreement in accordance with the terms set forth therein. 7. CONFIDENTIALITY AND NON-COMPETE -7- 8 7.1 NON-DISCLOSURE. Executive expressly covenants and agrees that he will not reveal, divulge or make known to any person, firm, company or corporation any secret or confidential infor mation of any nature concerning FirstMerit or its business, or anything connected therewith. 7.2 RETURN OF MATERIALS. Executive agrees to deliver or return to FirstMerit upon termination or expiration of this Agreement or as soon thereafter as possible, all non-public information, whether written or stored in media used in computer systems or otherwise, and any other similar items furnished by FirstMerit or prepared by Executive in connection with his services hereunder. Executive will retain no copies thereof after termination of this Agreement or Executive's employment. 7.3 NON-COMPETE. If Executive terminates his employment other than for Good Reason during the Term, or if FirstMerit terminates Executive's employment for Cause during the Term, then, until the first anniversary of the Termination Date, Executive shall not become associated, directly or indirectly, with any entity, whether as a shareholder (other than as a holder of not more than one percent (1%) of the outstanding voting shares of any publicly traded company), principal, partner, employee or consultant (such activities collectively referred to as an "Associate"), that is actively engaged in any business which is in competition with FirstMerit or any of its subsidiaries or affiliates in any geographic area in which FirstMerit or any of its subsidiaries or affiliates does business at the date of such termination. 7.4 INJUNCTIVE RELIEF. Executive acknowledges that it is impossible to measure in money the damages that will accrue to FirstMerit by reason of Executive's failure to observe any of the obligations imposed on him by this Section 7. Accordingly, if FirstMerit shall institute an action to enforce the provisions hereof, Executive hereby waives the claim or defense that an adequate remedy at law is available to FirstMerit, and Executive agrees not to urge in any such action the claim or defense that such remedy at law exists. 8. MISCELLANEOUS 8.1 ASSIGNMENT. This Agreement shall be binding upon the parties hereto, their respective heirs, personal representatives, executors, administrators and successors. 8.2 GOVERNING LAW. This Agreement shall be construed under and governed by the internal laws of the State of Ohio. In the event that any provision of this Agreement shall be held to be void or unenforceable by a court of competent jurisdiction, this Agreement shall not be rendered null and void thereby but shall be construed and enforced as if such void or unenforceable provision were not originally a part of this Agreement. The parties agree to the sole jurisdiction and venue of the Common Pleas Court in Summit County, Ohio, for any disputes arising hereunder. 8.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties concerning the employment of Executive by FirstMerit, and any oral or written statements, representations, agreements or understandings made or entered into prior to or contemporaneously -8- 9 with the execution of this Agreement, are hereby rescinded, revoked and rendered null and void by the parties. 8.4 ATTORNEYS' FEES. In the event that a dispute should arise between the parties regarding the performance, interpretation or enforcement of this Agreement, the prevailing party in such dispute, in addition to the other remedies to which it is entitled, shall also be entitled to receive court costs and reasonable attorneys' fees. 8.5 NO MITIGATION. Executive shall not be required to mitigate the amount of any salary or other payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer, by retirement income after the Termination Date, or otherwise. 8.6 HEADINGS. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed the day and year above first written. FIRSTMERIT CORPORATION By: /s/ John R. Cochran ---------------------------------- John R. Cochran, Chairman and Chief Executive Officer /s/ Charles F. Valentine ---------------------------------- Charles F. Valentine -9- EX-10.B 4 EXHIBIT 10(B) 1 EXHIBIT 10(b) MEMBERSHIP AGREEMENT WITH RESPECT TO THE FIRSTMERIT CORPORATION EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN -------------------------------------- Membership Agreement, dated this 23rd day of October, 1998, by and between FIRSTMERIT CORPORATION, an Ohio corporation (the "Employer") and CHARLES F. VALENTINE, an individual (the "Employee"). R E C I T A L S: A. The Employer maintains the FirstMerit Corporation Executive Supplemental Retirement Plan (the "Plan"), a copy of which is attached hereto as Exhibit A and is incorporated herein by reference, and has selected the Employee for participation in the Plan. B. Section 9.07 of the Plan provides that the Employer and any member in the Plan may, by written agreement, amend the provisions of the Plan as to only such member. C. The Employer desires that the Employee participate in the Plan, subject, however, to the modifications set forth in this Agreement and the Employee desires to accept membership in the Plan subject to such modifications. IN CONSIDERATION OF THE FOREGOING, and for good and valuable consideration, receipt of which is hereby acknowledged, the Employer and Employee agree as follows: 1. PARTICIPATION IN THE PLAN. The Employee shall become a Member of the Plan effective as of October 23, 1998. 2. EARLY RETIREMENT. Employer and Employee agree that, in the case of the Employee, the following Section 4.02 shall be substituted for, and shall apply in lieu of, the Section 4.02 set forth in the Plan: "SECTION 4.02 Subject to the provisions of Article X, if the Member elects Early Retirement after the third anniversary of the date of this Membership Agreement, he shall receive a Monthly Retirement Income determined as provided in Section 4.01, without regard to subparagraphs (a), (b), (c), (d) or (e) thereof, reduced by three percent for every year that the Member's Attained Age on his Retirement Date is less than 65 as set forth in the following table; PROVIDED, however, that the Member's Monthly Retirement Income determined under this Section 4.02, without regard to the reductions set forth in subparagraphs (a), (b), (c), (d) or (e) below, shall not be less than the Actuarial Equivalent of a lump sum benefit payable on the Member's Retirement Date in the amount of One Million Four Hundred Twenty Six Thousand Seven Hundred Sixty-nine Dollars ($1,426,769.00). 2
RETIREMENT INCOME AS A PERCENT OF MONTHLY RETIREMENT INCOME CALCULATED UNDER SECTION 4.01 WITHOUT REGARD TO ATTAINED AGE AT SUBPARAGRAPHS (a), EARLY RETIREMENT (b), (c), (d) OR (e) 60 85% 61 88% 62 91% 63 94% 64 97%
The Member's Monthly Retirement Income calculated under this Section 4.02 shall be further reduced by the following amounts: (a) One hundred percent (100%) of his Primary Social Security Benefit payable at his Retirement Date under the Social Security law in effect at that time. If the Member retires prior to age 62 he shall have his benefits reduced by his Primary Social Security payable at age 62, but such reduction shall not occur until the Member attains age 62. (b) One hundred percent (100%) of his monthly income payable under the Qualified Plan, calculated in the form of a straight life annuity commencing on the Member's Retirement Date. (c) One hundred percent (100%) of his monthly income, if any, payable under the Unfunded Supplemental Benefit Plan, calculated in the form of a straight life annuity commencing on the Member's Retirement Date. (d) One hundred percent (100%) of his monthly income, if any, payable under any other supplemental retirement plan, program, agreement, trust, or annuity provided to the Member by the Employer, calculated in the form of a straight life annuity commencing on the Member's Retirement Date. (e) One hundred percent (100%) of the benefits received by the Member under any Previous Employer Plan. Amounts payable to the Member pursuant to a Previous Employer Plan, including without limitation, lump sum distributions, shall be Actuarially Determined as a straight life annuity payable in equal monthly installments, regardless of the actual form of payment received by the Member. If the Member has received a lump sum distribution of all or part of his benefit under 2 3 a Previous Employer Plan prior to his retirement under this Plan, the amount of offset shall be Actuarially Determined by assuming that such lump sum distribution accumulated interest until the date of the Member's retirement under this Plan and by determining the amount of a straight life annuity payable to the Member from such adjusted lump sum distribution amount." 3. DEFERRED VESTED BENEFIT. Employer and Employee agree that Section 4.05 of the Plan shall not apply to the Employee. 4. DEATH BENEFIT. Employer and Employee agree that the third sentence of Section 5.02 is revised to read as follows: "If the Member's death occurs prior to his attainment of age 60, the death benefit provided under this Section 5.02 shall be determined under Section 4.02 as if the Member had attained age 60 on the date of his death." 5. EFFECT ON PLAN. Except a expressly modified by this Membership Agreement, all of the provisions of the Plan shall apply to the Employee. IN WITNESS WHEREOF, the Employer and Employee have duly executed this Membership Agreement the day and year above first written. FirstMerit Corporation By: /s/ John R. Cochran ----------------------------- John R. Cochran, Chairman and Chief Executive Officer EMPLOYER /S/ Charles F. Valentine ----------------------------- Charles F. Valentine EMPLOYEE 3 EX-10.C 5 EXHIBIT 10(C) 1 EXHIBIT 10(c) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") entered into this 23rd day of October, 1998, between and among FirstMerit Corporation, an Ohio corporation ("FirstMerit"), FirstMerit Bank, N.A., a national banking association ("FirstMerit Bank") (collectively sometimes "FirstMerit"), and Austin J. Mulhern ("Executive"). R E C I T A L S : FirstMerit and FirstMerit Bank desire to employ Executive for a period certain, subject, however, to the terms and conditions of this Agreement. IN CONSIDERATION OF THE FOREGOING, the mutual covenants contained herein, and other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree as follows: 1. EMPLOYMENT FirstMerit hereby employs Executive, and Executive hereby accepts employment, according to the terms and conditions set forth in this Agreement and for the period specified in Section 3 of this Agreement. 2. DUTIES During the Term (as defined in Section 3), Executive shall serve FirstMerit and FirstMerit Bank as its Senior Vice President in accordance with directions from the Chief Executive Officer. During the Employment Period, Executive shall devote Executive's exclusive business time, energies, attention and ability to the business of FirstMerit, and shall faithfully and diligently perform the duties of Executive's employment with FirstMerit and of any office or offices held by Executive in FirstMerit, provided that there shall be no set time or minimum time during which Executive shall perform such services. It is understood and agreed that, without prior written approval from the Board of Directors of FirstMerit (the "Board") (which approval shall not be unreasonably withheld to the extent such activities do not materially interfere with Executive's duties), Executive may not engage in any other business activities during the period of Executive's employment by FirstMerit, whether or not for profit or other pecuniary advantage. Notwithstanding the foregoing, (a) nothing contained in this Section 2 shall preclude Executive from any investment or activity that existed at the time of this Agreement, which were disclosed by Executive to FirstMerit and do not materially interfere with Executive's duties; (b) Executive may make personal financial investments after the date of this Agreement which do not involve any active participation on Executive's part, (c) Executive may 2 engage in charitable, educational, religious, civic, trade associations and similar types of activities, and (d) Executive may serve on the board of directors of such other entities; provided, however, that any such activities described in items (c) and (d) above must (i) be approved in advance by the Board (ii) must not interfere with the business or the performance of the Executive's duties under this Agreement, and (iii) must not conflict with policies concerning conflicts of interest. Any director's or other fees received by the Executive related to activities described in (a) and (d) above may be retained by Executive. 3. TERM OF EMPLOYMENT The term of this Agreement (the "Term") shall commence as of October 23, 1998 (the "Commencement Date"), and shall continue for a period of three (3) years ending at 11:59 pm Cleveland time on October 22, 2001 (the "Expiration Date"), unless this Agreement has been earlier terminated in accordance with the provisions of Section 6 hereof. Following the Expiration Date, Executive's employment status will be "at will." 4. COMPENSATION 4.1 BASE SALARY. While employed under this Agreement, Executive will receive as his compensation for the performance of his duties and obligations to FirstMerit under this Agreement a base salary of One Hundred Seventy Six Thousand Three Hundred Dollars ($176,300.00) per year, which will be payable in semi-monthly installments, and which will be subject to annual increase by the Compensation Committee as approved by the Board (the base salary, as it may be increased from time to time, is referred to herein as the "Base Salary"). 4.2 BONUS. In addition to the Base Salary, Executive will be eligible to receive with respect to each calendar year a bonus of 30%-60% of Base Salary in accordance with FirstMerit's Incentive Compensation Plan ("ICP"), a copy of which has been delivered to Executive, as it may be amended from time to time. Bonuses will be determined by FirstMerit's Compensation Committee in accordance with the terms of the ICP, subject to approval by the Board, will be calculated based upon the formula for determining bonuses under the ICP that is in effect on the Commencement Date unless the formula for determining bonuses under the ICP that is in effect on the date of determination of the amount of the bonus would produce a bonus of greater amount, and ordinarily will be paid during the first quarter of the year following the year to which the bonus relates. 4.3 RESERVED. 4.4 WITHHOLDING. All compensation payable to Executive pursuant to this Section 4 shall be paid net of amounts withheld for federal, state, municipal or local income taxes, Executive's share, if any, of any payroll taxes, and such other federal, state, municipal or local taxes as may be applicable to amounts paid by an employer to its employee or to the employer/employee relationship. -2- 3 5. OTHER BENEFITS OF EMPLOYMENT 5.1 RETIREMENT BENEFITS (A) PENSION PLAN. Executive will participate in the Pension Plan for Employees of FirstMerit Corporation and Subsidiaries (the "Pension Plan"), a copy of the summary plan description of which has been provided to Executive, in accordance with the provisions of the Plan, as amended from time to time. (B) EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN. Executive will be entitled to participate in the FirstMerit Corporation and Subsidiaries Employees' Salary Savings Retirement Plan (the "401(k) Plan"), a copy of the summary plan description of which has been provided to Executive, in accordance with the provisions of the Plan, as amended from time to time. (C) SERP. Executive will participate in the FirstMerit Corporation Executive Supplemental Retirement Plan ("Plan") in accordance with the provisions of the Plan (as may be amended from time to time) and the provisions of the Membership Agreement entered into by FirstMerit and Executive in connection with the Plan (the Plan and Membership Agreement collectively known as the "SERP"). A copy of the SERP has been provided to Executive. The Membership Agreement provides that Executive may receive a lump sum cash payment as his benefit under the SERP in the amount of the greater of (i) the Actuarial Equivalent (as defined in the SERP) of the Monthly Retirement Income (also as defined in the SERP) to which Executive is entitled under the terms of the SERP, or (ii) One Million Five Hundred Sixty One Thousand Eight Hundred Four Dollars ($1,561,804.00), provided in either case that Executive is employed under this Agreement on the Expiration Date. Such amounts payable under the SERP to the Executive, pursuant to the terms of the SERP, shall be reduced by amounts paid to Executive as provided in the SERP. (D) TOP HAT PLAN. Executive will be entitled to participate in the FirstMerit Corporation Unfunded Supplemental Benefits Plan (the "Top Hat Plan"), a copy of which has been provided to Executive, in accordance with the provisions of the Plan, as amended from time to time. Executive's benefits under the Top Hat Plan shall be calculated for all purposes based upon Executive's continuous employment at least through the Expiration Date, unless Executive's employment is terminated prior thereto under circumstances described in Section 6.2. 5.2 COMPENSATORY SEVERANCE BENEFIT. In the event that Executive's employment shall terminate for any reason prior to the Expiration Date, FirstMerit shall pay to Executive or his estate in a lump sum in cash, within 25 days after the Termination Date, an amount equal to Six Hundred Sixty One Thousand Dollars ($661,000.00). -3- 4 5.3 CHANGE OF CONTROL SEVERANCE BENEFIT. In the event that Executive's employment shall terminate following a Change of Control, which termination occurs after the first anniversary of this Agreement but before the Expiration Date, and under any circumstance other than as described in Section 6.2 or Executive's Death, FirstMerit shall cause the acquiror to pay to Executive in a lump sum in cash, within 25 days after the later of the date of such Change of Control or the Termination Date, an amount equal to 200% of Executive's "base amount" as determined under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), less the aggregate present value of the payments or benefits, if any, in the nature of compensation for the benefit of Executive, arising under any plan or arrangement between FirstMerit and Executive, which constitute "parachute payments" under Section 280G of the Code. 5.4 DISABILITY. Executive will be entitled to participate in FirstMerit's Long-Term Disability Plan applicable to executive level employees of FirstMerit, and in FirstMerit's Short-Term Illness Program, all in accordance with the provisions of such programs as may be amended from time to time. 5.5 MISCELLANEOUS BENEFITS. Executive will be entitled to participate in such hospitalization, life insurance, and other employee benefit plans and programs, if any, as may be adopted by FirstMerit from time to time, in accordance with the provisions of such plans and programs and on the same basis as other full-time salaried employees of FirstMerit who participate in such employee benefit plans (except to the extent that the benefits provided under any of such plans or programs are expressly offset by any of the benefits provided under or pursuant to this Agreement). 5.6 STOCK OPTIONS AND GRANTS. On the Commencement Date, FirstMerit will make an award to Executive under and pursuant to the terms of the FirstMerit 1997 Stock Plan, a copy of which has been provided to Executive, of non-qualified stock options ("NQSOs") for Fifteen Thousand (15,000) shares of FirstMerit Corporation common stock. The award will be made pursuant to a Stock Option Agreement in the form and subject to the terms customarily used by FirstMerit, but the terms of which will include the following: the NQSOs will be issued at fair market value on the date of grant; will be exercisable with respect to 3,334 shares on and after the first anniversary of the Commencement Date, an additional 3,333 shares on and after the second anniversary of the Commencement Date, and an additional 8,333 shares on and after the Expiration Date. Notwithstanding the foregoing, all NQSOs under this grant shall vest and become immediately exercisable if Executive's employment is terminated for any reason other than any circumstance described in Section 6.2. Once vested, the NQSOs will remain exercisable for a period ten (10) years from the Commencement Date, notwithstanding that Executive's employment terminates for any reason prior to the end of such period. 5.7 INCOME TAX PREPARATION. For calendar years beginning with 1998, FirstMerit will reimburse Executive for fees incurred in connection with personal income tax preparation in an amount not to exceed Seven Hundred Fifty Dollars ($750) per year. -4- 5 5.8 TAXES AND WITHHOLDING. Executive shall be responsible for paying all federal, state, municipal or local taxes payable by him with respect to any benefits provided under this Section 5, and FirstMerit will, when required by law or when otherwise appropriate or customary, withhold from the benefits or other compensation amounts sufficient to satisfy such taxes. 5.9 EXECUTIVE PHYSICAL EXAMINATION. Approximately every two (2) years, Executive will undergo an executive physical examination by physicians (not including any physicians who have performed or are then performing medical services for Executive) of the Cleveland Clinic or comparable facility. The expenses of the physical examinations required under this Section (but not any treatment in connection therewith), which are not otherwise covered by FirstMerit-sponsored medical plans, will be borne by FirstMerit. 5.10 VACATION. Executive shall be entitled to four (4) weeks paid vacation and ten (10) bank holidays per year. 5.11 REIMBURSEMENTS. Executive shall be entitled to reimbursement privileges with respect to reasonable business expenses in accordance with FirstMerit's standard reimbursement policy for executive employees of FirstMerit. 5.12 COUNTRY CLUB DUES; AUTOMOBILE. FirstMerit shall pay on a timely basis for the dues and reasonable business expenses of Executive's membership and participation in the country clubs that the Executive is a member as of April 5, 1998. The amounts that FirstMerit shall pay pursuant to this Section 5.12 shall not substantially exceed the amounts that were paid for such benefits during the twelve month period ending March 31, 1998 by Security First Corp. FirstMerit agrees to buyout the lease for the automobile which as of April 5, 1998 is being utilized by Executive for business and transfer the ownership of such automobile to Executive. 5.13 RESERVED. 6. TERMINATION 6.1 DEFINITIONS (A) "CHANGE OF CONTROL" means a change in control of a nature that would be required to be reported by persons or entities subject to the reporting requirements of Section 14(a) of the Securities Exchange Act of 1934 in response to item 5(f) of Schedule 14A of Regulation 14(A) as in effect on the date hereof, or successor provisions thereto, provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any unaffiliated "person," "entity," or "group" (as defined in Rule 13(d)-3 issued under the Securities Exchange Act of 1934) directly or indirectly becomes the owner of securities of FirstMerit representing thirty percent (30%) or more of the combined voting power of FirstMerit's then outstanding securities or (ii) at any time during any period of two (2) consecutive calendar years individuals, who at the beginning of such period constitute the Board of Directors of FirstMerit, cease for any reason to constitute at least the majority of -5- 6 such Board unless the election, or the nomination for election, by FirstMerit's shareholders of each new director was approved by a vote of at least two-thirds of the directors still in office who were directors of FirstMerit at the beginning of such two (2)-year period. (B) "TERMINATION DATE" means the date on which Executive's employment with FirstMerit terminates for any reason. (C) "TERMINATION OF EMPLOYMENT FOR CAUSE" means the termination of Executive's employment by FirstMerit on account of (i) intentional misconduct and/or gross negligence by Executive that has a material adverse effect on FirstMerit, monetarily or otherwise, (ii) Executive's personal dishonesty, (iii) incompetence, (iv) breach of a fiduciary duty involving personal profit, (v) intentional failure to perform stated duties, (vi) willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and- desist order, or (vi) material breach of any provision of this Agreement by Executive. No act by Executive shall be considered intentional unless Executive acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of FirstMerit. Notwithstanding the foregoing, there shall not be deemed to have been a Termination of Employment for Cause unless and until there shall have been delivered to Executive a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board stating that the Board believes the Executive has engaged in conduct described in the preceding sentence. (D) "TERMINATION OF EMPLOYMENT FOR GOOD REASON" means the voluntary termination of Executive's employment by Executive for any of the following reasons: (i) Executive is required to move to a new principal work location that is more than 25 miles from Executive's work location while with his prior employer; (ii) Executive's duties under this Agreement are subject to a substantial reduction; (iii) the material breach of this Agreement by FirstMerit, but only if such breach is not corrected within 30-days after written notice to FirstMerit detailing the breach; (iv) there is a substantial reduction in the cash compensation, perquisites or vacation provided to Executive by FirstMerit; (v) significant reduction in Executive's responsibilities and status within the FirstMerit organization, or a change in his title or office without prior written consent of Executive; or (vi) involuntary discontinuance of Executive's participation in any employee benefit plans maintained by FirstMerit unless such plans are discontinued by reason of law or loss of tax deductibility to FirstMerit with respect to contributions to such plans, or are discontinued as a matter of FirstMerit policy applied equally to all participants in such plans. 6.2 TERMINATION OF EMPLOYMENT UPON RESIGNATION OR FOR CAUSE. If Executive's employment is terminated as a result of Executive's voluntary resignation (other than Termination of Employment for Good Reason) or Termination of Employment for Cause, Executive shall be entitled to receive only Executive's Base Salary to which he was entitled through the Termination Date, any unpaid bonus due with respect to the year prior to the year in which the termination occurred, and such other payments and benefits to which he is entitled under the terms of this Agreement and as may be available to him through FirstMerit's benefit plans and policies. 6.3 TERMINATION UNDER OTHER CIRCUMSTANCES. -6- 7 (A) If Executive's employment is terminated under circumstances other than as described in Section 6.2, and the Termination Date is prior to the Expiration Date, Executive's Base Salary and bonus as calculated through the Expiration Date shall be payable in a lump sum in cash within 25 days after the Termination Date, and all other benefits and entitlements described in Sections 5.1, 5.2, 5.3, 5.4, 5.5 and 5.6 (including credit for Years of Service under the Pension Plan, 401(k) Plan and the Top Hat Plan) shall continue at FirstMerit's expense through the Expiration Date. (B) If Executive's employment is terminated after the Expiration Date, Executive shall be entitled to receive his Base Salary and bonus to which he was entitled through the Termination Date and such other payments and benefits to which he is entitled under the terms of this Agreement and as may otherwise be available to him through FirstMerit's benefit plans and policies. 6.4 EFFECT OF TERMINATION. Upon termination of Executive's employment, the obligations of each of the parties under this Agreement shall expire as of the Termination Date, including, without limitation, the obligations of FirstMerit to pay any compensation to Executive, except to the extent otherwise specifically provided in this Agreement. Notwithstanding the foregoing, the obligations contained in Section 7 of this Agreement and the provisions hereof relating to the obligations of FirstMerit described in the preceding sentence, shall survive the termination or expiration of this Agreement in accordance with the terms set forth therein. 7. CONFIDENTIALITY AND NON-COMPETE 7.1 NON-DISCLOSURE. Executive expressly covenants and agrees that he will not reveal, divulge or make known to any person, firm, company or corporation any secret or confidential infor mation of any nature concerning FirstMerit or its business, or anything connected therewith. 7.2 RETURN OF MATERIALS. Executive agrees to deliver or return to FirstMerit upon termination or expiration of this Agreement or as soon thereafter as possible, all non-public information, whether written or stored in media used in computer systems or otherwise, and any other similar items furnished by FirstMerit or prepared by Executive in connection with his services hereunder. Executive will retain no copies thereof after termination of this Agreement or Executive's employment. 7.3 NON-COMPETE. If Executive terminates his employment other than for Good Reason during the Term, or if FirstMerit terminates Executive's employment for Cause during the Term, then, until the first anniversary of the Termination Date, Executive shall not become associated, directly or indirectly, with any entity, whether as a shareholder (other than as a holder of not more than one percent (1%) of the outstanding voting shares of any publicly traded company), principal, partner, employee or consultant (such activities collectively referred to as an "Associate"), that is actively engaged in any business which is in competition with FirstMerit or any of its subsidiaries -7- 8 or affiliates in any geographic area in which FirstMerit or any of its subsidiaries or affiliates does business at the date of such termination. 7.4 INJUNCTIVE RELIEF. Executive acknowledges that it is impossible to measure in money the damages that will accrue to FirstMerit by reason of Executive's failure to observe any of the obligations imposed on him by this Section 7. Accordingly, if FirstMerit shall institute an action to enforce the provisions hereof, Executive hereby waives the claim or defense that an adequate remedy at law is available to FirstMerit, and Executive agrees not to urge in any such action the claim or defense that such remedy at law exists. 8. MISCELLANEOUS 8.1 ASSIGNMENT. This Agreement shall be binding upon the parties hereto, their respective heirs, personal representatives, executors, administrators and successors. 8.2 GOVERNING LAW. This Agreement shall be construed under and governed by the internal laws of the State of Ohio. In the event that any provision of this Agreement shall be held to be void or unenforceable by a court of competent jurisdiction, this Agreement shall not be rendered null and void thereby but shall be construed and enforced as if such void or unenforceable provision were not originally a part of this Agreement. The parties agree to the sole jurisdiction and venue of the Common Pleas Court in Summit County, Ohio, for any disputes arising hereunder. 8.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties concerning the employment of Executive by FirstMerit, and any oral or written statements, representations, agreements or understandings made or entered into prior to or contemporaneously with the execution of this Agreement, are hereby rescinded, revoked and rendered null and void by the parties. 8.4 ATTORNEYS' FEES. In the event that a dispute should arise between the parties regarding the performance, interpretation or enforcement of this Agreement, the prevailing party in such dispute, in addition to the other remedies to which it is entitled, shall also be entitled to receive court costs and reasonable attorneys' fees. 8.5 NO MITIGATION. Executive shall not be required to mitigate the amount of any salary or other payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer, by retirement income after the Termination Date, or otherwise. 8.6 HEADINGS. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed the day and year above first written. -8- 9 FIRSTMERIT CORPORATION By: /s/ John R. Cochran ---------------------------------- John R. Cochran, Chairman and Chief Executive Officer /S/ Austin J. Mulhern ------------------------------------- Austin J. Mulhern -9- EX-10.D 6 EXHIBIT 10(D) 1 EXHIBIT 10(d) MEMBERSHIP AGREEMENT WITH RESPECT TO THE FIRSTMERIT CORPORATION EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN -------------------------------------- Membership Agreement, dated this 23rd day of October, 1998, by and between FIRSTMERIT CORPORATION, an Ohio corporation (the "Employer") and AUSTIN J. MULHERN, an individual (the "Employee"). R E C I T A L S: A. The Employer maintains the FirstMerit Corporation Executive Supplemental Retirement Plan (the "Plan"), a copy of which is attached hereto as Exhibit A and is incorporated herein by reference, and has selected the Employee for participation in the Plan. B. Section 9.07 of the Plan provides that the Employer and any member in the Plan may, by written agreement, amend the provisions of the Plan as to only such member. C. The Employer desires that the Employee participate in the Plan, subject, however, to the modifications set forth in this Agreement and the Employee desires to accept membership in the Plan subject to such modifications. IN CONSIDERATION OF THE FOREGOING, and for good and valuable consideration, receipt of which is hereby acknowledged, the Employer and Employee agree as follows: 1. PARTICIPATION IN THE PLAN. The Employee shall become a Member of the Plan effective as of October 23, 1998. 2. EARLY RETIREMENT. Employer and Employee agree that, in the case of the Employee, the following Section 4.02 shall be substituted for, and shall apply in lieu of, the Section 4.02 set forth in the Plan: "SECTION 4.02 Subject to the provisions of Article X, if the Member elects Early Retirement on or after the date that he has attained age 60, he shall receive a Monthly Retirement Income determined as provided in Section 4.01, without regard to subparagraphs (a), (b), (c), (d) or (e) thereof, reduced by three percent for every year that the Member's Attained Age on his Retirement Date is less than 65 as set forth in the following table; PROVIDED, however, that if the Member elects Early Retirement on or after the date that he has attained age 62, the Member's Monthly Retirement Income determined under this Section 4.02, without regard to the reductions set forth in subparagraphs (a), (b), (c), (d) or (e) below, shall not be less than the Actuarial Equivalent of a lump sum benefit payable on the Member's Retirement Date in the amount of One Million Five Hundred Sixty One Thousand Eight Hundred Four Dollars ($1,561,804). 2
RETIREMENT INCOME AS A PERCENT OF MONTHLY RETIREMENT INCOME CALCULATED UNDER SECTION 4.01 WITHOUT REGARD TO ATTAINED AGE AT SUBPARAGRAPHS (a), EARLY RETIREMENT (b), (c), (d) OR (e) 60 85% 61 88% 62 91% 63 94% 64 97%
The Member's Monthly Retirement Income calculated under this Section 4.02 shall be further reduced by the following amounts: (a) One hundred percent (100%) of his Primary Social Security Benefit payable at his Retirement Date under the Social Security law in effect at that time. If the Member retires prior to age 62 he shall have his benefits reduced by his Primary Social Security payable at age 62, but such reduction shall not occur until the Member attains age 62. (b) One hundred percent (100%) of his monthly income payable under the Qualified Plan, calculated in the form of a straight life annuity commencing on the Member's Retirement Date. (c) One hundred percent (100%) of his monthly income, if any, payable under the Unfunded Supplemental Benefit Plan, calculated in the form of a straight life annuity commencing on the Member's Retirement Date. (d) One hundred percent (100%) of his monthly income, if any, payable under any other supplemental retirement plan, program, agreement, trust, or annuity provided to the Member by the Employer, calculated in the form of a straight life annuity commencing on the Member's Retirement Date. (e) One hundred percent (100%) of the benefits received by the Member under any Previous Employer Plan. Amounts payable to the Member pursuant to a Previous Employer Plan, including without limitation, lump sum distributions, shall be Actuarially Determined as a straight life annuity payable in equal monthly installments, regardless of the actual form of payment received by the Member. If the Member has received a lump sum distribution of all or part of his benefit under a Previous Employer Plan prior to his retirement under this Plan, the amount of offset 2 3 shall be Actuarially Determined by assuming that such lump sum distribution accumulated interest until the date of the Member's retirement under this Plan and by determining the amount of a straight life annuity payable to the Member from such adjusted lump sum distribution amount." 3. DEFERRED VESTED BENEFIT. Employer and Employee agree that Section 4.05 of the Plan shall not apply to the Employee. 4. DEATH BENEFIT. Employer and Employee agree that the third sentence of Section 5.02 is revised to read as follows: "If the Member's death occurs prior to his attainment of age 60, the death benefit provided under this Section 5.02 shall be determined under Section 4.02 as if the Member had attained age 60 of the date of his death." 5. EFFECT ON PLAN. Except a expressly modified by this Membership Agreement, all of the provisions of the Plan shall apply to the Employee. IN WITNESS WHEREOF, the Employer and Employee have duly executed this Membership Agreement the day and year above first written. FirstMerit Corporation By: /s/ John R. Cochran ------------------------------- John R. Cochran, Chairman and Chief Executive Officer EMPLOYER /s/ Austin J. Mulhern ---------------------------------- Austin J. Mulhern EMPLOYEE 3 EX-21 7 EXHIBIT 21 1 EXHIBIT 21 FIRSTMERIT CORPORATION LIST OF SUBSIDIARY COMPANIES As of November 1, 1998 Citizens Investment Corporation Citizens Savings Corporation of Stark County FirstMerit Bank, N.A. - Abell & Associates, Inc. - FirstMerit Insurance Agency, Inc. - FirstMerit Leasing Company - FirstMerit Mortgage Corporation - FirstMerit Securities, Inc. - OPN, Inc. - NB 5 Financial Services, Inc. FirstMerit Community Development Corporation FirstMerit Credit Life Insurance Company SF Development Corp. - Richwood Development (50%) - Rushmore Subdivision Ltd. (50%) - Courts of Weymouth Development, Ltd. (33%) EX-27 8 EXHIBIT 27
9 0000354869 FirstMerit Corporation 1,000 3-MOS DEC-31-1998 JUL-01-1998 SEP-30-1998 196,785 0 21,564 2,636 1,305,137 0 1,305,137 4,412,475 65,151 6,258,608 4,818,743 656,931 87,940 0 0 0 110,197 584,797 6,258,608 96,531 3,141 339 117,111 37,698 45,466 71,645 5,151 1,788 56,599 37,094 37,094 0 0 25,575 0.39 0.39 5.05 15,515 14,258 86 38,205 65,749 8,749 3,000 65,151 65,151 0 0
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