-----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, E45UKFRhkSAeG3aos4diBzQJEeEfFfHmWsfNBhCp1Ruq/FttWIjfHE+GuB8pxkyW 3oPdJDYphX4352fv7uAL9A== 0000950152-98-003826.txt : 19980504 0000950152-98-003826.hdr.sgml : 19980504 ACCESSION NUMBER: 0000950152-98-003826 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980430 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-K/A SEC ACT: SEC FILE NUMBER: 000-17894 FILM NUMBER: 98606260 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-K/A 1 FIRST FEDERAL FINANCIAL--FORM 10-K/A 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A [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. 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/A ANNUAL REPORT TABLE OF CONTENTS
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
3 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the Board of Directors of FirstFederal Financial Services Corp ("FirstFederal") as of December 31, 1997.
DIRECTOR TERM TO NAME AGE POSITIONS HELD IN FIRSTFEDERAL SINCE(1) EXPIRE - -------------------------------- ------- ------------------------------- ------------ ----------- R. Victor Dix 63 Director 1971 1998(2) Daniel H. Plumly 44 Director 1987 1998(2) L. Dwight Douce 49 Director, Executive Vice President 1989 1998(2) and Secretary David J. Olderman 62 Director 1997 1998(2) David C. Vernon 57 Director 1997 1998(2) Joseph P. Ciolek 52 Director 1997 1998(2) Gary G. Clark 48 Chairman of the Board and Chief 1983 1999 Executive Officer Steven N. Stein 42 Director 1989 1999 Ronald A. James, Jr. 48 Director 1996 1999 Richard E. Herald 68 Director 1977 2000 Gust B. Geralis 41 Director 1988 2000
(1) Includes service as a director of Signal Bank, a wholly owned subsidiary of FirstFederal, formerly known as First Federal Savings and Loan Association of Wooster. (2) Directors Dix, Plumly, Douce and Olderman will each be nominated for a three-year term to expire in 2001 at First Federal's Annual Meeting of Shareholders to be held in June 1998 (the "Annual Meeting"). In addition, at the Annual meeting, Director Vernon will be nominated for a two-year term to expire in 2000 and Director Ciolek will be nominated for a one year term to expire in 1999. The business experience of each of FirstFederal's directors for at least the past five years is as follows: R. Victor Dix. Mr. Dix is the President and Publisher of THE DAILY RECORD and Chairman and Director of Dix Communications. Mr. Dix has served as a Director of FirstFederal since its formation in 1989 and as a Director of Signal Bank since 1971. Daniel H. Plumly. Mr. Plumly has been engaged in the private practice of law with the firm of Critchfield, Critchfield & Johnston, Ltd. since 1978 and has been a principal in the firm since 1981. Mr. Plumly has served as a Director of FirstFederal since its formation in 1989 and as a Director of Signal Bank since 1987. L. Dwight Douce. In April 1994, Mr. Douce was named Executive Vice President of FirstFederal. Mr. Douce has served as a Director and Secretary of FirstFederal since its formation in 1989 and served as Treasurer of FirstFederal from 1989 to 1997. In June 1996, Mr. Douce was named President and Chief Operating Officer of Signal Bank. Prior thereto, Mr. Douce served as Executive Vice President of Signal Bank since August 1993, and Chief Financial Officer of Signal Bank since 1983. A Director of Signal Bank since 1989, Mr. Douce has 14 years of experience with Signal Bank. David J. Olderman. From 1988 to October 1997, Mr. Olderman served as Chairman and Chief Executive Officer of Carret, an investment company which manages approximately $1 billion in customer assets. Mr. Olderman is no longer involved in the day-to-day affairs of Carret, but will continue to serve as Chairman in an advisory capacity until 4 October 1998 as part of Carret's transition to new management. Mr. Olderman is a director of Grief Bros., Inc., a manufacturer of paper board products located in Delaware, Ohio. David C. Vernon. Mr. Vernon has served as Chairman, President and Chief Executive Officer of Summit Bank since 1991. Summit Bank was acquired by FirstFederal in July 1997. Joseph P. Ciolek. Mr. Ciolek has served as President of Alliance Corporate Resources, Inc. ("Alliance") since 1989. Alliance was acquired by Signal Bank in July 1997. Gary G. Clark. Mr. Clark succeeded Richard E. Herald as Chairman of the Board of FirstFederal and Signal Bank in April 1994. On August 1, 1993, Mr. Clark succeeded Richard E. Herald as Chief Executive Officer of FirstFederal and Signal Bank. Mr. Clark has served as a Director of FirstFederal since its formation in 1989 and President of FirstFederal from the time of its formation through January 1998. He has also been a Director of Signal Bank since 1983 and President and Chief Operating Officer of Signal Bank from 1989 until reaching his current positions. Mr. Clark has 20 years of experience with Signal Bank. Steven N. Stein. Mr. Stein has served as President of the Belvedere Corporation, a real estate company, located in Cincinnati, Ohio, since April 1990 and, since August 1995, as Chairman of Financial Stocks, Inc., the general partner of an investment partnership. Prior thereto he was an attorney with the law firm of Taft, Stettinius & Hollister, also based in Cincinnati. Mr. Stein has served as a Director of FirstFederal and Signal Bank since 1989. Ronald A. James, Jr. Since 1980, Mr. James has served as President of MCi, which was acquired by FirstFederal in April 1996. Richard E. Herald. Mr. Herald served as Chairman of the Board of FirstFederal and Signal Bank from 1989 until his retirement from such positions in April 1994. Mr. Herald retired from his position as Chief Executive Officer of FirstFederal and Signal Bank in 1993. From 1977 to February 1989, Mr. Herald served as President and Chief Executive Officer of Signal Bank. Gust B. Geralis. Mr. Geralis is a certified public accountant and the President of Mighty Associates Inc., an automotive service company located in Medina, Ohio. Mr. Geralis has served as a Director of FirstFederal since its formation in 1989. Mr. Geralis has also served as a Director of Signal Bank since 1988. The business experience of the executive officers of FirstFederal who are not also directors of FirstFederal is provided under Item 1 of Part I of this Report and incorporated by reference herein. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires FirstFederal's directors and executive officers, and persons who own more than 10% of a registered class of FirstFederal's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of FirstFederal Common Stock and other equity securities of FirstFederal. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish FirstFederal with copies of all Section 16(a) forms they file. To FirstFederal's knowledge, based solely on a review of the copies of such reports furnished to FirstFederal and written representations that no other reports were required during the fiscal year ended December 31, 1997, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with, except for the inadvertent failure to timely file a Form 3 by Director Olderman. A Form 3 was subsequently filed by Mr. Olderman. 5 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation paid or granted to FirstFederal's Chief Executive Officer and to certain other executive officers of FirstFederal whose salary and bonus for fiscal 1997 exceeded $100,000 (the "FirstFederal Named Executive Officers").
============================================================================================================================== SUMMARY COMPENSATION TABLE ------------------------------------------------------------------------------------------------------------------------------ ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------------------------------------------------------------------------------- AWARDS PAYOUTS ---------------------------------------- RESTRICTED SECURITIES STOCK UNDERLYING LTIP ALL OTHER SALARY BONUS AWARD(S) OPTIONS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)(1) ($) ($)(2) ------------------------------------------------------------------------------------------------------------------------------ Gary G. Clark 1997 $208,000 $65,000 --- 10,000 --- 22,108 Chairman and Chief Executive 1996 195,000 80,000 --- 10,000 --- 5,802 Officer 1995 180,000 67,500 --- 11,000 --- 5,786 ------------------------------------------------------------------------------------------------------------------------------ L. Dwight Douce 1997 $158,000 $25,000 --- 8,000 --- 17,056 Executive Vice President and 1996 135,000 45,000 --- 7,500 --- 5,600 Secretary 1995 115,000 34,500 --- 6,600 --- 4,718 ------------------------------------------------------------------------------------------------------------------------------ James J. Little(3) 1997 $138,000 $67,500 --- 18,000 --- 12,053 President and Chief Operating 1996 103,500 100,500 --- 5,000 --- 2,942 Officer 1995 33,500 --- --- 2,750 --- 37 ==============================================================================================================================
- ----------------------- (1) Options granted prior to 1997 have been adjusted for the 25% common stock dividend paid on May 22, 1997 and the 10% common stock dividends paid on May 22, 1996 and May 22, 1995 (the "Stock Dividends"). (2) Represents contributions under Signal Bank's 401(k) Savings and Investment Plan (the "Signal Bank 401(k) Plan") and life insurance premiums paid by Signal Bank on behalf of each of Messrs. Clark, Douce and Little, as follows: 1997: 401(k) - $21,530, $16,695 and $11,941; life insurance premiums - $578, $361 and $112; 1996: 401(k)- $4,500, $4,514 and $2,585; life insurance premiums - $1,302, $1,086 and $359; and 1995: 401(k) - $4,916, $3,848 and $0; life insurance premiums - $870, $870 and $37. (3) Mr. Little became an officer of FirstFederal in July 1995. He became President and Chief Operating Officer in January 1998 after serving as Executive Vice President and Chief Financial Officer. 6 The following table sets forth certain information concerning stock options granted to the FirstFederal Named Executive Officers in 1997. No stock appreciation rights were granted to the FirstFederal Named Executive Officers during 1997.
============================================================================================================================= OPTION GRANTS IN LAST FISCAL YEAR - ----------------------------------------------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM - ----------------------------------------------------------------------------------------------------------------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES OR BASE GRANTED IN FISCAL PRICE EXPIRATION NAME (#)(1) YEAR ($/SH) DATE 5% ($) 10% ($) - ----------------------------------------------------------------------------------------------------------------------------- Gary G. Clark 10,000 5.87% $37.50 06/17/07 $235,800 $ 597,700 - ----------------------------------------------------------------------------------------------------------------------------- L. Dwight Douce 8,000 4.70 37.50 06/17/07 188,640 478,160 - ----------------------------------------------------------------------------------------------------------------------------- James J. Little 18,000 10.57 37.50 06/17/07 424,440 1,075,860 =============================================================================================================================
- ----------------------------- (1) Options become exercisable in full on June 17, 2000, except with respect to the option granted to Mr. Little, which will become exercisable with respect to 8,000 shares on June 17, 2000 and 10,000 shares on June 17, 2002. The following table sets forth certain information concerning the number and value of stock options at December 31, 1997 held by the FirstFederal Named Executive Officers, with adjustments for those options awarded prior to the Stock Dividends.
=========================================================================================================================== AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES - --------------------------------------------------------------------------------------------------------------------------- VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY-END (#) FY-END ($)(2) -------------------------------------------------------------- SHARES ACQUIRED VALUE REALIZED NAME ON EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------------------------------------------------------------------------------------------------- Gary G. Clark 3,182 $107,329 41,146 36,250 $1,482,081 $734,962 - --------------------------------------------------------------------------------------------------------------------------- L. Dwight Douce --- --- 23,458 25,622 830,008 494,023 - --------------------------------------------------------------------------------------------------------------------------- James J. Little --- --- --- 27,687 --- 351,351 ===========================================================================================================================
- ----------------------------- (1) Represents the difference between the fair market value of the shares of FirstFederal Common Stock acquired upon exercise (based upon the closing price per share on the Nasdaq Stock Market on the date of exercise) and the aggregate exercise price of each option. (2) Represents the difference between the fair market of the shares of FirstFederal Common Stock underlying the options on December 31, 1997 (based upon the closing price per share on the Nasdaq Stock Market on December 31, 1997) and the aggregate exercise price of each option. 7 EMPLOYMENT AGREEMENTS. Signal Bank has entered into employment agreements with Messrs. Clark, Douce and Little. The employment agreements provide for an annual base salary in an amount not less than each individual's respective current salary and provide for a salary review by the Signal Bank Board not less often than annually. The agreements also provide for termination upon the employee's death, for cause or in certain other events specified in the agreements. The employment agreements are also terminable by the employee upon 90 days written notice to Signal Bank. The employment agreements provide for payment (in lieu of salary) to Messrs. Clark, Douce and Little of an amount equal to 299% of their five year average base compensation, respectively, in the event there is a "change in control" of Signal Bank where employment terminates in connection with such change in control or within 12 months thereafter. If the employment of Messrs. Clark, Douce and Little had been terminated as of December 31, 1997 under circumstances entitling them to severance pay as described above, they would have been entitled to receive lump sum cash payments of approximately $682,000, $440,000 and $612,000, respectively. DIRECTOR COMPENSATION Non-employee directors of FirstFederal receive a monthly retainer of $200, except for Director David J. Olderman, who has declined to accept such compensation; directors of FirstFederal who are also employees receive no compensation for their service as directors of FirstFederal. On April 29, 1997, each non-employee director of FirstFederal was granted an immediately exercisable option to purchase 1,000 shares of FirstFederal Common Stock, adjusted to 1,250 shares for the 25% stock dividend paid on May 22, 1997, at a split-adjusted exercise price of $29.80 per share. Each non-employee director of Signal Bank receives a monthly retainer of $850 and a fee of $500 for each meeting of the Board of Directors of Signal Bank (the "Signal Bank Board") attended. Directors Dix, Geralis, Herald, Plumly and Stein receive such compensation for their services as members of the Signal Bank Board. The FirstFederal Board has standing Mergers and Acquisitions, Stock Option and Compensation and Benefits Committees. The Signal Bank Board also has a Compensation and Benefits Committee, the members of which are the same as those of the FirstFederal Board's Compensation and Benefits Committee and which generally meets jointly with such committee, and an Audit and Compliance Committee. These committees, and the compensation of their members, are described below. Mergers and Acquisitions Committee. The Mergers and Acquisitions Committee is responsible for advising the FirstFederal Board as to merger and acquisition opportunities. The present members of this Committee are Directors Gary G. Clark, Chairman, Daniel H. Plumly, Steven N. Stein, David C. Vernon and L. Dwight Douce. Non-employee members are compensated at the rate of $300 for each meeting attended. This Committee met five times in 1997. Stock Option Committee. The Stock Option Committee is responsible for administering the Company's 1997 Omnibus Incentive Plan and 1994 Non-Employee Director Stock Option Plan. The members of this Committee are Directors Steven N. Stein (Chairman) and Gust B. Geralis. Chairman Stein received $400 and Mr. Geralis received $300 for each meeting attended during 1997. This Committee met five times during 1997. Compensation and Benefits Committees. The FirstFederal and Signal Bank Boards' Compensation and Benefits Committees are charged with reviewing and maintaining various items related to compensation, and other types of benefits such as health and medical insurance, life insurance, long-term disability insurance, and such other benefits that may from time to time be authorized by the FirstFederal and Signal Bank Boards, respectively. Directors Steven N. Stein (Chairman), Gust B. Geralis and Daniel H. Plumly, each an outside director, are the present members of the Compensation and Benefits Committees of the FirstFederal and Signal Bank Boards. Members are compensated at the rate of $300 for the Chairman and $400 for each other member for attendance at committee meetings. The Compensation and Benefits Committee of the FirstFederal Board met three times during fiscal 1997 and the Compensation and Benefits Committee of the Signal Bank Board met four times during fiscal 1997. Audit and Compliance Committee. The Audit and Compliance Committee of the Signal Bank Board is responsible for monthly review of reports developed by the internal audit department and compliance department and for follow-up 8 to determine that adequate action is taken to ensure correction of any problems that have been identified. Other responsibilities of this Committee are to recommend annually to the FirstFederal Board the engagement of an independent auditing firm, to review the scope and results of the audit with the independent auditors and to meet with internal and independent auditors as appropriate. Monthly reports are made to the full Signal Bank Board by this Committee. Current Committee members are Directors Gust B. Geralis (Chairman), Richard E. Herald, R. Victor Dix and Daniel H. Plumly. Committee members are compensated at the rate of $300 per meeting attended, except for the Chairman, who receives $400 per meeting attended. The Audit and Compliance Committee met ten times during 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Director Daniel H. Plumly, a member of the FirstFederal and Signal Bank Boards' Compensation and Benefits Committees is a principal in the law firm of Critchfield, Critchfield & Johnston, Ltd., Wooster, Ohio ("Critchfield"). Critchfield has provided legal services to Signal Bank for many years and to FirstFederal since its incorporation in 1989. During 1997, compensation paid to Critchfield for legal services totaled $900,448, as follows: FirstFederal - $92,345; Signal Bank - $183,457; Signal Securitization Corp. (a subsidiary of FirstFederal) - $265,150; Summit Bank - $16,115; MCi - $179,717; Alliance, a subsidiary of Signal Bank; - $64,429; Signal Finance Co., a subsidiary of Signal Bank, $10,288; all other subsidiaries of Signal Bank - $565; borrowers of Signal Bank and the sellers of real estate in connection with the closing of real estate loans made by Signal Bank - $88,382. Mr. Plumly is also a partner in Heartland Title Agency. During 1997, Heartland Title Agency received $25,726 from borrowers of Signal Bank and the sellers of real estate for escrow services, premiums for title insurance, title search fees and other matters relating to closing real estate loans. 9 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1997, there were 6,725,535 shares of FirstFederal Common Stock issued and outstanding. The following table sets forth, as of December 31, 1997, certain information as to (i) those persons who were known by management to be beneficial owners of more than 5% of the outstanding shares of FirstFederal Common Stock and (ii) the shares of FirstFederal Common Stock beneficially owned by the directors, nominees and executive officers of FirstFederal as a group.
SHARES PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS - ------------------------------------------------- ----------------------------- --------------- The Belden Brick Company, Robert F. Belden, Richard F. Belden, Sr. and Joseph G. Belden, Sr. 700 Tuscarawas Street Canton, Ohio 44702.................................. 808,502(1)(5)(7) 11.84% Carret and Company, Inc. 560 Lexington Avenue New York, New York 10022............................. 562,100(2) 8.36 Steven N. Stein 2211 Grandin Road Cincinnati, Ohio 45208............................... 421,577(4)(5)(7) 6.22 Ronald A. James, Jr. 3735 South Duck Creek Road North Jackson, Ohio 44451............................. 387,357(3)(7) 5.76 Directors, and executive officers as a group (13 persons).............................................. 1,108,419(6) 16.03%
- ------------------ (1) As reported by The Belden Brick Company ("Belden Brick"), Robert F. Belden, Richard F. Belden, Sr. and Joseph G. Belden, Sr. Belden Brick reported sole voting and investment power as to 779,076 of the total of 808,502 shares covered by the report and did not report shared voting or investment power as to any shares. Robert F. Belden reported shared voting and investment power as to 779,076 of such total number of shares and sole voting and investment power as to 17,004 shares. Richard F. Belden, Sr. reported shared voting and investment power as to 779,676 of such total number of shares and sole voting and investment power as to 10,310 shares. Joseph G. Belden, Sr. reported shared voting and investment power as to 779,076 of such total number of shares and sole voting and investment power as to 2,112 shares. Of the total 808,502 shares, 100,872 represent shares of FirstFederal Common Stock issuable upon conversion of shares of FirstFederal's 6 1/2% Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred Stock"). Robert F., Richard F. and Joseph G. Belden disclaimed beneficial ownership of the 779,076 shares of FirstFederal Common Stock owned by Belden Brick. Richard F. Belden, Sr. disclaimed beneficial ownership of the 10,310 shares owned by his wife. (2) As reported by Carret and Company, Inc. ("Carret"). Carret reported sole voting and investment power as to 82,292 and shared investment but no voting power as to 179,808 of the total of 562,100 shares covered by Carret's reports. Of such total, 56,985 represent shares of FirstFederal Common Stock issuable upon conversion of 35,400 shares of FirstFederal's Series B Preferred Stock. Carret disclaimed beneficial ownership as to 479,808 shares. (3) As reported by Ronald A. James, Jr. Except as provided in footnote (7), Mr. James reported sole voting and investment power as to all of such shares. 10 (4) As reported by Steven N. Stein. Mr. Stein reported sole voting and investment power as to 322,881 (except as provided in footnote (7)) and shared voting and investment power as to 98,696 of the total of 322,881 shares covered by the report. Of such total, 39,810 represent shares of FirstFederal Common Stock issuable upon conversion of shares of FirstFederal's Series B Preferred Stock. (5) Includes shares held directly, as well as 8,862 shares which are subject to options currently exercisable. (6) Includes shares held directly, as well as shares which are subject to currently exercisable options, shares issuable upon conversion of shares of Series B Preferred Stock, shares which are held in retirement accounts or by certain members of the named individuals' families, and shares of restricted stock over which shares the respective directors and officers may be deemed to have sole or shared voting or investment power. (7) Amounts for Messrs. James and Stein include 2,500 shares of restricted stock awarded to each individual over which such individuals have sole voting and no investment power. The following table sets forth certain information regarding the beneficial ownership of FirstFederal Common Stock by FirstFederal's directors and Named Executive Officers. The following directors and officers beneficially owned more than 1% of the shares of FirstFederal Common Stock outstanding as of December 31, 1997, as follows: Mr. Stein 6.22%, Mr. James 5.76%, Mr. Herald 1.0% and Mr. Clark 1.0%. No other director or officer beneficially owned more than 1% of the shares of FirstFederal Common Stock outstanding as of December 31, 1997.
SHARES OF FIRSTFEDERAL POSITIONS HELD IN FIRSTFEDERAL COMMON STOCK NAME BENEFICIALLY OWNED(1) - ---------------------------------------------------------------------------------------------------- R. Victor Dix Director 15,117(2)(3) Daniel H. Plumly Director 18,811(2)(3)(4) L. Dwight Douce Director, Executive Vice President 41,316(5) and Secretary David J. Olderman Director 17,016 David C. Vernon Director 46,710(6) James J. Little President and Chief Operating 8,053(7) Officer Joseph P. Ciolek Director 1,241 Richard E. Herald Director 61,002(3)(8) Gust B. Geralis Director 18,035(3) Gary G. Clark Chairman of the Board and Chief 65,508(5) Executive Officer Steven N. Stein Director 421,577(2)(3)(9) Ronald A. James, Jr. Director 387,357(9)
- ----------------------------- (1) Includes shares held directly, as well as shares which are held in retirement accounts or by certain members of the named individuals' families, over which shares the respective directors may be deemed to have sole or shared voting or investment power, including shares of restricted stock over which the respective directors have sole voting but no investment power. (2) Includes with respect to Messrs. Dix, Plumly and Stein, 168, 672 and 39,810 shares of FirstFederal Common Stock, respectively, issuable upon conversion of shares of FirstFederal's Series B Preferred Stock. 11 (3) Includes 8,862 shares of FirstFederal Common Stock each with respect to Messrs. Dix, Plumly, Herald, Geralis and Stein, subject to presently exercisable stock options and 2,500 shares of restricted stock awarded to each of the aforementioned directors over which such directors have sole voting but no investment power. (4) Excludes 812 shares held in the Individual Retirement Account of Mr. Plumly's wife, as to which Mr. Plumly disclaims beneficial ownership. (5) Includes with respect to Messrs. Clark and Douce, 41,146 and 23,458 shares of FirstFederal Common Stock, respectively, subject to presently exercisable stock options and 10,000 and 7,500 shares of restricted stock, respectively, over which Mr. Clark and Mr. Douce have sole voting but no investment power. (6) Includes 35,855 shares of FirstFederal Common Stock subject to currently exercisable options. Excludes 292 shares held by Mr. Vernon's wife and 92 shares held in a UGMA account of which Mr. Vernon is custodian, of which Mr. Vernon disclaims beneficial ownership. (7) Includes 5,000 shares of restricted stock awarded to Mr. Little over which Mr. Little has sole voting but no investment power. (8) Does not include 7,027 shares of FirstFederal Common Stock beneficially owned by Wayne Mutual Insurance Co., of which Mr. Herald is a director, as to which shares Mr. Herald disclaims beneficial ownership. (9) Includes 2,500 shares of restricted stock awarded to each of Messrs. Stein and James, over which such directors have sole voting but no investment power. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to FirstFederal's policies, all transactions with senior policy-making officers and directors must be on terms and conditions comparable to those for similar transactions with non-affiliates. In addition, all loans and other transactions between FirstFederal and such officers and directors will be subject to approval by a majority of the FirstFederal Board, including a majority of its disinterested directors. Signal Bank and Summit Bank continue to follow a policy of granting to employees loans for the financing and improvement of their personal residences as well as consumer loans on substantially the same terms and collateral, except for interest rates and waiver of certain fees, as those of comparable transactions prevailing at the time. On December 31, 1997, Director Ronald A. James, Jr., owner of Hudson Mobile Insurance Agency and Indy Mobile Insurance Agency, entered into an agreement with Signal Bank for the sale of such agencies for approximately $1.1 million in cash. 12 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. 13 (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
+ Previously Filed 14 *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 15 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized. FIRSTFEDERAL FINANCIAL SERVICES CORP Date: April 30, 1998 By: /s/ Jon W. Park - -------------------- -------------------------- Jon W. Park Chief Financial Officer EX-13 2 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 $55.00 $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 - 309,000 shares -- 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 - 369,000 shares -- 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 - 1,013,000 shares -- 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%. Restricted Stock Compensation Expense was $50,000 in 1997. 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 CHANGES 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 2.62% $25,511 2.60% - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST RATE SPREAD ............................ 2.31% 2.30% - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE INTEREST-EARNING ASSETS TO INTEREST-BEARING LIABILITIES .................. 106.15% 106.22% - ----------------------------------------------------------------------------------------------------------------------------------- AVERAGE EQUITY TO AVERAGE TOTAL ASSETS..................................... 7.52% 7.80% - -----------------------------------------------------------------------------------------------------------------------------------
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% - ----------------------------------------------------------------------------------------------------------------------------------- 8.27% 8.57% 7.99% - -----------------------------------------------------------------------------------------------------------------------------------
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 -----END PRIVACY-ENHANCED MESSAGE-----