-----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, HOCGOQHwYT84ptEoih4oFMz/45dO3D7l5SRARRcNRUCTQHDgP5Vyhsoa9Zw9eXEE lZkDS7v89fsqc+NCL6+ntA== 0000950152-98-002680.txt : 19980331 0000950152-98-002680.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950152-98-002680 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FEDERAL FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0000846814 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341622711 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-17894 FILM NUMBER: 98577968 BUSINESS ADDRESS: STREET 1: 135 E LIBERTY ST CITY: WOOSTER STATE: OH ZIP: 44691 BUSINESS PHONE: 3302648001 MAIL ADDRESS: STREET 1: 135 E LIBERTY ST CITY: WOOSTER STATE: OH ZIP: 44691 FORMER COMPANY: FORMER CONFORMED NAME: FIRSTFED FINANCIAL CORP/OH DATE OF NAME CHANGE: 19890731 10-K405 1 FIRSTFEDERAL FINANCIAL SERVICES FORM 10-K 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No fee required] For the transition period from ___________________ to ________________ Commission file number 0-17894 FIRSTFEDERAL FINANCIAL SERVICES CORP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 34-1622711 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 135 EAST LIBERTY STREET, WOOSTER, OHIO 44691 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (330-264-8001) - -------------------------------------------------------------------------------- Securities Registered Pursuant to Section 12(b) of the Exchange Act: None Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Title of each class: Name of each exchange on which registered: - -------------------- ------------------------------------------ Common Stock, par value $1.00 per share Nasdaq National Market 6 1/2% Cumulative Convertible Preferred Stock, Series B, without par value Nasdaq National Market
Indicate by check mark whether the Registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding l2 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 __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked prices of such stock on the Nasdaq Stock Market as of March 20, 1998, was $183,633,366. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of March 20, 1998, there were issued and outstanding 6,749,366 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV of Form 10-K - Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1997. Part III of Form 10-K - Portions of the Proxy Statement for 1998 Annual Meeting of Shareholders. 1 2 Note 1: In calculating the market value of securities held by non-affiliates of Registrant as disclosed on the cover page of this Form 10-K, Registrant has treated as securities held by affiliates as of December 31, 1997, voting stock owned of record by its directors and principal executive officers and shareholders owning greater than 10% of the voting stock. FIRSTFEDERAL FINANCIAL SERVICES CORP 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I PAGE -------- Item 1. Business.....................................................................................3 Item 2. Properties..................................................................................15 Item 3. Legal Proceedings...........................................................................16 Item 4. Submission of Matters to a Vote of Security Holders.........................................16 PART II Item 5. Market For Registrant's Common Equity and Related Shareholder Matters............Ex. 13, pg. 1 Item 6. Selected Financial Data..........................................................Ex. 13, pg. 1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................................Ex. 13, pg. 15 Item 7a. Quantitative and Qualitative Disclosures About Market Risk......................Ex. 13, pg. 20 Item 8. Financial Statements and Supplementary Data......................................Ex. 13, pg. 2 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................17 PART III Item 10. Directors and Executive Officers of the Registrant..........................................17 Item 11. Executive Compensation......................................................................17 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . ..17 Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . 17 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . .18
2 3 PART I ------ ITEM 1. BUSINESS - ------- -------- ORGANIZATION FirstFederal Financial Services Corp (the "Corporation"), an Ohio corporation, is a bank holding company which has as its primary wholly-owned subsidiaries Signal Bank, N.A., a national bank ("Signal Bank"), Summit Bank, N.A., a national bank ("Summit Bank") and Mobile Consultants, Inc., a broker and servicer of manufactured housing finance contracts ("MCi"). At December 31, 1997, the Corporation had assets of $1.5 billion, deposits of $981.7 million and shareholders' equity of $104.7 million. Founded in 1905 as an Ohio chartered stock building and loan association, Signal Bank (formerly known as First Federal Savings and Loan Association of Wooster) converted to a federally chartered mutual thrift in 1935, converted from mutual to stock form in 1987, and converted from a savings and loan association to a national bank in July 1997. On September 15, 1997, Signal Bank completed the acquisition of seven branches with approximately $151 million in deposits. Signal Bank serves north central Ohio (its "Market Area") through its home office, 23 full service banking offices, and 3 limited service facilities. Signal Bank offers a wide range of competitive consumer-oriented lending and deposit products and services throughout its Market Area. Signal Bank has achieved significant growth in recent years through the expansion of its asset origination capabilities and by acquiring branches in its Market Area. Summit Bank was acquired by the Corporation in July 1997. Summit Bank offers a full complement of banking products and services to small businesses, individuals and professionals in the Akron, Canton and Cleveland, Ohio metropolitan areas. Summit Bank operates 2 full service banking offices. MCi, a manufactured housing finance company which brokers manufactured home loans to and on behalf of financial institutions, was acquired by the Corporation in April 1996. MCi facilitates the origination of primarily non-mortgage, consumer loan contracts through 3,500 dealers of manufactured homes located in 42 states. MCi also services the collection and recovery of troubled loans on behalf of the financial institutions which originate the loans. The Corporation has one other wholly-owned subsidiary, Summit Banc Investments Corporation, which offers a full range of investment advisory services, financial planning and portfolio management. Signal Bank has 8 wholly-owned subsidiaries: Signal Mortgage Corp, a mortgage originator; Signal Finance Corp, a multi-purpose finance company; Signal Securitization Corp, an issuer of asset-backed securities; Alliance Corporate Resources ("ACR"), Inc., an information technology equipment leasing and consulting company, HFS Agency, Inc., seller of insurance and annuity products; Home Financial Services Corporation, an investment sales and advisory company; Professional Appraisal Services Corp, a real estate appraisal company; and Venture Mortgage Corp, a mortgage banking joint venture. Summit Bank has one wholly-owned subsidiary, Alpha Equipment Group, Inc., an equipment leasing company. In February 1998, the Corporation formed Signal Capital Trust One ("Signal Trust"), a Delaware business trust. Signal Trust was formed for the purpose of (I) issuing and selling $50 million of its 8.67% Capital Securities, Series A (the "Capital Securities") and common securities (the "Common Securities"), (ii) investing the proceeds thereof in the 8.67% Junior Subordinated Deferrable Interest Debentures, Series A, issued by the Corporation (the "FirstFederal Debentures") and (iii) engaging in certain other limited activities. The Capital Securities were issued and sold to investors in a private placement exempt from the Securities Act of 1933 on February 10, 1998. The Corporation is the sole owner of the Common Securities. Distributions on the Capital Securities are guaranteed by the Corporation, are cumulative, began accumulating on February 13, 1998 and are payable semi-annually in arrears on February 15 and August 15 of each year, commencing August 15, 1998 at the annual rate of 8.67% of the liquidation amount of $1,000 per security. The interest payment schedule of the FirstFederal Debentures is identical to that of the Capital Securities, except that so long as the Corporation is not in default 3 4 under the indenture governing the FirstFederal Debentures, the Corporation may defer the payment of interest on the FirstFederal Debentures at any time and from time to time for a period not exceeding ten consecutive semi-annual periods (an "Extension Period"). During any Extension Period, the Corporation will be prohibited from taking certain actions, including declaring or paying any dividends or distributions on or redeeming or purchasing any of its capital stock. When used in this form 10-K and in future filings by the Corporation with the Securities and Exchange Commission (the "SEC"), in the Corporation's press release or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, (I) the possibility that expected cost savings from the planned acquisition of First Shenango (as described below) cannot be fully realized or realized within the expected time frame, (ii) the possibility that costs or difficulties related to the integration of the businesses of the Corporation and First Shenango are greater than expected, (iii) the possibility that revenues following the proposed acquisition of First Shenango are lower than expected, (iv) changes in economic conditions in the Corporation's market area, (v) changes in policies by regulatory agencies and new legislation, (vi) fluctuations in interest rates, (vii) demand for loans in the Corporation's market area, and (viii) competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Corporation wishes to advise readers that the factors listed above and other factors could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Corporation does not undertake - and specifically declines any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. ACQUISITIONS On February 9, 1998, the Corporation announced the signing of a definitive agreement for the acquisition of First Shenango Bancorp, Inc. ("First Shenango"). First Shenango's wholly-owned subsidiary, First Federal Savings Bank of New Castle, is expected to become a separate operating subsidiary of the Corporation and operate under its current name and banking charter. Under the terms of the agreement, the Corporation will exchange 1.143 shares of its common stock for each of the 2,069,007 outstanding shares of First Shenango stock and 109,074 outstanding options. Based on the closing price per share of the Corporation's common stock on February 6, 1998 of $41.75, the transaction would be valued at approximately $103.9 million, or $47.72 per share of First Shenango stock. The merger, which will be accounted for as a pooling of interests, is expected to be consummated in the third quarter of 1998, pending approval by First Shenango's and the Corporation's shareholders, regulatory authorities and other customary conditions of closing. The transaction is expected to be a tax-fee reorganization for federal income tax purposes. First Shenango has four banking offices in Lawrence County, Pennsylvania. At December 31, 1997, First Shenango had total assets of $375.0 million, deposits of $275.2 million and shareholders' equity of $47.9 million. On September 15, 1997, Signal Bank completed the acquisition of seven branches of KeyBank, National Association, which have approximately $151 million in deposits and are located in the cities of Bucyrus, Crestline, Cygnet, Galion, Tiffin, Wayne and Willard in north central and north western Ohio. The purchase price was equal to 12.15% of average deposits measured just prior to closing resulting in approximately $19 million in goodwill. On July 8, 1997, the Corporation acquired Summit Bancorp, the parent company of Summit Bank through the exchange of 2.3375 common shares of the Corporation's common stock for each of the 234,891 shares of Summit Bancorp stock outstanding. At the time of acquisition, Summit Bank had $89 million in assets and $73 4 5 million in deposits and operated two offices in Summit County. The Summit acquisition was accounted for as a pooling-of-interests. On April 3, 1996, the Corporation acquired MCi. In the transaction, the Company acquired $7.1 million in assets consisting primarily of advances receivable on manufactured home loans and furniture and fixtures. The Corporation also assumed the liabilities of MCi, which consisted mainly of accounts payable to dealers and lines of credit. The purchase price of $10.6 million was comprised of $1 million in cash, $4 million in notes due quarterly during 1997, and 384,232 shares of the Corporation's common stock, valued at $5.6 million. The transaction was accounted for under the purchase method of accounting and, accordingly, the assets and liabilities of MCi were recorded at their estimated fair value at the date of acquisition. The purchase resulted in a cost in excess of fair value of net assets of $5.6 million, which is being amortized by the straight-line method over a period of no longer than 10 years. STATISTICAL INFORMATION Pages 5 to 7 contain statistical information on the Corporation and its subsidiaries. Information about the Corporation's business segments is incorporated herein by reference to page 13 of Registrant's 1997 Annual Report to Shareholders attached to this filing as Exhibit 13. SECURITIES PORTFOLIO - -------------------- The securities portfolio as of December 31 for each of the last five years, and the maturity distribution and weighted average yield of securities as of December 31, 1997, are incorporated herein by reference from the securities tables on pages 17 and 18 of the Corporation's 1997 Annual Report to Shareholders attached to this filing as Exhibit 13. As of December 31, 1997, the Corporation owned no securities (other than U.S. Government and U.S. Government agencies and corporations) issued by one issuer for which the book value exceeded ten percent of shareholders' equity. AVERAGE BALANCE SHEETS - ---------------------- The average balance sheets are incorporated herein by reference from Table 1 on pages 15 and 16 of the Corporation's 1997 Annual Report to Shareholders attached to this filing as Exhibit 13. ANALYSIS OF NET INTEREST INCOME AND NET INTEREST INCOME CHANGES - --------------------------------------------------------------- The analysis of net interest income and the analysis of net interest income changes are incorporated herein by reference to Table 1 and Table 2 and the related discussion on pages 15 through 17 of the Corporation's 1997 Annual Report to Shareholders attached to this filing as Exhibit 13. TYPES OF LOANS AND LEASES - ------------------------- The loans and lease portfolio as of December 31 for each of the last five years, and the percentage distribution by loan type, are incorporated herein by reference from the loan and lease table on page 18 of the Corporation's 1997 Annual Report to Shareholders attached to this filing as Exhibit 13. MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES - ---------------------------------------------------------------- The remaining maturities of the loan portfolio distributed to reflect cash flows at December 31, 1997, based on scheduled repayments and the sensitivity of loans to interest rate changes for loans due after one year is shown below. Commercial loans includes commercial real estate, commercial leases and commercial finance contracts. Consumer loans include residential mortgage loans, manufactured housing loans and consumer loans. 5 6
- ---------------------------------------------------------------------------------------------------------------------------- ($000's) Commercial Loans Real Estate Consumer Construction Loans Loans - ---------------------------------------------------------------------------------------------------------------------------- Due in one year or less.................................................. $108,174 $9,181 $279,854 Due after one year through five years.................................... 76,923 ---- 315,017 Due after five years..................................................... 28,983 ---- 188,717 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL $214,080 $9,181 $783,588 - ---------------------------------------------------------------------------------------------------------------------------- Loans due after one year: Predetermined interest rate........................................... $95,913 ---- $432,125 Floating or adjustable interest rate.................................. $9,993 ---- $71,609 - ----------------------------------------------------------------------------------------------------------------------------
LOANS AND LEASES AT RISK - ------------------------ The table of underperforming assets and the related discussion states the amount of non-accrual, past-due and renegotiated loans and leases on page 19 of the Corporation's 1997 Annual Report to Shareholders attached to this filing as Exhibit 13 is incorporated herein by reference. At December 31, 1997, loans with a total principal balance of $7.7 million have been identified by management as potentially nonperforming in the future, compared to $2.4 million at December 31, 1996 and $1.3 million at December 31, 1995. Increases in both years relate primarily to commercial loans. Management works closely with these borrowers in their efforts to resolve potential cash flow problems. Potential problem loans are not included in nonperforming assets since the borrowers currently meet all applicable loan agreement terms. SUMMARY OF CREDIT LOSS EXPERIENCE - --------------------------------- The table below reflects net charge-offs of loans and leases for each of the last five years.
- ---------------------------------------------------------------------------------------------------------------------------- NET CHARGE-OFFS ($000'S) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Commercial and industrial loans..................... $220 ---- ---- ---- ---- Real estate construction loans...................... ---- ---- ---- ---- ---- Commercial real estate loans........................ 106 $309 ---- $1,110 $253 Commercial lease financing.......................... 4 ---- ---- ---- ---- Residential mortgage loans.......................... 12 20 46 56 (1) Consumer loans...................................... 389 109 164 157 184 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL $731 $438 $210 $1,323 $436 - ---------------------------------------------------------------------------------------------------------------------------- Net charge-offs as a percent of average loans and leases................................. 0.09% 0.06% 0.04% 0.32% 0.13% - ----------------------------------------------------------------------------------------------------------------------------
The table below sets forth the allocation of the allowance for credit losses by loan category at the dates indicated.
AT DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- % of Loans to % of Loans to % of Loans to % of Loans to % of Loans to ($000's) AMOUNT Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - ----------------------------------------------------------------------------------------------------------------------------------- Type of Loan: Commercial and industrial loans.......... $1,216 10.0% ---- 0.7% ---- ---- ---- ---- ---- ---- Residential mortgage loans..................... 707 55.0 $593 79.4% $616 83.0% $867 85.5% $645 83.7% Commercial real estate....... 1,062 7.8 1,633 2.6 1,702 4.6 1,453 3.8 3,245 5.4 Consumer and other........... 2,553 27.2 690 17.3 676 12.4 884 10.7 622 10.9 - ----------------------------------------------------------------------------------------------------------------------------- Total allowance for credit losses............. $5,538 100% $2,916 100% $2,994 100% $3,204 100% $4,512 100% - -----------------------------------------------------------------------------------------------------------------------------
6 7 The analysis above is for analytical purposes. The allowance for credit losses is general in nature and is available to absorb losses from any portion of the loan and lease portfolio. MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT AT DECEMBER 31, 1997 - --------------------------------------------------------------------- The following table indicates the amount of the Corporation's certificates of deposit by time remaining until maturity as of December 31, 1997.
- ---------------------------------------------------------------------------------------------------------------------------- ($000's) All CDS CDS over $100,000 - ---------------------------------------------------------------------------------------------------------------------------- Due within three months................ $172,198 $70,144 Due in three to six months................. 104,299 15,002 Due in six to twelve months................ 103,103 41,783 Due after one year through five years.................................... 184,680 37,420 Due after five years........................ 46,993 ---- - ---------------------------------------------------------------------------------------------------------------------------- TOTAL $611,273 $164,349 - ----------------------------------------------------------------------------------------------------------------------------
REGULATION AND SUPERVISION GENERAL The Corporation is a registered bank holding company, subject to broad federal regulation and oversight by the Federal Reserve Bank (FRB). Signal Bank and Summit Bank (the "Banks") are national banks subject to broad federal regulation and oversight extending to all their operations by the Office of the Comptroller of the Currency (OCC) and by the Federal Deposit Insurance Corporation (FDIC). The Banks are also members of the Federal Home Loan Bank (FHLB) of Cincinnati. Signal Bank is a member of the Savings Association Insurance Fund (SAIF) and Summit Bank is a member of the Bank Insurance Fund (BIF) and the deposits of both Banks are insured by the FDIC. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. See Note 16 of Notes To Consolidated Financial Statements. FEDERAL REGULATION OF NATIONAL BANKS The OCC has extensive authority over the operations of national banks. As part of this authority, the Banks are required to file periodic reports with the OCC and are subject to periodic examinations by the OCC. All national banks are subject to a semi-annual assessment, based upon the bank's total assets, to fund the operations of the OCC. The OCC also has extensive enforcement authority over all national banks, including the Banks. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC. Except under certain circumstances, public disclosure of final enforcement actions by the OCC is required. 7 8 The Banks' loans-to-one borrower limit is generally limited to 15% of unimpaired capital and surplus. At December 31, 1997, the maximum amount which the Banks' have lent to any one borrower and the borrower's related entities was approximately $5.2 million, of which $4.3 million and $900,000 was lent by Signal Bank and Summit Bank, respectively. The Banks' five largest lending relationships at December 31, 1997 were performing in accordance with their terms and totaled $22.4 million, in aggregate. The five largest lending relationships were funded with $20.1 million and $2.3 million from Signal Bank and Summit Bank, respectively. The OCC, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. Failure to submit a plan or to comply with an approved plan will subject the institution to further enforcement action. INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC Signal Bank is a member of the SAIF and Summit Bank is a member of the BIF, both of which are administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC. The FDIC also has the authority to initiate enforcement actions against banks after giving the OCC an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. In order to equalize the deposit insurance premium schedules for BIF and SAIF insured institutions, the FDIC imposed a one-time special assessment on all SAIF-assessable deposits pursuant to federal legislation passed on September 30, 1996. Signal Bank's special assessment, which was $3.3 million, was paid in November 1996. Effective January 1, 1997, the premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points. However, SAIF-insured institutions are required to pay a Financing Corporation (FICO) assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. In 1997, for SAIF-insured institutions, the assessment was equal to about 6.50 basis points for each $100 in domestic deposits, while BIF-insured institutions paid an assessment equal to about 1.30 basis points for each $100 in domestic deposits. The assessment is expected to be reduced to about 2 basis points no later than January 1, 2000, when BIF insured institutions fully participate in the assessment. These assessments, which may be revised based upon the level of BIF and SAIF deposits will continue until the bonds mature in the year 2017. 8 9 NATIONAL BANKS The Banks are subject to the capital regulations of the OCC. The OCC's regulations establish two capital standards for national banks: a leverage requirement and a risk-based capital requirement. In addition, the OCC may, on a case-by-case basis, establish individual minimum capital requirements for a national bank that vary from the requirements which would otherwise apply under OCC regulations. A national bank that fails to satisfy the capital requirements established under the OCC's regulations will be subject to such administrative action or sanctions as the OCC deems appropriate. The leverage ratio adopted by the OCC requires a minimum ratio of "Tier 1 capital" to adjusted total assets of 3% for national banks rated composite 1 under the CAMEL rating system for banks. National banks not rated composite 1 under the CAMEL rating system for banks are required to maintain a minimum ratio of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level and nature of risks of their operations. For purposes of the OCC's leverage requirement, Tier 1 capital generally consists of common shareholders' equity and retained income and certain non-cumulative perpetual preferred stock and related income, except that no intangibles and certain purchased mortgage servicing rights and purchased credit card relationships may be included in capital. The risk-based capital requirements established by the OCC's regulations require national banks to maintain "total capital" equal to at least 8% of total risk-weighted assets. For purposes of the risk-based capital requirement, "total capital" means Tier 1 capital (as described above) plus "Tier 2 capital," provided that the amount of Tier 2 capital may not exceed the amount of Tier 1 capital, less certain assets. The components of Tier 2 capital include certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. The OCC has revised its risk-based capital requirements to permit the OCC to require higher levels of capital for an institution in light of its interest rate risk. PROMPT CORRECTIVE ACTION The OCC is authorized and, under certain circumstances required, to take certain actions against national banks that fail to meet their capital requirements. The OCC is generally required to take action to restrict the activities of an "undercapitalized institution" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such institution must submit a capital restoration plan and until such plan is approved by the OCC may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OCC is authorized to impose the additional restrictions that are applicable to significantly undercapitalized banks. Any national banking association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more of additional specified actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the institution. A national bank that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized banks. In addition, the OCC must appoint a receiver (or conservator with the concurrence of the FDIC) for a national bank, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized bank is also subject to the general enforcement authority of the OCC, including the appointment of a conservator or a receiver. 9 10 The OCC is also generally authorized to reclassify a bank into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS The Banks' ability to pay dividends is governed by the National Bank Act and OCC regulations. Under such statute and regulations, all dividends by a national bank must be paid out of current or retained net profits, after deducting reserves for losses and bad debts. The National Bank Act further restricts the payment of dividends out of net profits by prohibiting a national bank from declaring a cash dividend on its shares of common stock until the surplus fund equals the amount of capital stock or, if the surplus fund does not equal the amount of capital stock, until one-tenth of the Banks' net profits for the preceding half year in the case of quarterly or semi-annual dividends, or the preceding two half-year periods in the case of annual dividends, are transferred to the surplus fund. In addition, the prior approval of the OCC is required for the payment of a dividend if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits for the year combined with its net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The OCC has the authority to prohibit the payment of dividends by a national bank when it determines such payment to be an unsafe and unsound banking practice. In addition, the Banks would be prohibited by federal statute and the OCC's prompt corrective action regulations from making any capital distribution if, after giving effect to the distribution, the Banks would be classified as "undercapitalized" under the OCC's regulations. See "Prompt Corrective Action." ACCOUNTING The OCC requires that investment activities of a national bank be in compliance with approved and documented investment policies and strategies, and must be accounted for in accordance with generally accepted accounting principles ("GAAP"). Accordingly, management must support its classification of and accounting for loans and securities (i.e., whether held for investment, sale or trading) with appropriate documentation. The Banks are in compliance with these requirements. COMMUNITY REINVESTMENT ACT Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with the examination of the Banks, to assess the institutions' records of meeting the credit needs of its communities and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Banks. An unsatisfactory rating may be used as the basis for the denial of an application by the OCC. The federal banking agencies, including the OCC, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Banks may be required to devote additional funds for 10 11 investment and lending in its local community. The last CRA compliance exams ranked Signal Bank as outstanding and Summit Bank as satisfactory. TRANSACTIONS WITH AFFILIATES Generally, transactions between a national bank or its subsidiaries and its affiliates are required to be on terms as favorable to the institution as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of capital of the Banks. Affiliates of the Banks include any Corporation which is under common control with the Banks. Subsidiaries of the Banks are not deemed affiliates. However, the FRB has the discretion to treat subsidiaries of national banks as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons ("Insiders") are also subject to conflict of interest rules enforced by the OCC. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, as a general matter, loans to Insiders must be made on terms substantially the same as for loans to unaffiliated individuals. FEDERAL RESERVE SYSTEM The FRB requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). National banks are authorized to borrow from the Federal Reserve Bank "discount window," but FRB regulations require companies to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. The Banks are also members of the Federal Reserve System. HOLDING COMPANY REGULATION GENERAL The Corporation is a bank holding company, registered with the FRB. Bank holding companies are subject to comprehensive regulation by the FRB under the BHCA, and the regulations of the FRB. As a bank holding company, the Corporation is required to file reports with the FRB and such additional information as the FRB may require, and will be subject to regular examinations by the FRB. The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Under FRB policy, a bank holding company must serve as a source of strength for its subsidiary banks. Under this policy the FRB may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank. Under the BHCA, a bank holding company must obtain FRB approval before: (I) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or 11 12 controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any corporation which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers' checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. INTERSTATE BANKING AND BRANCHING On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Act") was enacted to ease restrictions on interstate banking. Effective September 29, 1995, the Act allows the FRB to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of the bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Act also prohibits the FRB from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. The Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the Act. Additionally, on June 1, 1997, the federal banking agencies were authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks opted out of the Act by adopting a law after the date of enactment of the Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described above. The State of Ohio has authorized interstate merger transactions. The Act authorizes the OCC and FDIC to approve interstate branching de novo by national and state banks, respectively, only in states which specifically allow for such branching. The Act also requires the appropriate federal banking agencies to prescribe regulations which prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production. These 12 13 regulations include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities which they serve. DIVIDENDS The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a corporation experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the FRB, the FRB may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized". See "Capital Requirements -- Prompt Corrective Action." Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any corporation that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a "2" and is not subject to any unresolved supervisory issues. CAPITAL REQUIREMENTS. The FRB has established capital requirements for bank holding companies that generally parallel the capital requirements for national banks. See "Regulatory Capital Requirements - National Banks." The Corporation's capital exceeds such requirements. FEDERAL HOME LOAN BANK SYSTEM The Banks are members of the FHLB of Cincinnati, one of twelve regional FHLBs that administer the home financing credit function of member institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures, established by the board of directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As members, the Banks are required to purchase and maintain stock in the FHLB of Cincinnati. At December 31, 1997, the Banks had $19.9 million in FHLB stock, which was in compliance with this requirement. In the past fiscal year, FHLB stock paid dividends to both Banks. Under federal law the FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to low- and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value 13 14 of FHLB stock in the future. A reduction in value of the Banks' FHLB stock may result in a corresponding reduction in the Banks' capital. For the year ended December 31, 1997, dividends paid by the FHLB of Cincinnati to the Banks totaled $1.3 million, which constitutes a $269,000 increase over the amount of dividends received in calendar year 1996. FEDERAL AND STATE TAXATION FEDERAL TAXATION In addition to the regular income tax, corporations, including the Banks, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. For taxable years beginning after 1986 and before 1996, entities, such as the Banks, are also subject to an environmental tax equal to 0.12% of the excess of alternative minimum taxable income for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2 million. The Corporation files consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. Signal Bank and its consolidated subsidiaries have been audited by the IRS with respect to consolidated federal income tax returns through December 31, 1992. Summit Bancorp and its consolidated subsidiary have been audited by the IRS with respect to consolidated federal income tax returns through December 31, 1993. With respect to years examined by the IRS, either all deficiencies have been satisfied or sufficient reserves have been established to satisfy asserted deficiencies. In the opinion of management, any examination of still open returns (including returns of subsidiaries and predecessors of, or entities merged into, the Banks) would not result in a deficiency which could have a material adverse effect on the financial condition of the Corporation, the Banks or their consolidated subsidiaries. OHIO TAXATION As national banks, the Banks are subject to an Ohio franchise tax based on its net worth plus certain reserve amounts. Total net worth for this purpose is reduced by certain exempted assets. The resultant net worth is taxed at a rate of 1.5% for 1997. Certain subsidiaries in the consolidated group will be subject to Ohio franchise tax based on the greater of the tax on net worth or the tax on net income, subject to various adjustments and varying rates. In addition, the subsidiaries will be subject to state taxes in other states in which they do business. Local taxes on property and income will also be imposed in certain jurisdictions. For additional information regarding taxation, see Note 8 of the Notes to the Consolidated Financial Statements in the Annual Report. 14 15 EMPLOYEES At December 31, 1997, the Corporation had a total of 635 full-time equivalent (FTE) employees including 191 part-time employees. None of the Corporation's employees are represented by a collective bargaining group. Management considers its employee relations to be excellent. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS - ---------------------------------------- The following information as to the business experience during the last five years is supplied with respect to executive officers who do not serve on the Corporation's Board of Directors. JAMES J. LITTLE. In January 1998, age 35, Mr. Little became President and Chief Operating Officer of the Corporation. Mr. Little served as Executive Vice President and Chief Financial Officer of the Corporation from June 1996 until his appointment as President and Chief Operating Officer and as Executive Vice President from July 1995 to June 1996. Prior to joining the Corporation in July 1995, Mr. Little served as President and Chief Executive Officer of Falls Financial, Inc. from 1993 to 1995 and as Executive Vice President and Chief Financial Officer of Falls Financial, Inc. from 1989 to 1993. JON W. PARK. Mr. Park, age 36, is Chief Financial Officer of the Corporation. Mr. Park has served as Senior Vice President and Chief Financial Officer of Signal Bank, N.A. since September 1997 and as Vice President and Chief Financial Officer of Summit Bank since December 1995. Mr. Park previously worked for Ernst & Young LLP from 1984 through November 1995. Mr. Park is a certified public accountant. COMPETITION The Banks face strong competition, both in originating real estate, commercial and consumer loans and in attracting deposits. Competition in originating loans comes primarily from commercial banks, credit unions and savings institutions located in the Banks' market area. Commercial banks, credit unions and savings institutions provide vigorous competition in consumer lending. The Bank competes for real estate and other loans principally on the basis of the quality of services it provides to borrowers, the interest rates and loan processing fees it charges, and the types of loans it originates. See "-Lending Activities." The Banks attract deposits through retail banking offices. Therefore, competition for those deposits is principally from retail brokerage offices, commercial banks, credit unions and savings institutions located in the communities in the Banks' Market Areas. The Banks compete for these deposits by offering a variety of account alternatives at competitive rates and by providing convenient business hours. ITEM 2. PROPERTIES - ------------------- The Corporation's executive offices and the main office of Signal Bank are located in downtown Wooster, Ohio in a 4-story office building owned by Signal Bank. At December 31, 1997, the Corporation, through Signal Bank and Summit Bank, operated 28 banking centers in Ohio, of which 20 were owned and 8 were leased. The Specialty Finance Group of the Corporation operated 6 facilities (4 in Ohio, 1 in Indiana and 1 in Virginia) at December 31, 1997, of 15 16 which 1 was owned and 5 were leased. The properties owned are generally free from mortgages and encumbrances. ITEM 3. LEGAL PROCEEDINGS - -------------------------- In the ordinary course of their respective businesses, the Corporation and its subsidiaries are parties to various legal proceedings. In the opinion of management of the Corporation, after consideration of advice from outside litigation counsel, the ultimate resolution of any legal proceedings outstanding as of December 31, 1997 will not have a material adverse effect on the Corporation's consolidated financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise, during the three months ended December 31, 1997. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS - ------------------------------------------------------------------------------ The information under the caption "Market Information" in the portions of the Corporation's Annual Report to Shareholders for the year ended December 31, 1997, included as Exhibit 13 to this Report, is herein incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The information required by this item is incorporated by reference from page 1 of the Corporation's 1997 Annual Report to Shareholders attached to this filing as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS --------------------- The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the portions of the Corporation's Annual Report to Shareholders for the year ended December 31, 1997, included as Exhibit 13 to this Report, is herein incorporated by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- The information required by this item is incorporated herein by reference from page 20 of the Corporation's 1997 Annual Report to Shareholders attached to this filing as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The consolidated financial statements and notes thereto contained in the portions of the Corporation's Annual Report to Shareholders for the year ended December 31, 1997, included as Exhibit 13 to this Report, are herein incorporated by reference. The independent auditor's report of Deloitte & Touche LLP dated January 26, 1996 is included as Exhibit 99 to this Report and is herein incorporated by reference. 16 17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- The information required by Item 304 of Regulation S-K was previously filed as part of the Corporation's Current Report on Form 8-K reporting the event of August 20, 1996 filed on August 27, 1996, as amended on Form 8-K/A filed on September 9, 1996. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Information concerning Executive Officers of the Corporation is contained under the heading "Executive Officers Who Are Not Directors" on page 15 herein. Information concerning Directors of the Registrant and compliance with the reporting requirements of Section 16(a) of the Securities and Exchange Act of 1934, as amended, is incorporated herein by reference from the definitive Proxy Statement for the Annual meeting of Shareholders to be held in 1998, a copy of which will be filed with the SEC in April 1998. Information contained under the headings "Compensation Committee Report on Executive Compensation" and "Performance Graph" included in the Proxy Statement pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- Information concerning executive compensation is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1998, a copy of which will be filed with the SEC in April 1998. Information contained under the headings "Compensation Committee Report on Executive Compensation" and "Performance Graph" included in the Proxy Statement pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1998, a copy of which will be filed with the SEC in April 1998. Information contained under the headings "Compensation Committee Report on Executive Compensation" and "Performance Graph" included in the Proxy Statement pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Information concerning certain relationships and related transactions is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1998, a copy of which will be filed with the SEC in April 1998. Information contained under the headings "Compensation Committee Report on Executive Compensation" and "Performance Graph" included in the Proxy Statement pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically not incorporated by reference herein. 17 18 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- (a)(1) Consolidated Financial Statements: ---------------------------------- The following information appears in the portions of the Corporation's Annual Report to Shareholders for the year ended December 31, 1997, included as Exhibit 13 to this Report:
PAGES IN EXHIBIT 13 ----------- Independent Auditors' Report............................................................................................14 Consolidated Statements of Financial Condition December 31, 1997 and 1996..........................................................................................2 Consolidated Statements of Operations Years Ended December 31, 1997, 1996 and 1995........................................................................3 Consolidated Statements of Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995........................................................................4 Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995........................................................................5 Notes to Consolidated Financial Statements............................................................................6-14
(a)(2) Financial Statement Schedules: ------------------------------ Financial statement schedules have been omitted because the required information is contained in the consolidated financial statements and notes thereto, or because such schedules are not required or applicable. 18 19 (a)(3) Exhibits --------
REFERENCE TO REGULATION PRIOR FILING OR S-K EXHIBIT EXHIBIT NUMBER NUMBER DOCUMENT ATTACHED HERETO - ------------------------------------------------------------------------------------------------------------------- 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession * 3(i) Articles of Incorporation ** 3(ii) By-Laws *** 4 Instruments defining the rights of security holders, See also Exhibit 3 including debentures **** 9 Voting Trust Agreement None 10 Material contracts 1987 Stock Option and Incentive Plan ***** Non-Employee Director Stock Option Plan ***** Management Incentive Compensation Plan ****** 1997 Omnibus Incentive Plan ****** Summit Bancorp 1989 Stock Incentive Plan ****** 1997 FirstFederal Employee Discount Stock Purchase Plan ****** Branch acquisition agreement with KeyBank, N.A. dated as of May 16, 1997 ******* Employment agreement of G. Clark ** Employment agreement of L.D. Douce ** Employment agreement of J. Little ** Employment agreement of R. James ** Employment agreement of J. Park 10a Employment agreement of D. Vernon 10b 11 Statement regarding computation of per share earnings None 12 Statement regarding computation of ratios Not required 13 Annual Report to Security Holders 13 16 Letter regarding change in certifying accountants Not required 18 Letter regarding change in accounting principles None 21 Subsidiaries of the registrant 21 22 Published report regarding matters submitted to vote of security holders None 23 Consents of Experts and Counsel 23.1 and 23.2 25 Power of Attorney Not required 27 Financial Data Schedule 27 99 Additional Exhibits -- report of predecessor independent accountants 99
19 20 *Filed as an exhibit to First Shenango Bancorp's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 23, 1998. **Filed as exhibits to the Corporation's Annual report on Form 10-K for the fiscal year ended December 31, 1996, filed with the Securities and Exchange Commission on March 25, 1997 (File No. 0-17594). Such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. ***Filed as exhibits to the Corporation's Registration Statement on Form S-2 under the Securities Act of 1933, filed with the Securities and Exchange Commission on September 28, 1992 (Registration No. 33- 50664). All of such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. ****The Corporation agrees to file with the Securities and Exchange Commission, if requested, a copy of the indenture relating to the Corporation's $40,500,000 of 9.125% Subordinated Notes due March 15, 2004. *****Filed as Exhibit 4 to the Corporation's Registration Statement on Form S-8 under the Securities Act of 1933, filed with the Securities and Exchange Commission on May 29, 1992 (Registration No. 33-48246). All of such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. ******Filed on Form S-8 with the Securities and Exchange Commission on October 6, 1997 (File No. 0-17894). All of such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. *******Filed as Exhibit 10 to the Corporation's quarterly report on Form 10-Q for the nine-month period ended September 30, 1997 filed with the Securities and Exchange Commission (File No. 0-17894). All of such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. EXHIBITS ARE AVAILABLE BY WRITTEN REQUEST TO: FIRSTFEDERAL FINANCIAL SERVICES CORP CONNIE S. STROCK VICE PRESIDENT P.O. BOX 385 WOOSTER, OH 44691 (b) Reports on Form 8-K: -------------------- None 20 21 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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. FIRSTFEDERAL FINANCIAL SERVICES CORP Date: March 26, 1998 By: /s/ Jon W. Park - ------------------------------------------------------------------------------------------------------------------ Jon W. Park Chief Financial Officer (Duly Authorized Representative and Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Gary G. Clark By: /s/ Joseph P. Ciolek ------------------------------------- ------------------------------------- GARY G. CLARK, Chairman of the Board, JOSEPH P. CIOLEK, Director Principal Executive Officer and Chief Executive Officer Date: March 26, 1998 -------------- Date: March 26, 1998 -------------- By: /s/ L. Dwight Douce ------------------------------------- By: /s/ Steven N. Stein L. DWIGHT DOUCE, Executive Vice ------------------------------------- President, Secretary and Director STEVEN N. STEIN, Director Date: March 26, 1998 Date: March 26, 1998 -------------- -------------- By: /s/ Gust B. Geralis By: /s/ R. Victor Dix ------------------------------------- ------------------------------------- GUST B. GERALIS, Director R. VICTOR DIX, Director Date: March 26, 1998 Date: March 26, 1998 -------------- -------------- By: /s/ Richard E. Herald By: /s/ David C. Vernon ------------------------------------- ------------------------------------- RICHARD E. HERALD, Director DAVID C. VERNON, Director Date: March 26, 1998 Date: March 26, 1998 -------------- -------------- By: /s/ Daniel H. Plumly ------------------------------------- DANIEL H. PLUMLY, Director Date: March 26, 1998 --------------
21 EX-10.A 2 EXHIBIT 10A 1 EXHIBIT 10a. EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this 8th day of July, 1997, by and between FIRSTFEDERAL FINANCIAL SERVICES CORP (the "Company"), and JON W. PARK (the "Executive"), effective for all purposes and in all respects at the Closing as such term is defined in the Agreement of Affiliation and Plan of Merger dated December 30, 1996, by and between the Company and Summit Bancorp (the "Merger Agreement"). WHEREAS, prior to Closing, Executive was Vice President and Chief Financial Officer of Summit Bank, National Association, formerly known as Summit Bank ("Summit Bank") and party to certain agreements which shall terminate upon the Closing of the Merger Agreement; WHEREAS, as a result of the Merger Agreement, Company is acquiring all of the issued and outstanding capital stock of Summit Bank; WHEREAS, Executive has unique talents and experience; WHEREAS, Company desires to employ Executive in the capacity of Treasurer of Company on and after the Closing on the terms and conditions set forth herein; WHEREAS, Executive desires to be employed by Company in the aforesaid capacity; and WHEREAS, Executive and Company desire to set forth in writing the terms and conditions of their agreements and understandings. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties intending to be legally bound, agree as follows: 1. TERM. The term of this Agreement shall be a period of two (2) years commencing on the Closing Date (the "Commencement Date"), subject to earlier termination as provided herein. Beginning on the second anniversary of the Commencement Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year, PROVIDED THAT neither the Executive nor Company has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms. 2. EMPLOYMENT. The Executive is employed as the Treasurer of Company. As Treasurer, Executive shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, including but not limited to such duties and responsibilities as set forth in Exhibit A attached hereto and incorporated hereby by reference, and shall have such other powers and duties as the Chief Executive Officer of the 2 Company may prescribe from time to time. The Executive shall devote his best efforts and all his business time and attention to the business and affairs of Company. 3. COMPENSATION. (a) SALARY. Company agrees to pay the Executive during the term of this Agreement an annual base salary of Seventy Seven Thousand Dollars ($77,000.00). The base salary shall be paid in accordance with Company's standard pay practices and shall be subject to all local, state, and federal withholding requirements. The Executive's base salary may not be reduced during the term of this Agreement. (b) DISCRETIONARY BONUSES. The Executive shall be entitled to discretionary bonuses as authorized and declared by the Company's Board of Directors to its executives subject to such terms and conditions set forth in the Management Incentive Compensation Plan. (c) EXPENSES. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and Signal Bank, National Association, formerly known as First Federal Savings and Loan Association of Wooster ("Signal Bank"), PROVIDED THAT the Executive properly accounts for such expenses in accordance with such policies and procedures. (d) NONCOMPETITION PAYMENT. In partial consideration for the execution of this Agreement, the Executive agrees to the noncompetition provisions set forth in Section 7 hereof. 4. BENEFITS. (a) PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. The Executive shall be entitled to participate in all plans relating to stock options (at a minimum level of 2,000 shares for the first year of this Agreement; and thereafter as the Company's Stock Option Committee shall determine), thrift, profit-sharing, group life insurance, medical and dental coverage, education, and other retirement or employee benefits or combinations thereof ("Plans") that are now or hereafter maintained for the benefit of Signal Bank's executive employees or its employees generally, provided that the Executive meets all eligibility requirements of such Plans. (b) FRINGE BENEFITS. The Executive shall be eligible to participate in, and receive benefits under, any other fringe benefit plans which are or may become applicable to Company's or Signal Bank's executive officers. (c) MOVING EXPENSES. In the event Company requests Executive to maintain his principal work place in Wooster and Executive moves his principal residence to Wooster, Company shall reimburse Executive all reasonable expenses related to such move including broker or realtor fees, real property purchase closing costs, and packing and shipment of household good costs. Executive shall also be entitled to participate in the Signal Bank's employee loan program then in effect. -2- 3 5. VACATIONS; LEAVE. The Executive shall be entitled to three (3) weeks or, if greater, that number of weeks of annual paid vacation provided in accordance with the policies established by Company's Board of Directors for executive employees and to voluntary leave of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors of Company may determine in their discretion. 6. TERMINATION OF EMPLOYMENT. (a) INVOLUNTARY TERMINATION. The Board of Directors may terminate the Executive's employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Executive's right to compensation or other benefits under this Agreement. In the event of Involuntary Termination, Company shall pay to the Executive during the remaining term of this Agreement but in no event less than twelve (12) months, his salary at the rate in effect immediately prior to the Date of Termination, payable in such manner and at such times as such salary would have been payable to the Executive under Section 1 if the Executive had continued to be employed by Company. (b) TERMINATION FOR CAUSE. In the event of Termination for Cause, Company shall pay the Executive his salary through the Date of Termination, and Company shall have no further obligation to the Executive under this Agreement. (c) DEATH; DISABILITY. In the event of the death of the Executive while employed under this Agreement and prior to any termination of employment, the Executive's estate, or such person as the Executive may have previously designated in writing, shall be entitled to receive from Company the salary of the Executive through the last day of the calendar month in which the Executive died. If the Executive becomes disabled as defined in Company's then current disability plan or if the Executive is otherwise unable to serve as Treasurer, the Executive shall be entitled to receive group and other disability income benefits of the type then provided by Signal Bank for executive officers. 7. NONCOMPETITION. (a) As a material inducement to Company to enter into this Agreement and for Company to pay Executive compensation stated in Section 3, as well as any additional benefits provided for herein, Executive covenants and agrees that: (i) If Executive voluntarily terminates his employment or is terminated for Cause, Executive shall not, in the Market Area as defined below, directly or indirectly, for a period commencing on the Closing Date and continuing for one year following the Date of Termination (the "Restricted Period"), for whatever reason, directly or indirectly, whether as shareholder, partner, joint venturer, or agent of any person, firm or corporation or other entity or otherwise, engage in any or all of the following activities: -3- 4 (a) Enter into or engage in any business which directly or indirectly competes with the business of Company and its subsidiaries (collectively for purposes only of this Section "Company"); (b) Interfere or attempt to interfere with the business, goodwill, trade, customers or employees of Company or with any one dealing with Company in the operation of Company's business; (c) Solicit borrowers' and depositors' business, patronage, or perform any services for, any business which directly or indirectly competes with the business carried on by Company; (d) Promote or assist, financially or otherwise, any person, firm, association or corporation engaged in any business which directly or indirectly competes with the business carried on by Company. (ii) During the Restricted Period, the Executive shall not, directly or indirectly, knowingly solicit or encourage to leave the employment of Company, any employee of Company or hire any employee who has left the employment of Company after the date of this Agreement within one year of the termination of such employee's employment with Company or such shorter period as shall be agreed by Company in writing. (b) If the Executive violates this restrictive covenant and Company brings legal action for injunctive or other relief, Company shall not as a result of the time involved in obtaining the relief be deprived of the benefit of the full period of the restrictive covenant. Accordingly, the restrictive covenant shall be deemed to have the duration specified herein, computed from the date the relief is granted, but reduced by the time between the period when the restriction began to run and the date of the first violation of the covenant by Executive. If any court shall determine that the duration or geographical limit of any restriction contained in this paragraph is unenforceable, it is the intention of the parties that the restrictive covenant set forth herein shall not thereby be permitted to be terminated but shall be deemed amended to the extent required to render it valid and enforceable. Such amendment shall apply only with respect to the operation of this paragraph and the jurisdiction of the court that has made the adjudication. (c) If any court determines that any provision of this Section, or any part thereof, is invalid or unenforceable, the remainder of the provisions of this Section shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (d) If any court determines that any of the provisions of this Section, or any part thereof, is unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provisions and, in its reduced form, such provision shall then be enforceable and shall be enforced. -4- 5 8. DISCLOSURE OF INFORMATION. The Executive acknowledges that in and as a result of his employment hereunder, he will be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to such matters as Company's and its affiliated companies' trade secrets, systems, procedures, manuals, confidential reports, and lists of customers. As a material inducement to Company to enter into this Agreement and for Company to pay Executive compensation stated in Section 3, as well as any additional benefits provided for herein, Executive covenants and agrees that he shall not at any time during or following the term of his employment, directly or indirectly divulge or disclose for any purpose whatsoever any confidential information that has been obtained by or disclosed to him as the result of employment by Company heretofore or hereafter, except that there shall be no breach of this Section so long as Executive is acting in good faith and there is no material harm to Company; provided, however, that this duty of confidentiality shall not apply to information which is on the date hereof generally known to the public or which is subsequently made public by an individual authorized to do so. 9. SURRENDER OF BOOKS AND RECORDS. Executive acknowledges that all files, books, records, literature, products, and other materials owned by Company or its affiliates or used by it in connection with the conduct of its business shall at all times remain the property of Company and that upon termination of the employment hereunder, irrespective of the time, manner, or cause of said termination, Executive will surrender to Company all such files, books, records, literature, products, and other materials, other than such personal effects not related to the operation of the business. 10. NO ASSIGNMENTS. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 11. REMEDIES. It is recognized by Executive that a special and confidential relationship exists between Company and Executive because of his knowledge, expertise and judgment and the dependence of Company upon his knowledge, expertise and judgment. Executive agrees that the remedy at law for any breach of threatened breach of the covenants set forth in paragraphs 7, 8 and 9 hereof will be inadequate and that any breach or attempted breach of such covenants would cause such immediate and permanent damage as would be irreparable and the exact amount of which would be impossible to ascertain. Executive further agrees that in the event of any such breach or threatened breach of such covenants by Executive, in addition to any and all other legal and equitable remedies available, Company may have any of such actions enjoined by any court authorized by law to take such action. Executive acknowledges and agrees that the limitations contained in paragraphs 7, 8 and 9 hereof are reasonable and properly required for the adequate protection of Company. -5- 6 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to Company at its home office, to the attention of the Board of Directors with a copy to the secretary of Company, or, if to the Executive, to such home or other address as the Executive has most recently provided, in writing to Company. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. 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. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity and unenforceability of any provisions shall not affect the validity or enforceability of the other provisions hereof. 16. GOVERNING LAW. This Agreement shall be governed by and is to be construed and enforced in accordance with the laws of the State of Ohio. 17. ARBITRATION. Any dispute or controversy arising hereunder or in connection with this Agreement shall be finally and conclusively determined by the decision of a board of arbitration consisting of three members (hereinafter sometimes called the "Board of Arbitration") collected as hereinafter provided. Both Company and Executive shall select one member and the third member shall be selected by mutual agreement of the other members, or if the other members fail to reach an agreement on a third member within 20 days after their selection, the third member shall thereafter be selected by the American Arbitration Association upon application made to it for such purpose by Company. The Board of Arbitration shall meet in Wooster, Ohio, or in such other place as the majority of the members of the Board of Arbitration determines more appropriate and shall reach and render a decision in writing (concurred in by a majority by the members of the Board of Arbitration) with respect to the resolution of the dispute or controversy. In connection with rendering its decision, the Board of Arbitration shall adopt and follow such rules and procedures, except with regard to discovery matters, as a majority of the members of the Board of Arbitration deem necessary or appropriate. Arbitration discovery shall be that discovery allowed by Ohio Rules of Civil Procedure Title V as amended and modified by the parties herein permitting discovery by deposition, interrogatories, requests for admission, and production of documents, which Rules are incorporated by reference herein, but shall be modified in their application as follows: (i) depositions shall be limited to: the adversary (or in case of a corporation or other entity to two agents thereof who may be required to be identified as competent for the discovery purpose); other third party witnesses whose discovery may lead to relevant evidence for the preparation of the arbitration; other third party witnesses whose testimony reasonably needs to be perpetuated, including witnesses who by affidavit, state that they cannot be available for the hearing. Depositions of third party witnesses shall be limited to three; (ii) request for production of documents shall be limited to one set of relevant and -6- 7 reasonable requests and to such supplemental requests as may be reasonably required from information produced; (iii) each side shall be permitted one set of interrogatories and request for admissions, each consisting of no more than thirty (30) items including sub-parts; (iv) the limitations contained herein on the number of depositions, requests for production of documents, interrogatories and requests for admissions may be modified by a majority of the members of the Board of Arbitration upon motion of a party; (v) all discovery disputes shall be resolved by the Board of Arbitration whose decision shall be final, except as below provided, in any post-award proceeding under O.R.C. Chapter 2711, the court may consider as an additional ground for vacating or modifying the award an Arbitration Discovery decision involving a gross abuse of discretion, the Board of Arbitration and/or the court shall also be empowered to impose costs, expenses (excluding attorney's fees) and sanctions as provided in the Rules of Civil Procedure against any party for failure to comply with the Arbitration Discovery, and to base such imposition on the same criteria used by the courts in similar circumstances. To the extent practical, decisions of the Board of Arbitration shall be rendered no more than 30 calendar days following commencement of proceedings with respect thereto. The Board of Arbitration's written decision made by the Board of Arbitration (either prior to or after the expiration of such 30 calendar day period) shall be final, binding and conclusive on Company and Executive and shall be entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. Each party shall bear its own costs and expenses and an equal share of the Board of Arbitration's fees and administrative fees of arbitration. Notwithstanding anything in this Agreement to the contrary, nothing in this Agreement shall restrict or prohibit any party to any arbitration under this Section from obtaining injunctive relief in connection with any claim hereunder. 18. OTHER AGREEMENTS. At the Effective Time (as defined in the Merger Agreement), all agreements by and between Executive and Summit Bancorp and Summit Bank shall terminate and be null and void, except that the Company shall provide the Executive with benefits substantially equivalent to those provided by the Agreements listed on the attached Schedule 18. At the Effective Time, this Agreement shall constitute the sole agreement for employment for Executive, except that Executive's rights to compensation or other benefits under those agreements set forth in Schedule 18 shall not be prejudiced as a result of Involuntary or Voluntary Termination under this Agreement, except as set forth therein. 19. DEFINITIONS. (a) The term "Date of Termination" means the earlier of (1) the date upon which Company gives notice to the Executive of the termination of his employment with Company other than pursuant to Paragraph 1 or (2) the date upon which the Executive ceases to serve as an employee of Company. (b) The term "Involuntary Termination" means the termination of the employment of Executive without his express written consent, and shall include a material diminution of or interference with the Executive's duties, responsibilities and benefits as Treasurer of the Company, including (without limitation) any of the following actions unless consented to in -7- 8 writing by the Executive; (1) a change in the principal workplace of the Executive to a location outside of a 60 mile radius from Company's headquarters office as of the date hereof; (2) a material demotion of the Executive; (3) a material adverse change in the Executive's salary, perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Company; and (4) a material permanent increase in the required hours of work or the workload of the Executive. The term "Involuntary Termination" does not include Termination for Cause or termination of employment due to retirement, death, or disability. (c) The terms "Termination for Cause" and "Terminated for Cause" mean termination of the employment of the Executive because of the Executive's personal dishonesty, willful misconduct, willful violation of any law, rule or regulation (other than traffic violations or similar offenses), incompetence, or material breach of any provision of this Agreement. No act, or failure to act, on the Executive's part shall be considered "willful" unless the Executive has acted (or failed to act) with an absence of good faith and without reasonable belief that the Executive's action or failure to act was in the best interest of Company. (d) The term "Market Area" means the following counties: Wayne, Medina, Summit, Tuscarawas, Knox, Ashland, Richland, and Licking. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. FIRSTFEDERAL FINANCIAL SERVICES CORP By /s/ Gary G. Clark --------------------------------------- Name: Gary G. Clark Title: Chairman of the Board, President and Chief Executive Officer EXECUTIVE: /s/ Jon W. Park --------------------------------------- Jon W. Park -8- EX-10.B 3 EXHIBIT 10B 1 EXHIBIT 10b. EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this 8th day of July, 1997, by and among SUMMIT BANK, NATIONAL ASSOCIATION, a bank chartered under the laws of the United States ("Summit"), FIRSTFEDERAL FINANCIAL SERVICES CORP (the "Company"), and DAVID C. VERNON (the "Executive"), effective for all purposes and in all respects at the Closing as such term is defined in the Agreement of Affiliation and Plan of Merger dated December 30, 1996, by and between the Company and Summit Bancorp (the "Merger Agreement"). WHEREAS, prior to Closing, Executive was Chairman of the Board, Chief Executive Officer, President, and a member of the Board of Directors of Summit; WHEREAS, as a result of the Merger Agreement, Company is acquiring all of the issued and outstanding capital stock of Summit; WHEREAS, Executive has unique talents and experience which are of value to Summit; WHEREAS, Summit desires to employ Executive in the capacity of Chairman of the Board, Chief Executive Officer, and President of Summit on and after the Closing on the terms and conditions set forth herein; WHEREAS, Executive desires to be employed by Summit in the aforesaid capacity; and WHEREAS, Executive and Summit desire to set forth in writing the terms and conditions of their agreements and understandings. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties intending to be legally bound, agree as follows: 1. TERM. The term of this Agreement shall be a period of five (5) years commencing on the Closing Date (the "Commencement Date"), subject to earlier termination as provided herein. Beginning on the fifth anniversary of the Commencement Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year, PROVIDED THAT neither the Executive nor Summit has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms. 2 2. EMPLOYMENT. The Executive is employed as the Chairman of the Board, Chief Executive Officer, and President of Summit. As Chairman of the Board, Chief Executive Officer, and President, Executive shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, including but not limited to such duties and responsibilities as set forth in Exhibit A, and shall have such other powers and duties of an officer of Summit as the Summit Board of Directors may prescribe from time to time. The Executive shall continue to devote his best efforts and all his business time and attention to the business and affairs of Summit. During the Executive's employment with Summit, the Executive shall not engage in any activity which conflicts or interferes with the performance of the duties hereunder or usurps the business interest, existing or potential, of Summit. Executive may terminate his employment under this Agreement at any time upon ninety (90) days prior written notice. 3. COMPENSATION. (a) SALARY. Summit agrees to pay the Executive during the term of this Agreement an annual base salary of One Hundred Thirty Thousand Dollars ($130,000.00) ("Base Salary"). The base salary shall be paid in accordance with Summit's standard pay practices and shall be subject to all local, state, and federal withholding requirements. The Base Salary may be raised from time to time within the sound discretion of the Summit Board of Directors but may not be reduced during the term of this Agreement. (b) DISCRETIONARY BONUSES. The Executive shall be entitled to discretionary bonuses as authorized and declared by the Company's Board of Directors subject to such terms and conditions set forth in the Management Incentive Compensation Plan. (c) EXPENSES. The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and Summit, PROVIDED THAT the Executive properly accounts for such expenses in accordance with such policies and procedures. (d) NONCOMPETITION PAYMENT. In partial consideration for the execution of this Agreement, the Executive agrees to the noncompetition provisions set forth in Section 7 hereof. (e) CHANGE IN CONTROL. Subject to the terms of this Paragraph, in the event of Involuntary Termination in connection with or within 12 months after a Change in Control which occurs at any time while Executive is employed under this Agreement, Summit shall in addition to all other benefits set forth or provided for in this Agreement, (i) pay to the Executive in a lump sum in cash within 25 business days after the Date of Termination an amount equal to 299% of the Executive's "base amount" as defined in Section 280G of the Internal Revenue Code of 1986 as amended (the "Code"), excluding from such base amount the amounts received or to be received by the Executive solely in connection with Section 5.1.15 of the Merger Agreement and the agreements listed on Schedule 18 hereof, (ii) provide to the Executive during the remaining -2- 3 term of this Agreement such health benefits as are maintained for executive officers of Summit from time to time during such remaining term of this Agreement or substantially the same health benefits as Summit maintains for its executive officers immediately prior to the Change in Control, whichever are greater. Notwithstanding any other provision of this Agreement, if payments under this Agreement, together with any other payments received or to be received by the Executive in connection with the change in control, would cause any amount to be non-deductible by Summit for federal income tax purposes pursuant to ss.280G of the Code, then the benefits under this Agreement (excluding therefrom any benefits under Schedule 18 and the agreements listed on Schedule 18 hereof and the Salary Continuation Agreement between Summit and Executive) shall be reduced (not less than zero) to the extent necessary so as to maximize payments to the Executive without causing any amount to become non-deductible by Summit or the Company. The Executive shall determine the allocation of such reduction among payments to the Executive. (f) BUSINESS ACQUISITION BONUS. In the event the Company or any subsidiary completes the acquisition of another financial institution for which Executive was substantially responsible for the identification and negotiation of such acquisition, Executive shall receive stock options or restricted stock in an amount and pursuant to such terms and conditions to be determined by the Company's Stock Option Committee of the Board of Directors. 4. BENEFITS. (a) PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. The Executive shall be entitled to participate in all plans relating to stock options (at a minimum level of 5,000 option shares for the first year of this Agreement; and thereafter as the Company's Stock Option Committee shall determine), thrift, profit-sharing, group life insurance, medical and dental coverage, education, and other retirement or employee benefits or combinations thereof ("Plans") that are now or hereafter maintained for the benefit of Summit's executive employees or its employees generally, provided that the Executive meets all eligibility requirements of such Plans and subject to the integration of such Plans into the Company's plans. In the event any of such Plans are not integrated into the Company's plans, Executive will nonetheless continue to receive the benefits of any Plans Summit continues to provide to its employees. During the term of this Agreement, Summit shall continue to pay the premiums on that certain universal life insurance policy insuring the Executive in the amount of $250,000. (b) FRINGE BENEFITS. The Executive shall be eligible to participate in, and receive benefits under, any other fringe benefit plans which are or may become applicable to Summit's executive officers specifically including but not limited to a car allowance in an amount not in excess of $600 per month, plus the cost of standard liability and casualty insurance coverage. (c) MEMBERSHIPS. Summit shall pay dues on behalf of Executive for memberships in Firestone Country Club and Fairlawn Country Club. Executive shall be responsible for all personal expenses incurred in connection with such memberships. -3- 4 (d) SICK LEAVE. Executive shall be entitled to up to six (6) months of paid sick leave per year in the event of illness. Executive shall not be entitled to be compensated by Summit during sick leave in excess of six (6) months per year. Executive shall not be entitled to any additional compensation or benefit for any unused sick leave other than the payments due under a certain Salary Continuation Agreement dated July 15, 1993, by and between Executive and Summit. 5. VACATIONS; LEAVE. The Executive shall be entitled to five (5) weeks or, if greater, that number of weeks of annual paid vacation provided in accordance with the policies established by Company's Board of Directors for executive employees and to voluntary leave of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors of Company may determine in its discretion. 6. TERMINATION OF EMPLOYMENT. (a) INVOLUNTARY TERMINATION. The Summit Board of Directors may terminate the Executive's employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Executive's right to compensation or other benefits under this Agreement. In the event of Involuntary Termination, Summit shall pay to the Executive during the remaining term of this Agreement, his Base Salary at the rate in effect immediately prior to the Date of Termination, payable in such manner and at such times as such salary would have been payable to the Executive under Section 1 if the Executive had continued to be employed by Summit. (b) TERMINATION FOR CAUSE. In the event of Termination for Cause, Summit shall pay the Executive his salary through the Date of Termination, and Summit shall have no further obligation to the Executive under this Agreement. (c) DEATH; DISABILITY. In the event of the death of the Executive while employed under this Agreement and prior to any termination of employment, the Executive's estate, or such person as the Executive may have previously designated in writing, shall be entitled to receive from Summit the salary of the Executive through the last day of the calendar month in which the Executive died. If the Executive becomes disabled as defined in Summit's then current disability plan or if the Executive is otherwise unable to serve as Chairman of the Board, Chief Executive Officer, or President, the Executive shall be entitled to receive group and other disability income benefits of the type then provided by Summit for executive officers. 7. NONCOMPETITION. (a) Executive covenants and agrees that: (i) If Executive voluntarily terminates his employment or is terminated for Cause, Executive shall not, in the Market Area (as defined below), directly or indirectly, for a period commencing on the Closing Date and continuing for three years following the Date -4- 5 of Termination (the "Restricted Period"), for whatever reason, directly or indirectly, whether as shareholder, partner, employee, officer, joint venturer, or agent of any person, firm or corporation or other entity or otherwise, engage in any or all of the following activities: (a) Enter into or engage in any business which directly or indirectly competes with the business of Summit; (b) Interfere or attempt to interfere with the business, goodwill, trade, customers or employees of Summit or with any one dealing with Summit in the operation of Summit's business; (c) Solicit borrowers' and depositors' business, patronage, or perform any services for, any business which directly or indirectly competes with the business carried on by Summit; (d) Promote or assist, financially or otherwise, any person, firm, association or corporation engaged in any business which directly or indirectly competes with the business carried on by Summit. (ii) During the Restricted Period, the Executive shall not, directly or indirectly, knowingly solicit or encourage to leave the employment of Company or Summit, any employee of Summit or hire any employee who has left the employment of Summit after the date of this Agreement within one year of the termination of such employee's employment with Summit or such shorter period as shall be agreed by Summit in writing. (b) If the Executive violates this restrictive covenant and Summit brings legal action for injunctive or other relief, Summit shall not as a result of the time involved in obtaining the relief be deprived of the benefit of the full period of the restrictive covenant. Accordingly, the restrictive covenant shall be deemed to have the duration specified herein, computed from the date the relief is granted, but reduced by the time between the period when the restriction began to run and the date of the first violation of the covenant by Executive. If any court shall determine that the duration or geographical limit of any restriction contained in this paragraph is unenforceable, it is the intention of the parties that the restrictive covenant set forth herein shall not thereby be permitted to be terminated but shall be deemed amended to the extent required to render it valid and enforceable. Such amendment shall apply only with respect to the operation of this paragraph and the jurisdiction of the court that has made the adjudication. (c) If any court determines that any provision of this Section, or any part thereof, is invalid or unenforceable, the remainder of the provisions of this Section shall not thereby be affected and shall be given full effect, without regard to the invalid portions. -5- 6 (d) If any court determines that any of the provisions of this Section, or any part thereof, is unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provisions and, in its reduced form, such provision shall then be enforceable and shall be enforced. (e) Notwithstanding any term to the contrary herein, during the Restricted Period Executive may engage in the type of business currently conducted by Summit Banc Investments Corporation, and the restrictions set forth in subparagraphs 7(a)(i)(a), (b), (c) and (d) shall not apply to Executive's activities under this subparagraph (e). 8. DISCLOSURE OF INFORMATION. The Executive acknowledges that in and as a result of his employment hereunder, he will be making use of, acquiring and/or adding to confidential information of a special and unique nature and value relating to such matters as Summit's and its affiliated companies' trade secrets, systems, procedures, manuals, confidential reports, and lists of customers. As a material inducement to Summit to enter into this Agreement and for Summit to pay Executive compensation stated in Section 3, as well as any additional benefits provided for herein, Executive covenants and agrees that he shall not at any time during or following the term of his employment, directly or indirectly divulge or disclose for any purpose whatsoever any confidential information that has been obtained by or disclosed to him as the result of employment by Summit heretofore or hereafter, except that there shall be no breach of this Section so long as Executive is acting in good faith and there is no material harm to Summit; provided, however, that this duty of confidentiality shall not apply to information which is on the date hereof generally known to the public or which is subsequently made public by an individual authorized to do so. 9. SURRENDER OF BOOKS AND RECORDS. Executive acknowledges that all files, books, records, literature, products, and other materials owned by Summit or its affiliates or used by it in connection with the conduct of its business shall at all times remain the property of Summit and that upon termination of the employment hereunder, irrespective of the time, manner, or cause of said termination, Executive will surrender to Summit all such files, books, records, literature, products, and other materials, other than such personal effects not related to the operation of the business. 10. NO ASSIGNMENTS. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. -6- 7 11. REMEDIES. It is recognized by Executive that a special and confidential relationship exists between Summit and Executive because of his knowledge, expertise and judgment and the dependence of Summit upon his knowledge, expertise and judgment. Executive agrees that the remedy at law for any breach of threatened breach of the covenants set forth in paragraphs 7, 8 and 9 hereof will be inadequate and that any breach or attempted breach of such covenants would cause such immediate and permanent damage as would be irreparable and the exact amount of which would be impossible to ascertain. Executive further agrees that in the event of any such breach or threatened breach of such covenants by Executive, in addition to any and all other legal and equitable remedies available, Summit may have any of such actions enjoined by any court authorized by law to take such action. Executive acknowledges and agrees that the limitations contained in paragraphs 7, 8 and 9 hereof are reasonable and properly required for the adequate protection of Summit. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to Summit at its home office, to the attention of the Board of Directors with a copy to the secretary of Summit, or, if to the Executive, to such home or other address as the Executive has most recently provided, in writing to Summit. 13. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 14. 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. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity and unenforceability of any provisions shall not affect the validity or enforceability of the other provisions hereof. 16. GOVERNING LAW. This Agreement shall be governed by and is to be construed and enforced in accordance with the laws of the State of Ohio. 17. ARBITRATION. Any dispute or controversy arising hereunder or in connection with this Agreement shall be finally and conclusively determined by the decision of a board of arbitration consisting of three members (hereinafter sometimes called the "Board of Arbitration") collected as hereinafter provided. Both Summit and Executive shall select one member and the third member shall be selected by mutual agreement of the other members, or if the other members fail to reach an agreement on a third member within 20 days after their selection, the third member shall thereafter be selected by the American Arbitration Association upon application made to it for such purpose by Summit. The Board of Arbitration shall meet in Wooster, Ohio, or in such other place as the majority of the members of the Board of Arbitration determines more appropriate and shall reach and render a decision in writing (concurred in by a -7- 8 majority by the members of the Board of Arbitration) with respect to the resolution of the dispute or controversy. In connection with rendering its decision, the Board of Arbitration shall adopt and follow such rules and procedures, except with regard to discovery matters, as a majority of the members of the Board of Arbitration deem necessary or appropriate. Arbitration discovery shall be that discovery allowed by Ohio Rules of Civil Procedure (Title V) as amended and modified by the parties herein permitting discovery by deposition, interrogatories, requests for admission, and production of documents, which Rules are incorporated by reference herein, but shall be modified in their application as follows: (i) depositions shall be limited to: the adversary (or in case of a corporation or other entity to two agents thereof who may be required to be identified as competent for the discovery purpose); other third party witnesses whose discovery may lead to relevant evidence for the preparation of the arbitration; other third party witnesses whose testimony reasonably needs to be perpetuated, including witnesses who by affidavit, state that they cannot be available for the hearing. Depositions of third party witnesses shall be limited to three; (ii) request for production of documents shall be limited to one set of relevant and reasonable requests and to such supplemental requests as may be reasonably required from information produced; (iii) each side shall be permitted one set of interrogatories and request for admissions, each consisting of no more than thirty (30) items including sub-parts; (iv) the limitations contained herein on the number of depositions, requests for production of documents, interrogatories and requests for admissions may be modified by a majority of the members of the Board of Arbitration upon motion of a party; (v) all discovery disputes shall be resolved by the Board of Arbitration whose decision shall be final, except as below provided, in any post-award proceeding under O.R.C. Chapter 2711, the court may consider as an additional ground for vacating or modifying the award an Arbitration Discovery decision involving a gross abuse of discretion, the Board of Arbitration and/or the court shall also be empowered to impose costs, expenses (excluding attorney's fees) and sanctions as provided in the Rules of Civil Procedure against any party for failure to comply with the Arbitration Discovery, and to base such imposition on the same criteria used by the courts in similar circumstances. To the extent practical, decisions of the Board of Arbitration shall be rendered no more than 30 calendar days following commencement of proceedings with respect thereto. The Board of Arbitration's written decision made by the Board of Arbitration (either prior to or after the expiration of such 30 calendar day period) shall be final, binding and conclusive on Summit and Executive and shall be entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. Each party shall bear its own costs and expenses and an equal share of the Board of Arbitration's fees and administrative fees of arbitration. Notwithstanding anything in this Agreement to the contrary, nothing in this Agreement shall restrict or prohibit any party to any arbitration under this Section from obtaining injunctive relief in connection with any claim hereunder. 18. OTHER AGREEMENTS. At the Effective Time (as defined in the Merger Agreement), all agreements by and between Executive and Summit Bancorp and/or Summit Bank, National Association, formerly known as Summit Bank, except the agreements listed on the attached Schedule 18, which agreements are not considered benefits subject to the terms of this Agreement, shall terminate and be null and void. At the Effective Time, this Agreement shall constitute the sole agreement for employment for Executive, except that Executive's rights to compensation or -8- 9 other benefits under those agreements set forth in Schedule 18 shall not be prejudiced as a result of Involuntary or Voluntary Termination under this Agreement, except as set forth therein. 19. CERTAIN REDUCTION OF PAYMENTS BY SUMMIT. (a) Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k) and any regulations promulgated thereunder. 20. DEFINITIONS. (a) The term "Date of Termination" means the earlier of (1) the date upon which Summit gives notice to the Executive of the termination of his employment with Summit other than pursuant to Paragraph 1 or (2) the date upon which the Executive ceases to serve as an employee of Summit. (b) The term "Involuntary Termination" means the termination of the employment of Executive without his express written consent, and shall include a material diminution of or interference with the Executive's duties, responsibilities and benefits as Chairman of the Board, Chief Executive Officer, and President of Summit, including (without limitation) any of the following actions unless consented to in writing by the Executive; (1) a change in the principal workplace of the Executive to a location outside Summit County; (2) a material demotion of the Executive; (3) a material reduction in the number or seniority of other Summit personnel reporting to the Executive or a material reduction in the frequency with which, or in the nature of the matters with respect to which, such personnel are to report to the Executive, other than as part of an Summit-wide reduction in staff; (4) a material adverse change in the Executive's salary, perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of Summit or the Company; and (5) a material permanent increase in the required hours of work or the workload of the Executive. The term "Involuntary Termination" does not include Termination for Cause or termination of employment due to retirement, death, or disability. (c) The terms "Termination for Cause" and "Terminated for Cause" mean termination of the employment of the Executive because of the Executive's gross negligence, unethical behavior, or any other acts which subject Summit to civil or criminal liability. (d) The term "Market Area" means Summit County, Ohio. (e) The term "Change in Control" means (1) an event of a nature that (i) results in a change in control of Summit or the Company within the meaning of the Bank Holding Company Act and its related regulations, (12 USCS 1841 and 12 CFR 225) as in effect on the date hereof; or (ii) would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); (2) any person (as that term is used in Sections 13(d) or 14(d) of the Exchange Act) who is or becomes the beneficial owner (as defined in Rule 13d-3 under the -9- 10 Exchange Act), directly or indirectly of securities of Summit or the Company representing 20% or more of Summit's or the Company's outstanding securities; or (3) individuals who are members of the board of directors of the Company on the date hereof (the "Incumbent Board") who cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the nominating committee serving under the Incumbent Board, shall be considered a member of the Incumbent Board. The term "Change in Control" shall not include an acquisition of securities by an employee benefit plan of Summit or the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. SUMMIT BANK, NATIONAL ASSOCIATION By /s/ David c. Vernon --------------------------------------- Name: David C. Vernon Title: Chairman of the Board, President and Chief Executive Officer FIRSTFEDERAL FINANCIAL SERVICES CORP By /s/ Gary G. Clark --------------------------------------- Name: Gary G. Clark Title: Chairman of the Board, President and Chief Executive Officer EXECUTIVE: /s/ David C. Vernon --------------------------------------- David C. Vernon -10- EX-13 4 EXHIBIT 13 1 Exhibit 13 FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------- December 31 ($000's except per share data) 1997 1996 1995 1994 1993 ================================================================================================================================== OPERATING DATA Net interest income $30,543 $25,511 $23,876 $22,727 $20,191 Net income 14,448 9,850 9,446 9,021 9,739 Net income applicable to common stock 12,864 8,154 7,660 7,657 8,733 PER COMMON SHARE DATA Basic earnings per share $2.59 $1.82 $1.85 $1.86 $2.13 Diluted earnings per share 1.96 1.43 1.42 1.43 1.67 Dividends paid per common share 0.43 0.38 0.34 0.31 0.23 Dividend payout ratio, including preferred dividends 25.65% 34.20% 33.73% 28.84% 20.16% END OF PERIOD FINANCIAL CONDITION DATA Total assets $1,457,415 $1,080,383 $947,270 $835,667 $682,639 Net loans and leases 914,356 669,697 581,060 478,576 381,241 Deposits 981,675 671,918 574,041 502,527 453,821 Borrowings including advances 347,243 312,413 286,726 258,171 168,379 Shareholders' equity 104,735 85,287 76,533 69,246 53,673 SELECTED FINANCIAL RATIOS Return on average assets 1.14% 0.95% 1.07% 1.21% 1.57% Return on average shareholders' equity 15.14 12.20 12.90 14.17 19.62 Shareholders' equity to total assets 7.19 7.89 8.08 8.29 7.86 Net interest margin 2.62 2.60 2.78 3.17 3.40 Total nonperforming assets to total assets 0.32 0.39 0.20 0.43 0.58 Allowance for loan losses to nonperforming assets 119.07 69.91 158.41 89.62 114.69 ==================================================================================================================================
See accompanying Consolidated Financial Statements and notes. Non-recurring expenses of $1.2 million ($1 million after tax) reflecting Summit Bank acquisition transaction costs were recorded in 1997. Non-recurring expenses of $3.3 million ($2.2 million after tax) were recorded in 1996 for the one-time assessment to recapitalization the Savings Association Insurance Fund. MARKET INFORMATION COMMON STOCK The Corporation's common stock is traded on the NASDAQ Stock Market. At December 31, 1997, its 6,725,535 outstanding shares were owned by approximately 1,800 shareholders of record. The closing price on December 31, 1997 was $44.00. The Corporation's current trading symbol remains "FFSW." PREFERRED STOCK The Corporation's 6 1/2% Cumulative Convertible Preferred Stock, Series B, is traded on the NASDAQ Stock Market. At December 31, 1997 there were 429,892 shares outstanding which were held by approximately 85 shareholders of record. The closing price on December 31, 1997 was $74.00. For its preferred stock, The Corporation's trading symbol remains "FFSWO." The Corporation's 7% Cumulative Convertible Preferred Shares, Series A, has been redeemed by the Corporation; the Series A shares had been traded under the symbol "FFSWP." HIGH AND LOW STOCK PRICES
- ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK PREFERRED STOCK SERIES A PREFERRED STOCK SERIES B High Low Dividend High Low Dividend High Low Dividend =================================================================================================================================== 1997 1st Qtr. $31.40 $28.90 $0.10 $92.94 $85.00 $0.4375 $51.75 $47.50 $0.4063 2nd Qtr. $42.00 $26.80 $0.11 $123.00 $78.50 $0.4375 $66.00 $43.50 $0.4063 3rd Qtr. $43.00 $40.25 $0.11 N/A N/A N/A $69.50 $65.00 $0.4063 4th Qtr. $48.13 $41.00 $0.11 N/A N/A N/A $82.00 $68.00 $0.4063 1996 1st Qtr. $18.73 $17.46 $0.09 $52.00 $52.00 $0.4375 $30.00 $28.00 $0.4063 2nd Qtr. $23.40 $18.00 $0.09 $66.75 $53.00 $0.4375 $39.00 $28.50 $0.4063 3rd Qtr. $25.20 $23.40 $0.10 $74.00 $66.50 $0.4375 $41.63 $37.00 $0.4063 4th Qtr. $32.00 $24.20 $0.10 $89.50 $72.50 $0.4375 $50.88 $40.75 $0.4063 ===================================================================================================================================
Market prices and dividends per share information on common stock have been adjusted to reflect the 10% stock dividend effective May 22, 1996, and the 25% stock dividend effective May 22, 1997. Exhibit 13, Page 1 2 FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------ December 31: ($000's) 1997 1996 ============================================================================================================================== ASSETS: - ------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks $ 32,323 $ 26,012 Securities available for sale 253,809 165,524 Securities held to maturity(a) 70,959 84,984 Other short term investments 19,216 9,000 Loans held for sale 86,955 88,982 Loans and leases: Residential mortgage loans 506,113 534,046 Commercial loans 45,293 4,850 Commercial mortgage loans 72,001 17,370 Commercial lease financing 41,909 -- Finance contracts 4,585 -- Manufactured housing loans 110,827 38,840 Consumer loans 139,166 77,507 Allowance for credit losses (5,538) (2,916) - ------------------------------------------------------------------------------------------------------------------------------ Net loans and leases 914,356 669,697 Premises and equipment, net 15,942 10,386 Intangible assets 32,062 10,572 Other assets 31,793 15,226 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,457,415 $1,080,383 ============================================================================================================================== LIABILITIES: - ------------------------------------------------------------------------------------------------------------------------------ Deposits: Non-interest bearing demand $ 47,574 $ 21,268 Interest checking 129,577 64,863 Savings 158,370 143,382 Money market 34,881 14,464 Certificates of $100,000 or more 164,349 82,122 Certificates and other time deposits 446,924 345,819 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 981,675 671,918 Short term borrowings 98,032 93,265 Long term borrowings 249,211 219,148 Other liabilities 23,762 10,765 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 1,352,680 995,096 - ------------------------------------------------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY: - ------------------------------------------------------------------------------------------------------------------------------ Preferred stock(b) 9,917 22,693 Common stock(c) 7,070 4,053 Additional paid-in capital 44,584 29,568 Retained earnings 45,249 32,756 Treasury stock, at cost (1,751) (2,637) Securities equity valuation account (334) (1,146) - ------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 104,735 85,287 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,457,415 $1,080,383 ============================================================================================================================== (a) Market value $71,059 in 1997 and $83,958 in 1996. (b) Preferred stock, no par value; authorized 1,500,000 shares; Series B 429,892 and 479,327 issued and outstanding, respectively. Series A 498,287 issued and outstanding in 1996. (c) Common stock, $1.00 par value; authorized 20,000,000 shares; 6,725,535 (net of 343,580 treasury shares) and 4,530,887 (net of 535,605 treasury shares), respectively.
See accompanying notes to consolidated financial statements. Exhibit 13, Page 2 3 FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------------- For the years ended December 31: ($000's except per share data) 1997 1996 1995 ============================================================================================================================ INTEREST INCOME: - ---------------------------------------------------------------------------------------------------------------------------- Loans and leases $68,481 $56,274 $42,841 Securities available for sale 15,288 11,554 12,895 Securities held to maturity 5,686 5,288 9,084 Other 638 443 102 - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 90,093 73,559 64,922 - ---------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: - ---------------------------------------------------------------------------------------------------------------------------- Interest on deposits: Interest checking 1,701 1,192 942 Savings 4,355 4,069 3,863 Money market 1,043 483 424 Certificates of $100,000 or more 6,190 4,001 2,116 Certificates and other time deposits 22,233 19,398 16,773 - ---------------------------------------------------------------------------------------------------------------------------- Total interest on deposits 35,522 29,143 24,118 Short-term borrowings 6,968 4,915 3,555 Long-term debt 17,060 13,990 13,373 - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 59,550 48,048 41,046 - ---------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 30,543 25,511 23,876 Provision for credit losses 842 360 ---- - ---------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 29,701 25,151 23,876 - ---------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Manufactured housing income 16,001 11,640 ---- Mortgage banking income 5,168 3,515 2,610 Customer service fee income 4,804 1,854 495 Net securities gains 1,175 397 384 Other 2,137 523 678 - ---------------------------------------------------------------------------------------------------------------------------- Total non-interest income 29,285 17,929 4,167 - ---------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: - ---------------------------------------------------------------------------------------------------------------------------- Personnel 16,469 10,938 5,763 Net occupancy expense 3,097 1,975 1,676 Outside services, data processing and communications 3,487 2,344 1,727 Professional fees 1,593 1,430 899 Amortization of intangibles 1,798 1,119 388 Other 7,990 6,199 3,198 Non-recurring expenses (a) 1,209 3,341 ---- - ---------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 35,643 27,346 13,651 - ---------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 23,343 15,734 14,392 Provision for income taxes 8,895 5,884 4,946 - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $14,448 $9,850 $9,446 ============================================================================================================================ Net income applicable to common stock $12,864 $8,154 $7,660 - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE: Basic $2.59 $1.82 $1.85 Diluted $1.96 $1.43 $1.42 - ---------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 4,971,619 4,469,970 4,136,379 Diluted 7,378,105 6,901,071 6,649,975 ============================================================================================================================ (a) Non-recurring expenses in 1997 of $1.2 million reflect acquisition transaction costs of Summit Bank, N.A. and 1996 expenses of $3.3 million reflect a one-time assessment for the recapitalization of the Savings Association Insurance Fund (SAIF).
See accompanying notes to consolidated financial statements. Exhibit 13, Page 3 4 FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------- Securities Years ended December 31, 1997, 1996, 1995 Preferred Common Paid-In Retained Treasury Equity Valuation ($000's except per share data) Stock Stock Capital Earnings Stock Account Total =================================================================================================================================== BALANCE AT JANUARY 1, 1995 $ 25,123 $3,096 $ 11,140 $ 34,604 $(2,139) $(2,578) $ 69,246 Net income -- -- -- 9,446 -- -- 9,446 Cash dividends: Common stock $.34 per share -- -- -- (1,403) -- -- (1,403) Series A preferred stock - $1.75 per share -- -- -- (974) -- -- (974) Series B preferred stock - $1.63 per share -- -- -- (809) -- -- (809) Proceeds from exercise of common stock options - 1,130 shares -- -- 2 -- 5 -- 7 Contribution of 3,076 shares to the 401(k) plan -- -- -- -- 41 -- 41 Conversion and redemption of 20,053 Series A preferred shares to common shares (501) -- 213 -- 288 -- -- Purchase of Series A preferred stock - 16,000 shares (402) -- (296) -- -- -- (698) Purchase of Series B preferred stock - 3,500 shares (88) -- (6) -- -- -- (94) Purchase of treasury stock - 60,236 shares -- -- -- -- (954) -- (954) 10% common stock dividend -- 309 5,257 (5,566) -- -- -- Unrealized gain on securities available for sale -- -- -- -- -- 2,725 2,725 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 24,132 3,405 16,310 35,298 (2,759) 147 76,533 Net income -- -- -- 9,850 -- -- 9,850 Cash dividends: Common stock $.38 per share -- -- -- (1,704) -- -- (1,704) Series A preferred stock - $1.75 per share -- -- -- (870) -- -- (870) Series B preferred stock - $1.63 per share -- -- -- (795) -- -- (795) Proceeds from exercise of common stock options - 13,523 shares -- -- 119 -- 139 -- 258 Contribution of 5,291 shares to the 401(k) plan -- -- -- -- 101 -- 101 Conversion and redemption of 15,260 Series A preferred shares to common shares and 3,550 Series B preferred shares to common shares (459) -- 198 -- 261 -- -- Purchase of Series A preferred stock - 25,300 shares (639) -- (879) -- -- -- (1,518) Purchase of Series B preferred stock - 9,900 shares (341) -- (143) -- -- -- (484) Purchase of treasury stock - 17,589 shares -- -- -- -- (379) -- (379) Issuance of 384,233 common shares in MCi acquisition -- 279 5,309 -- -- -- 5,588 10% common stock dividend -- 369 8,654 (9,023) -- -- -- Unrealized loss on securities available for sale -- -- -- -- -- (1,293) (1,293) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 22,693 4,053 29,568 32,756 (2,637) (1,146) 85,287 Net income -- -- -- 14,448 -- -- 14,448 Cash dividends: Common stock - $.43 per share -- -- -- (2,122) -- -- (2,122) Series A preferred stock - $1.75 per share -- -- -- (861) -- -- (861) Series B preferred stock - $1.63 per share -- -- -- (723) -- -- (723) Issuance of 548,949 common shares in Summit acquisition -- 549 4,911 1,499 -- (44) 6,915 Proceeds from exercise of common stock options - 49,476 shares -- -- 325 -- 225 -- 550 Tax benefit on stock options exercised -- -- -- 257 -- -- 257 Contribution of 2,737 shares to the 401(k) plan -- -- -- -- 133 -- 133 Conversion and redemption of 496,249 Series A preferred shares to common shares (11,539) 1,455 9,991 -- 93 -- -- Conversion and redemption of 49,435 Series B preferred shares to common shares (1,237) -- 802 -- 435 -- -- 25% common stock dividend -- 1,013 (1,013) (5) -- -- (5) Unrealized gain on securities available for sale -- -- -- -- -- 856 856 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ 9,917 $7,070 $ 44,584 $ 45,249 ($1,751) ($334) $ 104,735 ===================================================================================================================================
See accompanying notes to consolidated financial statements. Exhibit 13, Page 4 5 FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31: ($000's) 1997 1996 1995 ================================================================================================================================ OPERATING ACTIVITIES: - -------------------------------------------------------------------------------------------------------------------------------- Net income $14,448 $9,850 $9,446 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 842 360 ---- Depreciation, amortization and accretion 5,671 2,724 1,240 Net securities (gains) (1,175) (397) (384) Net gain on sales of loans (9,706) (3,882) (1,451) Proceeds from sales of loans held for sale 259,199 272,765 88,548 Origination of loans held for sale (257,172) (322,729) (120,303) (Increase) decrease in other assets (45,343) 7,222 (1,536) Increase in other liabilities 4,090 795 4,247 - -------------------------------------------------------------------------------------------------------------------------------- NET CASH USED BY OPERATING ACTIVITIES (29,146) (33,292) (20,193) ================================================================================================================================ INVESTING ACTIVITIES: - -------------------------------------------------------------------------------------------------------------------------------- Proceeds from sales of securities available for sale 83,766 47,105 47,067 Proceeds from calls, paydowns and maturities of securities available for sale 42,891 71,602 27,728 Purchases of securities available for sale (216,117) (68,895) (70,449) Purchases of securities held to maturity (1,417) (9,638) (14,209) Proceeds from maturities of securities held to maturity 15,442 14,596 22,070 Increase in other short-term investments (10,216) (138) (7,765) Increase in loans and leases (144,780) (125,223) (70,135) Purchases of premises and equipment, net (5,556) (3,524) (491) Net cash from purchases of subsidiaries and other acquisitions 2,556 ---- ---- - -------------------------------------------------------------------------------------------------------------------------------- NET CASH USED BY INVESTING ACTIVITIES (233,431) (74,115) (66,184) ================================================================================================================================ FINANCING ACTIVITIES: - -------------------------------------------------------------------------------------------------------------------------------- Increase in core deposits 86,157 71,450 71,514 Acquisition of deposits 150,800 24,606 ---- Net change in short-term borrowings 4,767 29,789 (26,666) Net change in long-term debt 30,063 (5,555) 55,221 Cash dividends paid (3,706) (3,369) (3,186) Exercise of stock options 807 258 7 Purchases of treasury stock ---- (379) (954) Purchases of preferred stock -- (2,002) (792) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 268,888 114,798 95,144 ================================================================================================================================ INCREASE IN CASH AND DUE FROM BANKS 6,311 7,391 8,767 CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 26,012 18,621 9,854 - -------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $32,323 $26,012 $18,621 ================================================================================================================================
The Corporation paid Federal income taxes of $6,420, $5,427 and $4,025 in 1997, 1996 and 1995, respectively. The Corporation paid interest of $58,123, $47,785 and $39,692 in 1997, 1996 and 1995, respectively. See accompanying notes to consolidated financial statements. Exhibit 13, Page 5 6 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES NATURE OF OPERATIONS FirstFederal Financial Services Corp ("The Corporation") conducts its principal activities through its banking and non-banking subsidiaries with 29 banking offices located throughout north central Ohio and non-banking facilities in Ohio, Indiana and Virginia doing business in 42 states. Principal activities include commercial and retail banking, investment services and brokering and servicing manufactured housing finance contracts. BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of FirstFederal Financial Services Corp and its subsidiaries. All material intercompany transactions and balances have been eliminated. Certain prior period data has been reclassified to conform to current period presentation. The preparation of Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates. SECURITIES Securities are classified as held to maturity, available for sale or trading. Only those securities classified as held to maturity, and which management has the intent and ability to hold to maturity, are reported at amortized cost. Available for sale and trading securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in shareholders' equity or income, respectively. The cost of securities sold is based on the specific identification method. Other short term investments consist primarily of interest bearing deposits with the Federal Home Loan Bank of Cincinnati (FHLB). LOANS AND LEASES Interest income on loans is based on the principal balance outstanding. The accrual of interest for commercial, construction and mortgage loans is discontinued when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Such loans are also placed on nonaccrual status when principal or interest is past due ninety days or more, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed against income. A loan remains on non-accrual status until the loan is current as to payment of both principal and interest, and/or the borrower demonstrates the ability to pay and remain current. Direct loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans or commitments as a yield adjustment. Net deferred loan fees or costs related to loans paid off or sold are included in income at the time of sale. Income on direct financing leases is recognized on a basis to achieve a constant periodic rate of return on the outstanding investment. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rates or the fair value of the underlying collateral. Impaired loans have been defined as all nonaccrual loans. Loans held for sale are valued at the lower of aggregate cost or market value as determined by outstanding commitments from investors or current investor yield requirements and were $86,955,000 and $88,982,000 at December 31, 1997 and 1996 respectively. The Corporation has commitments to sell residential mortgage loans held for sale in the secondary market. Gains and losses on residential mortgage loans sold are recorded at the time of the sale and are recognized as mortgage banking income. Mortgage servicing rights associated with mortgage loans originated and sold, where servicing is retained, are capitalized and amortized over the period of net revenue. The carrying value of such rights is subject to periodic adjustment based upon changing market conditions. The Corporation adopted the provisions of SFAS 125, "Accounting and Reporting for transfers and Servicing of Financial Assets and Extinguishments of Liabilities," on January 1, 1997, which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 125 is based on consistent application of a financial-components approach that focuses on control. Under the financial-components approach, the Corporation recognizes the financial and servicing asset it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS 125 also provides consistent standards for distinguishing transfers of financial assets that are secured borrowings. The Corporation records an asset upon sale or securitization of loans with servicing retained and allocates the total cost of loans to the servicing rights and the loans based on their relative fair values. The resulting servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Servicing rights are assessed for impairment recognized through a valuation allowance. For purposes of measuring impairment, the rights are stratified based on interest rate and original maturity. ALLOWANCE FOR CREDIT LOSSES The allowance is maintained at a level management considers to be adequate to absorb potential loan and lease losses. Credit losses are charged and recoveries are credited to the allowance. Provisions for credit losses are based on management's review of the historical credit loss experience and such other factors which, in management's judgement, deserve consideration under existing economic conditions in estimating potential credit losses. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is computed on the straight-line method over the lives of the related leases or useful lives of the related assets, whichever is shorter. Maintenance, repairs and minor improvements are charged to operating expenses as incurred. INTANGIBLE ASSETS Intangible assets, primarily premiums on purchased deposits, are amortized on a straight-line basis generally over a period of up to 15 years. Management reviews intangible assets for possible impairment if there is a significant event that detrimentally affects operations. Impairment is measured using estimates of the future earnings potential of the entity or assets acquired. Amortization of intangible assets was $1.7 million and $1.1 million in 1997 and 1996, respectively. DERIVATIVE FINANCIAL INSTRUMENTS The Corporation has entered into interest rate swap agreements to achieve a lower aggregate borrowing cost on certain fixed-rate long-term borrowings. Net interest expense resulting from the differential between exchanging fixed-rate and floating interest payments is recorded on an accrual basis as an adjustment to the interest expense of the associated liability. The Corporation periodically hedges the value of manufactured housing loans held for sale to mitigate the impact on the change Exhibit 13, Page 6 7 in value on sale of loans due to future fluctuations in interest rates. The contracts are designated as hedges, with gains and losses recorded as basis adjustments to loans held for sale. The Corporation does not hold or issue derivative financial instruments for trading purposes. NET INCOME PER SHARE Earnings per share is calculated by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The assumed conversion of convertible preferred stock and the exercise of stock options is included in the calculation of diluted earnings per share. SFAS No. 128, "Earnings Per Share," was adopted for 1997 with all prior-period earnings per share data restated. The statement requires dual presentation of basic earnings per share and diluted earnings per share on the Consolidated Statements of Income. STOCK DIVIDEND The Corporation's board of directors approved a 25% stock dividend in April 1997 and 10% stock dividend on both May 22, 1996 and May 22, 1995. The consolidated financial statements, notes and other references to share and per share data have been retroactively restated for the stock dividends. STOCK-BASED COMPENSATION SFAS No. 123 "Accounting for Stock-Based Compensation," was adopted January 1, 1996 and encourages, but does not require, adoption of a fair-value-based accounting method for employee stock-based compensation arrangements. The Corporation has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. ACCOUNTING PRONOUNCEMENTS SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and is effective for fiscal years beginnings after December 15, 1997. The statement requires additional reporting of items that affect comprehensive income but not net income. Examples relevant to the Corporation include unrealized gains and losses on securities available for sale. This statement will result in additional financial statement disclosures upon adoption. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was issued in June 1997 and is effective for fiscal years beginning after December 15, 1997. The statement requires financial disclosure and descriptive information about reportable operating segments. This statement may result in additional financial statement disclosures upon adoption, however the Corporation does not expect to make material changes to its current segment groupings. NOTE 2 - SECURITIES Securities available for sale as of December 31:
- --------------------------------------------------------------- 1997 ------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET ($000'S) COST GAINS LOSSES VALUE =============================================================== U.S. Government and agency obligations.... $29,240 $88 ($33) $29,295 Obligations of states and political subdivisions.......... 1,967 50 ---- 2,017 Agency mortgage- backed securities..... 167,178 417 (1,127) 166,468 Retained interest in securitized assets. 27,023 ---- ---- 27,023 Other bonds, notes and debentures........ 894 20 (3) 911 Other securities...... 28,043 75 (23) 28,095 - --------------------------------------------------------------- Total securities...... $254,345 $650 ($1,186) $253,809 ===============================================================
- --------------------------------------------------------------- 1996 --------------------------------------------- Amortized Unrealized Unrealized Market ($000's) Cost Gains Losses Value ============================================================== U.S. Government and agency obligations........ $45,430 $22 ($129) $45,323 Agency mortgage- backed securities.. 95,445 244 (1,904) 93,785 Retained interest in securitized assets 6,491 ---- ---- 6,491 Other bonds, notes and debentures..... 2,435 9 (4) 2,440 Other securities... 17,485 ---- ---- 17,485 - -------------------------------------------------------------- Total securities... $167,286 $275 ($2,037) $165,524 ==============================================================
Securities held to maturity as of December 31:
- -------------------------------------------------------------- 1997 --------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET ($000'S) COST GAINS LOSSES VALUE ============================================================== U.S. Government and agency obligations......... $4,500 $3 ($31) $4,472 Obligations of states and political subdivisions........ 2,906 64 ---- 2,970 Agency mortgage- backed securities... 61,450 424 (385) 61,489 Other securities.... 2,103 25 ---- 2,128 - -------------------------------------------------------------- Total securities.... $70,959 $516 ($416) $71,059 ==============================================================
- -------------------------------------------------------------- 1996 --------------------------------------------- Amortized Unrealized Unrealized Market ($000's) Cost Gains Losses Value ============================================================== U.S. Government and agency obligations......... $4,501 $12 ($45) $4,468 Obligations of states and political subdivisions........ 1,634 24 ---- 1,658 Agency mortgage- backed securities... 78,737 369 (1,386) 77,720 Other securities.... 112 ---- ---- 112 - -------------------------------------------------------------- Total securities.... $84,984 $405 ($1,431) $83,958 ==============================================================
The amortized cost and approximate market value of securities at December 31, 1997, by expected actual maturity, are shown in the following table. Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties. Maturities of mortgage-backed securities were estimated based on historical and expected future prepayment trends.
- -------------------------------------------------------------- AVAILABLE FOR SALE HELD TO MATURITY --------------------------------------------- AMORTIZED MARKET AMORTIZED MARKET ($000'S) COST VALUE COST VALUE ============================================================== Debt securities: Under 1 year.... $31,036 $31,122 $3,751 $3,724 1-5 years....... 155,072 155,094 51,033 50,979 6-10 years...... 52,779 52,464 5,121 5,135 Over 10 years... 15,458 15,129 11,054 11,221 - -------------------------------------------------------------- Total securities... $254,345 $253,809 $70,959 $71,059 ==============================================================
At December 31, 1997 and 1996, securities with a book value of $119,185,000 and $32,800,000, respectively, were pledged to secure short-term borrowings, public deposits, and for other purposes as required or permitted by law. Realized gains and losses respectively were as follows: 1997 - $1,180,000 and ($5,000); 1996 - $731,000 and ($334,000); and 1995 - $504,000 and ($120,000). Exhibit 13, Page 7 8 NOTE 3 - ALLOWANCE FOR CREDIT LOSSES Transactions in the allowance for credit losses for the years ended December 31:
- -------------------------------------------------------------- ($000's) 1997 1996 1995 ============================================================== Balance at January 1............ $2,916 $2,994 $3,204 Losses charged off.............. (831) (454) (225) Recoveries of losses previously charged off....... 100 16 15 - -------------------------------------------------------------- Net charge-offs................. (731) (438) (210) Provision charged to operations. 842 360 ---- Reserves of acquired businesses 2,511 ---- ---- - -------------------------------------------------------------- Balance at December 31.......... $5,538 $2,916 $2,994 ==============================================================
Impaired loan information at December 31:
- -------------------------------------------------------------- ($000's) 1997 1996 ============================================================== Impaired loans with a valuation reserve...... $4,353 $3,590 Valuation reserve on impaired loans.......... 2,177 1,795 Average impaired loans....................... $3,972 $2,508 ==============================================================
Cash basis interest income recognized on impaired loans during both years was immaterial. NOTE 4 - COMMERCIAL LEASE FINANCING A summary of the gross investment in commercial lease financing at December 31:
- -------------------------------------------------------------- ($000's) 1997 1996 ============================================================== Direct financing leases.................... $33,695 ---- Operating leases........................... 8,214 ---- - -------------------------------------------------------------- Total commercial lease financing........... $41,909 ---- ==============================================================
The components of the investment in direct financing leases at December 31:
- ------------------------------------------------------------------ ($000's) 1997 1996 ================================================================== Rentals receivables..............................$37,182 ---- Estimated residual value of leased assets........ 4,628 ---- - ------------------------------------------------------------------ Gross investment in direct financing leases...... 41,810 ---- Unearned income.................................. 8,115 ---- - ------------------------------------------------------------------ Total net investment in direct financing leases.. $33,695 ---- ==================================================================
At December 31, 1997, the minimum future lease payments receivable for each of the years 1998 through 2002 were $13,600,000, $11,094,000, $8,276,000, and $5,509,000, and $2,977,000, respectively. NOTE 5 - PREMISES AND EQUIPMENT A summary of premises and equipment at December 31:
- -------------------------------------------------------------- Estimated ($000's) Useful Life 1997 1996 ============================================================== Land and improvements........ ---- $2,147 $1,206 Buildings.................... 25 10,472 8,590 Furniture and equipment...... 3 to 10 yrs 13,183 7,276 Leasehold improvements....... 5 to 25 yrs 1,212 512 Accumulated depreciation and amortization................. (11,072) (7,198) - -------------------------------------------------------------- Total premises and equipment $15,942 $10,386 ==============================================================
Depreciation and amortization expense related to premises and equipment was $2,565,994 in 1997, $1,051,654 in 1996, and $539,371 in 1995. The Corporation's subsidiaries have entered into a number of noncancelable lease agreements with respect to premises. A summary of the minimum annual rental commitments under these leases at December 31, 1997, exclusive of taxes and other charges payable under the leases:
- -------------------------------------------------------------- ($000's) ============================================================== 1998................................................... $624 1999................................................... 576 2000................................................... 513 2001................................................... 301 2002................................................... 106 2003 and subsequent years.............................. 720 - -------------------------------------------------------------- Total.................................................. $2,840 ==============================================================
Rental expense for cancelable and noncancelable leases was $361,000 for 1997, $248,000 for 1996 and $119,000 for 1995. NOTE 6 - SHORT-TERM BORROWINGS A summary of short-term borrowings and rates at December 31:
- ---------------------------------------------------------------- ($000's) 1997 1996 1995 ================================================================ FHLB advances: Balance........................ $38,802 $67,648 $37,369 Rate........................... 5.92% 5.98% 5.29% - ---------------------------------------------------------------- Securities sold under agreements to repurchase: Balance........................ $55,814 $20,402 $24,654 Rate........................... 5.68% 5.44% 5.85% - ---------------------------------------------------------------- Other borrowings: Balance........................ $3,416 $5,215 ---- Rate........................... 8.50% 5.88% ---- - ---------------------------------------------------------------- Total short-term borrowings: Balance........................ $98,032 $93,265 $62,023 Rate........................... 5.90% 5.86% 5.51% ================================================================ Average outstanding............... $119,552 $83,198 $84,111 Maximum month-end balance......... $171,353 $124,652 $118,345 Weighted average interest rate.... 5.82% 5.63% 5.73% ================================================================
The market value of securities sold under repurchase agreements, all of which were under the Corporation's control, totaled $60,401,819 at December 31, 1997. At December 31, 1997, the Corporation had unused lines of credit of $40,000,000 available to support corporate requirements. NOTE 7 - LONG-TERM BORROWINGS A summary of long-term borrowings at December 31:
- -------------------------------------------------------------- ($000's) 1997 1996 ============================================================== Subordinated debt, 9.125% due 2004......... $40,500 ---- Federal Home Loan Bank advances............ 183,952 $219,148 Other, ranging from 8.0% to 9.6%........... 24,759 ---- - -------------------------------------------------------------- Total long-term borrowings................. $249,211 $219,148 ==============================================================
Interest on the subordinated debt is payable semiannually beginning in September 1997, and the debt is redeemable at the option of the Corporation any time after June 30, 2002 until its maturity date of June 30, 2004. At December 31, 1997, Federal Home Loan bank (FHLB) advances have rates ranging from 5.10% to 7.57%, with interest payable monthly. The advances are secured by a blanket lien on first mortgage loans with balances totaling 150 percent of such advances. The FHLB stock also serves as collateral for the advances. Long-term debt is scheduled to mature as follows: $8,946,000 in 1998, $67,736,000 in 1999, $51,077,000 in 2000, $12,300,000 in 2001, $26,709,000 in 2002, and $82,443,000 in 2003 and thereafter. NOTE 8 - INCOME TAXES The Corporation and its subsidiaries file a consolidated Federal income tax return. A summary of applicable income taxes included in the Consolidated Statements of Income follows:
- -------------------------------------------------------------- ($000's) 1997 1996 1995 ============================================================== Current U.S. income taxes.......... $2,781 $874 $4,516 State and local income taxes....... 311 283 ---- - -------------------------------------------------------------- Total.............................. 3,092 1,157 4,516 - -------------------------------------------------------------- Deferred U.S. income taxes resulting from temporary differences......... 5,803 4,727 430 - --------------------------------------------------------------
Exhibit 13, Page 8 9 - -------------------------------------------------------------- Provision for income taxes..........$8,895 $5,884 $4,946 ==============================================================
Deferred income taxes are included in the caption Other Liabilities in the Consolidated Balance Sheets and are comprised of the following temporary differences at December 31:
- ------------------------------------------------------------------ ($000's) 1997 1996 ================================================================== Deferred tax assets: Allowance for credit losses.................. $1,870 $758 Basis differences - fixed assets............. ---- 367 Other assets................................. 614 328 - ------------------------------------------------------------------ Total gross deferred tax assets................. 2,484 1,453 - ------------------------------------------------------------------ Deferred Tax Liabilities: Basis difference - leased property........... 3,976 ---- Unrealized gain on loans and securities available for sale......................... 165 594 FHLB stock dividends......................... 1,985 1,438 Originated servicing rights.................. 887 526 Deferred loan fees net of costs.............. 3,708 3,030 Tax bad debt reserve over base year reserves. 654 654 Deferred gain on sale of loans............... 2,066 535 Basis difference - fixed assets.............. 106 ---- Other net liabilities........................ 77 13 - ------------------------------------------------------------------ Total gross deferred tax liabilities............ 13,624 6,790 - ------------------------------------------------------------------ Net deferred tax liability.................. $11,140 $5,337 ==================================================================
Management has determined no valuation allowance for deferred tax assets was required at December 31, 1997 or 1996. A reconciliation between the statutory U.S. income tax rate and the Corporation's effective tax rate:
- -------------------------------------------------------------- 1997 1996 1995 ============================================================== Statutory tax rate.................. 35.0% 35.0% 35.0% Increase (decrease) resulting from: State and local income taxes net of 0.9 1.1 ---- federal benefit.................. Non-deductible merger transaction 0.9 ---- ---- expenses...................... Amortization of intangibles...... 1.0 1.0 ---- Other - net...................... 0.3 .3 (.6) - -------------------------------------------------------------- Effective tax rate.................. 38.1% 37.4% 34.4% ==============================================================
Retained earnings at December 31, 1997 includes approximately $3.6 million in allocations of earnings for bad debt deductions of a former thrift subsidiary for which no income tax has been provided. Under current tax law, if the Corporation's subsidiary uses this bad debt reserve for purposes other than to absorb bad debt losses or if it no longer qualifies as a bank or merges into a non-bank entity, the bad debt reserve will be subject to federal income tax at the current corporate rate. NOTE 9 - MANUFACTURED HOUSING INCOME The Corporation, through its subsidiary Mobile Consultants, Inc. (MCi), has sold certain manufactured housing finance contracts (MHF contracts) to various financial institutions while retaining the collection and recovery aspect of servicing. The amount of MHF contracts serviced as described above totaled $430.1 million and $438 million, at December 31, 1997 and 1996, respectively. At the time MCi sells a MHF contract to an unaffiliated financial institution, approximately one third of the fee collected is recorded as a "manufactured housing brokerage fee" and the remaining two thirds of the fee is deposited into escrow accounts and is available to offset potential prepayment or credit losses ("MCi reserves"). The MCi reserves are recognized as "servicing income on brokered MHF contracts" ratably over the MHF contract life based on the present value of the future cash flows of the MCi reserves utilizing assumptions for prepayment and credit losses and a discount rate. The undiscounted balance of the MCi reserves was $46.4 million and $46 million as of December 31, 1997 and 1996, respectively. The Corporation's subsidiary, Signal Bank, N.A., purchases MHF contracts from MCi, a portion of which are packaged in asset backed securitizations (ABS pools) and sold to investors. Sales and securitizations of MHF contracts totaled $137.3 million in 1997 and $48.9 million in 1996. At the time of sale, the Corporation records an asset, "retained interest in securitized assets," representing the discounted future cash flows to be received by the Corporation for 1) servicing income from the ABS pool, 2) principal and interest payments on MHF contracts contributed to the ABS pools as a credit enhancement, referred to as over-collateralization and 3) excess interest spread. Excess interest spread represents the difference between interest collected from MHF contract borrowers and interest paid to investors in the ABS pools net of a 60 basis point per annum provision for credit risk and further reduced by the impact of estimated prepayments using 130 MHP. MHP is the manufactured housing industry standard index for prepayment. Prepayment and credit loss assumptions are based on the Corporation's historical experience. Subordinated future cash flows from the ABS pools have been discounted at 10%. The carrying value of retained interest in securitized assets is subject to periodic adjustment based upon potential impairment and changing market conditions. Management periodically reviews the retained interest in securitized assets for possible impairment by comparing actual cash flows received by the Corporation from the ABS pools and actual prepayments and credit losses to the corresponding projections used at the time of sale for each ABS pool. Impairment, if any, is charged to operations. Favorable experience is recognized prospectively as realized. The aggregate amount of ABS pools serviced by the Corporation totaled $186.2 million and $48 million at December 31, 1997 and 1996, respectively, and such amounts are not included in the accompanying Consolidated Financial Statements. Changes in the retained interest in securitized assets for the years ended December 31 were as follows:
- -------------------------------------------------------------- ($000's) 1997 1996 ============================================================== Balance at January 1...................... $6,491 ---- Retained interest from ABS pool sales..... 21,386 $6,500 Amortization.............................. (854) (9) - -------------------------------------------------------------- Balance at December 31 $27,023 $6,491 ==============================================================
The portion of retained interest representing future servicing income was $5.7 million at December 31, 1997. The components of manufactured housing income were as follows:
- -------------------------------------------------------------- ($000's) 1997 1996 1995 ============================================================== Gain on sale of ABS pools.......... $5,734 $1,574 ---- Manufactured housing brokerage fees 3,151 6,726 ---- Servicing income on brokered MHF 4,400 3,200 ---- contracts....................... Servicing income on ABS pools...... 1,399 80 ---- Interest income on retained interest in securitized assets.............. 1,317 60 ---- - -------------------------------------------------------------- TOTAL MANUFACTURED HOUSING INCOME.....................$16,001 $11,640 $0 ==============================================================
NOTE 10 - MORTGAGE BANKING INCOME The Corporation has sold certain loans to various investors while retaining servicing rights. Loans serviced for others totaled $521 million and $419 million at December 31, 1997 and 1996, respectively, and are not included in the accompanying Consolidated Financial Statements. Changes in mortgage servicing rights, classified on the balance sheet within other assets, for the years ended December 31 were as follows:
- -------------------------------------------------------------- ($000's) 1997 1996 ============================================================== Balance at January 1........................ $1,503 ---- Originated mortgage servicing rights........ 1,589 $1,611
Exhibit 13, Page 9 10 Amortization................................ (551) (108) - -------------------------------------------------------------- Balance at December 31 $2,541 $1,503 ==============================================================
The components of mortgage banking income were as follows:
- ----------------------------------------------------------------------- ($000's) 1997 1996 1995 ======================================================================= Gain on sale of mortgage loans............. $3,972 $2,308 $1,451 Mortgage loan fee income................... 350 500 460 Mortgage servicing fees, net of amortization 846 707 699 - ----------------------------------------------------------------------- TOTAL MORTGAGE BANKING INCOME $5,168 $3,515 $2,610 =======================================================================
NOTE 11 - STOCK COMPENSATION PLANS Options can be granted under the Corporation's Stock Option Plans to key employees and directors of the Corporation and its subsidiaries for up to 1,070,640 shares of the Corporation's common stock. All options granted have up to ten year terms and vest and become fully exercisable at the end of three years of continued employment. A summary of option transactions during 1997, 1996 and 1995: - --------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------- AVERAGE Average Average (Shares in OPTION Option Option 000's) SHARES PRICE Shares Price Shares Price ===================================================================== Outstanding beginning of year........ 372,313 $12.48 268,783 $11.48 192,785 $10.25 Exercised......... (46,762) 11.83 (27,936) 9.25 (1,243) 5.98 Expired........... (13,175) ---- (7,409) ---- (379) ---- Granted........... 184,837 38.13 138,875 22.10 77,620 14.38 Acquired business....... 54,005 13.00 ---- ---- ---- ---- - --------------------------------------------------------------------- Outstanding, end of year ... 551,218 $22.95 372,313 $12.48 268,783 $11.48 - --------------------------------------------------------------------- Exercisable, end of year ... 191,534 $11.68 114,298 $9.73 85,636 $9.25 =====================================================================
As of December 31, 1997, options outstanding have exercise prices between $2.18 and $44.63 and a weighted average remaining contractual life of 7.7 years. At December 31, 1997, there were 460,055 incentive options and 91,163 nonqualified options outstanding and 519,422 shares were available for granting additional options. Under the 1997 Employee Stock purchase Plan, the Corporation is authorized to issue up to 136, 878 shares of common stock to its full time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees can choose each year to have up to 10 percent of their annual compensation withheld to purchase the Corporation's common stock. The purchase price of the stock is 85 percent of the lower of its beginning-of-purchase period or end-of-purchase period market price. Approximately 25 percent of eligible employees currently participate in the Plan. Under the Plan, the Corporation sold 6,053 shares to employees for 1997. The Corporation has elected to disclose pro forma net income and net income per share as if the fair-value-based method had been applied in measuring compensation costs. The Corporation's pro forma information for the years ended December 31:
- -------------------------------------------------------------- 1997 1996 1995 ============================================================== Pro forma net income ($000's).........$13,610 $9,412 $9,209 Pro forma basic net income per share.. $2.42 $1.73 $1.79 Pro forma diluted net income per share $1.84 $1.36 $1.38 ==============================================================
Compensation expense reflected in the pro forma disclosures is not indicative of future amounts when the SFAS No. 123 prescribed method will apply to all outstanding nonvested awards. The weighted average fair value of options granted was $17.43 in 1997, $11.54 in 1996 and $7.40 in 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997, 1996 and 1995: expected dividend yield of 1.10%, 1.78% and 1.78% and expected option lives of 10 years; expected volatility of 30%, 39%, and 39%, and risk-free interest rates of 5.70%, 6.25%, and 6.25%, respectively. The Corporation granted restricted stock to certain officers and directors in 1996 of which 53,125 shares are outstanding as of December 31, 1997. The restricted stock vests at a rate of 20% per year on each January 31 through January 2001, provided the Corporation return on average shareholders' equity of the preceding year equals or exceeds 15%. As of January 31, 1998, 20% of the restricted shares vested. NOTE 12 - PREFERRED STOCK The Corporation issued in 1994 500,000 shares of 6 1/2 percent cumulative convertible preferred stock, Series B, without par value. The stock is convertible at the option of the holder at any time or it may be redeemed by the Corporation on or after June 24, 1999 into 722,734 shares of common stock or 1.6812 common shares for each outstanding share of Series B preferred stock. Cash dividends are payable quarterly on December 1, March 1, June 1 and September 1 of each year. On December 16, 1997, the Corporation redeemed and converted the remaining 482,586 outstanding Series A preferred stock into 1,455,335 shares of common stock. The 7 percent cumulative convertible Series A preferred stock was originally issued in 1992. NOTE 13 - EMPLOYEE BENEFIT PLANS The Corporation has a profit sharing plan covering substantially all employees. Employer contributions to the plan reflect a 75 percent match of employee contributions up to 4% of employees wages and additional discretionary contributions as approved by the Board of Directors. As of December 31, 1997, the profit sharing plan held 22,855 shares of the Corporation valued at $1,005,620. Employer contributions to the profit sharing plan were $270,000, $100,000 and $60,000 for 1997, 1996 and 1995, respectively. The Corporation sponsored a final-pay noncontributory defined benefit plan for Signal Bank, N.A. employees. Effective December 31, 1996, the employer terminated the plan, settled the accumulated benefit obligation of $2,592,000 (nonvested benefits became vested upon termination of the plan) by rolling plan assets, primarily certificates of deposit, into the profit sharing plan and purchasing nonparticipating annuity contracts. Defined benefits were not provided under any successor plan. As a result, the Corporation recognized a loss of $200,000 determined as follows:
- ------------------------------------------------------------------------ Before Effect of After ($000's) Termination Termination Termination ======================================================================== Assets and obligations: Accumulated benefit obligation ($2,592) $2,592 $ ---- Effects of projected future compensation levels........ (584) 584 ---- ---------------------------------- Projected benefit obligation. (3,176) 3,176 ---- Plan assets at fair value..... 2,736 (2,736) ---- Items not yet recognized in earnings: Unrecognized net asset at transition................. 582 (582) ---- Unrecognized net gain subsequent to transition... (342) 342 ---- ---------------------------------- (Accrued)/prepaid pension cost on the balance sheet ............ ($200) $200 $ ---- ========================================================================
Net periodic pension expense was $200,000, $143,000 and $133,000 for 1997, 1996 and 1995, respectively. The Corporation does not provide postretirement benefits nor does it have any material liabilities for postemployment benefits. NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES The Corporation, in the normal course of business, is a party to financial instruments with off-balance-sheet risk to meet the Exhibit 13, Page 10 11 financing needs of its customers and to minimize exposure to fluctuations in interest rates. These financial instruments primarily include commitments to extend credit, standby and commercial letters of credit, and commitments to sell residential mortgage loans. These instruments involve, to varying degrees, elements of credit risk, counterparty risk and market risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with Corporation credit policies. Collateral, if deemed necessary, is based on management's credit evaluation of the counterparty and may include business assets of commercial borrowers as well as personal property and real estate of individual borrowers and guarantors. A summary of significant commitments and other off-balance-sheet items at December 31:
- -------------------------------------------------------------- Contract or Notional Amount --------------------- ($000's) 1997 1996 ============================================================== Commitments to extend credit............. $162,235 $68,866 Letters of credit (including standby 908 239 letters of credit).................... Commitments to sell residential mortgage loans........................ 10,320 56,124 Interest rate swap agreements............ 65,500 ---- Forward contract on loans held for sale.. 41,000 ---- ==============================================================
Commitments to extend credit are agreements to lend. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation's exposure to credit risk in the event of nonperformance by the other party is the contract amount. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. At December 31, 1997, all standby letters of credit will expire within one year. The amount of credit risk involved in issuing letters of credit in the event of nonperformance by the other party is the contract amount. The Corporation enters into forward contracts for future delivery of residential mortgage loans of a specified yield to reduce the interest rate risk associated with fixed-rate residential mortgages held for sale and commitments to fund residential mortgages. Credit risk arises from the possible inability of the other parties to comply with the contract terms. The majority of the Corporation's contracts are with U.S. government-sponsored agencies (FNMA and FHLMC). Fixed rate commitments to sell residential mortgage loans of $8.3 million at December 31, 1997 are subject to market risk resulting from fluctuations in interest rates and the Corporation's exposure is limited to the replacement value of those commitments. These contracts carry the risk of the counterparty's future ability to perform under the agreement. A limit of market exposure is approved for all counterparties. In 1997, the Corporation entered into interest rate swap agreements with a notional principal amount of $65.5 million in connection with the issuance of $40.5 million of long-term, fixed-rate subordinated notes and a $25 million brokered certificate of deposit. The Corporation receives fixed-rate payments at 9.125% and 7.10%, respectively, and pays a variable interest rate based upon three-month LIBOR. These transactions involve the exchange of fixed and floating rate payments without the exchange of the underlying principal amount. At December 31, 1997, the Corporation has a $41 million forward contract due to mature January 21, 1998 on manufactured housing loans held for sale. Notional principal amounts are often used to express the volume of these types of transactions, however, they do not represent the much smaller amounts that are potentially subject to credit risk. Entering into interest rate swap agreements and hedges involves the risk of dealing with counterparties and their ability to meet the terms of the contract. The Corporation controls the credit risk of these transactions through adherence to an investment policy, credit approval policies and monitoring procedures. There are legal claims pending against the Corporation and its subsidiaries. Based on a review of such litigation with legal counsel, management believes that any resulting liability would not have a material effect upon the Corporation's consolidated financial position or results of operations. NOTE 15 - ACQUISITIONS
- --------------------------------------------------------------- CONSIDERATION ------------------- COMMON DATE CASH SHARES METHOD OF COMPLETED ($000'S) ISSUED ACCOUNTING =============================================================== Alpha Equipment Group, Inc......... 10-31-97 $1,700 ---- purchase Summit Bancorp........ 7-8-97 ---- 548,949 pooling Alliance Corporate Resources, Inc..... 7-1-97 2,000 ---- purchase Mobile Consultants, Inc................ 4-3-96 6,900 384,233 purchase ===============================================================
The Consolidated Financial Statements have not been restated to include the acquisition of Summit Bancorp due to immateriality. On February 9, 1998, the Corporation announced the signing of a definitive agreement for the affiliation of First Shenango Bancorp, Inc. First Shenango's wholly-owned subsidiary, First Federal Savings Bank of New Castle, is expected to become a separate operating subsidiary of the Corporation and operate under its current name and banking charter. Under the terms of the agreement, the Corporation will exchange 1.143 shares of its common stock for each of the 2,069,007 outstanding shares of First Shenango stock and 109,074 outstanding options. Based on the closing price of FirstFederal Financial Services Corp on February 6, 1998 of $41.75, the transaction would be valued at approximately $103.9 million, or $47.72 per share of First Shenango stock. The merger, which will be accounted for as a pooling of interests, is expected to be consummated in the third quarter, pending First Shenango and FirstFederal Financial Services Corp shareholder approval, regulatory approval and other customary conditions of closing. The transaction is expected to be a tax-free reorganization for federal income tax purposes. First Shenango has four banking offices in Lawrence County, Pennsylvania. At December 31, 1997, First Shenango had total assets of $375.0 million, deposits of $275.2 million and shareholders' equity of $47.9 million. On September 15, 1997, the Corporation purchased deposits of approximately $151 million, loans of $24 million and seven North Central Ohio branch facilities from KeyBank, N.A. for approximately $19 million. On March 23, 1996, the Corporation purchased deposits of approximately $26.6 million and a branch facility in Mount Vernon, Ohio from Peoples National Bank for $2.4 million. NOTE 16 - REGULATORY MATTERS The principal source of income and funds for the Corporation (parent company) are dividends from its subsidiaries. During the year 1998, the amount of dividends that the banking subsidiaries can pay to the Corporation without prior approval of regulatory agencies is limited to their 1997 eligible net profits, as defined, plus the adjusted retained 1996 and 1995 net income of the subsidiaries. Banking subsidiaries must maintain noninterest-bearing cash Exhibit 13, Page 11 12 balances on reserve with the Federal Reserve Bank. In 1997 and 1996, the subsidiary banks were required to maintain average reserve balances of $5,821,000 and $3,511,000, respectively. The Federal Reserve Board adopted quantitative measures which assign risk weightings to assets and off-balance-sheet items and also define and set minimum regulatory capital requirements (risk-based capital ratios). All banks are required to have core capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital consists principally of shareholders' equity excluding unrealized gains and losses on securities available for sale, less goodwill. Total capital consists of Tier 1 capital plus certain debt instruments and the allowance for credit losses, subject to limitation. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. The regulations also define well capitalized levels. The subsidiary banks exceeded the minimum guidelines for well capitalized institutions. Capital and risk-based capital and leverage ratios for the Corporation and its significant subsidiaries at December 31:
- --------------------------------------------------------------- 1997 -------------------- ($000's) AMOUNT RATIO =============================================================== TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): FirstFederal Financial Services Corp... $114,668 12.89% Signal Bank N.A........................ 100,948 11.43% Summit Bank N.A........................ 7,355 9.88% TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): FirstFederal Financial Services Corp... 72,753 8.18% Signal Bank N.A........................ 86,441 9.78% Summit Bank N.A........................ 6,423 8.63% TIER 1 LEVERAGE CAPITAL (TO AVERAGE ASSETS): FirstFederal Financial Services Corp... 72,753 5.23% Signal Bank N.A........................ 86,441 6.68% Summit Bank N.A........................ $6,423 6.40% ===============================================================
In 1996, the Corporation had total capital to risk-weighted assets of 14.52%. Prior to July 1, 1997, the Corporation operated as a thrift holding company and was not required to compute Tier 1 risk adjusted capital. The thrift leverage (core) capital ratio, is comparable to the "Tier 1 leverage" ratio reported currently. The leverage (core) capital ratio was 6.60% on December 31, 1996, compared to the regulatory requirement of 3.00%. NOTE 17 - EARNINGS PER SHARE Reconciliation of Basic Earnings Per Share to Diluted Earnings Per Share for the Years Ended December 31:
- -------------------------------------------------------------- 1997 ------------------------------------ PER-SHARE (000's except per share data) INCOME SHARES AMOUNT ============================================================== BASIC EPS Income available to common shareholders.............. $12,864 4,972 $2.59 EFFECT OF DILUTIVE SECURITIES Convertible Preferred........ 1,584 2,170 0.57 Stock Options................ ---- 236 0.06 - -------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions............... $14,448 7,378 $1.96 ==============================================================
- -------------------------------------------------------------- 1996 ------------------------------------ Per-Share (000's except per share data) Income Shares Amount ============================================================== BASIC EPS Income available to common shareholders............... $8,154 4,470 $1.82 EFFECTIVE OF DILUTIVE SECURITIES Convertible Preferred......... 1,665 2,340 0.38 Stock Options................. 31 91 0.01 - -------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions................ $9,850 6,901 $1.43 ==============================================================
- -------------------------------------------------------------- 1995 ------------------------------------ Per-Share (000's except per share data) Income Shares Amount ============================================================== BASIC EPS Income available to common shareholders............... $7,660 4,136 $1.85 EFFECTIVE OF DILUTIVE SECURITIES Convertible Preferred......... 1,783 2,392 0.41 Stock Options................. 3 122 0.02 - -------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions................ $9,446 6,650 $1.42 ==============================================================
NOTE 18 - RELATED PARTY TRANSACTIONS At December 31, 1997 and 1996, certain directors, executive officers, principal holders of Corporation common stock and associates of such persons were indebted to the banking subsidiaries in the aggregate amount, net of participations, of $1,803,922 and $130,701, respectively. Summit Bank, N.A. had approximately $1.7 million of related party loans when acquired. During 1997, new loans aggregating $84,900 were made to such parties and loans aggregating $148,735 were repaid. Such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time of comparable transactions with unrelated parties. NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts and estimated fair values for financial instruments at December 31:
- --------------------------------------------------------------- 1997 ----------------------- CARRYING ($000's) AMOUNT FAIR VALUE =============================================================== FINANCIAL ASSETS: Cash and short-term investments........ $51,539 $51,539 Securities available for sale.......... 253,809 253,809 Securities held to maturity............ 70,959 71,059 Loans and leases including loans held for sale............................ 1,001,311 1,000,587 FINANCIAL LIABILITIES: Deposits............................... 981,675 981,675 Borrowings............................. 347,243 352,399 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: NOTIONAL -------- AMOUNT ------ Commitments to extend credit........... $162,235 162,235 Letters of credit...................... 908 908 Forward contracts: Commitments to sell loans........... 10,320 10,320 Forward contract on loans held for sale 41,000 (692) Interest rate swaps.................... 65,500 252 ===============================================================
Exhibit 13, Page 12 13
- --------------------------------------------------------------- 1996 Carrying ($000's) Amount Fair Value =============================================================== FINANCIAL ASSETS: Cash and short-term investments ....... $35,012 $35,012 Securities available for sale ......... 165,524 165,524 Securities held to maturity ........... 84,984 83,958 Loans including loans held for sale ... 758,679 754,930 FINANCIAL LIABILITIES: Deposits .............................. 671,918 692,049 Borrowings ............................ 312,413 312,612 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: NOTIONAL -------- AMOUNT ------ Commitments to extend credit .......... $68,866 68,866 Letters of credit ..................... 239 239 Forward contracts: Commitments to sell loans .......... 56,124 56,124 ===============================================================
Fair values for financial instruments were based on various assumptions and estimates as of a specific point in time and may vary significantly from amounts that will be realized in actual transactions. In addition, certain financial instruments and all non-financial instruments were excluded from the fair value disclosure requirements. Therefore, the fair values presented above should not be construed as the underlying value of the Corporation. In addition, the negative fair value of the interest rate hedge represents the estimated amount the Corporation would have to pay at each date to cancel the contracts or transfer them to other parties. The following methods and assumptions were used in determining the fair value of selected financial instruments: SHORT-TERM FINANCIAL ASSETS AND LIABILITIES - for financial instruments with short or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, other short-term investments, certain deposits (non-interest bearing demand, interest checking, savings and money market), repurchase agreements and short-term borrowings. SECURITIES, AVAILABLE FOR SALE AND HELD TO MATURITY - fair values were based on quoted market prices, dealer quotes and prices obtained from independent pricing services. LOANS AND LEASES - fair values were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrow with similar credit ratings and for the same remaining maturities. DEPOSITS - fair values for certificates of deposit - were estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities. LONG-TERM DEBT AND SUBORDINATED DEBT - fair value of long-term debt was based on quoted market prices, when available, and a discounted cash flow calculation using prevailing market rates for borrowings of similar terms. INTEREST RATE SWAPS AND FORWARD CONTRACTS - fair values of interest rate swaps and forward contracts were based on quoted market prices. COMMITMENTS AND LETTERS OF CREDIT - fair value of commitments to extend credit are based on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. NOTE 20 - SEGMENTS The Corporation's principal activities include Community Banking and Specialty Finance. Community Banking offers a full range of deposit and loan products and other services to individuals and businesses. The Specialty Finance Group 1) originates financing and services the collection and recovery of loans on manufactured houses through MCi, 2) provides equipment leasing, 3) provides investment advisory services, financial planning and portfolio management, 4) provides common financing services and 5) real estate appraisal services. The financial information for each business segment reflect those which are specifically identifiable or which are allocated based on an internal allocation method. The allocation has been consistently applied for all periods presented. The measurement of the performance of the business segments is based on the management structure of the Corporation and is not necessarily comparable with similar information for any other financial institution. The information presented is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities. Selected financial information by business segment for the three years ended December 31 is included in the following summary:
- -------------------------------------------------------------- ($000's) 1997 1996 1995 ============================================================== REVENUES: Community Banking Group $98,564 $79,740 $68,782 Specialty Finance Group 20,814 11,748 307 - -------------------------------------------------------------- TOTAL ................... 119,378 91,488 69,089 ============================================================== NET INCOME: Community Banking Group 7,465 6,899 9,368 Specialty Finance Group 6,983 2,951 78 - -------------------------------------------------------------- TOTAL ................... 14,448 9,850 9,446 ============================================================== IDENTIFIABLE ASSETS: Community Banking Group 1,393,160 1,058,095 945,972 Specialty Finance Group 64,255 22,288 1,298 - -------------------------------------------------------------- TOTAL ................... $1,457,415 $1,080,383 $947,270 ==============================================================
Capital expenditures relating primarily to the Community Banking Group totaled $5,556,000, $3,524,000, and $491,000 in 1997, 1996, and 1995, respectively. These expenditures consisted primarily of investments in data processing equipment, including network computer technology, software, operations, operations equipment and the retail distribution network. NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS The condensed financial statements of the Corporation ($000's):
- -------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY) For the Years Ended December 31: 1997 1996 1995 ============================================================== INCOME: Dividends from subsidiaries ...... $1,000 $1,000 $10,000 Interest on loans to subsidiaries 111 ---- ---- Securities gains ................. 576 ---- ---- Other ............................ 741 407 240 - -------------------------------------------------------------- TOTAL INCOME ..................... 2,428 1,407 10,240 - -------------------------------------------------------------- EXPENSES: Interest ......................... 2,922 ---- ---- Other ............................ 587 597 194 - -------------------------------------------------------------- TOTAL EXPENSES 3,509 597 194 - -------------------------------------------------------------- INCOME BEFORE TAXES AND CHANGE IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES (1,081) 810 10,046 Applicable income taxes (benefit) (378) 284 3,516 - -------------------------------------------------------------- INCOME BEFORE TAXES AND CHANGE IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES ...... (703) 526 6,530 - -------------------------------------------------------------- Undistributed earnings of subsidiaries ................... 15,151 9,324 2,916 - -------------------------------------------------------------- NET INCOME .......................$14,448 $9,850 $9,446 ==============================================================
Exhibit 13, Page 13 14
- -------------------------------------------------------------- CONDENSED BALANCE SHEET (PARENT COMPANY ONLY) For the Years Ended December 31: 1997 1996 ============================================================== ASSETS: Cash and equivalents ..................... $1,140 $1,784 Securities available for sale ............ 1,575 2,934 Loans to subsidiaries .................... 10,000 ---- Investment in subsidiaries ............... 144,713 84,481 Other assets ............................. 1,147 2,788 - -------------------------------------------------------------- TOTAL ASSETS ............................. 158,575 91,987 - -------------------------------------------------------------- LIABILITIES: Subordinated debt ........................ 40,500 ---- - -------------------------------------------------------------- Accrued expenses and other liabilities ... 13,340 6,700 - -------------------------------------------------------------- TOTAL LIABILITIES ........................ 53,840 6,700 - -------------------------------------------------------------- SHAREHOLDERS' EQUITY ..................... 104,735 85,287 - -------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $158,575 $91,987 ==============================================================
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) For the Years Ended December 31: 1997 1996 1995 ============================================================== OPERATING ACTIVITIES: Net income ...................... $14,448 $9,850 $9,446 Adjustments to reconcile net income to net cash (used) provided by operating activities: Undistributed earnings of subsidiaries .............. (15,151) (9,324) (2,916) Securities gains ............. (576) ---- ---- Decrease (increase) in other assets .................... 1,641 2,788 61 Increase (decrease) in accrued expenses and other liabilities ............... (2,074) (1,431) 3,415 - -------------------------------------------------------------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES ........ (1,712) 4,745 10,006 - -------------------------------------------------------------- INVESTING ACTIVITIES: Purchases of securities ......... (9,698) (9,415) (10,010) Proceeds from sales or maturities of securities ................ 10,982 18,404 4,434 Capital contributions to subsidiaries ................. (37,817) (10,589) ---- - -------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES ................... (36,533) (1,600) (5,576) - -------------------------------------------------------------- FINANCING ACTIVITIES: Issuance of debt ................ 40,500 4,000 ---- Purchase of treasury stock ...... ---- (379) (954) Purchase of preferred stock ..... ---- (2,002) (792) Proceeds from stock options ..... 807 258 7 Cash dividends paid ............. (3,706) (3,369) (3,186) - -------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......... 37,601 (1,492) (4,925) - -------------------------------------------------------------- INCREASE (DECREASE) IN CASH ..... (644) 1,653 (495) CASH AT BEGINNING OF YEAR ....... 1,784 131 626 - -------------------------------------------------------------- CASH AT END OF YEAR ............. $1,140 $1,784 $131 ==============================================================
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders FirstFederal Financial Services Corp Wooster, Ohio: We have audited the accompanying consolidated balance sheets of FirstFederal Financial Services Corp and subsidiaries (the Corporation) as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of the Corporation for the year ended December 31, 1995, were audited by other auditors whose report thereon, dated January 26, 1996, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstFederal Financial Services Corp and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Corporation adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," in 1997. /s/ KPMG Peat Marwick LLP Cleveland, Ohio February 6, 1998 Exhibit 13, Page 14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION: Many of the statements in Management's Discussion and Analysis of Financial Condition and Result of Operations, including the following discussion of the banking industry, set forth management's opinions with respect to present or future trends or factors affecting the operations, markets and products of FirstFederal Financial Services Corp and its consolidated subsidiaries (the "Corporation"). Actual results could differ materially from those projected. The Corporation undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report. The data presented in the following pages should be read in conjunction with the audited Consolidated Financial Statements. RESULTS OF OPERATIONS SUMMARY: Net income advanced by 46.7% in 1997 and 4.3% in 1996. The Corporation's net income to average assets, referred to as return on average assets (ROA), and return on average shareholders' equity (ROE) follow:
- -------------------------------------------------------------- 1997 1996 1995 1994 1993 ============================================================== Net Income ($000's).. $14,448 $9,850 $9,446 $9,021 $9,739 Basic Income per share(a).......... 2.59 1.82 1.85 1.86 2.13 Diluted income per share (a) ....... 1.96 1.43 1.42 1.43 1.67 ROA (b).............. 1.22% 1.16% 1.07% 1.21% 1.57% ROE (b).............. 16.19% 14.72% 12.90% 14.17% 19.62% ============================================================== (a) Per share amounts have been restated to reflect stock dividends. (b) Non-recurring expenses of $1.2 million ($1 million after tax) reflecting Summit acquisition costs included in the third quarter of 1997 and $3.3 million ($2.2 million after tax) included in the third quarter of 1996 for the one-time assessment for the re-capitalization of the Savings Association Insurance Fund (SAIF) have been excluded for comparative purposes from the performance ratios shown above.
NET INTEREST INCOME The largest source of the Corporation's revenue is net interest income. Net interest income is the spread between interest income on interest-earning assets, such as loans and leases and securities, and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Changes in net interest income are frequently measured by two statistics-net interest margin and net interest rate spread. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate incurred on the interest-bearing liabilities. Table 1, Consolidated Average Balance Sheets and Analysis of Net Interest Income, presents the net interest income, net interest margin, and net interest rate spread for the five years 1993 through 1997, comparing interest revenue and interest-bearing assets outstanding with interest cost and average interest-bearing liabilities outstanding. Nonaccrual loans and leases have been included in the average loan and lease balances. Average outstanding securities balances were based on amortized cost excluding unrealized gains or losses on securities available for sale. Net interest income grew to $30.5 million in 1997, an increase of 19% over the $25.5 million earned during 1996. Net interest income increased 6.9% in 1996 over 1995. For 1997, net interest income growth resulted from an increase in average interest-earning assets, a portion of which is attributable to 1997 businesses acquired, and improvement in the net interest margin from a higher yield on loans and leases. The increase in 1996 was attributable primarily to average interest-earning asset growth which overcame the effect of a compressed net interest margin. During 1997, average interest-earning assets grew by $183 million to $1.2 billion, an increase of 18.6% over 1996. In 1996, average interest-earning assets grew 14.3% over 1995. Securitization and sales of manufactured housing loans and cash proceeds from the KeyBank deposit acquisition in 1997 affected the Corporation's earning asset mix in 1997. The Corporation continues to use loan securitization and sales to increase balance sheet flexibility. TABLE 1 - CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME: FOR THE YEAR ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------- ------------------------------------ AVERAGE AVERAGE Average Average OUT- REVENUE/ YIELD/ Out- Revenue/ Yield/ (000's) STANDING COST RATE standing Cost Rate =================================================================================================================================== ASSETS Interest-earning assets Loans and leases including loans held for sale ... $821,150 $68,481 8.34% $718,802 $56,274 7.83% Securities ....................................... 328,882 20,974 6.38 251,718 16,842 6.69 Other interest-earning assets .................... 13,733 638 4.65 10,364 443 4.27 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets ....................... 1,163,765 90,093 7.74 980,884 73,559 7.50 - ----------------------------------------------------------------------------------------------------------------------------------- Non-interest-earning assets ......................... 105,379 54,405 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS ........................................ $1,269,144 $1,035,289 =================================================================================================================================== LIABILITIES Interest-bearing liabilities ........................ Interest checking ................................ $86,449 1,701 1.97 $57,547 1,192 2.07 Savings .......................................... 135,544 4,355 3.21 132,874 4,069 3.06 Money market ..................................... 23,552 1,043 4.43 14,034 483 3.44 Certificates of deposit .......................... 468,828 28,423 6.06 400,972 23,399 5.84 Advances and other borrowings .................... 381,982 24,028 6.29 317,999 18,905 5.94 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities .................. 1,096,355 59,550 5.43 923,426 48,048 5.20 - ----------------------------------------------------------------------------------------------------------------------------------- Demand deposits ..................................... 32,795 ---- 20,090 Other non-interest bearing liabilities .............. 44,585 11,010 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities ................................... 1,173,735 954,526 Shareholders' equity ................................ 95,409 80,763 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $1,269,144 $1,035,289 - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME MARGIN .......................... $30,543 2.66% $25,511 2.60% - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST RATE SPREAD ............................ 2.31% 2.30% - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE INTEREST-EARNING ASSETS TO INTEREST-BEARING LIABILITIES .................. 106.15% 106.22% - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit 13, Page 15 16 Sales and securitizations allow the Corporation to expand origination and servicing, and the related fee income, without increasing leverage. Sales and securitization of manufactured housing loans totaled $137.3 million in 1997 and $48.9 million in 1996. A portion of the proceeds from the $40.5 million subordinated debt offering in March 1997 and the KeyBank deposit acquisition were invested in securities to provide liquidity to fund loan and lease growth in our North Central Ohio markets. Average interest-bearing liabilities grew from $799 million in 1995 to $923 million in 1996 to $1.1 billion in 1997. Core deposits remain our most important funding source because they are relatively lower cost and the basis for ongoing customer relationships. In 1997, average core deposits increased 21.0% due to a renewed focus on new transaction account products and promotions, and deposit acquisitions in 1997 and 1996. Acquisitions contributed approximately $70 million of the $122 million total growth in average core deposits. Average demand, interest checking and savings accounts comprised 34.1% of total core deposits, compared to 33.7% in 1996 and 35.5% in 1995. Average non-core deposits and short-term borrowings increased to 52.6% from 50.8% of average interest-earning assets in 1996. The net interest margin improved 2 basis points (bp) (a basis point is equivalent to .01%) to 2.62% in 1997 from 2.60% in 1996. The 1997 increase follows an 18 bp drop in the net interest margin in 1996. The total cost of interest-bearing liabilities increased 23 bps during 1997 to 5.43% reflecting higher borrowing costs on short and long-term debt and interest rate increases on certain deposit products which generated additional core deposits in 1997. Interest-bearing deposit costs increased 16 bps from 4.81% in 1996 to 4.97% in 1997. The cost of borrowed funds, including short-term borrowings, subordinated notes and long-term debt, increased by 35 bps from 5.94% in 1996 to 6.29% in 1997. The effect of interest free funds on the net interest margin improved from 14 bps in 1996 to 20 bps in 1997 primarily due to the effect of acquisitions. Net interest margins compressed during 1995 and the first part of 1996, due primarily to 1995's rapid rise in short-term interest rates which caused short-term liabilities to reprice upward faster than short-term assets. Margins stabilized in the last part of 1996 as strong loan and lease volume and higher interest rates improved average interest-earning asset yields. The margin was also affected in part by additional balance sheet leverage in 1997 through the purchase of securities funded primarily by short-term borrowings. This securities leverage strategy favorably impacted 1997 ROE but negatively impacted the net interest margin. Table 2, the Analysis of Net Interest Income Changes, separates the Corporation's change in net interest income into two components: (1) volume of average interest-earning assets and interest-bearing liabilities outstanding; and (2) average yields on interest-earning assets and average rates for interest-bearing liabilities. Table 2 illustrates the net interest income effect of balance sheet changes and changes in interest rate levels which occurred during 1997 and 1996. NON-INTEREST INCOME Total non-interest income increased 63% over 1996 and was up 330% in 1996 over 1995. The largest increase was attributable to manufactured housing income, which originated in 1996 with the Corporation's acquisition of MCi, increasing $4.4 million in 1997 to $16 million from $11.6 million in 1996. Originations of manufactured housing finance contracts (MHF contracts) increased to $310.3 million in 1997 from $260.6 million in 1996 reflecting expansion of MCi's manufactured housing dealer base from 27 states in 1996 to 42 states. Gains realized upon the sale of MHF contracts improved in 1997 as management directed more product into asset securitizations or bulk sales and reduced the number of MHF contracts brokered on a flow basis to other financial institutions. Sales and securitizations of MHF contracts totaled $137.3 million in 1997 compared to $48.9 million in 1996. The components of manufactured housing income are shown in Note 9 to the Consolidated Financial Statements. Wider pricing spreads and heightened market sensitivity to gain on sale accounting is anticipated to result in lower gains realized upon the sale of MHF contracts in 1998 compared to 1997. Mortgage banking income increased 47% in 1997 and 35% in 1996 in large part due to lower interest rates which fueled origination volume and generated increased gains on sales of mortgage loans. Gains on sales of residential mortgage loans for 1997 were $4 million compared to $2.3 million for 1996, which TABLE 1 CONTINUED
- ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------- ----------------------------------------------------------------------------------- Average Average Average Average Average Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Average Yield/ standing Cost Rate standing Cost Rate standing Cost Rate =================================================================================================================================== $527,885 $42,841 8.12% $413,639 $33,750 8.16% $339,437 $29,472 8.68% 328,541 21,979 6.69 292,569 17,676 6.04 247,762 15,731 6.35 1,651 102 6.18 9,693 561 5.79 6,819 307 4.50 - ----------------------------------------------------------------------------------------------------------------------------------- 858,077 64,922 7.57 715,901 51,987 7.26 594,018 45,510 7.66 - ----------------------------------------------------------------------------------------------------------------------------------- 27,650 25,821 26,921 - ----------------------------------------------------------------------------------------------------------------------------------- $885,727 $741,722 $620,939 =================================================================================================================================== $49,746 942 1.89 $44,293 857 1.93 $36,410 787 2.16 127,789 3,863 3.02 151,214 4,578 3.03 137,199 4,489 3.27 12,537 424 3.38 15,507 391 2.52 17,064 465 2.73 325,391 18,889 5.81 267,227 12,845 4.81 236,114 11,567 4.90 283,828 16,928 5.96 190,612 10,589 5.56 132,962 8,011 6.03 - ----------------------------------------------------------------------------------------------------------------------------------- 799,291 41,046 5.14 668,853 29,260 4.37 559,749 25,319 4.52 - ----------------------------------------------------------------------------------------------------------------------------------- 8,804 6,679 7,272 4,421 2,605 4,281 - ----------------------------------------------------------------------------------------------------------------------------------- 812,516 678,137 571,302 73,211 63,585 49,637 - ----------------------------------------------------------------------------------------------------------------------------------- $885,727 $741,722 $620,939 - ----------------------------------------------------------------------------------------------------------------------------------- $23,876 2.78% $22,727 3.17% $20,191 3.40% - ----------------------------------------------------------------------------------------------------------------------------------- 2.43% 2.89% 3.14% - ----------------------------------------------------------------------------------------------------------------------------------- 107.35% 107.03% 106.12% - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit 13, Page 16 17 TABLE 2 - ANALYSIS OF NET INTEREST INCOME CHANGES
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 COMPARED TO 1996 1996 Compared to 1995 ------------------------------------------------ -------------------------------------------- ($000's) VOLUME YIELD/RATE TOTAL Volume Yield/Rate Total ==================================================================================================================================== Increase (decrease) in interest income Loans and leases ...................... $8,541 $3,666 $12,207 $14,963 ($1,530) $13,433 Securities ............................ 4,912 (780) 4,132 (5,137) ---- (5,137) Other interest earning assets ......... 156 39 195 373 (32) 341 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST INCOME CHANGE ............. 13,609 2,925 16,534 10,199 (1,562) 8,637 - ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in interest expense Deposits .............................. 6,453 (74) 6,379 3,449 1,576 5,025 Advances and other borrowings ......... 4,010 1,113 5,123 2,034 (57) 1,977 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE CHANGE ............ 10,463 1,039 11,502 5,483 1,519 7,002 - ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET INTEREST INCOME ................................ $3,146 $1,886 $5,032 $4,716 ($3,081) $1,635 ====================================================================================================================================
included the effect of adopting SFAS No. 122, and $1.5 million for 1995. During 1997, the Corporation originated $240.2 million in residential mortgage loans compared to $368.5 million in 1996, whereas sales totaled $121.6 million in 1997 and $223.4 million in 1996. Origination volume in 1997 was lower that 1996 primarily due to mortgage product mix and pricing changes implemented by management to enhance profit margins from mortgage banking activities. Residential mortgage loans serviced at December 31, 1997 were $1 billion, including $521 million serviced for others. Customer service fee income totaled $4.8 million in 1997 and $1.9 million in 1996, up 159% and 275%, respectively. The growth in both years was fueled by an expanding delivery system, deposit acquisitions, successful product campaigns and pricing enhancements. Other income increased $1.6 million in 1997, reflecting lease consulting activities of ACR acquired in 1997. NON-INTEREST EXPENSE The Corporation strives to control operating expenses through efficient staffing and a constant focus on improving productivity. Operating expense levels are often measured using the efficiency ratio (operating expenses before amortization divided by the sum of net interest income and non-interest income). The Corporation's efficiency ratio compares favorably to other banks at 54.55%, 52.78% and 50.61% for 1997, 1996 and 1995, respectively, excluding the impact of non-recurring expenses. Total non-interest expense excluding non-recurring expenses increased 43% in 1997 and 76% in 1996. Acquisitions and growth affected year-to-year operating expense comparisons. Excluding the non-recurring expenses, salaries, wages, incentives and employee benefits comprised 48% and 46% of total non-interest expense in 1997 and 1996, respectively, and increased by 51% and 90% during the same periods. The number of full-time equivalent (FTE) employees was 635 at the end of the year, an increase of 205 over year end 1996. The majority of the increase in FTE employees is directly due to acquisitions. Average salaries, wages, incentives and benefits per FTE have increased 2% from 1996, which was relatively unchanged from 1995. Net occupancy expenses increased 57% in 1997 and 18% in 1996. Increased costs in 1997 are associated with the net addition of 15 locations, primarily from acquisitions, including rental property costs, utilities, real estate taxes and depreciation. Upgrades of equipment to support growth and processing technology also contributed to the increase. Non-interest expense in 1997 includes $1.2 million for acquisition transaction costs of Summit Bank and 1996 expense includes a $3.3 million one-time assessment to recapitalize the SAIF fund. Outside services, data processing and communications expenses increased to $3.5 million, up $1.1 million or 49% over 1996, which was directly related to increased loan and deposit volumes. Intangible amortization was up approximately $.7 million in 1997 due to acquisition activity. FINANCIAL CONDITION SECURITIES The investment portfolio consists largely of fixed and floating rate mortgage related securities, predominantly underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC and FNMA. These securities differ from traditional debt securities primarily in that they have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying mortgages. The estimated average life of the portfolio is 4.3 years based on current prepayment expectations. The growth in the securities portfolio in 1997 reflects the investment of proceeds from deposit acquisitions and the $40.5 million subordinated debt offering in March 1997. The securities portfolio provides liquidity to fund future loan and lease growth in our expanding markets. SECURITIES PORTFOLIO AT DECEMBER 31
- ----------------------------------------------------------------------------------------------------------------- ---------------- ($000's) 1997 1996 1995 1994 1993 ================================================================================================================= ================ Securities available for sale: U.S. government and agencies ................... $29,295 $45,323 $38,971 $26,182 ---- States and political subdivisions ............... 2,017 ---- ---- ---- ---- Agency mortgage-backed securities ............... 166,468 93,785 174,974 118,031 ---- Retained interest in securitized assets ......... 27,023 6,491 ---- ---- ---- Other bonds, notes and debentures ............... 911 2,440 2,982 1,968 ---- Other securities ................................ 28,095 17,485 ---- ---- ---- - ---------------------------------------------------------------------------------------------------------------------------------- Total securities ................................... $253,809 $165,524 $216,927 $146,181 ---- ================================================================================================================= ================ Securities held to maturity: U S government agencies ........................ 4,500 4,501 2,502 3,503 $23,816 States and political subdivisions ............... 2,905 1,634 994 547 427 Agency mortgage-backed securities ............... 25,799 78,737 86,147 163,921 231,828 Other bonds, notes and debentures ............... 35,652 ---- ---- ---- ---- Other securities ................................ 2,103 112 299 526 3,007 - ----------------------------------------------------------------------------------------------------------------- ---------------- Total securities ................................... $70,959 $84,984 $89,942 $168,497 $259,078 ================================================================================================================= ================
Exhibit 13, Page 17 18 MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD OF SECURITIES AT DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------- MATURITY 1-5 YEAR 6-10 YEAR OVER 10 UNDER 1 YEAR MATURITY MATURITY YEAR MATURITY TOTAL ------------------- ------------------- -------------------- ------------------- ------------------- ($000's) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD =================================================================================================================================== SECURITIES AVAILABLE FOR SALE U.S. government and agencies .............. $999 5.95% $28,296 6.41% ---- ---- ---- ---- $29,295 6.39% - ----------------------------------------------------------------------------------------------------------------------------------- States and political subdivisions (a) ..... 108 6.31 93 7.46 ---- ---- $1,816 7.82% 2,017 7.72 - ----------------------------------------------------------------------------------------------------------------------------------- Agency mortgage-backed securities ........... 4,862 6.01 112,043 6.33 $36,250 6.33% 13,313 6.10 166,468 6.30 - ----------------------------------------------------------------------------------------------------------------------------------- Other bonds, notes, debentures and securities ........... 25,153 6.42 14,662 6.30 16,214 6.25 ---- ---- 56,029 6.41 - ----------------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY: U.S. Government and agencies ............. 2,500 5.05 ---- ---- ---- ---- 2,000 7.50 4,500 6.14 - ----------------------------------------------------------------------------------------------------------------------------------- State and political subdivisions (a) ...... 118 7.90 563 6.92 1,122 7.71 1,103 8.75 2,906 7.96 - ----------------------------------------------------------------------------------------------------------------------------------- Agency mortgage-backed securities .......... 1,095 7.80 48,405 6.44 3,999 6.03 7,951 6.67 61,450 6.40 - ----------------------------------------------------------------------------------------------------------------------------------- Other bonds, notes and debentures .......... 38 7.63 2,065 6.89 ---- ---- 2,103 6.77 ===================================================================================================================================
Maturities of mortgage-backed securities were estimated based on historical and predicted prepayment trends. (a) taxable equivalent yield LOAN AND LEASE PORTFOLIO AT DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------- ------------------- ------------------- ------------------ ------------------ ($000's) Amount % Amount % Amount % Amount % Amount % ================================================================================================================================== Commercial: Commercial.............. $45,293 4.9% $4,850 0.7% Mortgage................ 72,001 7.8 17,370 2.6 $26,966 4.6% $18,396 3.8% $20,838 5.4% Finance Contracts....... 4,585 0.5 ---- ---- ---- ---- ---- ---- Leases.................. 41,909 4.6 ---- ---- ---- ---- ---- ---- - ---------------------------------------------------------------------------------------------------------------------------------- Consumer:. Mortgage................ 506,113 55.0 534,046 79.4 484,744 83.0 411,690 85.5 322,694 83.7 Consumer Loans.......... 139,166 15.1 77,507 11.5 72,344 12.4 51,694 10.7 42,221 10.9 Manufactured Housing.... 110,827 12.1 38,840 5.8 ---- ---- ---- ---- - ---------------------------------------------------------------------------------------------------------------------------------- Total...................... $919,894 100% $672,613 100% $584,054 100% $481,780 100% $385,753 100% ==================================================================================================================================
Loan and lease balances increased 37% and 15%, respectively, in 1997 and 1996. Acquisitions completed in 1997 represent $119.1 million of the $247.3 million increase in 1997. In both years, the growth in outstandings was affected considerably by sales and securitizations of mortgage and manufactured housing loans, which allows the Corporation to be selective in how much of the expanding origination volume is retained in the loan and lease portfolio. For example, manufactured housing loan originations were $310.3 million in 1997 compared to $260.6 million in 1996, a 19% increase, but the related manufactured housing loan outstandings only increased $72 million because $137.3 million of this origination volume was securitized and sold in 1997. Similarly, residential mortgage loan balances actually declined during 1997 because the Corporation sold $121.9 million in mortgage loans which when combined with loan repayments, exceeded mortgage loan originations of $240.2 million in 1997. Consumer loans grew by 80% and 7% in 1997 and 1996, respectively, primarily due to increases in home equity loans in 1997. Commercial loan and lease outstandings increased to $163.8 million in 1997 from $22 million in 1996. The majority of the $141.4 million increase in 1997 reflects expanded commercial loan and lease portfolios and origination abilities through acquisitions completed in 1997. Commercial mortgages represent 8% of the total loan and lease portfolio and include primary financing of loans on properties occupied by the principal borrower ("owner-occupied") within our banking market areas in Ohio. ALLOWANCE FOR CREDIT LOSSES FIVE YEAR HISTORY
- ----------------------------------------------------------------------------------------------------------------------------------- ($000's) 1997 1996 1995 1994 1993 =================================================================================================================================== Balance at January 1........................................ $2,916 $2,994 $3,204 $4,512 $3,923 Provision for credit losses................................. 842 360 ---- 15 1,025 Losses charged off.......................................... (831) (454) (225) (1,337) (482) Recoveries of losses previously charged off................. 100 16 15 14 46 Allowance of acquired businesses............................ 2,511 ---- ---- ---- ---- - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31...................................... 5,538 2,916 2,994 3,204 4,512 =================================================================================================================================== Loans and leases outstanding at December 31................. 919,894 672,613 584,054 481,780 385,753 Average loans and leases excluding loans held for sale...... 733,181 655,979 527,885 413,639 339,437 Net charge-offs as a percent of average loans and leases outstanding....................................... 0.10% 0.07% 0.04% 0.32% 0.13% Allowance as a percent of total nonperforming assets........ 119.07 69.91 158.41 89.62 114.69 Allowance as a percent of total under-performing assets..... 115.11 69.91 158.41 89.62 114.69 ===================================================================================================================================
Exhibit 13, Page 18 19 ALLOWANCE FOR CREDIT LOSSES The Corporation provides as an expense an amount for expected credit losses. The provision for credit losses is based on the growth of the loan and lease portfolio and on recent loss experience. Actual losses on loans and leases are charged against the allowance for credit losses. The amount of loans and leases actually removed as assets from the Consolidated Balance Sheets is referred to as charge-offs and, after netting out recoveries on previously charged off assets becomes net charge-offs. Charge-offs, net of recoveries, increased $293,000 over 1996 due to higher losses on commercial loans. Net charge-offs as a percent of average loans and leases outstanding were 0.10%, 0.07% and 0.04% for 1997, 1996 and 1995 respectively. The allowance for credit losses as a percentage of total loans and leases increased to 0.60% at December 31, 1997 from 0.43% at December 31, 1996 due to the changing mix in loans and leases outstanding. UNDERPERFORMING ASSETS Underperforming assets consist of (1) nonaccrual loans and leases on which the ultimate collectibility of the full amount of interest is uncertain, (2) loans and leases which have been renegotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower, (3) loans and leases past due ninety days or more as to principal or interest and (4) other real estate owned. A summary of underperforming assets at December 31 follows:
- ------------------------------------------------------------------- ($000's) 1997 1996 1995 1994 1993 =================================================================== Nonaccrual loans and leases . $4,353 $3,590 $1,425 $831 $3,390 Renegotiated loans and leases ---- 340 366 2,714 491 Other real estate owned ..... 298 241 99 30 53 - ------------------------------------------------------------------- Total nonperforming as ...... 4,651 4,171 1,890 3,575 3,934 Ninety days past due loans and leases still accruing ... 160 ---- ---- ---- ---- - ------------------------------------------------------------------- Total underperforming assets $4,811 $4,171 $1,890 $3,575 $3,934 - ------------------------------------------------------------------- Nonperforming assets as a percent of total loans, leases and other real estate owned ............. 0.51% 0.62% 0.32% 0.74% 1.02% Underperforming assets as a percent of total loans, leases and other real estate owned ............. 0.52 0.62 0.32 0.74 1.02 ===================================================================
Nonperforming assets as a percentage of total loans, leases and other real estate owned decreased to 0.51% at December 31, 1997 from 0.62% at December 31, 1996. Of the total underperforming assets at December 31, 1997, $2.3 million are to residential mortgage borrowers and $.5 million relate to commercial loans or mortgages on projects in the Corporation's primary banking market areas in Ohio. The remaining $2 million of underperforming assets relate to consumer loans, primarily manufactured housing finance contracts, located throughout the United States. At the time loans are classified as non-accrual, any related interest income is reversed. For the years ended December 31, 1997, 1996 and 1995 respectively, additional interest income of $114,146, $70,660 and $75,642 would have been recorded if the nonaccrual and renegotiated loans and leases had been current in accordance with their original terms. No interest income on such loans was recorded for the years ended 1997, 1996 and 1995, respectively, after the dates on which such loans became nonaccrual loans. At December 31, 1996, underperforming residential mortgage loans were $2.3 million and underperforming commercials loans and consumer loans were $1 million and $.8 million, respectively. DEPOSITS Interest-earning assets are funded primarily by core deposits. The accompanying tables show the relative composition of the Corporation's average deposits and the change in average deposit sources during the last five years. Average core deposits increased 19.4% in 1997 due to a continued sales focus on transaction accounts and deposit acquisitions. Our new Money Market Index Account lead to increased savings and money market balances, while the High Performance Checking product and promotional campaigns contributed to advances in demand and interest checking. Core deposit growth in 1997 was instrumental in funding 1997 average asset growth of 22.6% without any significant change in short-term borrowings. The acquisition of deposits from KeyBank, N.A. increased deposits by $150.8 million. Deposits acquired in 1996 totaled approximately $26.6 million. Scheduled maturities of certificates and other time deposits at December 31, 1997, were as follows: through 1998 - $379,600,000; 1999 through 2002 - $184,680,000; and 2003 and after - $46,993,000. Interest expense on certificates of $100,000 or more was $6,190,000, $4,001,000 and $2,116,000 for 1997, 1996 and 1995, respectively. The following tables depict the distribution of average deposits and changes in average deposit sources for each of the last five years. DISTRIBUTION OF AVERAGE DEPOSITS
- --------------------------------------------------------------- 1997 1996 1995 1994 1993 =============================================================== Demand 4.4% 3.2% 1.6% 1.4% 1.7% Interest checking 11.6 9.2 9.5 9.1 8.4 Savings 18.1 21.3 24.4 31.2 31.6 Money market 3.2 2.2 2.4 3.2 3.9 Certificates of Deposit 62.7 64.1 62.1 55.1 54.4 - --------------------------------------------------------------- Total 100% 100% 100% 100% 100% ===============================================================
CHANGE IN AVERAGE DEPOSIT SOURCES
- --------------------------------------------------------------- ($000's) 1997 1996 1995 1994 1993 =============================================================== Demand $12,705 $11,286 $2,125 ($593) $4,604 Interest checking 28,902 7,801 5,453 7,883 7,059 Savings 2,670 5,085 (23,425) 14,015 47,605 Money market 9,518 1,497 (2,970) (1,557) (1,702) Certificates of Deposit 67,856 75,581 58,164 31,113 813 - --------------------------------------------------------------- Total $121,651 $101,250 $39,347 $50,861 $58,379 ===============================================================
SHORT-TERM BORROWINGS Short-term borrowings primarily consist of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank of Cincinnati (FHLB). Short-term borrowings are generally used to fund loans held for sale and the portion of earning asset growth not funded by core deposits. Average short-term borrowings as a percentage of average earning assets increased from 8.5% in 1996 to 10.3% in 1997. At year end 1997, borrowings supported a relatively smaller proportion of earning asset growth compared to 1996 because of the aforementioned deposit acquisitions and success in increasing core deposits. In 1996 and in 1995, loan and lease growth outpaced core deposit growth, increasing the reliance on short-term borrowings. LONG-TERM BORROWINGS Long-term borrowings, primarily consist of FHLB advances and subordinated debt. Long-term borrowings are generally used to fund longer term earning assets such as residential mortgage loans and manufactured housing loans. The $40.5 million subordinated debt is redeemable at the option of the Corporation at any time after June 30, 2002 until its maturity date of June 30, 2004. The subordinated debt qualifies as Tier 2 regulatory capital. In February, 1998, the Corporation issued $50 million of 8.67% Junior Subordinated Deferrable Interest Debentures due in 2028. Portions of these subordinated debentures qualify as Tier 1 and Tier 2 regulatory capital. Exhibit 13, Page 19 20 CAPITAL RESOURCES At December 31, 1997, shareholders' equity was $104.7 million compared to $85.3 million at December 31, 1996, an increase of $19.4 million or 23%. This increase in capital resulted primarily from the retention of earnings and the issuance of stock in an acquisition. The following table shows several capital ratios for the last three years:
- -------------------------------------------------------------- 1997 1996 1995 ============================================================== Average shareholders' equity to: Average assets...................... 7.52% 7.80% 8.26% Average deposits.................... 12.77 12.91 13.96 Average loans and leases excluding loans held for sale............... 13.01 12.31 13.87 ==============================================================
LIQUIDITY AND MARKET RISK The objective of the Corporation's Asset/Liability Management function is to maintain consistent growth in net interest income within the Corporation's policy guidelines. This objective is accomplished through flexible management of the Corporation's balance sheet liquidity and interest rate risk exposures due to changes in economic conditions, interest rate levels and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or any potential unexpected deposit withdrawals. This goal is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities and loans held for sale along with consistent core deposit growth, and the availability of unused borrowing capacity at FHLB. At December 31, 1997, the Corporation had approximately $141 million in securities, loans held for sale and other short-term investments maturing within one year compared to $121 million at year-end 1996. Additional asset liquidity is provided by the remainder of the securities portfolio and selected securitizable loan assets. The Corporation funds interest-earning assets with core deposits and borrowings. Average core deposits have funded approximately 66% of total average interest-earning assets over the last five years. This, in addition to the Corporation's borrowing capacity and 8% average equity capital base, serves as a stable funding base. Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income of the Corporation as a result of changes in interest rates. Consistency in the Corporation's earnings is largely dependent on the effective management of interest rate risk. The Corporation's Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and considers methods of managing the rate sensitivity and repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in economic value of equity (EVE) and net interest income (NII). The Corporation's asset/liability management program is designed to minimize the impact of sudden and sustained changes in interest rates on EVE and NII. The Corporation employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. An income simulation model is used to determine the Corporation's sensitivity to changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the subsidiaries assets and liabilities. If estimated changes to EVE and NII are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within board-approved limits. The models are based on actual cash flows and repricing characteristics for on and off balance sheet instruments and incorporate market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The models also include senior management projections for activity levels in product lines offered by the Corporation. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also inherently uncertain and, as a result, the model cannot precisely measure net interest rates or NII. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the EVE of 20%, 40%, 60% and 80% and decreases in NII of 10%, 20%, 30% and 40% in the event of a sudden and sustained 1 to 4 percent increase or decrease in market interest rates. The following table presents the Corporation's projected change in EVE and NII for various rate shock levels at December 31, 1997.
- -------------------------------------------------------------- Change in Percent Change in Percent Change in Interest Rates EVE over 12 months NII over 12 months ============================================================== +2.0% -18.8% -0.3% +1.0 -8.7 -0.2 0 ---- ---- -1.0 4.5 -1.7 -2.0 0.4 -3.4 ==============================================================
At December 31, 1997, the estimated changes in EVE and NII were within the policy guidelines established by the Board of Directors. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Corporation has developed strategies to shorten the effective maturity and increase the interest rate sensitivity of its asset base. Emphasis has been placed on the origination of adjustable-rate residential and commercial mortgage loans and adjustable-rate commercial and consumer loans to decrease the average maturity and repricing characteristics of the Corporation's assets. In addition, long-term, fixed-rate mortgage loans are underwritten according to guidelines of the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA) to facilitate sale of those loans into the secondary market for cash. Long-term, fixed rate manufactured housing loans are underwritten in accordance with guidelines established to facilitate securitization and sale to investors in secondary markets as well. As a primary means of funding interest-earning assets, the Corporation maintains core transaction deposits which generally are more resistant to interest rate changes than other funding options. The Corporation continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments such as interest rate swaps and forward commitments. The Corporation does not currently engage in trading activities. In addition, the Corporation uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities, and is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect NII, while a positive gap would result in an increase in NII. Conversely, during a period of falling interest rates, a negative gap would result in an increase in NII, while a positive gap would negatively affect NII. The following table summarizes the Corporation's interest rate sensitivity gap analysis at December 31, 1997: Exhibit 13, Page 20 21
- ---------------------------------------------------------------------------- Within 1 1-3 years 3-5 years greater than 5 years ($000's) year ============================================================================ Total interest rate sensitive assets....$659,327 $263,535 $177,488 $245,492 Total interest rate sensitive liabilities........ 783,762 345,140 100,893 99,591 Periodic GAP..........(124,435) (81,605) 76,594 145,901 Cumulative GAP........(124,435) (206,040) (129,446) 16,454 Cumulative GAP%....... (8.5%) (14.1%) (8.9%) 1.1% ============================================================================
YEAR 2000 Some of the Corporation's computer programs were originally designed to recognize calendar years by their last two digits. Calculations performed using these truncated fields may not work properly with dates from the year 2000 and beyond. The Corporation began planning its year 2000 conversion in 1997 and formed a project committee that quarterly reviews the status of the conversion. A comprehensive review to identify the systems affected by this issue was completed, estimated cost projections were determined and an implementation plan was compiled and is currently being executed. As a result of the procedures already completed, the Corporation expects to either modify or upgrade existing systems or replace some systems altogether. Considerable progress has been made by Corporation personnel and it is anticipated that this project will be largely completed by internal staff. The Corporation does not expect to spend any significant amounts with outside contractors relative to the completion of this task although no assurance can be given in this regard. Projected capital expenditures for 1998 and 1999 to upgrade technology equipment not year 2000 compliant is $1.5 to $2.0 million. These capital expenditures should not result in a material incremental increase in capital outlays from 1997 levels. Many of the Corporation systems are vendor-supplied, and most vendors have provided the Corporation with certification or a delivery commitment letter. The Corporation presently believes with the planned modifications to existing systems, conversion to new systems, and vendor delivery of millennium-compliant systems, the year 2000 compliance issues will be resolved on a timely basis, and any related costs will not have a material impact on the operations, cash flows, or financial condition of future periods although no assurance can be given in this regard. In addition to internal efforts, the Corporation began a series of customer awareness seminars in February 1998 to encourage commercial banking customers to address year 2000 risks and concerns present in their respective businesses. SUMMARIZED QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------------- ----------------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third Second First (Unaudited)($000's) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter ================================================================================================================================ Interest Income................ $26,194 $24,888 $20,313 $18,698 $19,440 $18,881 $17,967 $17,271 Net Interest Income............ 9,502 8,238 6,409 6,394 6,272 6,499 6,494 6,246 Provision for credit losses.... 300 265 170 107 90 90 90 90 Income before income taxes..... 6,980 5,227 5,486 5,650 5,231 1,289 5,324 3,890 Net income..................... 3,982 3,205 3,696 3,565 3,165 782 3,351 2,552 - -------------------------------------------------------------------------------------------------------------------------------- Net income per share basic..... 0.65 0.56 0.70 0.68 0.60 0.08 0.64 0.50 - -------------------------------------------------------------------------------------------------------------------------------- Net income per share diluted... 0.51 0.41 0.53 0.51 0.45 0.11 0.48 0.39 ================================================================================================================================
Exhibit 13, Page 21 EX-21 5 EXHIBIT 21 1 Exhibit 21 SUBSIDIARIES OF REGISTRANT
Date and Percent of Voting Shares, Year and Partnership Interests, State Voting Trust Certificates, Name and Address Incorporated Capital Contributions Description of Activity - ---------------- ------------ -------------------------- ----------------------- Signal Bank, N.A. Ohio 1987 100% Commercial banking 1905 Summit Bank, N.A. Ohio 1997 100% Commercial banking 1991 Summit Banc Investments Corp. Ohio 1997 100% Securities product sales 1996 Alpha Equipment Group, Inc.(2) Ohio 1997 100% Equipment leasing 1990 Signal Finance Company(1) Ohio 1997 100% Multi-purpose finance company 1997 Alliance Corporate Resources, Inc.(1) Ohio 1997 100% Information technology leasing 1987 Signal Mortgage Corp.(1) Ohio 1978 100% Mortgage loan origination 1978 First Federal Capital Corp. I(1) Delaware 1986 100% CMO Issue 1986 Home Financial Services, Inc.(1) Ohio 1988 100% Securities product sales 1988 H.F.S. Agency, Inc.(1) Ohio 1989 96% Tax-deferred annuity sales 1989 Professional Appraisal Services Corp.(1) Ohio 1993 100% Appraisal services 1993 Venture Mortgage Corp.(1) Ohio 1996 100% Operating subsidiary 1995 Signal Securitization Corp.(1) Delaware 1996 100% Securitization Issue 1996 Mobile Consultants, Inc. Ohio 1996 100% Origination and servicing of 1973 manufactured housing loans (1) Subsidiaries of Signal Bank, N.A., subsidiary of the Registrant. (2) Subsidiary of Summit Bank, N.A., subsidiary of the Registrant.
EX-23.1 6 EXHIBIT 23.1 1 Exhibit 23.1 The Board of Directors FirstFederal Financial Services Corp and Subsidiaries: We consent to incorporation by reference in the registration statements (No. 33-48246, No. 33-87046, No. 333-37305, No. 333-37219, and No. 333-24707) on Form S-8 of FirstFederal Financial Services Corp of our report dated February 6, 1998, relating to the consolidated balance sheets of FirstFederal Financial Services Corp and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended, which report appears in the December 31, 1997 annual report on Form 10-K of FirstFederal Financial Services Corp. Our report refers to the adoption of the provisions of the Financial Accounting Standard Boards' Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, in 1997. /s/ KPMG Peat Marwick LLP Cleveland, Ohio March 25, 1998 EX-23.2 7 EXHIBIT 23.2 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in these Registration Statements No. 33-48246, No. 33-87046, No. 333-24707, No. 333-37219 and No. 333-37305 of FirstFederal Financial Services Corp on Form S-8 of our report dated January 26, 1996 appearing in this Annual Report on Form 10-K of FirstFederal Financial Services Corp for the year ended December 31, 1997. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Columbus, Ohio March 26, 1998 EX-27.1 8 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED CONDENSED BALANCE SHEET AND STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 32,323 19,216 0 0 253,809 70,959 71,059 1,006,849 5,538 1,457,415 981,675 98,032 23,762 249,211 9,917 0 7,070 87,748 1,457,415 68,481 20,974 638 90,093 35,522 59,550 30,543 842 1,175 35,643 23,343 14,448 0 0 14,448 2.59 1.96 2.62 4,353 160 0 0 2,916 831 100 5,538 5,538 0 0
EX-27.3 9 EXHIBIT 27.3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED CONDENSED BALANCE SHEET AND STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 26,012 9,000 0 0 141,548 84,984 83,958 756,768 2,916 1,080,383 671,918 93,265 10,765 219,148 22,693 0 4,053 58,541 1,080,383 56,274 16,842 443 73,559 29,143 48,048 25,511 360 397 27,346 15,734 9,850 0 0 9,850 1.82 1.43 2.60 3,590 0 340 0 2,994 454 16 2,916 2,916 0 0 REVISED DUE TO ADOPTION OF FAS 128, EARNINGS PER SHARE
EX-99 10 EXHIBIT 99 1 EXHIBIT 99 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders of FirstFederal Financial Services Corp. Wooster, Ohio We have audited the consolidated statements of financial condition of FirstFederal Financial Services Corp and Subsidiary (the "Corporation") as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepting auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. we believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstFederal Financial Services Corp and Subsidiary at December 31, 1995 in conformity with generally accented accounting principles. As discussed in Note 1 to the Consolidated Financial Statements in 1994, the Corporation changed its method of accounting for certain investments in debt and equity securities to conform with Statement of Financial Accounting Standard No. 115. /s/ Deloitte & Touche LLP January 26, 1996 Columbus, Ohio -----END PRIVACY-ENHANCED MESSAGE-----