<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRSTMERIT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OHIO 6711 34-1339938
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
of incorporation or Classification Code No.)
organization)
</TABLE>
III CASCADE PLAZA, AKRON OHIO 44308 (330) 996-6300
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
TERRY E. PATTON
SENIOR VICE PRESIDENT AND SECRETARY
FIRSTMERIT CORPORATION
III CASCADE PLAZA, AKRON, OHIO 44308 (330) 996-6300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
Kevin C. O'Neil
Brouse & McDowell, L.P.A
500 First National Tower
Akron, Ohio 44308
(330) 434-5207
James S. Fleischer, P.C.
Michael S. Sadow, P.C.
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W., Suite 700
Washington, D.C. 20001
(202) 414-6100
------------------------
Approximate date of commencement of proposed sale of securities to the public:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
TITLE OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT TO BE OFFERING PRICES AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value(4) 7,800,000 shares $28.80 $253,628,826 $24,094
=================================================================================================================================
</TABLE>
(1) Based upon the maximum number of shares of FirstMerit Corporation common
stock, no par value ("FirstMerit Common Stock") that may be issued upon
consummation of the merger described herein.
(2) Calculated in accordance with Rule 457(f)(1) based on the aggregate market
value on June 18, 1998 of the shares of Security First Corp. common stock,
par value $.01 per share ("Security First Common Stock"), expected to be
canceled in connection with the merger and computed by dividing (i) the
product of (a) the average of the high and low prices of Security First
Common Stock as reported by The Nasdaq Stock Market National Market System
on June 18, 1998 ($25.50), and (b) 8,807,984, representing the maximum
number of shares of Security First Common Stock expected to be canceled and
exchanged in connection with the merger (including shares issuable pursuant
to the exercise of outstanding options and convertible debentures, by (ii)
7,800,000, representing the maximum number of shares of FirstMerit Common
Stock, to be issued in connection with the merger.
(3) In accordance with Rule 457(b), the filing fee of $50,726 paid pursuant to
Section 14(g) of the Securities Exchange Act of 1934, as amended, and Rule
0-11 thereunder at the time of the filing of the Proxy Statement and
Prospectus contained in this Registration Statement as preliminary proxy
materials of Security First has been credited to offset the $74,820
registration fee that would otherwise be payable.
(4) Includes associated rights under the FirstMerit Shareholder Rights Agreement
(the "Rights"). Until the occurrence of certain prescribed events, the
Rights are not exercisable, are evidenced by the certificates representing
the FirstMerit Common Stock, and trade with the FirstMerit Common Stock.
================================================================================
<PAGE> 2
SECURITY FIRST CORP.
July 1, 1998
Dear Fellow Shareholders:
On behalf of the Board of Directors and management of Security First Corp.
("Security First") we cordially invite you to attend the 1998 Annual Meeting of
Shareholders. The Annual Meeting will be held at 2:00 p.m., on Thursday, July
30, 1998 at the Holiday Inn located at Interstate 271 and Wilson Mills Road,
Mayfield Village, Ohio.
At this important Annual Meeting, holders of Security First common stock
will be asked to adopt the Agreement of Affiliation and Plan of Merger dated
April 5, 1998 (the "Merger Agreement"), by and between FirstMerit Corporation
("FirstMerit") and Security First. Pursuant to the Merger Agreement, Security
First will merge with and into First Merit (the "Merger"), with the effect that
FirstMerit will be the surviving corporation resulting from the Merger. Upon
consummation of the Merger, each share of Security First common stock issued and
outstanding will be canceled and exchanged for the right to receive .8855 of a
share of FirstMerit common stock, together with the associated FirstMerit Rights
(as defined in the accompanying Prospectus and Proxy Statement), and cash in
lieu of issuing any fractional share. Based on the closing price of FirstMerit
common stock on The Nasdaq Stock Market on June 18, 1998, the value of .8855 of
a share of FirstMerit Common Stock was $26.012. The actual value of the
FirstMerit common stock to be received by Security First shareholders could be
higher or lower and will depend on the market price of FirstMerit Common Stock
upon consummation of the Merger.
The terms of the proposed Merger, including the method for determining the
amount of FirstMerit common stock to be issued to Security First shareholders,
as well as other important information relating to Security First, FirstMerit
and the proposed combined company, are explained in more detail in the
accompanying Notice of Annual Meeting and Prospectus and Proxy Statement. Please
read these materials carefully and thoughtfully consider the information
contained in them. The approvals of not only Security First's shareholders, but
also those of certain federal and state governmental regulatory agencies, are
required to consummate the Merger.
Charles Webb & Company, Security First's financial advisor, has issued its
opinion to your Board of Directors regarding the fairness, from a financial
point of view, of the consideration to be paid by FirstMerit pursuant to the
Merger Agreement. A copy of the opinion is included as Appendix B to the
Prospectus and Proxy Statement.
THE BOARDS OF DIRECTORS OF SECURITY FIRST AND FIRSTMERIT HAVE EACH
UNANIMOUSLY APPROVED THE MERGER AGREEMENT, INCLUDING THE MERGER, AND THE BOARD
OF DIRECTORS OF SECURITY FIRST RECOMMENDS THAT THE SHAREHOLDERS OF SECURITY
FIRST VOTE FOR ADOPTION OF THE MERGER AGREEMENT. THE MERGER AGREEMENT MUST BE
ADOPTED BY THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE ISSUED AND
OUTSTANDING SHARES OF SECURITY FIRST COMMON STOCK ENTITLED TO VOTE AT THE ANNUAL
MEETING. AN ABSTENTION OR FAILURE TO VOTE HAS THE SAME EFFECT AS A VOTE AGAINST
THE PROPOSAL. ACCORDINGLY, YOUR VOTE IS IMPORTANT.
At the Annual Meeting you will also be asked to consider and vote upon the
election of two directors of Security First and to ratify the appointment of
Deloitte & Touche LLP as Security First's independent auditors for the fiscal
year ending March 31, 1999. Directors will serve until the Merger is consummated
or, in the event the Merger is not consummated, until the expiration of their
respective three-year terms or until their respective successors are elected and
qualified.
Whether or not you plan to attend the Annual Meeting in person, you are
urged to complete, sign, date and promptly return the enclosed proxy card to
assure that your shares of Security First common stock will be voted at the
Annual Meeting. There is included with this material a postage-paid addressed
envelope for returning your proxy card. No additional postage is required if
mailed in the United States.
Sincerely,
Charles F. Valentine Signature
Chairman and Chief Executive Officer
Austin J. Mulhern Signature
President and Chief Operating Officer
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME.
<PAGE> 3
SECURITY FIRST CORP.
1413 Golden Gate Boulevard
Mayfield Heights, Ohio 44124
(440) 449-3700
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 30, 1998
Notice is hereby given that the Annual Meeting of Shareholders (the
"Meeting") of Security First Corp. ("Security First") will be held at the
Holiday Inn located at Interstate 271 and Wilson Mills Road, Mayfield Village,
Ohio, on Thursday, July 30, 1998 at 2:00 p.m.
A Proxy Card and a Prospectus and Proxy Statement for the Meeting are
enclosed.
The Meeting is for the purpose of considering and acting upon:
1. A proposal to adopt the Agreement of Affiliation and Plan of Merger
dated April 5, 1998 (the "Merger Agreement"), by and between FirstMerit
Corporation ("FirstMerit") and Security First, a copy of which is
included at Appendix A in the accompanying Prospectus and Proxy
Statement, pursuant to which Security First will merge with and into
FirstMerit, and each share of Security First common stock issued and
outstanding will be canceled and exchanged for the right to receive
.8855 of a share of FirstMerit common stock, together with the
associated FirstMerit Rights (as defined in the accompanying Prospectus
and Proxy Statement), and cash in lieu of issuing any fractional share;
2. The election of two directors of Security First;
3. The ratification of the appointment of Deloitte & Touche LLP as auditors
for Security First for the fiscal year ending March 31, 1999; and
such other matters as may properly come before the Meeting, or any adjournments
thereof. The Board of Directors is not aware of any other business to come
before the Meeting.
Only Security First shareholders of record at the close of business on June
17, 1998, will be entitled to receive notice of and to vote at the Meeting.
THE MERGER AGREEMENT MUST BE ADOPTED BY THE AFFIRMATIVE VOTE OF AT LEAST A
MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF SECURITY FIRST COMMON STOCK
ENTITLED TO VOTE AT THE MEETING. An abstention or failure to vote has the same
effect as a vote against the proposal. In the event there are not sufficient
votes to adopt the Merger Agreement or such other proposal at the time of the
Meeting, the Meeting may be adjourned by a majority of the votes cast in order
to permit further solicitation of proxies by Security First; provided, however,
that no proxy which is voted against a proposal will be voted in favor of
adjournment to solicit further proxies for such proposal.
Whether or not you plan to attend the Meeting, please sign and date the
enclosed proxy card and return it at once in the stamped return envelope in
order to ensure that your shares of Security First common stock will be
represented at the Meeting. PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS
TIME. If you attend the Meeting in person, your proxy can be revoked if you wish
and you may vote your shares in person at the Meeting.
By Order of the Board of Directors
Charles F. Valentine Signature
Charles F. Valentine
Chairman of the Board and Chief
Executive Officer
Mayfield Heights, Ohio
July 1, 1998
<PAGE> 4
PROXY STATEMENT
OF
SECURITY FIRST CORP.
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 30, 1998
------------------------
PROSPECTUS
OF
FIRSTMERIT CORPORATION
COMMON STOCK, NO PAR VALUE
(NOT TO EXCEED 7,800,000 SHARES)
This Prospectus and Proxy Statement relates to the proposed merger of
Security First Corp., a Delaware corporation ("Security First") with and into
FirstMerit Corporation, an Ohio Corporation ("FirstMerit"), as contemplated by
the Agreement of Affiliation and Plan of Merger dated April 5, 1998 (the "Merger
Agreement"), by and between FirstMerit and Security First. The Merger Agreement
is included at Appendix A and incorporated herein by reference.
This Prospectus and Proxy Statement is being furnished to the holders of
common stock, par value $.01 per share, of Security First ("Security First
Common Stock") in connection with the solicitation of proxies by the Board of
Directors of Security First for use at an annual meeting of Security First's
shareholders to be held at 2:00 p.m., on Thursday, July 30, 1998 at the Holiday
Inn located at Interstate 271 and Wilson Mills Road, Mayfield Village, Ohio, and
at any adjournments or postponements thereof (the "Meeting").
This Prospectus and Proxy Statement also constitutes a Prospectus of
FirstMerit in respect of up to 7,800,000 shares of FirstMerit common stock, no
par value, which includes the associated Rights (as defined below) ("FirstMerit
Common Stock"), to be issued in connection with the proposed merger (the
"Merger") of Security First with and into FirstMerit. Upon consummation of the
Merger, each outstanding share of Security First Common Stock will be exchanged
for shares of FirstMerit Common Stock. See "TERMS OF MERGER -- Conversion of
Security First Common Stock."
The outstanding shares of FirstMerit Common Stock are, and the shares of
FirstMerit Common Stock offered hereby will be, quoted on The Nasdaq Stock
Market National Market System ("Nasdaq/NMS"). The closing sales price of
FirstMerit Common Stock reported on Nasdaq/NMS on June 18, 1998 was $29.375 per
share.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS AND PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE SECURITIES OF FIRSTMERIT OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR BANK
DEPOSITS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NONBANKING
AFFILIATE OF FIRSTMERIT AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------
This Prospectus and Proxy Statement shall not constitute a prospectus for public
reoffering of the FirstMerit Common Stock issuable pursuant to the Merger.
------------------------
THE DATE OF THIS PROSPECTUS AND PROXY STATEMENT IS JUNE , 1998.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. iv
FORWARD LOOKING STATEMENTS.................................. v
SUMMARY..................................................... 1
Introduction.............................................. 1
Parties to the Merger..................................... 1
Security First Annual Meeting............................. 2
Terms of Merger........................................... 3
Reasons for Merger........................................ 5
Opinion of Security First's Financial Advisor............. 6
Recommendation of Directors............................... 6
Interests of Certain Persons in Merger.................... 6
Comparison of Rights of Holders of FirstMerit Common Stock
and Security First Common Stock........................ 7
Market Prices for FirstMerit and Security First Common
Stock.................................................. 7
Selected Consolidated Financial Data (Unaudited).......... 8
Comparative Per Share Data (Unaudited).................... 12
ANNUAL MEETING OF SECURITY FIRST SHAREHOLDERS............... 14
Date, Time and Place...................................... 14
Purpose of Meeting........................................ 14
Record Date; Shares Outstanding and Entitled to Vote...... 14
Quorum; Vote Required..................................... 14
Voting; Solicitation and Revocation of Proxies............ 14
No Appraisal Rights....................................... 15
Recommendation of Security First's Board of Directors..... 15
Beneficial Ownership...................................... 15
BACKGROUND OF AND REASONS FOR MERGER........................ 16
Reasons for Merger -- FirstMerit.......................... 16
Background of Merger -- Security First.................... 17
Reasons for Merger -- Security First...................... 18
Opinion of Security First's Financial Advisor............. 19
Recommendation of Security First's Board of Directors..... 21
TERMS OF MERGER............................................. 21
General................................................... 21
Conversion of Security First Common Stock................. 21
No Effect on FirstMerit Common Stock...................... 21
No Fractional Shares of FirstMerit Common Stock to be
Issued................................................. 22
Rights of Holders of Security First Stock Certificates
Prior to Surrender..................................... 22
Lost Certificates......................................... 22
Treatment of Stock Options Outstanding Under Security
First Stock Option Plans............................... 22
Conduct of FirstMerit's Business Pending the Merger....... 22
Conduct of Security First's Business Pending the Merger... 23
Conditions to the Merger.................................. 24
Regulatory Approvals...................................... 25
Actions Required for Regulatory Approval.................. 25
Waiver of Conditions, Amendment, or Termination of the
Merger Agreement....................................... 25
Effective Time............................................ 26
Security First Stock Purchase Option...................... 26
Interests of Certain Persons in Merger.................... 28
Employees of Security First............................... 31
PRICE RANGE OF COMMON STOCK AND DIVIDENDS................... 31
Market Prices............................................. 31
Dividends................................................. 32
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 33
</TABLE>
ii
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ACCOUNTING TREATMENT OF MERGER.............................. 34
RESALES OF FIRSTMERIT COMMON STOCK RECEIVED IN MERGER....... 34
FIRSTMERIT'S ARTICLES OF INCORPORATION AND CODE OF
REGULATIONS............................................... 35
NO RIGHTS OF APPRAISAL...................................... 35
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)............................................... 35
BUSINESS OF FIRSTMERIT...................................... 43
Overview.................................................. 43
Subsidiaries.............................................. 43
Subsidiary Operations..................................... 43
Recent Developments....................................... 44
BUSINESS OF SECURITY FIRST.................................. 44
REGULATORY MATTERS.......................................... 45
General................................................... 45
Regulation of Bank Holding Companies...................... 46
Limits on Dividends and Other Payments.................... 46
DESCRIPTION OF FIRSTMERIT CAPITAL STOCK..................... 47
FirstMerit Common Shares.................................. 47
FirstMerit Preferred Stock................................ 47
COMPARISON OF FIRSTMERIT AND SECURITY FIRST CAPITAL STOCK... 47
FirstMerit Common Stock and Security First Common Stock... 47
Voting Rights............................................. 48
Shareholder Rights Plan................................... 50
Anti-Takeover Statutes.................................... 52
Amendment to Charter Documents............................ 54
Directors................................................. 54
Dividends................................................. 56
Preferred Stock........................................... 56
Transfer Agent............................................ 57
ELECTION OF DIRECTORS....................................... 58
Meetings of the Board of Directors and Committees......... 59
Compensation of Directors................................. 59
Compensation of Executive Officers........................ 60
Employment Agreements..................................... 62
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION..... 62
STOCK PERFORMANCE GRAPH..................................... 65
RATIFICATION OF APPOINTMENT OF AUDITORS..................... 65
SHAREHOLDER PROPOSALS....................................... 66
ANNUAL REPORT ON FORM 10-K.................................. 66
OTHER MATTERS............................................... 66
LEGAL MATTERS............................................... 66
EXPERTS..................................................... 66
APPENDICES
A. Agreement of Affiliation and Plan of Merger
B. Fairness Opinion of Charles Webb & Company
C. Security First Corp. Management's Discussion and
Analysis of Financial Condition and Results of
Operations and Consolidated Statements of Financial
Condition as of March 31, 1998 and 1997, and the
related Consolidated Statements of Income,
Shareholders' Equity, and Cash flows for each of the
Three Years in the Period Ended March 31, 1998.
</TABLE>
iii
<PAGE> 7
AVAILABLE INFORMATION
Each of FirstMerit and Security First is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements, and other
information with the Securities and Exchange Commission (the "Commission").
FirstMerit has filed with the Commission a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), covering the FirstMerit securities to be issued to Security
First shareholders in the Merger. As permitted by the rules and regulations of
the Commission, this Prospectus and Proxy Statement omits certain information,
exhibits and undertakings contained in the Registration Statement. Reference is
made to the Registration Statement and to the exhibits thereto for further
information. Statements contained herein concerning such documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto, as well as the
reports, proxy statements and other information filed with the Commission by
FirstMerit and Security First under the Exchange Act, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such material may also be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains an
Internet worldwide web site that contains reports, proxy and information
statements and other information regarding issuers, like FirstMerit and Security
First, who file electronically with the Commission. The address of that site is
http://www.sec.gov. In addition, reports, proxy statements and other information
concerning FirstMerit and Security First may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus and Proxy Statement incorporates certain documents of
FirstMerit by reference which are not presented herein or delivered herewith.
These documents (without exhibits, unless such exhibits are specifically
incorporated by reference into this Prospectus and Proxy Statement) are
available without charge to each person, including any beneficial owner, to whom
a copy of this Prospectus and Proxy Statement is delivered, upon written or oral
request. Requests for such documents should be directed to Terry E. Patton,
Secretary, FirstMerit Corporation, III Cascade Plaza, Akron, Ohio 44308
(telephone (330) 996-6300).
This Prospectus and Proxy Statement incorporates certain documents of
Security First by reference which are not presented herein or delivered
herewith. These documents (without exhibits, unless such exhibits are
specifically incorporated by reference into this Prospectus and Proxy Statement)
are available without charge to each person, including any beneficial owner, to
whom a copy of this Prospectus and Proxy Statement is delivered, upon written or
oral request. Requests for such documents should be directed to Jeffrey J.
Calabrese, Secretary, Security First Corp., 1413 Golden Gate Boulevard, Mayfield
Heights, Ohio 44124, (telephone (440) 449-3700).
FirstMerit or Security First, as the case may be, will send the requested
documents by first-class mail within one business day of the receipt of the
request. In order to ensure timely delivery of the documents, any request should
be made by July 26, 1998. Persons requesting copies of exhibits to such
documents that are not specifically incorporated by reference in such documents
will be charged the costs of reproduction and mailing of such exhibits.
The following documents filed with the Commission under the Exchange Act by
FirstMerit are hereby incorporated by reference into this Prospectus and Proxy
Statement: (a) FirstMerit's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended by Form 10-K/A filed on April 30, 1998; (b) the
portions of FirstMerit's Proxy Statement for the Annual Meeting of Shareholders
held April 8, 1998 that have been incorporated by reference in the FirstMerit
Form 10-K for the year ended December 31, 1997; (c) FirstMerit's Quarterly
Report on Form 10-Q for the period ended March 31, 1998; (d) FirstMerit's
Current Reports on
iv
<PAGE> 8
Form 8-K filed on April 9, 1998 and May 22, 1998; (e) the description of
FirstMerit Common Stock contained in (i) FirstMerit's Registration Statement on
Form S-14 (No. 2-73592), filed with the Commission on August 5, 1981 and
incorporated by reference in FirstMerit's current report on Form 8-K, filed with
the Commission on January 15, 1982, in lieu of Form 8-B, to report FirstMerit's
status as a successor issuer pursuant to Rule 12g-3(a) (file no. 0-10161), (ii)
amendments updating such description filed with the Commission on Form 10-Q for
the quarter ended June 30, 1984 and on Form 8-K dated May 11, 1988; and (iii)
the description of the rights issued pursuant to the FirstMerit Shareholders
Rights Agreement, dated as of dated October 23, 1993, by and between FirstMerit
and FirstMerit Bank, N.A., as rights agent, contained in FirstMerit's
Registration Statement on Form 8-A with respect thereto dated November 1, 1993,
as amended and restated and filed on June 22, 1998 (and any further amendment or
report filed for the purpose of updating the description).
The following documents filed with the Commission under the Exchange Act by
Security First are hereby incorporated by reference into this Prospectus and
Proxy Statement: Security First's Annual Report on Form 10-K for the year ended
March 31,1998; and Security First's Current Report on Form 8-K dated April 5,
1998.
All documents filed by FirstMerit and Security First under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
Proxy Statement and prior to the date of the Effective Time shall be deemed to
be incorporated by reference in this Prospectus and Proxy Statement and to be a
part hereof from the date of filing such documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus and Proxy Statement to the extent that a statement contained herein
or in any other subsequently filed document which is also incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement, as so modified or superseded, shall not be deemed, except as
so modified or superseded, to constitute a part of this Prospectus and Proxy
Statement. The information relating to FirstMerit and Security First contained
in this Prospectus and Proxy Statement should be read together with the
information in the documents incorporated by reference.
FORWARD LOOKING STATEMENTS
This Prospectus and Proxy Statement contains certain forward-looking
statements with respect to the financial condition, results of operations and
business of FirstMerit and Security First prior to the consummation of the
Merger, and FirstMerit following the consummation of the Merger, including
statements relating to the cost savings and other advantages that are expected
to be realized from the Merger, the expected impact of the Merger on
FirstMerit's financial performance and earnings estimates for the combined
company (See "BACKGROUND OF AND REASONS FOR MERGER -- Reasons of
Merger -- FirstMerit," and " -- Reasons for the Merger -- Security First.").
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) expected cost savings from the Merger cannot be
fully realized or realized within the expected time frame; (2) greater than
expected deposit attrition, customer loss or revenue loss following the Merger;
(3) competitive pressure in the banking industry increases significantly; (4)
greater than expected costs or difficulties related to regulatory requirements
attendant to the consummation of the Merger or the integration of the businesses
of FirstMerit and Security First; (5) changes in the interest rate environment
reduce margins; (6) general economic conditions, either nationally or
regionally, are less favorable than expected, resulting in, among other things,
a deterioration in credit quality; (7) legislation or regulatory requirements or
changes adversely affect the businesses in which the combined company would be
engaged; (8) changes in business conditions and inflation; and (9) changes in
the securities markets. The forward-looking earnings estimates included in this
Prospectus and Proxy Statement have not been examined or compiled by the
independent public accountants of FirstMerit or Security First nor have such
accountants applied any procedures thereto. Accordingly, such accountants do not
express an opinion or any other form of assurance on them. Further information
on other factors which could affect the financial results of FirstMerit and
Security First is included in the Commission filings incorporated by reference
herein.
v
<PAGE> 9
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS AND PROXY STATEMENT AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FIRSTMERIT OR SECURITY FIRST. THIS PROSPECTUS AND PROXY STATEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE,
THE SECURITIES OFFERED BY THIS PROSPECTUS AND PROXY STATEMENT OR THE
SOLICITATION OF A PROXY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
AN OFFER, SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS AND PROXY STATEMENT, NOR ANY DISTRIBUTION OF THE SECURITIES
OFFERED PURSUANT TO THIS PROSPECTUS AND PROXY STATEMENT SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF FIRSTMERIT OR SECURITY FIRST
OR ANY OF THEIR RESPECTIVE SUBSIDIARIES SINCE THE DATE OF THIS PROSPECTUS AND
PROXY STATEMENT.
ALL INFORMATION CONTAINED OR INCORPORATED IN THIS PROSPECTUS AND PROXY STATEMENT
WITH RESPECT TO FIRSTMERIT WAS SUPPLIED BY FIRSTMERIT AND ALL INFORMATION
CONTAINED OR INCORPORATED IN THIS PROSPECTUS AND PROXY STATEMENT WITH RESPECT TO
SECURITY FIRST WAS SUPPLIED BY SECURITY FIRST. ALTHOUGH NEITHER FIRSTMERIT NOR
SECURITY FIRST HAS ANY KNOWLEDGE THAT WOULD INDICATE THAT ANY STATEMENTS OR
INFORMATION RELATING TO THE OTHER PARTY CONTAINED HEREIN IS INACCURATE OR
INCOMPLETE, NEITHER FIRSTMERIT NOR SECURITY FIRST CAN WARRANT THE ACCURACY OR
COMPLETENESS OF SUCH STATEMENTS OR INFORMATION AS THEY RELATE TO THE OTHER
PARTY.
vi
<PAGE> 10
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus and Proxy Statement and is not intended to be a complete
statement of all material facts regarding the matters to be considered at the
Security First Annual Meeting. This summary is qualified in its entirety by
reference to the more detailed information contained elsewhere in this
Prospectus and Proxy Statement, the appendices hereto and the documents referred
to and incorporated herein.
INTRODUCTION
The Boards of Directors of FirstMerit and Security First have each
unanimously adopted the Merger Agreement. A copy of the Merger Agreement is
attached hereto at Appendix A. The Merger Agreement provides for the proposed
merger of Security First with and into FirstMerit. The terms of the Merger and
information regarding the Meeting and related matters are summarized below.
PARTIES TO THE MERGER
FIRSTMERIT CORPORATION. FirstMerit is a bank holding company organized in
1981 under the laws of the State of Ohio and registered under the Bank Holding
Company Act of 1956, as amended ("BHCA"). As of March 31, 1998, FirstMerit had
total consolidated assets of $5.4 billion and total shareholders' equity of
$515.3 million. FirstMerit's principal subsidiaries include FirstMerit Bank,
N.A., FirstMerit Credit Life Insurance Company and FirstMerit Community
Development Corporation. On March 31, 1998, FirstMerit and its subsidiaries
employed approximately 2,300 full and part-time employees. See "BUSINESS OF
FIRSTMERIT."
FirstMerit's principal business as of March 31, 1998 consists of owning and
supervising its subsidiaries which primarily operate in Ashtabula, Cuyahoga,
Erie, Geauga, Lake, Lorain, Medina, Portage, Stark, Summit and Wayne Counties in
Ohio. Although FirstMerit is principally a banking organization, its direct and
indirect nonbanking subsidiaries also provide securities brokerage services,
corporate and personal trust services, equipment lease financing, insurance and
other financial services. FirstMerit directs the overall policies and financial
resources of the subsidiaries, but the day-to-day affairs, including lending
practices, services, and interest rates, are managed by their own officers.
FirstMerit Credit Life Insurance engages in underwriting of credit life and
credit accident and health insurance directly related to the extension of credit
by the subsidiary banks to their customers. FirstMerit Community Development
Corporation was organized to further the efforts of the subsidiaries in meeting
the credit needs of their lending communities, and to meet the requirements of
the Community Reinvestment Act. The principal executive offices of FirstMerit
are located at III Cascade Plaza, 7th Floor, Akron, Ohio 44308, and its
telephone number is (330) 996-6300.
On November 2, 1997, FirstMerit entered into an Agreement of Affiliation
and Plan of Merger with CoBancorp Inc. ("CoBancorp"), a bank holding corporation
headquartered in Elyria, Ohio. On May 22, 1998, CoBancorp was merged with and
into FirstMerit. This merger was structured as a tax-free exchange for CoBancorp
shareholders receiving FirstMerit common stock, and was accounted for as a
purchase transaction. CoBancorp shareholders had a right to elect to exchange
their common stock for either common stock of FirstMerit, cash, or a combination
of stock and cash, provided that no less than 30 percent nor more than 49
percent of the total transaction value could be paid in cash. At the effective
time, based upon the average closing price for a specified period of
FirstMerit's common stock of $29.375, the value of the transaction on such date
was approximately $174.1 million. In connection with this merger, FirstMerit
issued 3.895 million shares of its common stock and paid $50.0 million in cash
based upon the shareholder elections and allocations.
At May 31, 1998, due to the merger of CoBancorp with and into FirstMerit,
total consolidated assets increased to approximately $6.1 billion and
consolidated total shareholders' equity increased to approximately $629.8
million. In addition, total outstanding shares of FirstMerit Common Stock
increased to approximately 65,140,577 and the number of shareholders of record
increased to 7,747.
SECURITY FIRST CORP. Security First is a multiple savings and loan holding
company organized in 1992 under the laws of the State of Delaware and registered
under the Home Owners' Loan Act, as amended ("HOLA"). As of March 31, 1998,
Security First had total assets of $685.5 million and total shareholders' equity
1
<PAGE> 11
of $64.7 million. Security First's principal operating subsidiaries are Security
Federal Savings and Loan Association of Cleveland ("Security Federal") and First
Federal Savings Bank of Kent ("First Federal" and together with Security
Federal, referred to herein as the "Associations").
Security First's primary business, conducted through the Associations,
consists of attracting deposits from the general public and originating real
estate loans and other types of investments. Security Federal conducts its
operations through its main office located in Mayfield Heights, Ohio and 11
other full-service branch offices located in Medina, Chardon, Cleveland,
Painesville, Geneva, Madison, Parma Heights, Broadview Heights, Strongsville and
Willoughby, Ohio. First Federal conducts its operations through its main office
located in Kent, Ohio and its full service branch office located in Ravenna,
Ohio.
As of March 31, 1998, Security First and its subsidiaries employed
approximately 174 full and part-time employees. See"BUSINESS OF SECURITY FIRST."
The principal executive offices of Security First are located at 1413 Golden
Gate Boulevard, Mayfield Heights, Ohio 44124, and its telephone number is (440)
449-3700.
SECURITY FIRST ANNUAL MEETING
MEETING DATE, TIME AND
PLACE...................... The Meeting will be held on July 30, 1998 at 2:00
p.m. (local time), at the Holiday Inn located at
Interstate 271 and Wilson Mills Road, Mayfield
Village, Ohio. This Prospectus and Proxy Statement
is being furnished to the holders of Security First
Common Stock in connection with the solicitation of
proxies by the Board of Directors of Security First
for use at the Meeting and any adjournments or
postponements thereof.
PURPOSE OF MEETING......... The purpose of the Meeting is to consider and vote
upon (i) a proposal to adopt the Merger Agreement;
(ii) the election of two directors of Security
First, (iii) the ratification of the independent
auditors for Security First, and (iv) to transact
such other business as may properly come before the
Meeting or any adjournment or postponement thereof.
SHARES ENTITLED TO VOTE.... Shares of Security First Common Stock are the only
shares entitled to be voted at the Meeting. Each
share of Security First Common Stock issued and
outstanding on the Record Date (as defined below)
is entitled to one vote.
REQUIRED VOTES TO ADOPT
PROPOSALS................ The affirmative vote of the holders of a majority
of the outstanding shares of Security First Common
Stock is required to adopt the Merger Agreement.
The election of directors requires a plurality of
the votes of the shares present in person or by
proxy and entitled to vote. Ratification of the
appointment of Security First's independent
auditors requires approval by a majority of the
shares duly voted in person or by proxy on the
proposal. Each vote is important and all Security
First shareholders are encouraged to vote their
shares, in person or by proxy, at the Meeting.
THE BOARD OF DIRECTORS OF SECURITY FIRST
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF
SECURITY FIRST VOTE "FOR" ADOPTION OF THE MERGER
AGREEMENT AND "FOR" EACH OF THE OTHER PROPOSALS TO
BE VOTED UPON AT THE MEETING.
The affirmative vote of a majority of the shares
represented at the Meeting, in person or by proxy,
may authorize the adjournment of the Meeting;
provided, however, that no proxy which is voted
against a proposal will be voted in favor of
adjournment to solicit further proxies for such
proposal.
2
<PAGE> 12
RECORD DATE AND SHARES
OUTSTANDING.............. June 17, 1998 is the record date ("Record Date")
for determination of the Security First
shareholders entitled to notice of and to vote at
the Meeting. Only Security First shareholders of
record as of the Record Date are entitled to notice
of, and to vote at, the Meeting. On such date,
there were 7,863,587 shares of Security First
Common Stock outstanding.
SECURITY OWNERSHIP OF
SECURITY FIRST........... As of the Record Date, Security First's directors
and executive officers and their affiliates
beneficially owned 1,181,959 shares of Security
First Common Stock (excluding 298,177 shares that
may be acquired by the exercise of outstanding
options and the conversion of debentures to acquire
Security First Common Stock), which represented
approximately 15% of the outstanding shares of
Security First Common Stock entitled to vote at the
Meeting. Such individuals have indicated that they
intend to vote "FOR" the proposal to adopt the
Merger Agreement. Accordingly, assuming such shares
are voted "FOR" the proposal to adopt the Merger
Agreement, adoption of the Merger Agreement will
require the affirmative vote of the holders of
approximately an additional 35% of the outstanding
shares of Security First Common Stock. See "ANNUAL
MEETING OF SECURITY FIRST SHAREHOLDERS -- Vote
Required" and " -- Beneficial Ownership of Security
First." Security First's directors and executive
officers and their affiliates have also indicated
that they intend to vote "FOR" each of the other
proposals to be voted upon at the Meeting.
As of the Record Date, FirstMerit owned no shares
of Security First Common Stock.
NO APPRAISAL RIGHTS........ Holders of Security First Common Stock are not
entitled to appraisal rights under the Delaware
General Corporation Law (the "DGCL") in connection
with the Merger. See "ANNUAL MEETING OF SECURITY
FIRST SHAREHOLDERS -- No Appraisal Rights."
TERMS OF MERGER
STRUCTURE................ Security First will be merged with and into
FirstMerit, and FirstMerit will be the surviving
corporation. See "TERMS OF MERGER -- General."
Promptly after the consummation of the Merger, the
Associations will be merged with and into
FirstMerit Bank, N.A., a national bank subsidiary
of FirstMerit ("FirstMerit Bank").
CONVERSION OF SECURITY
FIRST COMMON STOCK....... Upon consummation of the Merger, each outstanding
share of Security First Common Stock will be
canceled and exchanged for the right to receive
shares of FirstMerit Common Stock (the "Merger
Consideration"). Shares of Security First Common
Stock will be exchanged for shares of FirstMerit
Common Stock at an exchange ratio of .8855 per
share ("Exchange Ratio"). If a Security First
shareholder would receive a fraction of a share of
FirstMerit Common Stock, cash will be paid in lieu
of such fractional share.
VALUE OF THE MERGER........ If the Merger had been consummated on June 18,
1998, based on the closing sale price of FirstMerit
Common Stock as reported on Nasdaq/ NMS on that
date, the market value for a share of Security
First Common Stock would have been $26.012. The
approximate market value of the total
3
<PAGE> 13
Merger Consideration as of such date would have
equaled approximately $229.1 million.
EFFECTIVE TIME............. The Merger will be consummated after the adoption
of the Merger Agreement by the requisite vote of
the Security First shareholders, the receipt of the
necessary regulatory approvals, the satisfaction or
waiver of all other conditions to the consummation
of the Merger specified by the Merger Agreement.
See "TERMS OF MERGER -- Effective Time,"
"Conditions to the Merger," and "Regulatory
Approvals." It is currently anticipated that the
Merger will be consummated during the third or
fourth quarter of 1998.
TAX AND ACCOUNTING
TREATMENT................ The Merger is intended to qualify as a
reorganization under Section 368(a)(1) of the
Internal Revenue Code of 1986, as amended (the
"Code"). FirstMerit's legal counsel has delivered
an opinion, based upon certain customary
assumptions and representations, and assuming the
Merger occurs in accordance with the Merger
Agreement and conditioned on the accuracy of
certain representations made or to be made by
FirstMerit and Security First, that the Merger will
constitute a "reorganization" for federal income
tax purposes and that, accordingly, no gain or loss
will be recognized by FirstMerit, Security First or
the Security First shareholders who exchange their
shares of Security First Common Stock solely for
shares of FirstMerit Common Stock in the Merger.
Security First shareholders who, however, receive
cash in exchange for Security First Common Stock in
lieu of fractional shares will recognize taxable
income to the extent of cash received.
No ruling has been or will be requested from the
Internal Revenue Service ("IRS") with respect to
the federal income tax consequences of the Merger.
The opinion of counsel only represents counsel's
best judgment and is not binding on the IRS or the
courts. Accordingly, no assurance can be given that
the IRS or a court (if a matter is litigated), will
agree with counsel's conclusions, that the IRS will
not challenge the tax treatment of the Merger, or
that such a challenge if made (whether or not it is
litigated), will not be successful.
IT IS IMPORTANT THAT EACH SHAREHOLDER OF SECURITY
FIRST CONSULT THEIR OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER.
For a more complete description of the federal
income tax consequences, see "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES" and "ACCOUNTING TREATMENT
OF MERGER."
The Merger, if completed as proposed, will qualify
as a pooling-of-interests for financial accounting
purposes. The Merger Agreement provides as a
condition to the parties' obligations to consummate
the Merger that FirstMerit shall have received a
letter from Coopers & Lybrand LLP, dated the day of
the Effective Time, to the effect that, for
financial reporting purposes, the Merger qualifies
for pooling-of-interests accounting treatment under
generally accepted accounting principles if
consummated in accordance with the Merger
Agreement. See "MERGER -- Accounting Treatment."
4
<PAGE> 14
CONDITIONS................. Consummation of the Merger is conditioned upon the
adoption of the Merger Agreement by the requisite
vote of the Security First shareholders, the
receipt of all necessary approvals of the Merger
from government regulatory agencies, the absence of
a material adverse change in the consolidated
financial condition, results of operations, or
business of FirstMerit or Security First, the truth
and accuracy of the representations and warranties
of each party as set forth in the Merger Agreement,
the performance of obligations by each party, and
certain other customary conditions. See "TERMS OF
MERGER -- Conditions to Merger" and " -- Regulatory
Approvals."
NO SOLICITATION............ Security First has agreed, subject to certain
fiduciary obligations of its Board of Directors,
that neither it nor any of its subsidiaries will
solicit or initiate any discussions or offers from
any person to acquire Security First or any of its
subsidiaries or any material amount of its assets
or any of its equity securities. See "TERMS OF
MERGER -- Conduct of Security First's Business
Pending the Merger."
SECURITY FIRST STOCK
PURCHASE OPTION............ In connection with the execution of the Merger
Agreement, Security First has granted FirstMerit an
option to purchase shares of Security First Common
Stock under certain circumstances set forth in the
Stock Purchase Option dated April 5, 1998 between
Security First and FirstMerit (the "Security First
Stock Option" or "Option"). The Security First
Stock Option provides FirstMerit an option to
purchase up to 19.9% of the outstanding shares of
Security First's Common Stock (without giving
effect to any shares subject to or issued pursuant
to the Stock Purchase Option) at $22.25 per share,
subject to certain adjustments. The Option is
exercisable only upon the occurrence of certain
events, all as set forth in the Security First
Stock Option. None of such events has occurred as
of the date hereof. Security First granted the
Option as a condition of and in consideration for
FirstMerit's entering into the Merger Agreement.
The Security First Stock Option is intended to
increase the likelihood that the Merger will be
consummated in accordance with the terms of the
Merger Agreement. Consequently, the Security First
Stock Option may have the effect of discouraging
persons who might now or prior to the consummation
of the Merger be interested in acquiring Security
First (or a significant interest in Security First)
from considering or proposing such an acquisition,
even if such person were prepared to pay a higher
price per share for Security First Common Stock
than the price per share implicit in the Merger
Consideration. In the event FirstMerit acquires
shares pursuant to the Security First Stock Option,
it would vote those shares in the election of
Security First directors and other matters
requiring a shareholder vote, thereby potentially
having a material impact on the outcome of such
matters. See "TERMS OF MERGER -- Security First
Stock Purchase Option."
REASONS FOR MERGER
FIRSTMERIT. After careful review and consideration, FirstMerit's Board of
Directors approved the terms of the Merger. The Merger with Security First
represents the continued realization of FirstMerit's long-standing philosophy of
acquiring retail-oriented financial institutions with dominant market share for
continued customer growth. The Merger also represents a continuation of
FirstMerit's acquisition strategy of combining with banking institutions in Ohio
and contiguous states where FirstMerit already has or intends to obtain a
significant market
5
<PAGE> 15
position. The expansion of FirstMerit's existing operations in its major
northern Ohio market resulting from the Merger will provide both stronger market
positions and opportunities to achieve efficiencies for the combined operations
in that market. FirstMerit will draw on its experience with previous
acquisitions in seeking to achieve an effective consolidation of Security
First's operations with those of FirstMerit. See "BACKGROUND OF AND REASONS FOR
MERGER -- Reasons for Merger -- FirstMerit."
SECURITY FIRST. In July 1997, Security First and Charles Webb & Company
("Charles Webb"), Security First's financial advisor, identified certain factors
which could limit the ability of Security First to continue its historic
earnings per share and stock price growth in the future. Some of these factors
included: (i) the balance sheet was approaching maximum leverage and Security
First could not increase funding or attract sufficient deposits at a reasonable
cost to support lending growth; (ii) reduced earnings growth due to slower asset
growth and narrowing interest rate spreads; (iii) increased competition for
deposits; and (iv) the expense of implementing continuing technological advances
necessary to remain competitive.
The terms of the Merger Agreement, including the consideration to be paid
to Security First's shareholders, were the result of arm's length negotiations
between the authorized representatives of FirstMerit and Security First. Among
the factors considered by Security First's Board were (i) the consideration to
be paid to Security First's shareholders in relation to the market value, book
value, earnings per share and dividend rates of Security First Common Stock,
(ii) the financial condition, results of operations, capital levels, asset
quality and prospects for Security First (iii) industry and economic conditions,
(iv) the impact of the Merger on the depositors, employees, customers and
communities served by Security First, (v) the opinion of Security First's
financial advisor as to the fairness of the consideration, from a financial
point of view, to the holders of Security First Common Stock, (vi) the general
structure of the transaction and the compatibility of the management and
business philosophy of both organizations, (vii) the likelihood of receiving the
required approvals in a timely manner, and (viii) the ability of the combined
enterprise to compete in relevant banking and non-banking markets. See
"BACKGROUND OF AND REASONS FOR MERGER -- Reasons for Merger -- Security First,"
" -- Opinion of Security First's Financial Advisor" and " -- Recommendation of
Security First's Board of Directors."
OPINION OF SECURITY FIRST'S FINANCIAL ADVISOR
Charles Webb has delivered its written opinion to Security First's Board of
Directors to the effect that, as of the date the Merger Agreement was signed,
the Merger Consideration was fair, from a financial point of view, to the
holders of Security First Common Stock. A copy of the opinion of Charles Webb is
attached hereto at Appendix B. The opinion should be read in its entirety for a
description of the procedures followed, assumptions and qualifications made and
matters considered by Charles Webb, and the limitations of the opinion. See also
"BACKGROUND OF AND REASONS FOR MERGER -- Opinion of Security First's Financial
Advisor."
RECOMMENDATION OF DIRECTORS
The Board of Directors of FirstMerit has unanimously approved the Merger
Agreement. The Board of Directors of Security First has also unanimously
approved the Merger Agreement and recommends the adoption of the Merger
Agreement by the Security First shareholders. See "BACKGROUND OF AND REASONS FOR
MERGER -- Recommendation of Security First's Board of Directors."
ACCORDINGLY, SECURITY FIRST'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT SECURITY FIRST SHAREHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT.
INTERESTS OF CERTAIN PERSONS IN MERGER
Certain members of Security First's management and the Security First Board
of Directors have interests in the Merger in addition to their interests as
shareholders of Security First generally. Those interests relate to provisions
in the Merger Agreement, among other provisions, regarding: (i) the appointment
of Charles F. Valentine, Chairman of the Board and Chief Executive Officer of
Security First, to the FirstMerit Board of
6
<PAGE> 16
Directors; (ii) new three-year employment agreements for Mr. Valentine, Austin
J. Mulhern, President and Chief Operating Officer of Security First, and Jeffrey
J. Calabrese, Vice President and Secretary of Security First, which include
compensation terms, in addition to salary and bonuses, such as option grants,
signing bonuses, termination and change in control provisions; (iii) change in
control payments of $415,000 and $254,000 to Louis J. Sorboro, President of
First Federal, and to Mary H. Crotty, Vice President and Chief Financial Officer
of Security First, respectively; (iv) the creation of and the appointment of
certain individuals to a non-compensatory advisory board for the Kent, Ohio
market to allow for the vesting of certain Security First options and restricted
stock which would otherwise be forfeited upon consummation of the Merger; (v)
the assumption of outstanding Security First stock options by FirstMerit; and
(vi) the continuation of certain indemnification and limitation of liability
provisions provided to Security First's and Associations' directors and officers
by Security First and the Associations. For a more detailed description of the
interests of certain persons in the Merger, see "TERMS OF THE
MERGER -- Interests of Certain Persons in the Merger."
COMPARISON OF RIGHTS OF HOLDERS OF FIRSTMERIT COMMON STOCK AND SECURITY FIRST
COMMON STOCK
The rights of the holders of Security First Common Stock are governed by
the DGCL, Security First's Certificate of Incorporation ("Security First
Certificate") and Security First's Bylaws ("Security First Bylaws"). At the
Effective Time, Security First's shareholders will become FirstMerit
shareholders and their rights will be governed thereafter by the Ohio General
Corporation Law ("OGCL") and by FirstMerit's Amended and Restated Articles of
Incorporation ("FirstMerit Articles"), its Amended and Restated Code of
Regulations ("FirstMerit Regulations"), and the FirstMerit Shareholders Rights
Agreement dated October 21, 1993, as amended and restated on July 16, 1996 and
May 20, 1998. ("FirstMerit Rights Agreement").
The rights of a holder of Security First Common Stock are similar in most
respects to the rights of a holder of FirstMerit Common Stock. FirstMerit Common
Stock has associated rights which trade with the FirstMerit Common Stock, which
arise pursuant to the terms of the FirstMerit Rights Agreement. Each share of
FirstMerit Common Stock issued to shareholders of Security First in the Merger
represents an interest in the FirstMerit Rights Agreement. The rights provide a
shareholder of FirstMerit with the ability to acquire shares of capital stock of
FirstMerit in the event of an attempted "takeover" of FirstMerit. The rights are
not currently exercisable. All references to the FirstMerit Common Stock in this
Prospectus and Proxy Statement include the associated rights ("Rights"). See
"COMPARISON OF FIRSTMERIT AND SECURITY FIRST CAPITAL STOCK."
MARKET PRICES FOR FIRSTMERIT AND SECURITY FIRST COMMON STOCK
FirstMerit Common Stock and Security First Common Stock are included for
quotation on Nasdaq/NMS, under the symbols "FMER" and "SFSL," respectively. As
of June 17, 1998, the Security First Record Date, there were 65,140,577 shares
of FirstMerit Common Stock outstanding and held by approximately 7,747 holders
of record, and 7,863,587 shares of Security First Common Stock outstanding and
held by approximately 1,158 holders of record.
The information presented in the table below sets forth the last sale
prices as reported on Nasdaq/NMS for FirstMerit Common Stock and Security First
Common Stock on April 3, 1998 (the last trading date preceding the public
announcement of the Merger Agreement). In addition, the table indicates the last
sale prices as reported on Nasdaq/NMS for FirstMerit Common Stock and Security
First Common Stock on June 18, 1998, the most recent practicable date prior to
the mailing of the Prospectus and Proxy Statement. The "Equivalent Value Per
Share" is calculated by multiplying the last sale price of FirstMerit Common
Stock on such dates by the Exchange Ratio of .8855.
<TABLE>
<CAPTION>
FIRSTMERIT SECURITY FIRST EQUIVALENT
COMMON COMMON VALUE
STOCK STOCK PER SHARE
---------- -------------- ----------
<S> <C> <C> <C>
April 3, 1998............................................. $33.063 $22.375 $29.277
June 18, 1998............................................. $29.375 $ 24.75 $26.012
</TABLE>
7
<PAGE> 17
For additional information regarding the market prices and dividends paid
on the FirstMerit Common Stock and Security First Common Stock during 1996, 1997
and 1998, see "PRICE RANGE OF COMMON STOCK AND DIVIDENDS -- Market Price;" and
" -- Dividends."
NO ASSURANCE CAN BE GIVEN AS TO THE MARKET PRICE OF SHARES OF FIRSTMERIT
COMMON STOCK IF AND WHEN THE MERGER IS CONSUMMATED, OR WHEN THE SHARES OF
FIRSTMERIT COMMON STOCK ARE ACTUALLY DELIVERED.
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following tables present for FirstMerit, selected consolidated
financial data for the three-month periods ended March 31, 1998 and 1997 and for
the five-year period ended December 31, 1997, and for Security First, selected
consolidated financial data for the five-year period ended March 31, 1998. The
information for FirstMerit has been derived from the consolidated financial
statements of FirstMerit, including the unaudited consolidated financial
statements of FirstMerit incorporated in this Prospectus and Proxy Statement by
reference to FirstMerit's March 31, 1998 Form 10-Q, and the audited consolidated
financial statements of FirstMerit incorporated in this Prospectus and Proxy
Statement by reference to the FirstMerit 1997 Form 10-K, and should be read in
conjunction therewith and with the notes thereto. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE." The information for Security First has been derived
from the consolidated financial statements of Security First, including the
audited consolidated financial statements of Security First for the year ended
March 31, 1998, and should be read in conjunction therewith and with the notes
thereto, all as included herein at Appendix C to this Prospectus and Proxy
Statement. Historical results are not necessarily indicative of results to be
expected for any future period. With respect to FirstMerit, results for the
three-month period ended March 31, 1998 are not necessarily indicative of
results which may be expected for any other interim period or for the year as a
whole. See "BUSINESS OF FIRSTMERIT -- Recent Developments" for information
concerning FirstMerit's acquisition of CoBancorp Inc.
8
<PAGE> 18
FIRSTMERIT CORPORATION
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest income........... $ 102,149 $ 98,562 $ 407,825 $ 411,745 $ 416,627 $ 371,018 $ 361,208
Conversion to fully-tax
equivalent.............. 717 861 3,212 3,043 3,840 4,590 5,264
---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest income*.......... 102,866 99,423 411,037 414,788 420,467 375,608 366,472
Interest expense.......... 38,049 36,058 152,369 160,773 180,933 140,181 135,149
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income*...... 64,817 63,365 258,668 254,015 239,534 235,427 231,323
Provision for possible
loan losses............. 5,463 4,161 21,593 17,751 19,763 4,624 8,056
Other income.............. 23,653 19,576 83,578 82,496 68,517 70,656 71,909
Other expenses............ 50,784 47,747 191,080 209,702 227,779 193,410 187,945
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before federal
income taxes*........... 32,223 31,033 129,573 109,058 60,509 108,049 107,231
Federal income taxes...... 9,541 9,939 39,998 35,075 30,950 32,110 33,335
Fully-tax equivalent
adjustment.............. 717 861 3,212 3,043 3,840 4,590 5,264
---------- ---------- ---------- ---------- ---------- ---------- ----------
Federal income taxes*..... 10,258 10,800 43,210 38,118 34,790 36,700 38,599
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary item...... 21,965 20,233 86,363 70,940 25,719 71,349 68,632
Extraordinary item -- gain
on disposition of assets
after combination (net
of tax effect).......... -- -- -- -- 5,599 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................ $ 21,965 $ 20,233 $ 86,363 $ 70,940 $ 31,318 $ 71,349 $ 68,632
========== ========== ========== ========== ========== ========== ==========
Per share:
Income before
extraordinary item.... $ 0.36 $ 0.32 $ 1.38 $ 1.09 $ 0.38 $ 1.07 $ 1.03
Extraordinary item (net
of tax effect)........ -- -- -- -- 0.09 -- --
Basic net income........ $ 0.36 $ 0.32 $ 1.38 $ 1.09 $ 0.47 $ 1.07 $ 1.03
========== ========== ========== ========== ========== ========== ==========
Diluted net income...... $ 0.35 $ 0.32 $ 1.36 $ 1.08 $ 0.47 $ 1.07 $ 1.03
========== ========== ========== ========== ========== ========== ==========
Cash dividends.......... $ 0.16 $ 0.145 $ 0.61 $ 0.55 $ 0.51 $ 0.49 $ 0.44
Dividend payout ratio... 44.97% 45.65% 44.30% 50.56% 132.68% 45.72% 42.13%
AVERAGE RATIOS
Return on total assets.... 1.68% 1.59% 1.64% 1.29% 0.55% 1.32% 1.34%
Return on shareholders'
equity.................. 16.75% 15.61% 16.62% 13.44% 5.93% 13.86% 14.30%
Shareholders' equity to
total assets............ 10.02% 10.19% 9.89% 9.64% 9.34% 9.56% 0.38%
BALANCE SHEET DATA
Total assets
(period-end).......... $5,367,184 $5,225,011 $5,307,461 $5,227,908 $5,596,521 $5,722,573 $5,179,298
Daily averages:
Total assets............ $5,308,648 $5,162,405 $5,253,785 $5,478,482 $5,654,811 $5,385,758 $5,113,854
Earning assets.......... 4,977,221 4,847,829 4,926,372 5,143,321 5,287,521 5,030,012 4,724,710
Deposits and other
funds................. 4,684,505 4,548,648 4,641,569 4,879,343 5,058,333 4,820,339 4,581,960
Shareholders' equity.... 531,979 525,819 519,618 527,899 528,038 514,860 479,792
</TABLE>
- ---------------
*Fully-tax equivalent basis
N/A = not available
9
<PAGE> 19
SECURITY FIRST CORP.
FIVE YEAR SUMMARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Interest income......................... $ 55,715 $ 49,178 $ 43,593 $ 39,410 $ 38,578
Interest expense........................ 29,566 25,563 22,608 18,123 18,000
-------- -------- -------- -------- --------
Net interest income................... 26,149 23,615 20,985 21,287 20,578
Provision for loan losses............... 310 323 377 582 695
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses........................... 25,839 23,292 20,608 20,705 19,883
Other income............................ 1,758 1,698 1,699 1,418 1,518
Merger expenses......................... -- -- (737) -- --
Terminated merger costs................. -- -- -- (504) --
Amortization of goodwill................ (104) (107) (111) (112) (111)
SAIF assessment......................... -- (2,567) -- -- --
Other expenses.......................... (13,202) (12,535) (12,519) (11,393) (11,275)
Federal income tax...................... (4,980) (3,371) (3,334) (3,414) (3,433)
-------- -------- -------- -------- --------
Income before cumulative effect of
accounting change..................... 9,311 6,410 5,606 6,700 6,582
Cumulative effect of accounting change
for income taxes...................... -- -- -- -- 1,168
-------- -------- -------- -------- --------
Net income.............................. $ 9,311 $ 6,410 $ 5,606 $ 6,700 $ 7,750
======== ======== ======== ======== ========
</TABLE>
SUMMARY OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Cash and deposits with banks............ $ 10,003 $ 4,685 $ 6,314 $ 7,513 $ 8,067
Investments, interest-bearing deposits,
federal funds sold, and short-term
investments........................... 21,318 35,555 40,782 45,245 46,786
Loans receivable and mortgage-backed
securities............................ 629,303 570,498 478,906 435,119 402,926
Goodwill................................ 924 1,028 1,135 1,246 1,358
Other assets............................ 23,934 22,995 20,090 18,628 17,773
-------- -------- -------- -------- --------
Total assets.................. $685,482 $634,761 $547,227 $507,751 $476,910
======== ======== ======== ======== ========
Deposits................................ $508,157 $445,182 $410,737 $393,314 $387,776
Borrowings.............................. 105,107 123,700 76,858 59,347 47,513
Other liabilities....................... 7,539 6,444 5,251 4,881 4,920
Shareholders' equity.................... 64,679 59,435 54,381 50,209 36,701
-------- -------- -------- -------- --------
Total liabilities and
equity...................... $685,482 $634,761 $547,227 $507,751 $476,910
======== ======== ======== ======== ========
</TABLE>
10
<PAGE> 20
OTHER STATISTICAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Return on average assets................ 1.39% 1.07% 1.07% 1.37% 1.64%
Return on average equity................ 14.92% 11.33% 10.64% 14.58% 23.23%
Equity to assets:
Average for the year.................. 9.29% 9.47% 10.02% 9.42% 7.08%
At year end........................... 9.44% 9.36% 9.94% 9.89% 7.70%
Net interest income to other expenses... 198.07% 188.39% 167.63% 186.84% 182.51%
Efficiency ratio(1)..................... 47.29% 49.52% 55.19% 50.18% 51.03%
Net yield on average interest-earning
assets(2)............................. 4.05% 4.12% 4.16% 4.57% 4.56%
Interest rate spread during period(3)... 3.70% 3.78% 3.80% 4.30% 4.39%
Per share information(4):
Earnings per share -- basic........... $ 1.23 $ 0.86 $ 0.78 $ 0.93(8) $ 1.40(8)
Earnings per share -- diluted(5)...... $ 1.11 $ 0.78 $ 0.70 $ 0.82(8) $ 1.15(8)
Dividends paid per share(6)........... $ 0.32 $ 0.28 $ 0.27 $ 0.21 $ 0.12
Dividend payout ratio(5).............. 28.83% 35.90% 38.57% 25.61% 10.44%
Book value per share.................. $ 8.56 $ 7.92 $ 7.35 $ 6.90 $ 7.33
Tangible book value per share(7)...... $ 8.44 $ 7.78 $ 7.20 $ 6.73 $ 7.06
Weighted average shares outstanding(4):
Common shares......................... 7,552,329 7,434,891 7,169,640 7,013,042(8) 4,973,829(8)
Common and common stock equivalent
shares............................. 8,718,437 8,695,436 8,514,312 8,422,766(8) 6,375,611(8)
</TABLE>
- ---------------
(1) Non-interest expense less goodwill divided by the sum of net interest income
and other income, not including one-time gains or non-recurring expenses.
(2) Net interest income divided by average interest-earning assets.
(3) Average yield earned on interest-earning assets less average rates paid on
interest-bearing liabilities.
(4) All share and per share information has been adjusted for prior stock splits
in fiscal 1998 and 1994.
(5) Represents or utilizes diluted earnings, shares, and amounts, as
appropriate.
(6) The amounts herein are historical per share amounts declared and paid by the
Company, as adjusted for stock splits. No adjustment has been made for the
acquisition of First Kent Financial Corporation, which was accounted for as
a pooling of interests.
(7) Represents shareholders' equity less goodwill divided by common shares
outstanding.
(8) Basic and diluted earnings per share of First Kent Financial Corporation,
former parent of First Federal, subsequent to First Federal's mutual to
stock conversion in June 1994 are calculated based on net income subsequent
to the stock conversion divided by the weighted average shares outstanding
subsequent to the stock conversion. Basic and diluted earnings per share for
the fiscal year ended March 31, 1994 (prior to First Federal's mutual to
stock conversion) does not include the results of First Federal.
11
<PAGE> 21
COMPARATIVE PER SHARE DATA (UNAUDITED)
For the periods indicated, the following table sets forth common share book
value, cash dividends paid, and net income of (a) FirstMerit on a historical
basis, (b) CoBancorp on a historical basis, (c) Security First Corp. on a
historical basis, (d) FirstMerit, CoBancorp, and Security First on a pro forma
combined basis, and (e) FirstMerit, CoBancorp and Security First on a pro forma
equivalent basis. The pro forma data in the table assumes the acquisition of
CoBancorp is accounted for as a purchase and the acquisition of Security First
as a pooling-of-interests. The CoBancorp acquisition became effective May 22,
1998. In accordance with purchase accounting requirements, CoBancorp's pro forma
results are included in the pro forma combined data for the three months ended
March 31, 1998 and the year ended December 31, 1997. The pro forma dividends per
share are assumed to be the same as FirstMerit's historical dividends per share.
The selected annual historical data for each entity coincides with their
respective fiscal years, which is December 31 for FirstMerit and CoBancorp, and
March 31 for Security First and the selected unaudited interim historical
financial data for each entity is based on the three month periods ended March
31, 1998 for all three entities and March 31, 1997 for FirstMerit and Security
First. Information presented for years ended 1997 and prior thereto for Security
First is based on its fiscal years ended March 31, 1998, 1997, 1996, 1995 and
1994. It is anticipated that upon consummation of the Merger, the fiscal year of
the combined company will be December 31. Accordingly, historical financial
statements of the combined company subsequent to the Merger will include the
financial information of Security First on a calendar year basis. The following
information should be read in conjunction with the historical financial
statements of FirstMerit, CoBancorp and Security First incorporated by reference
in this Prospectus and Proxy Statement and the pro forma condensed consolidated
combined financial information giving effect to the Merger included elsewhere in
the Prospectus and Proxy Statement.
THE INFORMATION PRESENTED BELOW IS NOT NECESSARILY INDICATIVE OF THE
RESULTS WHICH ACTUALLY WOULD HAVE BEEN OBTAINED IF THE MERGER HAD BEEN
CONSUMMATED IN THE PAST OR WHICH MAY BE OBTAINED IN THE FUTURE.
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED
--------------- ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----- ------ ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL PER SHARE DATA
FIRSTMERIT
Net income per basic common share......... $0.36 $ 0.32 $1.38 $1.09 $0.47 $1.07 $ 1.03
Net income per diluted common share....... 0.35 0.32 1.36 1.08 0.47 1.07 1.03
Cash dividends paid per common share...... 0.16 0.145 0.61 0.55 0.51 0.49 0.44
Book value per common share (period
end).................................... 8.42 8.24 8.56 8.19 8.10 7.86 7.51
COBANCORP
Net income per basic common share......... 0.38 0.37 1.39
Net income per diluted common share....... 0.37 0.37 1.37
Cash dividends paid per common share...... 0.18 0.17 0.71
Book value per common share (period
end).................................... 17.17 15.78 16.93
SECURITY FIRST
Net income per basic common share......... 0.33 0.29 1.23 0.86 0.78 0.93 1.40
Net income per diluted common share....... 0.29 0.26 1.11 0.78 0.70 0.82 1.15
Cash dividends paid per common share...... 0.08 0.07 0.32 0.28 0.27 0.21 0.12
Book value per common share (period
end).................................... 8.56 7.92 8.56 7.92 7.35 6.90 7.33
PRO FORMA COMBINED
Net income per basic common share......... 0.33 0.29 1.27 1.08 0.50 1.07 1.08
Net income per diluted common share....... 0.32 0.29 1.24 1.06 0.49 1.07 1.06
Cash dividends paid per common share...... 0.16 0.145 0.61 0.55 0.51 0.49 0.435
Book value per common share (period
end).................................... 9.71 9.78 9.79 8.26 8.12 7.85 7.56
</TABLE>
12
<PAGE> 22
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED
--------------- ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----- ------ ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA EQUIVALENT(1)
Net income per basic common share......... $0.29 $ 0.26 $1.12 $0.96 $0.44 $0.97 $ 0.96
Net income per diluted common share....... 0.28 0.26 1.10 0.94 0.43 0.95 0.94
Cash dividends paid per common share...... 0.14 0.13 0.54 0.49 0.45 0.43 0.39
Book value per common share (period
end).................................... 8.60 8.66 8.67 7.31 7.19 6.95 6.69
</TABLE>
- ---------------
(1) The Security First pro forma equivalent information presented represents the
pro forma combined information multiplied by the exchange ratio of .8855.
13
<PAGE> 23
ANNUAL MEETING OF SECURITY FIRST SHAREHOLDERS
DATE, TIME AND PLACE
The Security First Annual Meeting will be held on Thursday, July 30, 1998,
commencing at 2:00 p.m. (local time), at the Holiday Inn located at Interstate
271 and Wilson Mills Road, Mayfield Village, Ohio.
PURPOSE OF MEETING
The purpose of the Meeting is to consider and vote upon (i) a proposal to
adopt the Merger Agreement by and between FirstMerit and Security First; (ii)
the election of two directors of Security First; (iii) ratification of the
appointment of Deloitte & Touche LLP as auditors for Security First for the
fiscal year ending March 31, 1999; and (iv) such other matters as may properly
come before the Meeting, or any adjournments thereof.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
The Record Date for the determination of holders of shares of Security
First Common Stock entitled to notice of and to vote at the Meeting has been
fixed by the Board of Directors of Security First as of the close of business on
June 17, 1998. As of the Record Date, there were approximately 7,863,587 shares
of Security First Common Stock issued and outstanding, held by approximately
1,158 shareholders of record. Holders of record of Security First Common Stock
on the Record Date are entitled to one vote per share.
QUORUM; VOTE REQUIRED
In order for Security First to be able to transact business at the Meeting,
a quorum must be achieved. A quorum would be achieved only if one-third of the
shares of Security First Common Stock entitled to vote at the Meeting are
represented in person or by proxy at the Meeting.
If a quorum is achieved, the affirmative vote of the holders of a majority
of the shares of Security First Common Stock outstanding on the Record Date is
required to adopt the Merger Agreement. The election of directors requires a
plurality of the votes of the shares present in person or by proxy and entitled
to vote. Ratification of the appointment of Security First's independent
auditors requires approval by a majority of the shares duly voted in person or
by proxy on the proposal. For purposes of counting votes on the proposal to
adopt the Merger Agreement, failures to vote, abstentions and broker non-votes
(i.e., proxies from brokers or nominees indicating that such persons have not
received instructions from the beneficial owners or other persons as to the
proposal on which such beneficial owners or persons are entitled to vote their
shares but with respect to which the brokers or nominees have no discretionary
power to vote without such instructions) will have the same effect as votes
against the Merger Agreement. With regard to the election of directors, votes
may be cast in favor of or withheld from each nominee; votes that are withheld
will be excluded entirely from the vote and will have no effect. On the proposal
to ratify Deloitte and Touche LLP as Security First's auditors, abstentions will
have the effect of a negative vote on the proposal while failures to vote and
broker non-votes will have no effect.
VOTING; SOLICITATION AND REVOCATION OF PROXIES
The enclosed Security First proxy card is solicited on behalf of the
Security First Board of Directors and may be used by Security First shareholders
to vote at the Meeting. Security First shareholders are requested to complete,
date and sign the accompanying proxy card and promptly return it in the
accompanying postage prepaid envelope. PLEASE DO NOT FORWARD ANY STOCK
CERTIFICATES WITH YOUR PROXY CARDS. Shares represented by valid proxies will be
voted at the Meeting in accordance with the instructions noted thereon, but in
the absence of such instructions, will be voted for adoption of the Merger
Agreement and for each of the other proposals referred to herein. Failure to
return your properly executed proxy card or failure to vote at the meeting will
have the same effect as a vote against the proposal to adopt the Merger
Agreement, but will have no effect on the election of directors or ratification
of auditors.
In addition to solicitation by mail, directors, officers and employees of
Security First, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of Security First, personally
14
<PAGE> 24
or by telephone, telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy material to beneficial owners. In
addition, Security First has engaged Corporate Investors Communications ("CIC")
to assist Security First in distributing proxy materials and contacting record
and beneficial owners of Security First Common Stock. Security First has agreed
to pay CIC approximately $4,500 plus out-of-pocket expenses for its services to
be rendered on behalf of Security First. All costs of soliciting proxies will be
borne by Security First. FirstMerit will bear the cost of all Commission filing
fees incurred in connection with the Merger, and the costs of printing and
mailing the Prospectus and Proxy Statement.
Any Security First shareholder who has executed and delivered a proxy card
to Security First may revoke it at any time before it is voted by attending the
Meeting and voting in person, by giving notice of revocation in writing or by
submitting a signed proxy card bearing a later date to Security First Corp.,
1413 Golden Gate Boulevard, Mayfield Heights, Ohio 44124, Attention: Secretary,
provided such notice or later dated proxy card is actually received by Security
First before the vote of the Security First shareholders has been taken at the
Meeting.
NO APPRAISAL RIGHTS
Under Section 262 of the DGCL, appraisal rights are available to dissenting
shareholders in connection with certain mergers or consolidations. However,
unless the certificate of incorporation otherwise provides and the Security
First Certificate does not, Section 262 does not provide for appraisal rights
(i) if the shares of the corporation are listed on a national securities
exchange or designated as a national market system security on an inter-dealer
quotations system by the National Association of Securities Dealers, Inc. or
held of record by more than 2,000 shareholders (as long as the shareholders
receive in the merger shares of the surviving corporation or of any other
corporation the shares of which are listed on a national securities exchange or
designated as a national market system security on an inter-dealer quotations
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 shareholders) or (ii) if the corporation is the surviving
corporation and no vote of its shareholders is required on the merger.
Accordingly, shareholders of Security First are not entitled to appraisal rights
in connection with the Merger.
RECOMMENDATION OF SECURITY FIRST'S BOARD OF DIRECTORS
The Security First Board has unanimously approved (i) the Merger Agreement
and the transactions contemplated thereby and has determined that the Merger is
fair to, and in the best interests of, Security First and its shareholders; (ii)
the election of two directors of Security First, and (iii) the ratification of
the appointment of Deloitte & Touche LLP as auditors for Security First for the
fiscal year ending March 31, 1999. For a discussion of the factors considered by
the Security First Board in reaching its decision to approve the Merger
Agreement, see "BACKGROUND OF AND REASONS FOR MERGER -- Reasons for
Merger -- Security First."
THE BOARD OF DIRECTORS OF SECURITY FIRST UNANIMOUSLY RECOMMENDS THAT ITS
SHAREHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT, THE ELECTION OF
DIRECTORS AND THE RATIFICATION OF THE AUDITORS.
BENEFICIAL OWNERSHIP
The following table sets forth information, as of the Record Date,
regarding beneficial share ownership of Security First's directors, certain
executive officers (for whom disclosure is required to be provided pursuant to
Commission regulations), and all directors and executive officers of Security
First as a group. The address of the directors and executive officers listed in
the following table is the same as that of Security First. No persons or
15
<PAGE> 25
entities were known by management to beneficially own more than 5% of the
outstanding shares of Security First Common Stock as of the Record Date.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED(1) PERCENT OF CLASS
---------------- ------------------- ----------------
<S> <C> <C>
Charles F. Valentine, Chairman of the Board and CEO......... 329,615 4.15%
Austin J. Mulhern, President and COO........................ 263,053(2) 3.32%
Robert L. Anderson, Director................................ 286,082(3) 3.63%
James P. Myers, Director.................................... 74,690 .95%
Nicholas E. Rinaldi, D.D.S., Director....................... 103,377 1.31%
Donald E. Snow, Director.................................... 51,244(4) .65%
Louis J. Sorboro, Director.................................. 152,586 1.93%
Paul V. Voinovich, Director................................. 107,895 1.37%
Jeffrey J. Calabrese, Vice President and Secretary.......... 59,515(5) .75%
Mary H. Crotty, Vice President and CFO...................... 29,419 .37%
Thomas J. Deighton, Vice President.......................... 22,660 .29%
All directors and executive officers of Security First as a
group
(12 persons).............................................. 1,480,136(6) 18.14%
</TABLE>
- ---------------
(1) The nature of beneficial ownership for shares reported in this column is
sole voting and investment power, except as otherwise set forth in these
footnotes. Included in the shares beneficially owned by the named
individuals are options to purchase shares of Common Stock and certain
subordinated debentures which are convertible into shares of Common Stock,
as follows: Mr. Valentine - 71,173 shares; Mr. Mulhern - 57,046 shares; Mr.
Anderson - 25,674 shares; Mr. Myers - 7,166 shares; Dr. Rinaldi - 18,837
shares; Mr. Snow - 4,067 shares; Mr. Sorboro - 35,443 shares; Mr.
Voinovich - 2,783 shares; Mr. Calabrese - 32,792 shares; Ms. Crotty - 22,668
shares; and Mr. Deighton - 20,527 shares.
(2) Includes 137,329 shares in which Mr. Mulhern has reported shared ownership.
(3) Includes 75,000 shares in which Mr. Anderson has reported shared ownership.
(4) Includes 47,177 shares in which Mr. Snow has reported shared ownership.
(5) Includes 20,946 shares in which Mr. Calabrese has reported shared ownership.
(6) Includes shares held directly, 298,777 shares subject to options granted by
Security First and outstanding convertible subordinated debentures, and
shares held by controlled corporations and family members, with respect to
which shares the listed individuals or group members may be deemed to have
sole voting and investment power.
BACKGROUND OF AND REASONS FOR MERGER
REASONS FOR MERGER -- FIRSTMERIT
After careful review and consideration, FirstMerit's Board of Directors
approved the terms of the Merger. The Merger with Security First represents the
continued realization of FirstMerit's long-standing philosophy of acquiring
retail oriented financial institutions with dominant market share for continued
customer growth. The Merger will expand FirstMerit's existing banking operations
in its major Northern Ohio markets, providing both stronger market positions and
opportunities to achieve efficiencies for the combined operations in those
markets.
In approving the Merger, FirstMerit's Board of Directors reviewed a number
of factors, including certain risks of the Merger, with a view to increasing
shareholder value in the intermediate and long term. These factors included the
analysis and advice of FirstMerit's management and outside advisors on the due
diligence review of Security First and their analysis and advice on the
financial and strategic implications of the Merger. Some of the significant
strategic matters considered by FirstMerit's Board of Directors and management
included the analysis
16
<PAGE> 26
and advice that the Merger will result in (a) anticipated cost savings
attributable to consolidation of operations, increased efficiencies, economies
of scale, and related factors, (b) improved positions in FirstMerit's major
markets, and (c) a combined entity with increased financial resources. Certain
risks of the Merger considered by FirstMerit's Board and senior management
included Security First's loan quality, litigation, regulatory, and other legal
contingencies, the uncertainties inherent in any combination of two companies,
and the effort that would be necessary to achieve the anticipated cost savings
and enhanced revenues. FirstMerit believes that its prior successful experience
in effecting mergers will assist it in achieving the anticipated cost savings
and enhanced revenues.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger, the FirstMerit Board did not quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination.
During the review process, FirstMerit's senior management believed it could
achieve cost reductions over time through consolidating the operations of
Security First, especially where those operations will overlap or become
redundant, and by achieving greater efficiencies. See "TERMS OF
MERGER -- Conduct of Security First's Business Pending the Merger." The cost
reductions are expected to result from consolidation of certain facilities,
elimination of duplicate data processing and other corporate overhead, and
consolidation of other operations. While FirstMerit believes that these
anticipated cost reductions are realistic and achievable, no assurance can be
given that the cost reductions, in fact, will be achieved, or will be achieved
within the time frame planned by FirstMerit, or that any cost savings which are
achieved will not be offset by declining revenues or other charges to earnings.
In the event that such cost reductions are not achieved, or are not achieved
within the time frame planned by FirstMerit, there would be a reduction in
FirstMerit's anticipated earnings on a combined basis after the Merger.
BACKGROUND OF MERGER -- SECURITY FIRST
Security First was organized in 1992 as the holding company for Security
Federal Savings & Loan Association of Cleveland, which had converted from a
mutual savings and loan to a stock savings and loan in 1988. In April 1996,
Security First acquired First Kent Financial Corporation ("First Kent") and its
wholly owned subsidiary First Federal.
Through the years Security First has, on an ongoing basis, reviewed its
options to enhance shareholder value. Security First's primary shareholder
enhancement strategy has been to build a strong retail franchise combined with a
lending niche in residential construction and development. With approximately
25% of its loan portfolio invested in residential construction and development
loans, Security First has generated interest rate spreads, net income and
returns on equity which exceed the performance of most of its peers.
In July 1997, Security First and Charles Webb identified certain factors
which could limit the ability of Security First to continue its historic
earnings per share and stock price growth in the future. Some of these factors
included: (i) the balance sheet was approaching maximum leverage and Security
First could not increase funding or attract sufficient deposits at a reasonable
cost to support lending growth; (ii) reduced earnings growth due to slower asset
growth and narrowing interest rate spreads; (iii) increased competition for
deposits; and (iv) the expense of implementing continuing technological advances
necessary to remain competitive.
Based on the considerations above, Security First analyzed the
opportunities for a merger of equals or the sale of Security First. At the July
31, 1997 and August 18, 1997 board meetings, Charles Webb reviewed with Security
First the status of the current merger market, the relative pricing and
opportunities that might be available. The Security First Board elected to
pursue a possible affiliation with other financial institutions.
Discussions were held with two financial institutions to test the market
and to obtain an indication of pricing. Following several months of discussions,
it became evident that these potential affiliations would not occur.
In early 1998, the Board of Directors authorized Charles Webb to conduct a
confidential inquiry regarding the possible interest of eight entities,
including one of the financial institutions originally contacted, in pursuing a
strategic alliance. All eight entities expressed an interest and, after signing
a confidentiality agreement, were provided with Security First's financial
statements, loan and deposit summaries and other data. In March 1998,
17
<PAGE> 27
four companies submitted preliminary, non-binding indications of interest to
merge with Security First. Charles Webb reviewed with the Board the details of
these indications of interest received. Additionally, Charles Webb reviewed with
the Board the estimated relative value of the stock of each of the interested
parties.
After careful consideration, it was determined that the FirstMerit proposal
was the most attractive of the four. Off-site due diligence and negotiation of
the Merger Agreement began immediately. Once due diligence and the negotiation
of the Merger Agreement were completed, a fixed exchange ratio of .8855 shares
of FirstMerit stock for each share of Security First stock was set.
On April 3, 1998, Security First's Board met with Charles Webb and Security
First's legal counsel. At this meeting Security First's legal counsel reviewed
the terms of the Merger Agreement, the Security First Stock Option and the
contemplated transaction . Charles Webb delivered its opinion that the Merger
Consideration was fair, from a financial point of view, to the shareholders of
Security First Common Stock. After a thorough discussion of the transaction, the
meeting was adjourned so that Security First's Board could have additional time
to review the Merger Agreement. The meeting was reconvened on April 5, 1998 and
additional discussion followed. Security First's Board voted unanimously to
approve the Merger Agreement and authorized the execution of the Merger
Agreement and the Security First Option.
REASONS FOR THE MERGER -- SECURITY FIRST
The terms of the Merger Agreement, including the consideration to be paid
to Security First's shareholders, were the result of arm's length negotiations
between the authorized representatives of FirstMerit and Security First. Among
the factors considered by Security First's Board were (i) the consideration to
be paid to Security First's shareholders in relation to the market value, book
value, earnings per share and dividend rates of Security First Common Stock,
(ii) the financial condition, results of operations, capital levels, asset
quality and prospects for Security First (iii) industry and economic conditions,
(iv) the impact of the Merger on the depositors, employees, customers and
communities served by Security First, (v) the opinion of Security First's
financial advisor as to the fairness of the consideration, from a financial
point of view, to the holders of Security First Common Stock, (vi) the general
structure of the transaction and the compatibility of the management and
business philosophy of both organizations, (vii) the likelihood of receiving the
required approvals in a timely manner, and (viii) the ability of the combined
enterprise to compete in relevant banking and non-banking markets. In making its
determination, Security First's Board did not find it practical to, and did not
quantify or otherwise attempt to, assign relative weights to the specific
factors considered in reaching its determination.
In approving the Merger Agreement, the Security First Board of Directors
was aware that (i) the Merger Agreement contains certain provisions prohibiting
Security First from initiating, soliciting, or negotiating other offers or
agreements to acquire Security First, and (ii) the Security First Stock Option
may have the effect of discouraging persons who may now, or prior to the
Effective Time, be interested in acquiring all of or a significant interest in
Security First from considering or proposing such an acquisition, even if such
person were prepared to offer to pay consideration to stockholders of Security
First which had a higher current market price than the Merger Consideration to
be received for each share of Security First Common Stock pursuant to the Merger
Agreement. See "TERMS OF THE MERGER -- Security First Stock Purchase Option."
However, the Security First Board of Directors was also aware that such terms
were specifically bargained for inducements for FirstMerit to enter into the
Merger Agreement, and that the obligation of the Security First Board of
Directors under the Merger Agreement to recommend approval of the Merger
Agreement by its stockholders was explicitly made subject to, among other
conditions, the fiduciary obligations of the Security First Board of Directors
under applicable law. Accordingly, the Merger Agreement permits Security First
Board of Directors, if required by the exercise of its fiduciary duties under
applicable law, to withdraw, modify or change such recommendations. See "TERMS
OF THE MERGER -- Conduct of Security First's Business Pending Merger." In
addition, in connection with its approval of the proposed Merger, the Security
First Board of Directors was advised by Charles Webb that the indicated value of
the Merger exceeded Charles Webb's range of estimates of Security First's
stand-alone value (i.e., the market price of Security First Common Stock if
Security First remained an independent company). In presenting this advice,
Charles Webb stated that these findings were necessarily based upon economic,
market, monetary and other conditions as they existed and could be evaluated at
the time, represented its best business judgment under the circumstances and
should not be construed in any way as a
18
<PAGE> 28
financial fairness or other form of expert opinion. Charles Webb's opinion is
described below and included as Appendix B to this Prospectus and Proxy
Statement. See " -- Opinion of Security First's Financial Advisor."
Security First's Board has unanimously adopted and approved the Merger
Agreement and the transactions contemplated thereby and has determined that the
Merger is fair to, and in the best interests of, Security First and its
shareholders. THE SECURITY FIRST BOARD UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT.
OPINION OF SECURITY FIRST'S FINANCIAL ADVISOR
In May 1997, Charles Webb met with Security First to evaluate Security
First's strategic alternatives as part of a shareholder enhancement program and
to evaluate any specific proposals that might be received regarding an
acquisition of Security First. Charles Webb, as part of its investment banking
business, is regularly engaged in the evaluation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, and
distributions of listed and unlisted securities. Charles Webb is familiar with
the market for common stocks of publicly traded banks, thrifts and bank and
thrift holding companies. The Security First Board selected Charles Webb on the
basis of the firm's reputation and its experience and expertise in transactions
similar to the Merger and its prior work for and relationship with Security
First.
Pursuant to its engagement, Charles Webb was asked to render an opinion as
to the fairness, from a financial point of view, of the Exchange Ratio to
shareholders of Security First in the Merger. The Exchange Ratio, upon which the
Merger Consideration will be based, was determined through arm's-length
negotiations between FirstMerit and Security First, although Security First was
advised during such negotiations by Charles Webb. Charles Webb delivered its
opinion to the Security First Board that, as of April 5, 1998, and confirmed as
of the date of this Prospectus and Proxy Statement, the Merger Consideration is
fair, from a financial point of view, to the shareholders of Security First.
Charles Webb's opinion does not constitute a recommendation as to how any
stockholder of Security First should vote with respect to the Merger Agreement.
No limitations were imposed by the Security First Board upon Charles Webb with
respect to the investigations made or procedures followed by it in rendering its
opinion. Charles Webb has consented to the inclusion herein of the summary of
its opinion to the Security First Board and to the reference to the entire
opinion attached hereto at Appendix B.
THE FULL TEXT OF THE OPINION OF CHARLES WEBB, WHICH IS ATTACHED AT APPENDIX
B TO THIS PROSPECTUS AND PROXY STATEMENT, SETS FORTH CERTAIN ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY CHARLES WEBB AND
SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF CHARLES WEBB SET
FORTH IN THIS PROSPECTUS AND PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION.
In rendering its opinion, Charles Webb (i) reviewed the Merger Agreement,
(ii) reviewed Security First's and FirstMerit's Annual Reports to Shareholders,
proxy statements and annual reports on Form 10-K for the three fiscal years
ended 1997, 1996 and 1995, certain interim reports to stockholders, quarterly
reports on Form 10-Q of both companies, and certain other internal financial
analysis considered relevant, (iii) discussed with senior management and the
boards of directors of Security First and its wholly-owned subsidiary, Security
Federal, the past and current business operations, regulatory relationships,
financial condition and future prospects for Security First, (iv) discussed with
senior management of FirstMerit their operations, financial performance and
future plans and prospects, (v) considered historical quotations, levels of
activity and prices of recorded transactions in Security First's and
FirstMerit's common stock, (vi) reviewed financial and stock market data of
other thrifts in a comparable asset range to Security First, (vii) reviewed
financial and stock market data of other thrifts in a comparable asset and
performance range to FirstMerit, (viii) reviewed certain recent business
combinations with thrifts as the acquired company, which Charles Webb deemed
comparable in whole or in part, and (ix) performed other analyses which Charles
Webb considered appropriate.
In rendering its opinion, Charles Webb assumed and relied upon the accuracy
and completeness of the financial information provided to it by Security First
and FirstMerit. In its review, with the consent of Security First, Charles Webb
did not undertake any independent verification of the information provided to
it, make any independent appraisal or evaluation of the assets, liabilities,
potential exposure resulting from Year 2000 issues of Security First or
FirstMerit, or potential or contingent liabilities of Security First or
FirstMerit.
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<PAGE> 29
Analysis of Recent Comparable Acquisition Transactions. In rendering its
opinion, Charles Webb analyzed certain comparable merger and acquisition
transactions of both pending and completed thrift deals, comparing the
acquisition price relative to tangible book value, last twelve months ("LTM")
earnings, total assets, total deposits, and premium to core deposits. The
analysis included a comparison of the median of the above ratios for completed
and pending acquisitions, based on the following five comparable groups: (i) all
thrift acquisitions since October 1, 1997 ("Recent Transactions"); (ii) all
thrift acquisitions with a total transaction value between $200 million and $400
million ("Comparable Transaction Value"); (iii) all acquisitions since October
1, 1997 with the selling thrift having equity to total assets of between 8.0%
and 12.0% ("Comparable Equity Ratio"); (iv) all thrift acquisitions since
October 1, 1997 with the selling thrift having a return on average equity
greater than 12.0% ("Comparable Earnings Ratio"); and (v) all thrift
acquisitions since October 1, 1997 located in the Midwest ("Comparable Regional
Deals").
The information in the following table summarizes the material information
analyzed by Charles Webb with respect to the Merger. The summary does not
purport to be a complete description of the analysis performed by Charles Webb
and should not be construed independently of the other information considered by
Charles Webb in rendering its opinion. Selecting portions of Charles Webb's
analysis or isolating certain aspects of the comparable transactions without
considering all analysis and factors could create an incomplete or potentially
misleading view of the evaluation process.
<TABLE>
<CAPTION>
PRICE TO
----------------------------------------
TANGIBLE LTM CORE
BOOK EPS(2) DEPOSITS ASSETS DEPOSIT
(%) (X) (%) (%) PREMIUM(3)
-------- ------ -------- ------ ----------
<S> <C> <C> <C> <C> <C>
CONSIDERATION -- $29.28 PER SHARE(1)......... 354.5 27.4 50.4 37.4 36.7
</TABLE>
<TABLE>
<CAPTION>
NUMBER MEDIAN FOR ALL DEALS SINCE OCTOBER 1, 1997
------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RECENT TRANSACTIONS
Completed................................... 47 198.6 23.0 18.0 24.8 12.6
Pending..................................... 50 205.1 22.7 21.2 28.1 16.4
COMPARABLE TRANSACTION VALUE
Completed................................... 2 217.2 17.3 21.1 35.0 22.2
Pending..................................... 7 232.2 24.2 21.3 30.9 21.3
COMPARABLE EQUITY RATIO
Completed................................... 21 214.3 23.9 22.4 26.2 18.7
Pending..................................... 14 214.8 26.1 21.6 30.8 20.4
COMPARABLE EARNINGS RATIO
Completed................................... 12 238.3 21.4 17.3 21.8 15.1
Pending..................................... 16 256.1 18.2 19.8 27.8 19.9
COMPARABLE REGIONAL DEALS
Completed................................... 15 169.8 23.0 22.4 28.6 16.3
Pending..................................... 14 191.8 22.5 20.6 29.0 15.3
</TABLE>
- ---------------
(1) Based on FirstMerit's closing price of $33.06 on April 3, 1998 and the
Exchange Ratio of .8855.
(2) Last twelve months ending December 31, 1997 earnings per share ("EPS") were
$1.07.
(3) Calculation based on total transaction value less equity divided by core
deposits.
Based on the above information Charles Webb concluded that the multiples
implied by the .8855 Exchange Ratio and the implied per share price of $29.28,
were in the ranges of each mentioned comparable group, and relative to price to
tangible book and price to LTM EPS exceeded significantly all of the comparable
groups.
In preparing its analyses, Charles Webb made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Charles Webb and Security
First. The analyses performed by Charles Webb are not necessarily indicative of
actual values or future
20
<PAGE> 30
results, which may be significantly more or less favorable than suggested by
such analyses and do not purport to be appraisals or reflect the prices at which
a business may be sold.
Charles Webb will receive a fee of approximately $2.5 million for services
rendered in connection with advising and issuing a fairness opinion regarding
the Merger. As of the date the Prospectus and Proxy Statement was mailed to
Security First shareholders, Charles Webb had received $125,000 of such fee, the
remainder of the fee is due at the Effective Time.
RECOMMENDATION OF SECURITY FIRST'S BOARD OF DIRECTORS
The Security First Board has unanimously adopted and approved the Merger
Agreement and the transactions contemplated thereby and has determined that the
Merger is fair to, and in the best interests of, Security First and its
shareholders. THE SECURITY FIRST BOARD THEREFORE RECOMMENDS A VOTE FOR APPROVAL
OF THE MATTERS PRESENTED AT THE SECURITY FIRST ANNUAL MEETING.
For a discussion of the factors considered by the Security First Board in
reaching its decision to approve the Merger Agreement, see "BACKGROUND OF AND
REASONS FOR MERGER -- Reasons for Merger -- Security First."
THE BOARD OF DIRECTORS OF SECURITY FIRST UNANIMOUSLY RECOMMENDS THAT ITS
SHAREHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT.
TERMS OF MERGER
THIS PORTION OF THE PROSPECTUS AND PROXY STATEMENT DESCRIBES VARIOUS
ASPECTS OF THE MERGER. THE FOLLOWING DESCRIPTION DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT ATTACHED
HERETO AT APPENDIX A AND INCORPORATED HEREIN BY REFERENCE. THE SHAREHOLDERS OF
SECURITY FIRST ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
GENERAL
The Merger Agreement provides that, subject to the satisfaction or waiver
of certain conditions (including, among other things, the adoption of the Merger
Agreement by the shareholders of Security First and the receipt of all necessary
regulatory approvals), Security First will be merged with and into FirstMerit at
the Effective Time. The separate corporate existence of Security First will
cease at the Effective Time, FirstMerit will be the surviving corporation in the
Merger and the shareholders of Security First will become shareholders of
FirstMerit. See "TERMS OF MERGER -- Effective Time."
CONVERSION OF SECURITY FIRST COMMON STOCK
Upon consummation of the Merger, each outstanding share of Security First
Common Stock will be canceled and exchanged for the right to receive .8855 of a
share of FirstMerit Common Stock. If a Security First shareholder would receive
a fraction of FirstMerit Common Stock, cash will be paid in lieu of such
fractional share.
SECURITY FIRST STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO THE EXCHANGE
AGENT UNTIL A SECURITY FIRST SHAREHOLDER HAS RECEIVED THE TRANSMITTAL LETTER AND
SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY.
NO EFFECT ON FIRSTMERIT COMMON STOCK
At the Effective Time, each share of FirstMerit Common Stock then issued
and outstanding will continue to be one share of FirstMerit Common Stock.
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<PAGE> 31
NO FRACTIONAL SHARES OF FIRSTMERIT COMMON STOCK TO BE ISSUED
No fractional shares of FirstMerit Common Stock will be issued in the
Merger. In lieu of fractional shares, each holder of shares of Security First
Common Stock who otherwise would have been entitled to a fraction of a share of
FirstMerit Common Stock, upon surrender of his certificates representing shares
of Security First Common Stock, will be paid the cash value (without interest)
of such fraction, which will be equal to such fraction multiplied by the average
of the last sale prices of FirstMerit Common Stock as reported on Nasdaq/ NMS
for the five trading days immediately preceding the Effective Time.
RIGHTS OF HOLDERS OF SECURITY FIRST STOCK CERTIFICATES PRIOR TO SURRENDER
Upon surrender to the Exchange Agent of certificates representing shares of
Security First Common Stock, the shareholder will be entitled to receive in
exchange, certificate(s) representing the appropriate number of shares of
FirstMerit Common Stock to which such shareholder is entitled, as well as cash
in lieu of any fractional share of FirstMerit Common Stock. Unless and until the
certificates representing shares of Security First Common Stock are so
surrendered, no dividend or other distribution with respect to FirstMerit Common
Stock with a record date occurring after the Effective Time as of any time
subsequent to the consummation of the Merger will be paid to the holder of any
such unsurrendered certificate. Holders of unsurrendered certificates are
entitled to vote after the Effective Time at any meeting of FirstMerit
shareholders regardless of whether such holders have exchanged their
certificates. Upon surrender of certificates to the Exchange Agent, the former
Security First shareholder will receive certificates representing the FirstMerit
Common Stock into which such shareholder's shares of Security First Common Stock
were converted and the dividends or other distributions (without interest) that
have previously become payable with respect to such FirstMerit Common Stock.
LOST CERTIFICATES
Any Security First shareholder who has lost or misplaced a certificate for
any of his shares of Security First Common Stock should immediately contact
National City Bank Shareholder Services at (800) 622-6757, to begin the process
for replacing the lost certificate prior to the Effective Time.
TREATMENT OF STOCK OPTIONS OUTSTANDING UNDER SECURITY FIRST STOCK OPTION PLANS
As of March 31, 1998, there were unexercised stock options outstanding
under the Security First 1987 Stock Option and Incentive Plan, 1996 Stock Option
and Incentive Plan and the First Kent Financial Corporation 1994 Stock Option
Plan (collectively, the "Security First Option Plans") to purchase 374,892
shares of Security First Common Stock at prices varying from $3.92 to $13.41 per
share. Each stock option or right to acquire Security First Common Stock granted
pursuant to the Security First Option Plans which is outstanding and
unexercised, whether or not then exercisable, immediately prior to the Effective
Time, will cease to represent the right to acquire shares of Security First
Common Stock and shall be converted into the right to acquire that number of
FirstMerit Common Stock equal to (a) the number of shares of Security First
Common Stock subject to the unexercised option multiplied by (b) the Exchange
Ratio. The exercise price per share of FirstMerit Common Stock under such option
shall be equal to the exercise price per share of the Security First Common
Stock which was purchasable under each unexercised option divided by the
Exchange Ratio (rounded to the nearest whole cent) necessary to assure that the
rights and benefits of the optionee under such option shall not be increased or
decreased by reason of this conversion. The duration and other terms and
conditions of the options shall be the same, except that references to Security
First shall be deemed to be references to FirstMerit. Under the Merger
Agreement, Security First has agreed not to grant additional options under the
Security First Option Plans. See "TERMS OF MERGER -- Interests of Security First
Executive Officers and Directors."
CONDUCT OF FIRSTMERIT'S BUSINESS PENDING THE MERGER
The Merger Agreement requires FirstMerit (including its subsidiaries) to
conduct its business, during the period from the date the Merger Agreement was
signed until the Effective Time, in such a manner so as not to materially
interfere with the ability to consummate the Merger, to delay the Effective Time
or to have a material adverse effect upon the transactions contemplated by the
Merger Agreement.
22
<PAGE> 32
CONDUCT OF SECURITY FIRST'S BUSINESS PENDING THE MERGER
GENERAL. The Merger Agreement requires Security First (including its
subsidiaries) to conduct its business, during the period from the date the
Merger Agreement was signed until the Effective Time, in the ordinary course
substantially consistent with its practices in effect on the date the Merger
Agreement was signed. In addition, the Merger Agreement restricts Security First
from engaging in certain transactions during the period from the date the Merger
Agreement was signed until the Effective Time, including, among other things,
(a) amending, repealing, or otherwise modifying the Security First Certificate
or Security First Bylaws, or comparable organizational documents of any of the
subsidiaries of Security First, (b) entering into any loan or credit commitment
to, or investing or agreeing to invest in, any person or entity if such
commitment or investment would exceed $500,000 as a residential loan or $1.0
million as a commercial loan, without first consulting with FirstMerit, except
that Security First and its subsidiaries may honor contractual obligations in
existence on the date of the Merger Agreement, (c) selling, assigning or
disposing of certain of its significant assets to a third party or purchasing or
acquiring certain significant assets from a third party, (d) entering into any
transaction, agreement, or commitment outside the ordinary course of its
business which is material to Security First and its subsidiaries taken as a
whole, (e) issuing or selling any capital stock or other securities (with
certain limited exceptions, including pursuant to the exercise of employee stock
options or the convertible subordinated debentures outstanding on the date of
the Merger Agreement), (f) acquiring beneficial ownership of any class of equity
securities of any corporation, (g) declaring a dividend, except for a regular
quarterly cash dividend not in excess of $.09 per share, or (h) adopting or
amending (with certain limited exceptions) any employee compensation, bonus, or
benefit plans or, except in amounts generally consistent with past practice,
increasing the compensation or fringe benefits of any present or former
director, officer or employee or paying any bonus, compensation, or benefit not
required by any existing plan or arrangement.
NO SOLICITATION OF ALTERNATIVE ACQUISITION TRANSACTIONS. The Board of
Directors of Security First is recommending unanimously that the holders of
Security First Common Stock vote in favor of adoption of the Merger Agreement at
the Security First Annual Meeting. Security First has agreed that neither it nor
any of its subsidiaries will solicit or initiate any proposals or offers from
any person, or discuss or negotiate with any such person, to acquire Security
First, any of its subsidiaries, any material amount of its assets, any of its
equity securities, or consider any merger or business consolidations, except
that Security First and/or its subsidiaries may furnish information to and
discuss or negotiate with any person making an unsolicited proposal if (i) the
Board of Directors of Security First determines in good faith and upon the
advice of legal counsel that such action is required for the directors of
Security First to fulfill their fiduciary duties and obligations to the Security
First shareholders and other constituencies under Delaware law, and (ii) prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, Security First provides immediate written notice to
FirstMerit to the effect that it is furnishing information to, or entering into
discussions or negotiations with, such a person or entity. In addition, the
Merger Agreement provides that the Security First Board of Directors may not
withdraw or modify its recommendation to the Security First shareholders
following receipt of a proposal for any such transaction unless the Board of
Directors of Security First determines in good faith and upon the advice of
legal counsel that such action is required for the directors of Security First
to fulfill their fiduciary duties and obligations to the Security First
shareholders and other constituencies under Delaware law.
ADDITIONAL SECURITY FIRST RESERVES, ACCRUALS, CHARGES, AND EXPENSES. The
Merger Agreement provides that FirstMerit and Security First will consult and
cooperate with each other prior to the Effective Time (a) to conform Security
First's approach to determining the level of the allowance for loan losses to
the approach used by FirstMerit, (b) to determine appropriate accruals, reserves
and charges for Security First to establish and take in respect of excess
facilities and equipment capacity, severance costs, write-down or write-off of
various assets, and other appropriate accounting adjustments, taking into
account FirstMerit's business plan following the Merger, and (c) to determine
the amount and timing for recognizing, for financial accounting purposes, the
expenses of the Merger and the restructuring charges related to or to be
incurred in connection with the Merger. Security First will, on a basis mutually
satisfactory to Security First and FirstMerit, establish and take all such
reserves, accruals and charges and recognize, for financial accounting purposes,
such expenses and charges, provided that all conditions to FirstMerit's and
Security First's obligations to consummate the Merger have been
23
<PAGE> 33
satisfied or waived and that such reserves, accruals and charges conform with
generally accepted accounting principles, applicable laws and regulations and
the requirements of governmental entities.
CONDITIONS TO THE MERGER
CONDITIONS FOR BOTH FIRSTMERIT AND SECURITY FIRST. The obligations of each
of FirstMerit and Security First to consummate the Merger are subject to the
fulfillment or waiver at or prior to the closing of the Merger, including, but
not limited to, of the following conditions: (a) the Merger and the Merger
Agreement shall have been approved and adopted by the requisite vote of the
shareholders of Security First; (b) there shall have been received all necessary
consents to and approvals of the transactions contemplated by the Merger
Agreement from governmental agencies (other than immaterial consents), and such
consents shall not include any conditions or requirements which, in the
reasonable opinion of the Board of Directors of FirstMerit, would have a
Material Adverse Effect (as defined below) on the anticipated economic and
business benefits to FirstMerit of the transactions contemplated by the Merger,
taken as a whole; (c) the Registration Statement shall have been declared
effective by the Commission and shall not be subject to a stop order; (d) no
restraining order or injunction prohibiting the Merger shall be in effect; (e)
FirstMerit shall have received an opinion of its counsel to the effect the
Merger will constitute a tax-free reorganization under Code Section
368(a)(1)(A); and (f) FirstMerit shall have received a letter, dated the date of
the Closing, from Coopers & Lybrand to the effect that, for financial reporting
purposes, the Merger qualifies for pooling-of-interests accounting treatment
under generally accepted accounting principles, if consummated in accordance
with this Agreement.
CONDITIONS FOR FIRSTMERIT. The obligation of FirstMerit to consummate the
Merger is also subject to the fulfillment or waiver of the following additional
conditions: (a) Security First shall have performed in all material respects all
of its obligations contained in the Merger Agreement required to be performed at
or prior to the closing of the Merger; (b) the representations and warranties of
Security First contained in the Merger Agreement shall be true and correct as of
the Effective Time, except (among other exceptions) as expressly contemplated by
the Merger Agreement and to the extent that the inaccuracy of Security First's
representations or warranties, individually or in the aggregate, shall not have
a Material Adverse Effect on Security First; (c) there shall not have been any
change in the financial condition, results of operations or business of Security
First and its subsidiaries that either individually or in the aggregate would
have a Material Adverse Effect on Security First, other than as a result of any
action taken by Security First at the written request of FirstMerit pursuant to
the Merger Agreement to establish specified additional reserves, accruals,
charges or expenses; (d) receipt by FirstMerit of officers' certificates as to
certain matters; and (e) receipt by FirstMerit of an opinion of Security First's
legal counsel regarding certain customary legal matters.
CONDITIONS FOR SECURITY FIRST. The obligation of Security First to
consummate the Merger is also subject to the fulfillment or waiver of the
following additional conditions: (a) FirstMerit shall have performed in all
material respects all of its obligations contained in the Merger Agreement
required to be performed at or prior to the closing of the Merger; (b) the
representations and warranties of FirstMerit contained in the Merger Agreement
shall be true and correct as of the Effective Time, except (among other
exceptions) as expressly contemplated by the Merger Agreement and to the extent
that the inaccuracy of FirstMerit's representations or warranties, individually
or in the aggregate, shall not have a Material Adverse Effect on FirstMerit; (c)
receipt by Security First of officers' certificates as to certain matters; (d)
receipt by Security First of an opinion of FirstMerit's legal counsel regarding
certain customary legal matters; and (e) there shall not have been any change in
the financial condition, results of operations or business of FirstMerit and its
subsidiaries that would have a Material Adverse Effect on FirstMerit.
"Material Adverse Effect" on Security First or FirstMerit is defined in the
Merger Agreement to mean a material adverse effect (other than as a result of
changes (x) in banking laws or regulations of general applicability or
interpretations thereof by court or governmental entities, and (y) in generally
accepted accounting principles) on the respective condition (financial and
otherwise), results of operations, or business of Security First and its
subsidiaries, or FirstMerit and its subsidiaries, as the case may be, taken as a
whole, or on the ability of Security First or FirstMerit, as the case may be, to
consummate the transactions contemplated hereby. The effect of any action taken
by Security First at the written request of FirstMerit pursuant to the Merger
Agreement
24
<PAGE> 34
to establish specified additional reserves, accruals, charges, or expenses,
shall not be taken into consideration in determining whether any Material
Adverse Effect has occurred. See "TERMS OF MERGER -- Conduct of Security First's
Business Pending the Merger."
REGULATORY APPROVALS
Consummation of the Merger is subject to and conditioned upon receipt by
FirstMerit and Security First of all necessary and material regulatory
approvals. Approvals must be obtained from the Board of Governors of the Federal
Reserve System ("Federal Reserve") and the Office of the Comptroller of the
Currency ("OCC"), with a notice filing with the Office of Thrift Supervision
("OTS"). Applications for these approvals have all been filed, but to date
approvals have not been granted by any of the agencies. The Merger may not be
consummated until all of these regulatory approvals are received and until the
15th day after approval is received from the latest of the Federal Reserve or
OCC.
ACTIONS REQUIRED FOR REGULATORY APPROVAL
The Merger Agreement provides that each of FirstMerit and Security First
shall use its diligent efforts to resolve any objections asserted with respect
to the Merger by the Federal Reserve, the United States Department of Justice
("Department of Justice") or any other governmental entity (including, without
limitation, objections under any antitrust and banking laws). In the event a
suit is threatened or instituted challenging the Merger as violative of the
antitrust laws, the Merger Agreement requires each of FirstMerit and Security
First to use its diligent efforts to avoid the filing of, resist, or resolve
such suit. FirstMerit and Security First must use their diligent efforts to take
such action as may be required (a) by the Federal Reserve, the Department of
Justice or any other governmental entity in order to resolve such objections as
any of them may have to the Merger, or (b) by any federal or state court of the
United States, in any suit brought by a private party or governmental entity
challenging the Merger as violative of any antitrust laws, in order to avoid the
entry of, or to effect the dissolution of, any injunction, temporary restraining
order, or other order, which has the effect of preventing the consummation of
the Merger.
WAIVER OF CONDITIONS, AMENDMENT, OR TERMINATION OF THE MERGER AGREEMENT
WAIVER. The Merger Agreement provides that either FirstMerit or Security
First may extend the time for the performance of the obligations of the other,
waive any inaccuracies in the representations or warranties of the other party
contained in the Merger Agreement or in any document delivered pursuant thereto,
waive compliance with any of the conditions or covenants of the other party
contained in the Merger Agreement, or waive or modify performance of any of the
obligations of the other party under the Merger Agreement. Notwithstanding these
provisions, the Merger cannot be completed unless the approvals of the Merger by
the Federal Reserve and OCC, and certain other regulatory authorities are
obtained and unless the shareholders of Security First adopt the Merger
Agreement by the requisite affirmative vote. See "TERMS OF MERGER -- Regulatory
Approvals" and "ANNUAL MEETING OF SECURITY FIRST SHAREHOLDERS -- Vote Required."
AMENDMENT. The Merger Agreement may be amended, either before or after its
adoption by the shareholders of Security First, upon authorization by the
respective Boards of Directors of Security First and FirstMerit. Any such
amendment, however, made subsequent to the adoption of the Merger Agreement by
the shareholders of Security First may not (a) alter the amount or change the
form of the consideration contemplated by the Merger Agreement, (b) alter or
change any term of the articles of incorporation of the surviving corporation to
be affected by the Merger, or (c) alter or change the qualification of the
Merger as a tax-free reorganization under the provisions of Section 368 of the
Code.
TERMINATION. The Merger Agreement may be terminated at any time prior to
the Effective Time, whether before or after adoption of the Merger Agreement by
the shareholders of Security First, under any of the following circumstances:
(a) by mutual agreement of the parties by the vote of a majority of the Board of
Directors of each of FirstMerit and Security First; (b) by the vote of a
majority of the Board of Directors of either FirstMerit or Security First if the
Merger is not consummated on or before December 31, 1998, unless the failure to
consummate is related to the action or inaction of a regulatory agency and such
action or inaction is not related
25
<PAGE> 35
to either FirstMerit's or Security First's breach of their respective
obligations to file certain material with regulatory agencies, then on or before
March 31, 1999; (c) by the vote of a majority of the Board of Directors of
Security First if certain material conditions have not been met or waived by
Security First; (d) by the vote of a majority of the Board of Directors of
FirstMerit if certain material conditions have not been met or waived by
FirstMerit; (e) by the vote of a majority of the Board of Directors of either
FirstMerit or Security First if any regulatory agency has denied approval of the
Merger and such denial has become final and non-appealable; and (f) by the vote
of a majority of the Board of Directors of either FirstMerit or Security First
in the event of a material breach by the other party of any representation or
covenant, which breach is not cured, within 30 days after written notice.
EXPENSES. Generally, each party is responsible for the costs and expenses
incurred by it in connection with the transactions contemplated by the Merger
Agreement. If the Merger Agreement is terminated by Security First or FirstMerit
because of the material breach by the other party of any representation,
warranty, covenant, undertaking or restriction contained in the Merger
Agreement, and if the terminating party is not in material breach of any
representation, warranty, covenant, undertaking or restriction contained in the
Merger Agreement, then the breaching party shall pay all costs and expenses of
the terminating party, including but not limited to printing, mailing and
related fees, as well as fees for financial advisors, accountants and legal
counsel; provided, however, that if the Merger Agreement is terminated under
other circumstances, all costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby will be paid by the
party incurring such costs and expenses.
EFFECTIVE TIME
Upon satisfaction of all conditions under the Merger Agreement that have
not been waived, FirstMerit and Security First will file appropriate
certificates with the Secretary of State of the State of Ohio and the Secretary
of State of the State of Delaware. The Merger will become effective when such
filing has been made, whereupon FirstMerit will be the surviving corporation and
the separate existence of Security First will cease. The Effective Time will
occur as promptly as practicable after the date all of the conditions to the
Merger are satisfied or duly waived or at such other date as FirstMerit and
Security First may agree. FirstMerit and Security First currently anticipate
that the Merger will be completed during the third or fourth quarter of 1998,
although delays in obtaining the necessary regulatory approvals, which approvals
cannot be waived, could delay such completion of the Merger. See "TERMS OF
MERGER -- Regulatory Approvals" and "Actions Required for Regulatory Approvals."
SECURITY FIRST STOCK PURCHASE OPTION
GENERAL. Subsequent to the execution of the Merger Agreement, FirstMerit
and Security First entered into the Security First Stock Option. One effect of
the Security First Stock Option is to increase the likelihood that the Merger
will be consummated by making it both more difficult and more expensive for
another party to attempt to obtain control of or acquire Security First. The
terms of the Security First Stock Option provide that FirstMerit has an option
to purchase up to 19.9% of Security First Common Stock (without giving effect to
the issuance of any shares subject to the Security First Stock Option). The
purchase price is $22.25 per share. The number of shares and the purchase price
are subject to adjustment as described in the Security First Stock Option.
PURCHASE EVENTS; EXERCISE OF OPTION. The Security First Stock Option
provides that FirstMerit may exercise the Security First Stock Option upon the
occurrence of one or more of the following "Purchase Events:" (a) Security First
shall have proposed to enter into or enters into an agreement (other than with
FirstMerit) to effect (i) a merger, consolidation, or other business combination
involving Security First or any of its significant subsidiaries with or into any
person, (ii) a sale, lease, or other disposition of assets or earning power of
Security First representing 20% or more of the consolidated assets or earning
power of Security First to any person, or (iii) an issuance, sale, or other
disposition of securities representing 20% or more of the voting power of
Security First to any person (any of the foregoing being an "Acquisition
Transaction"); (b) any person, other than FirstMerit, commences or files a
registration statement with respect to a tender offer or exchange offer to
acquire shares of Security First Common Stock such that the person would
beneficially own 25% or more of the Security
26
<PAGE> 36
First Common Stock then outstanding; (c) any person, other than FirstMerit,
acquires beneficial ownership of 20% or more of the Security First Common Stock
then outstanding, or any group has been formed that beneficially owns 20% or
more of the Security First Common Stock then outstanding; or (d) the holders of
Security First Common Stock do not approve the Merger Agreement at the Security
First Annual Meeting, the Security First Annual Meeting is not held or is
canceled prior to termination of the Merger Agreement, or Security First's Board
of Directors withdraws or modifies in a manner adverse to FirstMerit the
recommendation of Security First's Board of Directors that Security First's
shareholders approve the Merger, in each case after any person (i) publicly
announces a bona fide proposal, or publicly discloses a bona fide intention to
make a bona fide proposal, to engage in an Acquisition Transaction, or (ii)
files an application or gives notice under the BHCA or the Change in Bank
Control Act of 1978 for approval to engage in an Acquisition Transaction.
Generally, the right to exercise the Security First Stock Option terminates
upon the earliest of (a) the Effective Time, (b) 12 months after the first
occurrence of a Purchase Event, and (c) termination of the Merger Agreement in
accordance with its terms before the occurrence of a Purchase Event.
In the event of any change in the Security First Common Stock by reason of
a stock dividend, split-up, recapitalization, combination, exchange of shares,
or similar transaction, the type and number of shares or securities subject to
the Security First Stock Option and the purchase price therefor will be adjusted
appropriately.
REPURCHASE OF OPTION. During the 12-month period following the first
occurrence of a Repurchase Event (as described below), FirstMerit will have the
right to require Security First to repurchase the Security First Stock Option
and all shares of Security First Common Stock purchased upon exercise of the
Security First Stock Option that are beneficially owned by FirstMerit at the
time the repurchase is requested. The aggregate repurchase price will be the sum
of (a) the aggregate purchase price paid by FirstMerit for all shares of
Security First Common Stock, if any, purchased upon exercise of the Security
First Stock Option that are beneficially held by FirstMerit at the time the
repurchase is requested, (b) the excess, if any, of the Applicable Price (as
described below) over the purchase price paid by FirstMerit for each share of
Security First Common Stock purchased upon exercise of the Security First Stock
Option that are beneficially held by FirstMerit at the time the repurchase is
requested, multiplied by the number of such shares, and (c) the excess, if any,
of the Applicable Price over the purchase price payable upon exercise of the
Security First Stock Option multiplied by the number of shares with respect to
which the Security First Stock Option has not been exercised.
"Repurchase Event" has the same meaning as "Acquisition Transaction,"
except that the percentage referred to in subparagraph (a)(ii) of the definition
of Acquisition Transaction above in the paragraph captioned "Purchase Events;
Exercise of Option" is 50%, and the percentage referred to in subparagraph
(a)(iii) of the definition is 40%. "Applicable Price" means the highest of (x)
the highest price per share to be paid by any person (other than FirstMerit) for
Security First Common Stock or the highest consideration per share to be
received by the holders of Security First Common Stock, in each case pursuant to
an agreement for a business combination with Security First that is entered into
after April 5, 1998 and before the repurchase is requested, (y) the highest
closing sales price per share of Security First Common Stock reported on
Nasdaq/NMS during the 60 business days before the repurchase is requested, and
(z) in the event of the sale by Security First of assets or earning power
aggregating more than 50% of the consolidated assets or earning power of
Security First and its subsidiaries to any person, the sum of the price paid for
such assets or earning power and the current value of the remaining assets of
Security First and its subsidiaries, divided by the number of shares of Security
First Common Stock outstanding at the time of the sale. Notwithstanding any
other provision, the consideration payable to FirstMerit shall be adjusted so
that the maximum payable to FirstMerit under this provision will not exceed the
aggregate purchase price paid by FirstMerit pursuant to the Security First Stock
Option, plus $7.5 million.
Except to the extent that FirstMerit has exercised its right to require
Security First to repurchase the Security First Stock Option and the Security
First Common Stock purchased upon exercise of the Security First Stock Option,
as described in the preceding paragraphs, during the six-month period beginning
12 months after the first occurrence of a Repurchase Event, Security First will
have the right to repurchase from FirstMerit all of the shares of Security First
Common Stock purchased upon exercise of the Security First Stock Option that are
beneficially owned by FirstMerit at the time the repurchase is requested. The
aggregate price will be the greater
27
<PAGE> 37
of (a) 110% of the average closing sales price per share of Security First
Common Stock reported on Nasdaq/ NMS for the ten business days before the
repurchase is requested and (b) the sum of (x) the purchase price per share paid
by FirstMerit for such shares and (y) FirstMerit's "pre-tax per share carrying
cost" (as defined in the Security First Stock Option) for such shares,
multiplied in either case by the number of shares being repurchased.
REGISTRATION RIGHTS; RIGHT OF FIRST REFUSAL. Upon request by FirstMerit
within the 18-month period following the first exercise of the Security First
Stock Option (or later in the event of a delay in obtaining certain regulatory
approvals), Security First will prepare and file a registration statement with
the Commission if such registration is necessary to permit the sale or other
disposition of the shares of Security First Common Stock purchased upon exercise
of the Security First Stock Option. Security First is also required to permit
FirstMerit to include the shares in certain registration statements filed by
Security First with the Commission during the periods referred to in the prior
sentence.
At any time after the first occurrence of a Purchase Event and until the
later of (a) 24 months following the first exercise of the Security First Stock
Option and (b) termination of the Security First Stock Option, Security First
will have a right of first refusal with respect to the sale or other disposition
of shares of Security First Common Stock purchased by FirstMerit upon exercise
of the Security First Stock Option. This right of first refusal will not,
however, apply to (x) any disposition in which the proposed transferee will
receive not more than 2% of the outstanding Security First Common Stock, (y) any
registered public offering in which steps are taken to reasonably ensure that no
purchaser will acquire more than 2% of the outstanding Security First Common
Stock, and (z) any transfer to a wholly owned subsidiary of FirstMerit that
agrees to be bound by the terms of the Security First Stock Option.
TERMINATION OF OPTION. FirstMerit may not exercise the Security First
Stock Option if, at the time of exercise, it is in material breach of the Merger
Agreement. Moreover, Security First's obligations under the Security First Stock
Option will terminate and the Security First Stock Option will no longer be
exercisable if the Merger Agreement is terminated and FirstMerit is in material
breach of the Merger Agreement when it is terminated; provided that, for this
purpose, if the Merger Agreement is to be terminated by FirstMerit, Security
First must upon request notify FirstMerit if a material breach by FirstMerit
exists and, if the Merger Agreement is terminated by Security First and all of
the material breaches by FirstMerit are curable, Security First must provide
FirstMerit with notice of the material breaches and an opportunity to cure.
ADDITIONAL PROVISIONS. Certain rights and obligations of Security First
and FirstMerit under the Security First Stock Option are subject to receipt of
required regulatory approvals. Among others things, regulatory approvals are
required for the acquisition by FirstMerit of more than 5% of the outstanding
Security First Common Stock.
INTERESTS OF CERTAIN PERSONS IN MERGER
GENERALLY. Certain members of Security First's management and the Security
First Board of Directors may be deemed to have interests in the Merger in
addition to their interests as shareholders of Security First generally. The
Security First Board of Directors was aware of these interests and considered
them in adopting the Merger Agreement. Set forth below are descriptions of the
material interests of the directors and certain executive officers of Security
First in the Merger in addition to their interests as shareholders of Security
First generally.
POST-MERGER DIRECTORS AND OFFICERS. Charles F. Valentine, Chairman of the
Board and Chief Executive Officer of Security First will be appointed, promptly
after the Effective Time, as a member of the Board of Directors of FirstMerit
for a term to expire in the year 2001. In addition, Mr. Valentine and Austin J.
Mulhern, President and Chief Operating Officer of Security First, will become
officers of FirstMerit and FirstMerit Bank, and Jeffrey J. Calabrese, Vice
President and Secretary of Security First, will become an officer of FirstMerit
Bank. See " -- New Employment Agreements" below. Mr. John R. Cochran, the
Chairman and Chief Executive Officer of FirstMerit, will continue as the
Chairman and Chief Executive Officer of FirstMerit. The persons currently
serving as directors of FirstMerit will continue to serve on the Board of
Directors of FirstMerit, and persons currently serving as executive officers of
FirstMerit will continue to serve in such capacities.
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<PAGE> 38
EXISTING EMPLOYMENT AGREEMENTS. Security Federal maintains employment
agreements with Messrs. Valentine, Mulhern, Calabrese and Mary H. Crotty, Vice
President and Chief Financial Officer of Security First. First Federal maintains
an employment agreement with Louis J. Sorboro, President of First Federal. These
employment agreements provide for, among other things, an annual base salary in
an amount not less than such employee's current salary and a rolling three year
term (with annual extensions subject to an annual performance review and
approval by the Security Federal or First Federal Board of Directors, as the
case may be). The existing employment agreements provide for payment to the
employee of his or her salary for the remainder of the term of the agreement,
plus up to 299% of his or her "base compensation" (five-year average) under
certain circumstances in the event of a change in control of Security Federal or
First Federal. The existing employment agreements also entitle such employees to
continuing health benefits for the terms of their agreements in the event of
termination other than for cause.
Consummation of the Merger will constitute a change in control for purposes
of the existing employment agreements. Pursuant to the Merger Agreement,
FirstMerit has agreed (i) to enter into new employment agreements with Messrs.
Valentine, Mulhern and Calabrese as of the Effective Time, conditioned upon the
cancellation of their current employment agreements with Security First and (ii)
that Security First will, as of the Effective Time, pay to Mr. Sorboro $415,000
and to Ms. Crotty $254,000 due to them under their existing employment
agreements in connection with a change in control. Mr. Sorboro and Ms. Crotty
will also receive continued health benefits during the remaining terms of their
prior employment agreements following the Effective Time. See "Election of
Directors -- Employment Agreements" for additional information on the existing
employment agreements.
NEW EMPLOYMENT AGREEMENTS. FirstMerit will enter into new employment
agreements with Messrs. Valentine, Mulhern and Calabrese at the Effective Time.
These employment agreements are summarized below.
Mr. Valentine, pursuant to his employment agreement with FirstMerit, will
serve as Executive Vice President of FirstMerit and President of the
Construction Financing Division of FirstMerit Bank. Mr. Valentine's term of
employment will be for three years. Mr. Valentine will receive an annual base
salary of $219,000 and a grant of a non-qualified stock option to purchase
22,500 shares of FirstMerit common stock at the fair market value of the
underlying common stock on the date of grant. The option will vest over three
years (5,000 after the first year, 5,000 after the second year and 12,500 after
the third year); however, vesting will accelerate if Mr. Valentine is terminated
for any reason other than voluntary resignation (except for good reason) or
termination for cause. Mr. Valentine will be eligible to receive an annual cash
bonus of 40% to 70% of his base salary in accordance with FirstMerit's Incentive
Compensation Plan. FirstMerit has also agreed to reimburse Mr. Valentine for
certain expenses and to pay for certain perquisites generally provided to other
similarly situated employees of FirstMerit. Mr. Valentine's employment agreement
with FirstMerit contains provisions regarding non-competition and maintenance of
trade secrets and confidential information not covered in his employment
agreement with Security First. In the event Mr. Valentine's employment with
FirstMerit is terminated for any reason prior to the expiration of the term of
his employment agreement, FirstMerit will pay him a lump sum cash payment of
$985,000. As an inducement to enter into the new employment agreement with
FirstMerit, FirstMerit will pay Mr. Valentine a $150,000 signing bonus payable
upon execution of his new employment agreement.
Mr. Valentine will participate in FirstMerit's retirement benefit plans
typically available to similarly situated FirstMerit employees, including
FirstMerit's pension plan, employees' salary savings retirement plan, unfunded
supplemental benefits plan and supplemental executive retirement plan. Pursuant
to the membership agreement entered into between FirstMerit and Mr. Valentine
under the supplemental executive retirement plan (the "SERP"), if Mr. Valentine
maintains employment with FirstMerit for the term of his employment agreement he
will receive a lump sum cash payment in the amount of the greater of (i) the
Actuarial Equivalent of the Monthly Retirement Income (as such terms are defined
in the SERP), or (ii) $1,426,769.
Mr. Valentine's employment agreement with FirstMerit also contains a change
in control provision. This provision provides generally that after the first
anniversary of his employment agreement but before the expiration of such
agreement, if Mr. Valentine's employment is terminated following a change in
control of FirstMerit, other than as a result of voluntarily resignation (except
for good reason), termination for cause, or
29
<PAGE> 39
death, he will receive an amount equal to 200% of his "base amount" as
determined under Section 280G of the Internal Revenue Code of 1986, as amended,
subject to certain adjustments.
Mr. Mulhern, pursuant to his employment agreement with FirstMerit, will
serve as Senior Vice President of FirstMerit and Senior Vice President of
FirstMerit Bank. Mr. Mulhern's term of employment will be for three years. Mr.
Mulhern will receive an annual base salary of $176,300 and a grant of a
non-qualified stock option to purchase 15,000 shares of FirstMerit common stock
at the fair market value of the underlying common stock on the date of grant.
The option will vest over three years (3,334 after the first year, 3,333 after
the second year and 8,333 after the third year); however, vesting will
accelerate if Mr. Mulhern is terminated for any reason other than voluntary
resignation (except for good reason) or termination for cause. Mr. Mulhern will
be eligible to receive an annual cash bonus of 30% to 60% of his base salary in
accordance with FirstMerit's Incentive Compensation Plan. FirstMerit has also
agreed to reimburse Mr. Mulhern for certain expenses and to pay for certain
perquisites generally provided to other similarly situated employees of
FirstMerit. Mr. Mulhern's employment agreement with FirstMerit also contains
provisions regarding non-competition and maintenance of trade secrets and
confidential information not covered in his employment agreement with Security
First. In the event Mr. Mulhern's employment with FirstMerit is terminated for
any reason prior to the expiration of the term of his employment agreement,
FirstMerit will pay him a lump sum cash payment of $661,000.
Mr. Mulhern will participate in FirstMerit's retirement benefit plans
typically available to similarly situated FirstMerit employees, including
FirstMerit's pension plan, employees' salary savings retirement plan, unfunded
supplemental benefits plan and SERP. Pursuant to the membership agreement
entered into between FirstMerit and Mr. Mulhern under the SERP, if Mr. Mulhern
maintains employment with FirstMerit for the term of his employment agreement he
will receive a lump sum cash payment in the amount of the greater of (i) the
Actuarial Equivalent of the Monthly Retirement Income (as such terms are defined
in the SERP), or (ii) $1,561,804.
Mr. Mulhern's employment agreement with FirstMerit contains a change in
control provision identical to the one described above for Mr. Valentine.
Mr. Calabrese, pursuant to his employment agreement with FirstMerit, will
serve as Vice President of the Construction Financing Division of FirstMerit
Bank. Mr. Calabrese's term of employment will be for three years. Mr. Calabrese
will receive an annual base salary of $85,700 and a grant of a non-qualified
stock option to purchase 20,000 shares of FirstMerit common stock at the fair
market value of the underlying common stock on the date of grant. The option
will vest over three years (2,000 after the first year, 3,000 after the second
year and 15,000 after the third year); however, vesting will accelerate if Mr.
Calabrese is terminated for any reason other than voluntary resignation (except
for good reason) or termination for cause. Mr. Calabrese will be eligible to
receive an annual cash bonus of 20% to 40% of his base salary in accordance with
FirstMerit's Incentive Compensation Plan. FirstMerit has also agreed to
reimburse Mr. Calabrese for certain expenses and to pay for certain perquisites
generally provided to other similarly situated employees of FirstMerit. Mr.
Calabrese's employment agreement with FirstMerit also contains provisions
regarding non-competition and maintenance of trade secrets and confidential
information not covered in his employment agreement with Security First. In the
event that Mr. Calabrese's employment with FirstMerit is terminated for any
reason prior to the expiration of the term of his employment agreement,
FirstMerit will pay him a lump sum cash payment of $296,000. As an inducement to
enter into the new employment agreement with FirstMerit, FirstMerit will pay Mr.
Calabrese a $200,000 signing bonus payable upon execution of his new employment
agreement.
Mr. Calabrese will participate in FirstMerit's retirement benefit plans
typically available to similarly situated FirstMerit employees, including
FirstMerit's pension plan and employees' salary savings retirement plan.
STOCK OPTION PLAN. The Security First outstanding options under its stock
option plan will be assumed by FirstMerit. All terms and conditions of the
Security First stock options will remain unchanged, except that from and after
the Effective Time (i) FirstMerit and its compensation committee shall be
substituted for Security First and its Stock Option Committee, (ii) each such
Security First stock option may be exercised only for FirstMerit Common Stock,
(iii) the number of shares subject to Security First stock options will be
adjusted to allow the holder, upon exercise, to receive shares of FirstMerit
Common Stock calculated by multiplying the Exchange Ratio (.8855) by the number
of shares of Security First Common Stock subject to the Security First stock
options,
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<PAGE> 40
and (iv) the exercise price of each Security First stock option will be adjusted
by dividing the exercise price per share by the Exchange Ratio.
ADVISORY BOARD. Pursuant to the Merger Agreement, FirstMerit has agreed to
establish a non-compensated advisory board for the Kent, Ohio market and to
appoint each holder of an unvested option or restricted stock, which persons
include, among others, Mr. Sorboro and director Myers, to such advisory board
for the purpose of allowing such options and restricted stock to vest in
accordance with their terms.
INDEMNIFICATION. The Merger Agreement provides that, except as may be
limited by applicable law, FirstMerit agrees to honor, for a period of six years
after the Effective Time, the terms of indemnification and the limitations on
liability which are provided Security First's and Associations' directors,
officers and employees, for matters occurring prior to the Effective Time.
FirstMerit has also agreed to maintain in effect, for a period of up to three
years after the Effective Time, the current insurance policies maintained by
Security First (or substitute policies with substantially the same coverage and
terms) covering directors' and officers' liability with respect to claims which
arise from factors or events which occurred before the Effective Time, except
that FirstMerit's obligation for the second and subsequent years following the
Effective Time will be based upon its ability to obtain such insurance at a
commercially reasonable cost.
Indemnification of directors, officers and employees of Security First and
the Associations for activities following the Effective Time will be provided to
the same extent it is provided to other persons working in similar capacities
for FirstMerit.
EMPLOYEES OF SECURITY FIRST
Employees of Security First, other than the persons who are parties to the
agreements, who do not become employees of FirstMerit or its subsidiaries, or
who become employees of FirstMerit or its subsidiaries but whose employment is
terminated during the 180-day period after the Effective Time (except if such
termination is for cause), will be entitled to receive separation monies under
FirstMerit's standard separation plan in consideration for a standard release of
FirstMerit regarding matters related to employment and termination of
employment. The separation monies are generally calculated as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE NON-EXEMPT EXEMPT
---------------- ---------- ------
<S> <C> <C>
Up to one year continuous service............ 2 Weeks Pay 4 Weeks Pay
One year to 5 years continuous service....... 4 Weeks Pay 8 Weeks Pay
Five years continuous service or more........ 1 Week Pay per year of 2 Weeks Pay per year of
service maximum of 26 service; maximum of 26
weeks weeks
</TABLE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
MARKET PRICES
FirstMerit Common Stock and Security First Common Stock are included for
quotation on Nasdaq/NMS, under the symbols "FMER" and "SFSL," respectively. As
of the June 17, 1998, there were approximately 65,140,577 shares of FirstMerit
Common Stock outstanding and held by approximately 7,747 holders of record, and
7,863,587 shares of Security First Common Stock outstanding and held by
approximately 1,158 holders of
31
<PAGE> 41
record. The following table sets forth the high and low closing sale prices of
the FirstMerit Common Stock and Security First Common Stock for the periods
indicated.
<TABLE>
<CAPTION>
FIRSTMERIT SECURITY FIRST
SALE PRICES(1) SALE PRICES(2)
---------------- ------------------
HIGH LOW HIGH LOW
------ ------ ------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter............................. $16.25 $13.88 $ 10.00 $ 7.67
Second Quarter............................ 16.00 15.00 9.50 7.67
Third Quarter............................. 16.00 14.13 9.67 8.83
Fourth Quarter............................ 18.00 15.63 12.09 9.17
YEAR ENDED DECEMBER 31, 1997:
First Quarter............................. 21.38 17.38 12.83 11.67
Second Quarter............................ 25.25 19.25 15.00 12.00
Third Quarter............................. 27.00 22.63 19.25 14.50
Fourth Quarter............................ 30.75 24.88 21.50 17.38
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................. 34.38 25.88 24.00 18.50
Second Quarter (through June 18, 1998).... 33.25 28.00 27.875 22.375
</TABLE>
- ---------------
(1) Adjusted to reflect 2-for-1 stock split paid in the form of a 100% stock
dividend completed in September 1997.
(2) Adjusted to reflect the 3-for-2 stock split paid in the form of a 50% stock
dividend in July 1997.
DIVIDENDS
The following table sets forth dividends declared per share of FirstMerit
Common Stock and Security First Common Stock, respectively, for the periods
indicated. The ability of either FirstMerit or Security First to pay dividends
to its respective shareholders is subject to certain restrictions. See
"REGULATORY MATTERS."
<TABLE>
<CAPTION>
FIRSTMERIT SECURITY FIRST
DIVIDENDS(1) DIVIDENDS(2)
------------ --------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter............................................ $0.135 $0.06
Second Quarter........................................... 0.135 0.07
Third Quarter............................................ 0.135 0.07
Fourth Quarter........................................... 0.145 0.07
YEAR ENDED DECEMBER 31, 1997:
First Quarter............................................ $0.145 $0.07
Second Quarter........................................... 0.145 0.08
Third Quarter............................................ 0.16 0.08
Fourth Quarter........................................... 0.16 0.08
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................ $ 0.16 $0.08
Second Quarter (through June 18, 1998)................... 0.16 0.09
</TABLE>
- ---------------
(1) Adjusted to reflect 2-for-1 stock split paid in the form of a 100% stock
dividend in September 1997.
(2) Adjusted to reflect the 3-for-2 stock split paid in the form of a 50% stock
dividend in July 1997.
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<PAGE> 42
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the anticipated material federal
income tax consequences of the Merger of Security First with and into FirstMerit
to Security First and to the existing shareholders of Security First, but does
not purport to be a complete analysis of all the potential tax effects of the
Merger. The discussion is based upon an opinion of FirstMerit's legal counsel,
which is based upon the Code, Treasury Regulations, IRS rulings and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial, or administrative action. Any such change may or may not
be applied retroactively. No discussion is rendered with respect to the effect,
if any, of any pending or future legislation or administrative regulation or
ruling which may have a bearing on any of the foregoing.
There is no undertaking or requirement to provide notice of changes which
may occur after the date hereof, including any change in the law, whether by
legislative or regulatory action, judicial interpretation or otherwise, or of
any change of facts as they presently exist. No information is provided herein
with respect to foreign, state or local tax laws or estate and gift tax
considerations, or the federal or state income tax considerations that may
affect the treatment of a shareholder who acquired his Security First Common
Stock pursuant to an employee stock option, under special circumstances or is
subject to special rules (such as foreign persons, financial institutions,
tax-exempt organizations, retirement plans, dealers in securities or insurance
companies).
No ruling has been or will be requested from the IRS with respect to the
federal income tax consequences of the Merger. The opinion of counsel only
represents counsel's best judgment and is not binding on the IRS or the courts.
Accordingly, no assurance can be given that the IRS or a court (if a matter is
litigated), will agree with counsel's conclusions, that the IRS will not
challenge the tax treatment of the Merger, or that such a challenge if made
(whether or not it is litigated), will not be successful.
IT IS IMPORTANT THAT EACH SHAREHOLDER OF SECURITY FIRST CONSULT THEIR OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER.
FirstMerit has received an opinion of Brouse & McDowell, L.P.A., dated the
date of this Prospectus and Proxy Statement, to the effect that, under currently
applicable law, the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code and,
accordingly, for United States federal income tax purposes:
(i) no gain or loss will be recognized by FirstMerit or Security First
as a result of the Merger;
(ii) no gain or loss will be recognized by the shareholders of
Security First who exchange their shares of Security First Common Stock
solely for shares of FirstMerit Common Stock pursuant to the Merger (except
with respect to cash received in lieu of a fractional share interest in
FirstMerit Common Stock);
(iii) the tax basis of shares of FirstMerit Common Stock received by
shareholders of Security First who exchange all of their shares of Security
First Common Stock solely for shares of FirstMerit Common Stock in the
Merger will be the same as the tax basis of the shares of Security First
Common Stock surrendered in exchange therefor (reduced by any amount
allocable to a fractional share interest for which cash is received); and
(iv) the holding period of the shares of FirstMerit Common Stock
received in the Merger will include the period during which the shares of
Security First Common Stock surrendered in exchange therefor were held,
provided such shares of Security First Common Stock were held as capital
assets at the Effective Time.
The opinion of Brouse & McDowell, L.P.A. described above is based on facts,
representations and assumptions set forth in such opinion, and certificates of
officers of Security First and FirstMerit.
The obligations of the parties to consummate the Merger are conditioned
upon the receipt by FirstMerit of an opinion of Brouse & McDowell, L.P.A., dated
the day of the Effective Time, substantially to the foregoing effect. Such
opinion will be based upon facts, representations and assumptions set forth in
such opinion which are consistent with the state of facts existing at the
Effective Time. In rendering such opinion, Brouse & McDowell, L.P.A. may require
and rely upon representations contained in certificates of officers of Security
First, FirstMerit and others.
33
<PAGE> 43
Cash received by a holder of Security First Common Stock in lieu of a
fractional share interest in FirstMerit Common Stock will be treated as received
in redemption of such fractional share interest, and a Security First
shareholder should generally recognize capital gain or loss for federal income
tax purposes measured by the difference between the amount of cash received and
the portion of the tax basis of the share of Security First Common Stock
allocable to such fractional share interest. Such gain or loss should be a
long-term capital gain or loss if the holding period for such share of Security
First Common Stock is greater than one year at the Effective Time. In the case
of an individual Security First shareholder, such capital gain will be taxed at
a maximum rate of 28%, if such Security First shareholder's holding period is
more than one year but not more than 18 months, and at a maximum rate of 20% if
such holding period is more than 18 months. The holding period of a share of
FirstMerit Common Stock received in the Merger (including a fractional share
interest deemed received and redeemed as described above) will include the
holder's holding period in the Security First Common Stock surrendered in
exchange therefor.
THE FOREGOING IS A SUMMARY OF THE ANTICIPATED FEDERAL INCOME TAX
CONSEQUENCES OF THE PROPOSED MERGER UNDER THE CODE AND IS FOR GENERAL
INFORMATION ONLY. IT DOES NOT INCLUDE CONSEQUENCES OF STATE, LOCAL OR OTHER TAX
LAWS OR SPECIAL CONSEQUENCES TO PARTICULAR SHAREHOLDERS HAVING SPECIAL
SITUATIONS. SHAREHOLDERS OF SECURITY FIRST SHOULD CONSULT THEIR OWN TAX ADVISORS
REGARDING SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE
APPLICATION AND EFFECT OF FEDERAL, STATE AND LOCAL TAX LAWS AND TAX CONSEQUENCES
OF SUBSEQUENT SALES OF FIRSTMERIT COMMON STOCK.
ACCOUNTING TREATMENT OF MERGER
The Merger, if completed as proposed, will qualify as a
pooling-of-interests for accounting and financial reporting purposes. Under the
pooling-of-interests method of accounting, the historical basis of the assets
and liabilities of FirstMerit and Security First will be retroactively combined
for the entire fiscal period in which the Merger occurs and for all periods
prior to the Merger at historically recorded amounts. See "PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)." In order to qualify for the
pooling-of-interests method of accounting, FirstMerit will issue approximately
1.1 million shares of FirstMerit Common Stock, prior to the Effective Time to
cure tainted shares.
The obligations of FirstMerit and Security First to effect the Merger are
conditioned, among other things, upon their receipt from Coopers & Lybrand LLP
of a letter, dated the day of the Effective Time, to the effect that, for
financial accounting purposes, the Merger qualifies for pooling-of-interests
accounting treatment under generally accepted accounting principles if
consummated in accordance with the Agreement. See "MERGER -- Conditions to the
Merger -- Conditions to Each Party's Obligations." The Merger Agreement further
provides that neither FirstMerit nor Security First shall intentionally take or
cause to be taken any action, whether before or after the Effective Time, which
would disqualify the Merger as a pooling-of-interests for accounting purposes.
RESALES OF FIRSTMERIT COMMON STOCK RECEIVED IN MERGER
The shares of FirstMerit Common Stock issued to Security First shareholders
pursuant to the Agreement will have been registered under the 1933 Act, but such
registration does not cover resales by shareholders of Security First who may be
deemed to be "affiliates" of Security First, as that term is used in paragraphs
(c) and (d) of Rule 145 promulgated under the 1933 Act. In addition, there are
limitations on resales by affiliates of Security First necessary in order for
the Merger to qualify for pooling-of-interests accounting treatment. Pursuant to
the Agreement, prior to the Effective Time, Security First shall identify to
FirstMerit all persons who were, at the time of the Annual Meeting, possible
"affiliates" of Security First. The Merger Agreement further provides that
Security First shall use reasonable efforts to obtain from each person it
identifies to FirstMerit as a possible "affiliate" of Security First a
commitment that such person will not sell, pledge, transfer or otherwise dispose
of any shares of Security First Common Stock held by such "affiliate" or shares
of FirstMerit Common Stock received by such "affiliate" in the Merger: (a) in
the case of FirstMerit Common Stock only, except in compliance with the
applicable provisions of the 1933 Act and the rules and regulations promulgated
thereunder,
34
<PAGE> 44
and (b) during the periods during which any such sale, pledge, transfer or other
disposition would, under generally accepted accounting principles or the rules,
regulations or interpretations of the Commission, disqualify the Merger for
pooling-of-interests treatment. Commission guidelines indicate that the
pooling-of-interests method of accounting generally will not be challenged on
the basis of sales by "affiliates" of the acquiring or acquired company if such
"affiliates" do not dispose of any of the shares of the acquired or acquired
company they owned prior to the consummation of a merger or shares of the
acquiring corporation they receive in connection with a merger during the period
beginning 30 days before the merger and ending when financial results covering
at least 30 days of post-merger operations of the combined entity have been
published.
This Prospectus and Proxy Statement does not cover any reoffers or resales
of FirstMerit Common Stock received by affiliates of Security First.
FIRSTMERIT'S ARTICLES OF INCORPORATION AND CODE OF REGULATIONS
The Articles of FirstMerit in effect immediately prior to the Merger will
be the articles of incorporation of FirstMerit as the surviving corporation
after the Merger. The Regulations of FirstMerit in effect immediately prior to
the Merger will be the regulations of FirstMerit after the Merger.
NO RIGHTS OF APPRAISAL
Section 262(b)(1) of the DGCL provides that no appraisal rights under the
DGCL shall be available (unless the Security First Certificate otherwise
provides, which it does not) for the holders of shares of any class or series of
stock which, at the record date fixed to determine the stockholders entitled to
receive notice of and vote at the meeting of stockholders to act upon an
agreement of merger, were either listed on a national securities exchange or
held of record by more than 2,000 stockholders (as long as the stockholders
receive in the merger shares of the surviving corporation or of any other
corporation the shares of which are listed on a national securities exchange or
held of record by more than 2,000 stockholders). Because Security First Common
Stock is listed on Nasdaq/ NMS and is held of record by more than 2,000
stockholders, and FirstMerit Common Stock is listed on a national securities
exchange and is held of record by more than 2,000 stockholders, stockholders of
Security First are not entitled to appraisal rights in connection with the
Merger.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma condensed combined financial statements
are presented assuming the Merger will be accounted for using the
pooling-of-interests method. Historical financial data of FirstMerit and
Security First included in the following data have been taken from the financial
statements and other financial information of FirstMerit and Security First
incorporated herein by reference. The pro forma condensed combined balance sheet
includes the historical accounts of FirstMerit and Security First as of March
31, 1998 and the related pro forma condensed combined statements of income for
the three months ended March 31, 1998 and 1997 include the historical accounts
of FirstMerit and Security First for the periods indicated. The acquisition of
CoBancorp by FirstMerit on May 22, 1998 was accounted for as a purchase and its
results are included as of March 31, 1998, for the three months ended March 31,
1998 and the year ended December 31, 1997. The pro forma condensed combined
consolidated statements of income for years ended in 1997, 1996 and 1995 include
the financial data of FirstMerit for its fiscal years ended December 31 and the
financial data of Security First for its fiscal years ended March 31. The
unaudited pro forma combined financial data do not reflect expenses expected to
be incurred by FirstMerit and Security First in connection with the Merger.
THE FOLLOWING PRO FORMA INFORMATION IS NOT NECESSARILY INDICATIVE OF THE
RESULTS WHICH ACTUALLY WOULD HAVE BEEN OBTAINED IF THE MERGER HAD BEEN
CONSUMMATED IN THE PAST OR WHICH MAY BE OBTAINED IN THE FUTURE.
35
<PAGE> 45
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
<TABLE>
<CAPTION>
(FMER) (COBI) FMER/COBI
FIRSTMERIT COBANCORP PRO FORMA PRO FORMA SECURITY FIRST PRO FORMA
CORPORATION INC. ADJUSTMENTS NOTE COMBINED CORP. ADJUSTMENTS COMBINED
----------- --------- ----------- ---- --------- -------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment
securities.......... $ 1,166,734 144,106 362 2D 1,311,202 19,765 1,330,967
Federal funds sold..... 100 22,700 22,800 2,700 25,500
Net loans.............. 3,802,974 407,558 (10,752) 2E 4,199,780 627,460 4,827,240
Cash and due from
banks............... 179,437 29,850 ( 57,261) 2 152,026 10,699 162,725
Premises and equipment,
net................. 100,560 19,150 (9,540) 2G 110,170 8.534 118,704
Accrued interest and
other assets........ 117,379 20,428 124,419 2H 262,226 16,324 278,550
----------- ------- -------- --------- ------- ------- ---------
$ 5,367,184 643,792 47,228 6,058,204 685,482 0 6,743,686
=========== ======= ======== ========= ======= ======= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Deposits............... $ 4,246,131 559,959 (9,806) 2F 4,796,284 508,157 5,304,441
Securities sold under
agreement to
repurchase and other
borrowings.......... 517,956 16,874 534,830 98,267 633,097
Accrued taxes, expenses
and other
liabilities......... 87,716 7,160 94,876 14,379 109,255
----------- ------- -------- --------- ------- ------- ---------
4,851,803 583,993 (9,806) 5,425,990 620,803 6,046,793
Common stock........... 110,197 6,738 (6,738) 1 110,197 76 16,021 126,294
Treasury stock......... (133,609) 116,833 2 (16,776) (1,671) (18,447)
Capital surplus........ 18,554 (18,554) 1 16,021 (16,021)
Net unrealized gains on
available for sale
securities.......... 1,879 1,185 (1,185) 1,879 48 1,927
Retained earnings...... 536,914 33,322 (33,322) 536,914 50,205 587,119
----------- ------- -------- --------- ------- ------- ---------
515,381 59,799 59,799 632,214 64,679 0 696,893
----------- ------- -------- --------- ------- ------- ---------
$ 5,367,184 643,792 47,228 6,058,204 685,482 0 6,743,686
=========== ======= ======== ========= ======= ======= =========
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
36
<PAGE> 46
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
(FMER) (COBI) FMER & COBI SECURITY
FIRSTMERIT COBANCORP PRO FORMA PRO FORMA FIRST PRO FORMA
CORPORATION INC. ADJUSTMENTS NOTE(S) COMBINED CORP. COMBINED
----------- --------- ----------- ------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........... $ 102,149 11,942 (30) 3 114,445 14,259 128,704
384 3
Interest expense.......... 38,049 4,647 817 3 44,201 7,447 51,648
688 3
---------- --------- ------ ---------- --------- ----------
Net interest income..... 64,100 7,295 (1,151) 70,244 6,812 77,056
Provision for loan
losses.................. 5,463 75 5,538 84 5,622
---------- --------- ------ ---------- --------- ----------
Net interest income
after provision for
loan losses........... 58,637 7,220 (1,151) 64,706 6,728 71,434
Other income.............. 22,105 1,676 23,781 461 24,242
Net securities gains...... 1,548 16 1,564 1,564
Other expenses............ 50,784 7,025 239 3 59,601 3,400 63,001
1,553 3
---------- --------- ------ ---------- --------- ----------
Income before income
taxes & extraordinary
item.................. 31,506 1,887 (2,943) 30,451 3,789 34,240
---------- --------- ------ ---------- --------- ----------
Federal income taxes...... 9,541 415 (1,030) 8,926 1,329 10,255
Extraordinary
item -- merger costs,
net of tax.............. 164 164 164
---------- --------- ------ ---------- --------- ----------
Net income.............. $ 21,965 1,308 (1,913) 21,360 2,460 23,820
========== ========= ====== ========== ========= ==========
Per share data:
Basic EPS................. $ 0.36 0.38 0.33 0.33 0.33
Diluted EPS............... $ 0.35 0.37 0.32 0.29 0.32
Average common shares
outstanding -- basic.... 61,731,556 3,481,800 65,597,050 7,546,978 72,279,899
Average common shares
outstanding -- diluted... 62,576,989 3,535,828 66,502,465 8,653,919 74,165,511
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
37
<PAGE> 47
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
(FMER) (COBI) FMER & COBI SECURITY
FIRSTMERIT COBANCORP PRO FORMA PRO FORMA FIRST PRO FORMA
CORPORATION INC. ADJUSTMENTS NOTE(S) COMBINED CORP. COMBINED
----------- ---------- ----------- ------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.......... $ 98,562 11,137 (30) 3 110,053 12,874 122,927
384 3
Interest expense......... 36,058 4,239 817 3 41,802 6,795 48,597
688 3
---------- ---------- ------ ---------- --------- ----------
Net interest income.... 62,504 6,898 (1,151) 68,251 6,079 74,330
Provision for loan
losses................. 4,161 75 4,236 59 4,295
---------- ---------- ------ ---------- --------- ----------
Net interest income
after provision for
loan losses.......... 58,343 6,823 (1,151) 64,015 6,020 70,035
Other income............. 19,113 1,486 20,599 402 21,001
Net securities gains..... 463 (13) 450 450
Other expenses........... 47,747 6,728 239 3 56,267 3,216 59,483
1,553 3
---------- ---------- ------ ---------- --------- ----------
Income before income
taxes................ 30,172 1,568 (2,943) 28,797 3,206 32,003
---------- ---------- ------ ---------- --------- ----------
Federal income taxes..... 9,939 281 (1,030) 9,190 1,056 10,246
---------- ---------- ------ ---------- --------- ----------
Net income............. $ 20,233 1,287 (1,913) 19,607 2,150 21,757
========== ========== ====== ========== ========= ==========
Per share data:
Basic EPS................ $ 0.32 0.37 0.29 0.29 0.29
Diluted EPS.............. $ 0.32 0.37 0.29 0.26 0.29
Average common shares
outstanding -- basic... 63,695,444 3,453,824 67,529,880 7,478,418 74,152,019
Average common shares
outstanding -- diluted... 64,222,751 3,480,023 68,086,272 8,743,175 75,828,358
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
38
<PAGE> 48
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE YEAR ENDED 1997
<TABLE>
<CAPTION>
(FMER) (COBI) FMER/COBI SECURITY
FIRSTMERIT COBANCORP PRO FORMA PRO FORMA FIRST PRO FORMA
CORPORATION INC. ADJUSTMENTS NOTE(S) COMBINED CORP. COMBINED
----------- --------- ----------- -------- ---------- -------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........ $ 407,825 48,141 (121) 3 457,381 55,715 513,096
1,536 3
Interest expense....... 152,369 19,087 3,269 3 177,475 29,566 207,041
2,750 3
----------- --------- ------- ---------- --------- ----------
Net interest
income............. 255,456 29,054 (4,604) 279,906 26,149 306,055
Provision for loan
losses............... 21,593 225 21,818 310 22,128
----------- --------- ------- ---------- --------- ----------
Net interest income
after provision for
loan losses.......... 233,863 28,829 (4,604) 258,088 25,839 283,927
Other income........... 81,621 7,709 89,330 1,758 91,088
Net securities gains
(losses)............. 1,957 494 2,451 2,451
Other expenses......... 191,080 29,941 954 3 228,187 13,306 241,493
6,212 3
----------- --------- ------- ---------- --------- ----------
Income before taxes &
extraordinary
item............... 126,361 7,091 (11,770) 121,682 14,291 135,973
Federal income taxes... 39,998 1,567 (4,120) 37,445 4,980 42,425
----------- --------- ------- ---------- --------- ----------
Income before
extraordinary
item............... 86,363 5,524 (7,650) 84,287 9,311 93,548
Extraordinary item --
merger costs, net of
tax.................. 724 724 724
----------- --------- ------- ---------- --------- ----------
Net income......... $ 86,363 4,800 (7,650) 83,513 9,311 92,824
=========== ========= ======= ========== ========= ==========
Per share data:
Basic EPS.............. $ 1.38 1.39 1.25 1.23 1.27
Diluted EPS............ $ 1.36 1.37 1.24 1.11 1.24
Average common shares
outstanding -- basic... 62,717,185 3,455,010 66,552,937 7,552,329 73,240,524
Average common shares
outstanding -- diluted... 63,537,328 3,497,150 67,419,864 8,718,437 75,140,040
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
39
<PAGE> 49
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (UNAUDITED)
FOR THE YEARS ENDED
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- --------------------------------------
SECURITY SECURITY
FIRSTMERIT FIRST PRO FORMA FIRSTMERIT FIRST PRO FORMA
NOTES CORPORATION CORP. COMBINED CORPORATION CORP. COMBINED
----- ----------- ---------- ----------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........... $ 411,745 49,178 460,923 $ 416,627 43,593 460,220
Interest expense.......... 160,773 25,563 186,336 180,933 22,608 203,541
---------- ---------- ----------- ----------- ---------- -----------
Net interest income..... 250,972 23,615 274,587 235,694 20,985 256,679
Provision for loan
losses.................. 17,751 323 18,074 19,763 377 20,140
---------- ---------- ----------- ----------- ---------- -----------
Net interest income
after
provision for loan
losses................ 233,221 23,292 256,513 215,931 20,608 236,539
Other income.............. 84,272 1,698 85,970 67,978 1,699 69,677
Net securities gains
(losses)................ (1,776) (1,776) 539 539
Other expenses............ 209,702 15,209 224,911 227,779 13,367 241,146
---------- ---------- ----------- ----------- ---------- -----------
Income before income
taxes & extraordinary
item.................. 106,015 9,781 115,796 56,669 8,940 65,609
Federal income taxes...... 35,075 3,371 38,446 30,950 3,334 34,284
Extraordinary
item -- gain on
disposition of assets
after business
combination, net of
taxes................. 5,599 5,599
---------- ---------- ----------- ----------- ---------- -----------
Net income.............. $ 70,940 6,410 77,350 31,318 5,606 36,924
========== ========== =========== =========== ========== ===========
Per share data:
Net income -- basic....... 1 $ 1.09 $ 0.86 $ 1.08 $ 0.47 $ 0.78 $ 0.50
========== ========== =========== =========== ========== ===========
Net income -- diluted..... 1 $ 1.08 $ 0.78 $ 1.06 $ 0.47 $ 0.70 $ 0.49
========== ========== =========== =========== ========== ===========
Average common shares
outstanding -- basic.... 1 65,215,132 7,434,891 71,798,728 66,908,906 7,169,640 73,257,622
========== ========== =========== =========== ========== ===========
Average common shares
outstanding -- diluted... 1 65,468,213 8,695,436 73,168,022 67,138,260 8,514,312 74,677,683
========== ========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
40
<PAGE> 50
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, SHARES AND PER SHARE AMOUNTS ACTUALS)
NOTE 1.
The pro forma condensed combined financial information assumes the issuance
of 6,689,991 shares of FirstMerit common stock in exchange for all outstanding
shares of Security First common stock. For purposes of the pro forma
calculations, Security First convertible bonds/stock options converted to
Security First common stock add another 1.1 million shares to diluted shares
outstanding. All Security First shares, options and bonds were converted at a
fixed exchange ratio of 0.8855 shares of FirstMerit common stock for each share
of Security First common stock and stock equivalent.
NOTE 2.
Shown below are the purchase accounting adjustments representing
FirstMerit's May 22, 1998 acquisition of CoBancorp.; the actual purchase
accounting adjustments will be made on the basis of appraisals and evaluations
as of a date subsequent to the Merger and, therefore, will differ from those
reflected in the unaudited Pro Forma Condensed Financial Information. These pro
forma financial statements are presented as if the transaction was consummated
on January 1, 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C>
STOCK CONSIDERATION:
Shares of CoBancorp's common stock outstanding.............. 3,582,487 (A)
Consideration percentage paid in stock...................... 70%(B)
----------
FirstMerit common stock equivalent.......................... 2,507,741
Exchange Ratio.............................................. 1.586
----------
FirstMerit common stock assumed issued...................... 3,977,277
Assumed FirstMerit share price.............................. 29,375 (C)
----------
Assumed additional shareholders' equity..................... 116,833
----------
CASH CONSIDERATION:
Shares of CoBancorp's common stock outstanding.............. 3,582,487 (A)
Consideration percentage paid in cash....................... 30%(B)
----------
FirstMerit common stock equivalent.......................... 1,074,746
Cash price per share........................................ $ 44.50 (B)
----------
Consideration to be paid in cash............................ $ 47,826
----------
Cash and stock consideration................................ $ 164,659
Other costs expended for merger............................. 9,435
----------
Total acquisition cost...................................... $ 174,094
Less: historical net assets acquired........................ 59,799
----------
Premium to allocate......................................... $ 114,295
==========
ADJUSTMENTS TO FAIR VALUE OF NET ASSETS ACQUIRED:
Investment securities....................................... $ 362 (D)
Loans....................................................... (10,752) (E)
Deposits.................................................... 9,806 (F)
Fixed assets................................................ (9,540) (G)
Intangibles................................................. 124,419 (H)
----------
$ 114,295
==========
</TABLE>
- ---------------
(A) The number of shares of CoBancorp's common stock exchanged were those
outstanding immediately prior to the effective time of the merger. The
number of shares of CoBancorp common stock outstanding on May 12, 1998 has
been used in the pro forma computations.
41
<PAGE> 51
(B) Each share of CoBancorp's common stock outstanding at the effective time was
exchanged in the merger for $44.50 in cash or for shares of common stock of
FirstMerit Corporation with a market value per share of $44.50, based upon
the $29.375 market value of FirstMerit common stock during the ten day
period ending ten days prior to closing of the transaction, subject to
adjustment as provided for in the merger agreement. CoBancorp shareholders
elected to exchange their common stock for either common stock of
FirstMerit, or $44.50 in cash, or a combination thereof, provided that no
less than 30 percent nor more than 49 percent of the total transaction value
will be paid in cash.
An assumed cash election of 30% has been used in the pro forma computations.
The unaudited Pro Forma Condensed Financial Information reflects funding of
the cash component of the purchase price from normal operations of
FirstMerit.
(C) FirstMerit common stock price as determined during the repricing period of
April 29 -- May 12, 1998.
(D) Reflects the excess of fair market value over carrying value in the
held-to-maturity investment securities portfolio at January 1, 1997. Current
values are not expected to be materially different.
(E) Reflects the carrying value of the loan portfolio in excess of the estimated
fair value at January 1, 1997 including $4 million to conform to FirstMerit
allowance methodology.
(F) Reflects the carrying value of deposit liabilities in excess of the
estimated fair value at January 1, 1997. Current values are not expected to
be materially different.
(G) Reflects adjustments to reduce the book value of property, plant and
equipment to the estimated fair Adjustment estimated to be amortized over
ten year life.
(H) Includes both identifiable intangibles and goodwill. Since the final
determination of adjustments to assets and liabilities will be made based
upon the fair values as of the Effective Time and after appraisals and
evaluations are complete, the final amounts will differ from the estimates
provided herein.
NOTE 3.
The purchase accounting adjustments related to the Merger between
FirstMerit and CoBancorp reflected in the unaudited Pro Forma Condensed Combined
Statements of Income are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED
1998 DECEMBER 31,
AND 1997 1997
------------ ------------
<S> <C> <C>
Interest Income
Amortization of investment securities adjustment....... ($ 30) (121)
Amortization of loan portfolio adjustment.............. 384 1,536
Interest Expense
Amortization of deposit liabilities adjustment......... (817) (3,269)
Imputed interest to fund cash component of purchase
price............................................... (688) (2,750)
Other Expenses
Amortization of incremental intangibles................ (1,553) (6,212)
Amortization of fixed asset adjustments................ (239) (954)
Federal tax benefit of pro forma adjustments............. 1,030 4,120
------- ------
Net decrease to pro forma combined net income............ ($1,913) (7,650)
======= ======
</TABLE>
NOTE 4.
The following assumption was used in establishing the purchase accounting
adjustments related to the FirstMerit/CoBancorp Merger in the unaudited Pro
Forma Condensed Combined Financial Statements of Income:
Intangibles: Amortize goodwill on a straight-line basis over 20 years.
NOTE 5.
Income tax expense on pro forma adjustments is reflected using a 35% tax
rate.
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BUSINESS OF FIRSTMERIT
OVERVIEW
FirstMerit is a bank holding company organized in 1981 under the laws of
the State of Ohio and registered under the BHCA. At March 31, 1998, FirstMerit,
its affiliated bank and other subsidiaries had total consolidated assets of
approximately $5.4 billion and consolidated total shareholders' equity of
approximately $515.3 million. FirstMerit through its affiliates operates
principally as a regional banking organization, providing a wide range of
banking, fiduciary, financial, insurance and investment services to corporate,
institutional and individual customers throughout northern Ohio, including
Ashtabula, Cuyahoga, Erie, Geauga, Jefferson, Lake, Lorain, Medina, Portage,
Stark, Summit and Wayne Counties. At March 31, 1998, FirstMerit's subsidiary
operated 128 full service banking offices, had 161 automated teller machines
located in 11 counties in Ohio and employed approximately 2,300 full- and
part-time employees. FirstMerit's principal business consists of owning and
supervising its affiliates. FirstMerit directs their overall policies, including
lending practices, and financial resources, but most day-to-day affairs are
managed by the affiliates' own officers.
SUBSIDIARIES
FirstMerit's wholly-owned subsidiaries include FirstMerit Bank, N.A.
("FirstMerit Bank"), FirstMerit Credit Life Insurance Company, FirstMerit
Community Development Corporation, Citizens Investment Corporation and Citizens
Savings Corporation of Stark County. FirstMerit's indirect subsidiaries, which
are subsidiaries of FirstMerit Bank, include Abell & Associates, Inc.,
FirstMerit Insurance Agency, Inc., FirstMerit Leasing Company, FirstMerit
Mortgage Corporation and FirstMerit Securities, Inc. FirstMerit Bank provides a
full range of customary banking products and services. In addition, FirstMerit
Bank provides a wide range of specialized services tailored to specific markets,
including personal and corporate trust services, personal financial services,
cash management services and international banking services. FirstMerit's
non-banking direct and indirect subsidiaries provide insurance sales services,
credit life, accident and health insurance, securities brokerage services,
equipment lease financing and other financial services.
FirstMerit recently completed a merger of all of its subsidiary banks under
a single charter. FirstMerit Bank is the resulting institution of the charter
consolidations. As part of its community banking philosophy, FirstMerit Bank has
divided its markets into geographic areas designated as follows: FirstMerit
Bank/Akron, FirstMerit Bank/Citizens (Canton), FirstMerit Bank/Cleveland,
FirstMerit Bank/Elyria, FirstMerit Bank/Old Phoenix (Medina), FirstMerit
Bank/Wooster and FirstMerit Bank/Peoples (Ashtabula). Each of these regional
operations is headed by its own President and local community board.
FirstMerit is a corporate entity legally separate and distinct from its
affiliates, however, bank holding companies such as FirstMerit are expected to
act as a source of financial strength to their respective subsidiary banks. See
"REGULATORY MATTERS -- Regulation of Bank Holding Companies." The principal
source of FirstMerit's income is dividends from its subsidiaries. There are
certain regulatory restrictions on the extent to which the subsidiaries can pay
dividends or otherwise supply funds to FirstMerit. See "REGULATORY
MATTERS -- Limits on Dividends and Other Payments."
SUBSIDIARY OPERATIONS
FirstMerit Bank engages in commercial banking in its respective
geographical markets. Commercial banking includes the acceptance of a variety of
demand, savings and time deposits and the granting of commercial and consumer
loans for the financing of both real and personal property. Other services
include automated banking programs, credit cards, rental of safe deposit boxes,
letters of credit, leasing, discount brokerage and credit life insurance.
FirstMerit Bank also operates a trust department which offers estate and trust
services. It offers its services primarily to consumers and small and medium
size businesses. FirstMerit Bank is not engaged in lending outside the
continental United States and it is not dependent upon any one significant
customer or a specific industry.
FirstMerit Credit Life Insurance Company was formed in 1985 to engage in
underwriting of credit life and credit accident and health insurance directly
related to the extension of credit to its customers. FirstMerit Community
Development Corporation was organized in 1994 to further the efforts in meeting
the credit needs of
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their lending communities, and the requirements of the Community Reinvestment
Act ("CRA"). Congress enacted CRA to assure that financial institutions meet the
deposit and credit needs of FirstMerit's communities. Through a community
development corporation, financial institutions can meet these needs by
nontraditional activities such as acquiring, rehabilitating or investing in real
estate in low to moderate income neighborhoods, and promoting the development of
small businesses.
FirstMerit Bank is the parent corporation of several wholly-owned Ohio
corporations. In 1995, FirstMerit Mortgage Corporation ("FirstMerit Mortgage"),
which is located in Canton, Ohio, was organized and capitalized. FirstMerit
Mortgage is engaged in the business of originating residential mortgage loans
and providing mortgage loan servicing for itself and FirstMerit Bank. In 1993,
FirstMerit Leasing Company ("FirstMerit Leasing") and FirstMerit Securities,
Inc. ("FirstMerit Securities") were organized. FirstMerit Leasing primarily
provides equipment lease financing and related services, while FirstMerit
Securities primarily provides discount brokerage services to customers of
FirstMerit Bank and other FirstMerit subsidiaries.
FirstMerit Bank is also the parent corporation of Abell & Associations,
Inc. ("Abell"), a nationally known life insurance and financial consulting firm,
which it acquired in May 1997 and FirstMerit Insurance Agency, Inc. Abell
assists in the design and funding of estate plans, corporate succession plans
and executive compensation plans. The firm also does consulting work for law and
accounting firms and with individual corporations, designing funding for
corporate liability issues and structured settlements. FirstMerit Insurance
Agency, Inc. is a subsidiary acquired by FirstMerit when it acquired Great
Northern Financial Corporation in 1994. FirstMerit Insurance Agency, Inc.'s
license to sell life insurance products and annuities was reactivated in 1997.
RECENT DEVELOPMENTS
FirstMerit engages on a regular basis in discussions concerning possible
acquisitions of other financial institutions and financial services companies.
FirstMerit also acquires from time to time, branches and deposits in its
principal markets.
On April 6, 1998, when FirstMerit announced that it had entered into a
definitive agreement to acquire Security First, it also announced that its Board
of Directors had terminated its previously announced stock repurchase programs.
In order to qualify for the pooling-of-interests method of accounting for the
Security First merger, FirstMerit will need to issue approximately 1.1 million
shares of FirstMerit Common Stock, prior to the Effective Time to cure tainted
shares. FirstMerit has retained McDonald & Company Securities, Inc., as lead
underwriter, and Keefe, Bruyette & Woods, Inc., to also act as an underwriter
with regard to such issuance.
On November 2, 1997, FirstMerit entered into an Agreement of Affiliation
and Plan of Merger with CoBancorp Inc. ("CoBancorp"), a bank holding corporation
headquartered in Elyria, Ohio. On May 22, 1998, CoBancorp was merged with and
into FirstMerit. This merger was structured as a tax-free exchange for CoBancorp
shareholders receiving FirstMerit common stock, and was accounted for as a
purchase transaction. CoBancorp shareholders had a right to elect to exchange
their common stock for either common stock of FirstMerit, cash, or a combination
of stock and cash, provided that no less than 30 percent nor more than 49
percent of the total transaction value could be paid in cash. At the effective
time, based upon the average closing price for a specified period of
FirstMerit's common stock of $29.375, the value of the transaction on such date
was approximately $174.1 million. In connection with this merger, FirstMerit
issued 3.895 million shares of its common stock and paid $50.0 million in cash
based upon the shareholder elections and allocations.
At May 31, 1998, due to the merger of CoBancorp with and into FirstMerit,
total consolidated assets increased to approximately $6.1 billion and
consolidated total shareholders' equity increased to approximately $629.8
million. In addition, total outstanding shares of FirstMerit Common Stock
increased to approximately 65,140,577 and the number of shareholders increased
to 7,747.
BUSINESS OF SECURITY FIRST
Security First is a multiple savings and loan holding company organized in
1992 under the laws of the State of Delaware and registered under the Home
Owners' Loan Act, as amended ("HOLA"). As of March 31, 1998, Security First had
total assets of $685.5 million and total shareholders' equity of $64.7 million.
Security First's
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principal operating subsidiaries are Security Federal and First Federal. At
March 31, 1998, Security First and its subsidiaries employed approximately 174
full and part-time employees.
Security First's primary business, conducted through the Associations,
consists of attracting deposits from the general public and originating real
estate loans and other types of investments. Security Federal conducts its
operations through its main office located in Mayfield Heights, Ohio and 11
other full-service branch offices located in Medina, Chardon, Cleveland,
Painesville, Geneva, Madison, Parma Heights, Broadview Heights, Strongsville and
Willoughby, Ohio. First Federal conducts its operations through its main office
located in Kent, Ohio and its full service branch office located in Ravenna,
Ohio.
The principal executive offices of Security First are located at 1413
Golden Gate Boulevard, Mayfield Heights, Ohio 44124, and its telephone number is
(440) 449-3700.
REGULATORY MATTERS
GENERAL
Bank holding companies, banks and savings associations are regulated
extensively under federal and state law. The following information describes
statutory and regulatory provisions and is qualified in its entirety by
reference to the particular statutory or regulatory provisions.
FirstMerit Bank is a national bank and a member of the Federal Reserve, and
is subject to the supervision of and regular examination by the OCC and the
Federal Reserve. As an insured bank under the Federal Deposit Insurance Act,
FirstMerit Bank is a member of the Bank Insurance Fund ("BIF"). FirstMerit Bank
is regulated by the FDIC. The affairs and records of FirstMerit Bank are
examined regularly by OCC and FirstMerit Bank must furnish quarterly and annual
reports to OCC.
Security First is a savings and loan holding company and the parent
corporation to Security Federal and First Federal. The Associations are
federally chartered savings and loan associations, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Associations are subject to broad federal
regulation and oversight extending to all their operations. The Associations are
members of the FHLB of Cincinnati and are subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of the Associations, Security
First also is subject to federal regulation and oversight. The purpose of the
regulation of Security First and other holding companies is to protect
subsidiary savings associations.
After the Merger, the Associations will be merged with and into FirstMerit
Bank and will cease to exist as separate chartered institutions, and therefore
neither will be subject to separate regulation.
The periodic examinations by the regulatory agencies are intended to test
institutions' compliance with various regulatory requirements and to determine
if operations are conducted in a safe and sound manner. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of nonperforming and other assets
and the establishment of adequate loan loss reserves for regulatory purposes.
Any change in such regulation, whether by OTS, OCC, the FDIC, the Federal
Reserve or Congress, could materially and adversely impact the powers and
operations of FirstMerit, Security First or any of their respective subsidiary
financial institutions. It is impossible to predict when or whether any such
proposals will be adopted and the impact, if any, of such adoption on the
business of Security First or FirstMerit, or their subsidiaries.
The operations of financial institutions are significantly affected by
general economic conditions as well as the monetary and fiscal policies of the
federal government and its agencies, particularly the Federal Reserve, and other
policies of federal and state regulatory authorities. The Federal Reserve's
actions affect interest rates charged on bank loans and paid on bank deposits,
and therefore influence growth in bank loans, investments and deposits. The
nature and results of changes in monetary and fiscal policies likewise cannot be
predicted.
FirstMerit and Security First are also under the jurisdiction of the
Commission and certain state securities commissions for matters relating to the
offering and sale of securities. FirstMerit and Security First are subject to
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the disclosure and regulatory requirements of the Securities Act and the
Exchange Act, as administered by the Commission.
REGULATION OF BANK HOLDING COMPANIES
FirstMerit is registered with the Federal Reserve as a bank holding company
under the BHCA. Bank holding companies and their activities are subject to
extensive regulation by the Federal Reserve. Bank holding companies are required
to file reports with the Federal Reserve and such additional information as the
Federal Reserve may require, and are subject to regular inspections by the
Federal Reserve. The Federal Reserve also has extensive enforcement authority
over bank holding companies, including, among other things, the ability to
assess civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices.
Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to each subsidiary bank and to commit resources
to support such subsidiary banks. Under this policy the Federal Reserve may
require a bank holding company to contribute additional capital to an
undercapitalized subsidiary bank.
The BHCA requires the prior approval of the Federal Reserve in any case
where a bank holding company proposes to acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank that is not already
majority-owned by it, to acquire all or substantially all of the assets of
another bank or bank holding company, or to merge or consolidate with any other
bank holding company. Section 4 of the BHCA also prohibits a bank holding
company, with certain exceptions, from acquiring more than 5% of the voting
shares of any company that is not a bank and from engaging in any business other
than banking or managing or controlling banks. The primary exception allows the
ownership of shares by a bank holding company in any company the activities of
which the Federal Reserve has determined to be so closely related to banking or
to managing or controlling banks as to be a proper incident thereto. The Federal
Reserve has by regulation determined that certain activities are closely related
to banking within the meaning of the BHCA. These activities include: operating a
savings association, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing
investment and financial advice; and acting as an insurance agent for certain
types of credit-related insurance.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on maintenance of reserves
against deposits, extensions of credit to the bank holding company or any of its
subsidiaries, on investments in the stock or other securities of the bank
holding company or its subsidiaries and on the taking of such stock or
securities as collateral for loans to any borrower. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of any services. Various consumer laws and regulations
also affect the operations of these subsidiaries.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
FirstMerit and Security First are legal entities separate and distinct from
their respective subsidiary financial institutions. See "COMPARISON OF
FIRSTMERIT AND SECURITY FIRST CAPITAL STOCK -- Dividends." There are various
legal limitations on the extent to which such subsidiary banks and savings
associations may finance or otherwise supply funds to their parent holding
companies. Under federal law, subsidiary banks may not, subject to certain
limited exceptions, make loans or extensions of credit to, or investments in the
securities of, their bank holding companies. Subsidiary banks are also subject
to collateral security requirements for any loans or extension of credit
permitted by such exceptions.
FirstMerit Bank is required by federal law to obtain the prior approval of
OCC for the declaration and payment of dividends if the total of all dividends
declared by the board of directors of the bank in any year will exceed the total
of (i) the bank's net profits for that year, plus (ii) the retained net profits
for the preceding two years, less any required transfers to surplus. In
addition, these banks may only pay dividends to the extent that retained net
profits (including any portion transferred to surplus) exceed bad debts.
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OTS regulations impose various restrictions on savings associations, such
as the Associations, with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account. OTS regulations
also prohibit a savings association from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory capital of
the association would be reduced below the amount required to be maintained for
the liquidation account established in connection with its mutual to stock
conversion.
As of April 30, 1998, FirstMerit Bank, without obtaining governmental
approvals, could declare aggregate dividends of approximately $35.6 million.
DESCRIPTION OF FIRSTMERIT CAPITAL STOCK
FIRSTMERIT COMMON SHARES
The FirstMerit Articles have authorized for issuance 160,000,000 shares of
Common Stock, no par value, of which 61,245,221 were outstanding as of March
31,1998. These shares may be issued and sold without further shareholder action
provided that the issuance and sale is made in compliance with the corporate
governance documents of FirstMerit and OGCL. Each share of FirstMerit Common
Stock is accompanied by one FirstMerit Right pursuant to the Rights Agreement.
Each share of FirstMerit Common Stock is entitled to (a) dividends when and
as declared by the directors, but after payment of dividends to any FirstMerit
Preferred Stock that may hereafter be issued, (b) to one vote per share on each
matter properly submitted to shareholders for their vote, and (c) to participate
ratably in the net assets of FirstMerit in the event of liquidation, after any
FirstMerit Preferred Stock that may hereafter be issued.
On March 31, 1998, FirstMerit had 6,958 shareholders of record. Holders of
FirstMerit Common Stock have no preemptive rights for the purchase of additional
shares of any class of FirstMerit capital stock, nor do they have the right to
cumulate their voting power.
FIRSTMERIT PREFERRED STOCK
The FirstMerit Articles have authorized 7,000,000 shares of Preferred
Stock, no par value, of which no shares were outstanding as of March 31, 1998.
FirstMerit has created a class of Preferred Stock entitled the "Series A
Preferred Stock" and has currently designated 700,000 shares for issuance
thereunder. The Series A Preferred Stock was created pursuant to the
FirstMerit's Rights Agreement. The remaining 6,300,000 shares of Preferred Stock
may be issued and sold without further shareholder action provided that the
issuance and sale is made in compliance with the corporate governance documents
of FirstMerit and OGCL.
The holders of FirstMerit Preferred Stock are entitled to one vote per
share on matters on which they are entitled to vote, and the other terms thereof
may be fixed by FirstMerit's Board of Directors, including dividend rate,
liquidation price, redemption price, sinking fund provisions, conversion rights,
and restrictions on issuance of shares of the same series or any other class or
series as may be determined by the directors. As to dividend, redemption, and
liquidation rights, each series of FirstMerit Preferred Stock will be senior to
FirstMerit Common Stock. See "COMPARISON OF FIRSTMERIT AND SECURITY FIRST
CAPITAL STOCK."
COMPARISON OF FIRSTMERIT AND SECURITY FIRST CAPITAL STOCK
FIRSTMERIT COMMON STOCK AND SECURITY FIRST COMMON STOCK
If the Merger is consummated, all shareholders of Security First will
become shareholders of FirstMerit. FirstMerit is a corporation organized under
Ohio law, and governed by the OGCL, the FirstMerit Articles, the FirstMerit
Regulations and the FirstMerit Rights Agreement. Security First is a corporation
organized under Delaware law, and is governed by the DGCL, the Security First
Certificate and the Security First Bylaws. The rights of a holder of Security
First Common Stock are similar in most respects to, but different in certain
other
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respects from, the rights of a holder of FirstMerit Common Stock. Certain of the
most significant similarities and differences are summarized below.
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OGCL, THE
FIRSTMERIT ARTICLES, THE FIRSTMERIT REGULATIONS, THE FIRSTMERIT RIGHTS
AGREEMENT, THE DGCL AND THE SECURITY FIRST CERTIFICATE AND THE SECURITY FIRST
BYLAWS.
VOTING RIGHTS
CUMULATIVE VOTING AND PREEMPTIVE RIGHTS. Each holder of FirstMerit Common
Stock and Security First Common Stock has the right to cast one vote for each
share owned on all matters submitted to a vote of shareholders. No holder of
shares of any class of capital stock of FirstMerit or Security First is entitled
to the right of cumulative voting in the election of directors.
The FirstMerit Articles provide that no holder of shares of any class of
capital stock of FirstMerit is entitled to preemptive rights. Under Section 102
of the DGCL, no statutory preemptive rights will exist, unless a corporation's
certificate of incorporation specifies otherwise. Security First's Certificate
does not provide for any such preemptive rights.
DIRECTOR NOMINATIONS. Any shareholder of FirstMerit who determines to
nominate a person for election as a director must deliver written notice to the
Secretary of FirstMerit not later than (a) with respect to an election to be
held at an Annual Meeting of Shareholders for the election of directors, 90 days
in advance of such meeting, and (b) with respect to such an election to be held
at an Annual Meeting of Shareholders, the close of business on the seventh day
following the date on which notice of such meeting is first given to
shareholders. The notice must set forth specific information regarding the
nominating shareholder and nominee, and must be accompanied by a consent of the
nominee to serve as a director if so elected. The chairman of the meeting may
refuse to acknowledge the nomination of any person not made in compliance with
this procedure.
The Security First Bylaws provide that any shareholder wishing to nominate
a person for election as a director must deliver written notice to the secretary
at least 60 days prior to the anniversary of the preceding year's annual
meeting. In the event that the date of the annual meeting is advanced, however,
by more than 20 day, or delayed by more than 60 days from such anniversary date,
notice by the stockholder to be timely must be delivered not later than the
close of business on the later of the 60th day prior to such annual meeting or
the tenth day following the day on which notice of the date of the annual
meeting was mailed or publicly announced.
SPECIAL MEETINGS. A special meeting of the shareholders of FirstMerit can
be called by the President, by the Board of Directors acting at a meeting, by a
majority of the Board when not in a meeting, or by shareholder(s) owning
one-half or more of the outstanding shares of FirstMerit Common Stock. Under
Section 211(d) of the DGCL, the board of directors or those persons authorized
by the corporation's certificate of incorporation or bylaws may call a special
meeting of the corporation's stockholders. The Security First Bylaws provide
that a special meeting may be called only by the Board pursuant to a resolution
adopted by a majority of the whole Board (the total number of directors which
Security First would have if there were no vacancies on the Board).
ACTION WITHOUT A MEETING. Ohio law provides that any shareholder action to
be taken by written consent without a meeting, must be done unanimously. Section
228 of the DGCL permits any action required or permitted to be taken at a
stockholders' meeting to be taken by written consent signed by the holders of
the number of shares that would have been required to effect the action at an
actual meeting of the stockholders. Generally, holders of a majority of
outstanding shares can effect such an action. The DGCL also provides that a
corporation's certificate of incorporation may restrict or even prohibit
stockholders' action without a meeting. The Security First Certificate does not
permit any shareholder action to be taken without a meeting.
VOTING LIMITATIONS. The Security First Certificate provides that in no
event shall any record owner of any outstanding Security First Common Stock
which is beneficially owned, directly or indirectly, by a person in excess of
10% of the outstanding shares of Security First Common Stock (the "Limit") be
entitled or permitted to any vote in respect of the shares held in excess of the
Limit. This provision would make it impractical for a third party to acquire
beneficial ownership of more than 10% of the outstanding voting stock of
Security First
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without first receiving shareholder and regulatory approvals, since any party
who acquired shares in excess of the 10% threshold would lose all significant
rights associated with the voting of such shares.
FirstMerit does not have a like provision restricting voting rights of
certain beneficial owners.
MERGERS, CONSOLIDATIONS, DISSOLUTIONS, COMBINATIONS, AND OTHER
TRANSACTIONS. Subject to the provisions discussed in "Anti-Takeover Statutes"
below, Ohio law requires a merger, consolidation, dissolution, disposition of
all or substantially all of a corporation's assets, and a "majority share
acquisition" or "combination" involving issuance of shares with one-sixth or
more of the voting power of the corporation be adopted by the affirmative vote
of the holders of shares entitled to exercise at least two-thirds of the voting
power of the corporation on such proposal, unless the articles of incorporation
specify a different proportion (but not less than a majority). Adoption by the
affirmative vote of the holders of two-thirds of any class of shares, unless
otherwise provided in the articles, may also be required if the rights of
holders of that class are affected in certain respects by the merger or
consolidation. Except for the "Fair Price and Supermajority Vote Provisions"
discussed below, the FirstMerit Articles do not modify such voting requirements.
The DGCL generally requires a majority vote of stockholders to approve a
merger, sale of assets or similar reorganization transaction. Under Section
251(f) of the DGCL, however, no vote of the stockholders of a corporation
surviving the merger is required if the number of shares to be issued in the
merger does not exceed 20% of the shares of the surviving corporation
outstanding immediately prior to the date of the merger and if certain other
conditions are met. Except as discussed below under the "Fair Price and
Supermajority Vote Provisions," the Security First Certificate does not modify
such voting requirements.
FAIR PRICE AND SUPERMAJORITY VOTE PROVISIONS. Article Seventh of the
FirstMerit Articles requires that a merger or consolidation of FirstMerit into
or with a corporation, person, or entity that is the beneficial owner of 10% or
more of the issued and outstanding shares of a class of FirstMerit capital stock
("Interested Party"), or the sale, lease or other disposition of all or
substantially all of the assets of FirstMerit to an Interested Party, requires
the approval of 80% of the outstanding voting shares of each class of FirstMerit
stock entitled to vote as a class. This supermajority vote requirement is waived
in the event the transaction has been approved (i) by the Board of Directors
prior to the time the Interested Party beneficially owns 10% or more of the
outstanding capital stock of FirstMerit, or (ii) at any time before its
consummation by two-thirds vote of the total members of the FirstMerit Board of
Directors and a majority of the directors who either were appointed prior to the
time the party beneficially owned four percent or more of an outstanding class
of capital stock or were recommended to succeed such a director by a majority of
such directors; provided, that the transaction is structured in such a manner
that the price to be paid by the Interested Party is fair to all shareholders of
FirstMerit. A FirstMerit shareholder must receive a price equal to the highest
price per share previously paid to a shareholder by the Interested Party for a
share of FirstMerit capital stock of the same class. If that supermajority vote
requirement is waived, the transaction may be approved by the holders of at
least two-thirds of the outstanding capital stock.
The Security First Certificate includes a fair price vote provision. The
Security First Certificate provides that in connection with certain "Business
Combinations" (as defined below) and related transactions between Security First
and an "Interested Stockholder" (as defined below), any Business Combination
involving any Interested Stockholder (which generally includes any person or
entity owning or controlling more than 10% of the outstanding voting stock of
Security First) must be approved by at least 66 2/3% of all outstanding shares
of voting stock, voting together as a single class, unless the transaction (i)
is authorized by a majority of the directors of the Security First Board who are
unaffiliated with the Interested Stockholder and who were directors prior to the
time that the person became an Interested Stockholder, or (ii) meets certain
fair price requirements. If the Security First Board gives such approval or such
fair price requirements are met, only the affirmative vote of the majority of
the outstanding stock, voting as a single class, would be required.
The Security First Certificate defines Business Combination as: (i) any
merger or consolidation of Security First or any of its subsidiaries with or
into any Interested Stockholder; (ii) any sale, lease, exchange, mortgage,
pledge, transfer, or other disposition to or with an Interested Stockholder of
any assets of Security First having an aggregate fair market value equal to or
exceeding 25% or more of the combined assets of Security First and its
subsidiaries; (iii) the issuance or transfer by Security First of any securities
to any Interested Stockholder in exchange for cash, securities or other property
(or combination thereof) having an aggregate fair market value
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equal to or exceeding 25% of the combined assets of Security First and its
subsidiaries, except pursuant to an employee benefit plan of Security First or
its subsidiaries; (iv) the adoption of any plan or proposal for the liquidation
or dissolution of Security First proposed by, or on behalf of, an Interested
Stockholder; or (v) any reclassification, recapitalization, merger or
consolidation of Security First with any of its subsidiaries or any other
transaction that would have the effect of increasing the voting power of an
Interested Stockholder.
Under Delaware law, absent such a supermajority voting provision, Business
Combinations, including mergers, consolidations and sales of substantially all
of the assets of Security First must be approved by the vote of the holders of a
majority of the outstanding shares of Security First Common Stock, subject to
certain exceptions. The increased stockholder vote required to approve a
Business Combination may have the effect of foreclosing mergers and other
business combinations which a majority of stockholders deem desirable and may
place the power to prevent such a merger or combination in the hands of a
minority of stockholders.
SHAREHOLDER RIGHTS PLAN
Pursuant to the terms of the Rights Agreement, between FirstMerit and
FirstMerit Bank, as rights agent, a dividend of one preferred share purchase
right (a "Right") for each outstanding share of FirstMerit Common Stock
(sometimes hereinafter "Common Stock") was declared by the FirstMerit Board of
Directors. Each Right entitles its registered holder to purchase from
FirstMerit, after the Distribution Date, one one-hundredth of a share of Series
A Preferred Stock, no par value (the "Preferred Shares"), for $120 (the
"Purchase Price"), subject to adjustment. The Rights will be evidenced by the
Common Share certificates until the close of business on the earlier of the date
(either, the "Distribution Date") which is (i) the tenth business day (or such
later date as the Board of Directors of FirstMerit may from time to time fix by
resolution adopted prior to the Distribution Date that would otherwise have
occurred) after the date on which any Person (as defined in the Rights
Agreement) commences a tender or exchange offer which, if consummated, would
result in such Person's becoming an Acquiring Person, as defined below, or (ii)
the tenth business day (or such earlier or later date as the Board of Directors
of FirstMerit may from time to time fix by resolution adopted prior to the
Flip-in Date (as defined below) that would otherwise have occurred) after the
first date of public announcement by FirstMerit that such Person has become an
Acquiring Person (the "Flip-in Date"); provided that if a tender or exchange
offer referred to in clause (i) is canceled, terminated or otherwise withdrawn
prior to the Distribution Date without the purchase of any shares of stock
pursuant thereto, such offer shall be deemed never to have been made.
An Acquiring Person is any Person who is the Beneficial Owner (as defined
in the Rights Agreement) of 10% or more of the outstanding Common Stock,
provided, however, such term shall not include (i) FirstMerit, any wholly-owned
subsidiary of FirstMerit or any employee stock ownership or other employee
benefit plan of FirstMerit, (ii) any person who is the Beneficial Owner of 10%
or more of the outstanding Common Stock as of the date of the Rights Agreement
or who shall become the Beneficial Owner of 10% or more of the outstanding
Common Stock solely as a result of an acquisition of Common Stock by FirstMerit,
until such time as such Person acquires additional Common Stock, other than
through a dividend or stock split, (iii) any Person who becomes an Acquiring
Person without any plan or intent to seek or affect control of FirstMerit if
such Person promptly divests sufficient securities such that such 10% or greater
Beneficial Ownership ceases; or (iv) any Person who Beneficially Owns Common
Stock consisting solely of (A) shares acquired pursuant to the grant or exercise
of an option granted by FirstMerit in connection with an agreement to merge
with, or acquire, FirstMerit prior to a Flip-in Date, (B) shares owned by such
Person and its Affiliates and Associates at the time of such grant, (C) shares,
amounting to less than 1% of the outstanding Common Stock, acquired by
Affiliates and Associates of such Person after the time of such grant and (D)
shares which are held by such Person in trust accounts, managed accounts and the
like or otherwise held in a fiduciary capacity, that are beneficially owned by
third persons who are not Affiliates or Associates of such Person or acting
together with such Person to hold shares, or which are held by such Person in
respect of a debt previously contracted.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Promptly following the
Distribution Date, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to holders of record of Common Stock at the
Distribution Date.
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The Rights will not be exercisable until the Business Day (as defined in
the Rights Agreement) following the Distribution Date. The Rights will expire on
the earliest of (i) the Exchange Time (as defined below), (ii) the close of
business on July 18, 2006, (iii) the date on which the Rights are redeemed as
described below and (iv) upon certain mergers of FirstMerit with another
corporation pursuant to an agreement entered into prior to a Flip-in Date (in
any such case, the "Final Expiration Date").
In the event that prior to the Expiration Time a Flip-in Date occurs, each
Right (other than Rights Beneficially Owned by the Acquiring Person or any
affiliate or associate thereof, which Rights shall become void) shall constitute
the right to purchase from FirstMerit, upon the exercise thereof in accordance
with the terms of the Rights Agreement, that number of Common Stock of
FirstMerit having an aggregate Market Price (as defined in the Rights
Agreement), on the date of the public announcement of an Acquiring Person's
becoming such (the "Stock Acquisition Date") that gave rise to the Flip-in Date,
equal to twice the Purchase Price for an amount in cash equal to the then
current Purchase Price. In addition, the Board of Directors of FirstMerit may,
at its option, at any time after a Flip-in Date and prior to the time an
Acquiring Person becomes the Beneficial Owner of more than 50% of the
outstanding Common Stock, elect to exchange all (but not less than all) the then
outstanding Rights (other than Rights Beneficially Owned by the Acquiring Person
or any affiliate or associate thereof, which Rights become void) for Common
Stock at an exchange ratio of one Common Share per Right, appropriately adjusted
to reflect any stock split, stock dividend or similar transaction occurring
after the date of the Distribution Date (the "Exchange Ratio"). Immediately upon
such action by the Board of Directors (the "Exchange Time"), the right to
exercise the Rights will terminate and each Right will thereafter represent only
the right to receive a number of Common Stock equal to the Exchange Ratio.
Whenever FirstMerit shall become obligated under the preceding paragraph to
issue Common Stock upon exercise of or in exchange for Rights, FirstMerit, at
its option, may substitute therefor shares of Preferred Stock, at a ratio of one
one-hundredth of a share of Preferred Stock for each Common Share so issuable.
In the event that prior to the Final Expiration Date FirstMerit enters
into, consummates or permits to occur a transaction or series of transactions
after the time an Acquiring Person has become such in which, directly or
indirectly, (i) FirstMerit shall consolidate or merge or participate in a
binding share exchange with any other Person if, at the time of the
consolidation, merger or share exchange or at the time FirstMerit enters into an
agreement with respect to such consolidation, merger or share exchange, the
Acquiring Person Controls the Board of Directors of FirstMerit (as defined in
the Rights Agreement) and either (A) any term of or arrangement concerning the
treatment of shares of capital stock in such merger, consolidation or share
exchange relating to the Acquiring Person is not identical to the terms and
arrangements relating to other holders of Common Stock or (B) the Person with
whom the transaction or series of transactions occurs is the Acquiring Person or
an Affiliate or Associate of the Acquiring Person or (ii) FirstMerit shall sell
or otherwise transfer (or one or more of its subsidiaries shall sell or
otherwise transfer) assets (A) aggregating more than 50% of the assets (measured
by either book value or fair market value) or (B) generating more than 50% of
the operating income or cash flow, of FirstMerit and its subsidiaries (taken as
a whole) to any other Person (other than FirstMerit or one or more of its
wholly-owned subsidiaries) or to two or more such Persons which are affiliated
or otherwise acting in concert, if, at the time such sale or transfer of assets
or at the time FirstMerit (or any such subsidiary) enters into an agreement with
respect to such sale or transfer, the Acquiring Person Controls the Board of
Directors of FirstMerit (a "Flip-over Transaction or Event"), FirstMerit shall
take such action as shall be necessary to ensure, and shall not enter into,
consummate or permit to occur such Flip-over Transaction or Event until it shall
have entered into a supplemental agreement with the Person engaging in such
Flip-over Transaction or Event or the parent corporation thereof (the "Flip-over
Entity"), for the benefit of the holders of the Rights, providing, that upon
consummation or occurrence of the Flip-over Transaction or Event (i) each Right
shall thereafter constitute the right to purchase from the Flip-over Entity,
upon exercise thereof in accordance with the terms of the Rights Agreement, that
number of shares of common stock of the Flip-over Entity having an aggregate
Market Price on the date of consummation or occurrence of such Flip-over
Transaction or Event equal to twice the Exercise Price for an amount in cash
equal to the then current Exercise Price and (ii) the Flip-over Entity shall
thereafter be liable for, and shall assume, by virtue of such Flip-over
Transaction or Event and such supplemental agreement, all the obligations and
duties of FirstMerit pursuant to the Rights Agreement. For purposes of the
foregoing
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description, the term "Acquiring Person" shall include any Acquiring Person and
its Affiliates and Associates counted together as a single Person.
The Board of Directors of FirstMerit may, at its option, at any time prior
to the close of business on the Flip-in Date, redeem all (but not less than all)
the then outstanding Rights at a price of $.01 per Right (the "Redemption
Price"), as provided in the Rights Agreement. Immediately upon the action of the
Board of Directors of FirstMerit electing to redeem the Rights, without any
further action and without any notice, the right to exercise the Rights will
terminate and each Right will thereafter represent only the right to receive the
Redemption Price in cash for each Right so held.
The holders of Rights will, solely by reason of their ownership of Rights,
have no rights as shareholders of FirstMerit, including, without limitation, the
right to vote or to receive dividends.
A copy of Rights Agreement is included as an exhibit to the Amendment No. 2
to Form 8-A filed by FirstMerit with the Commission on June 22, 1998. The
foregoing description of the Rights Agreement does not purport to be complete
and is qualified in its entirety by reference to the Rights Agreement.
Security First has not adopted a shareholder rights or similar plan.
ANTI-TAKEOVER STATUTES
Except as otherwise noted, the statutes described below apply to
FirstMerit.
OHIO CONTROL SHARE ACQUISITION ACT. The Acquisition Act provides that
certain notice and informational filings and special shareholder meeting and
voting procedures must be followed prior to consummation of a proposed "control
share acquisition," which is defined as any acquisition of an issuer's shares
which would entitle the acquiror, immediately after such acquisition, directly
or indirectly, to exercise or direct the exercise of voting power of the issuer
in the election of directors within any of the following ranges of such voting
power: (a) one-fifth or more but less than one-third of such voting power; (b)
one-third or more but less than a majority of such voting power; or (c) a
majority or more of such voting power. Assuming compliance with the notice and
information filings prescribed by statute, the proposed control share
acquisition may be made only if, at a duly convened special meeting of
shareholders, the acquisition is approved by both a majority of the voting power
of the issuer represented at the meeting and a majority of the voting power
remaining after excluding the combined voting power of the "interested shares,"
being the shares held by the intended acquiror and the directors and officers of
the issuer. In addition "interested shares" are defined to include those
acquired by any person: (i) after the first date of public disclosure (April 6,
1998) of the Merger and prior to the date of the Security First Annual Meeting,
provided such person has paid over $250,000 for such purchased shares or such
purchased shares represents greater than .05% of the outstanding shares of the
company being acquired, and (ii) that transfers such shares for valuable
consideration after the record date established by the directors, if accompanied
by the voting power. The Acquisition Act may be made inapplicable to a company
by its corporate governance documents, but those of FirstMerit and Security
First do not so provide.
OHIO MERGER MORATORIUM STATUTE. The Ohio Merger Moratorium provisions
prohibit certain business combinations and transactions between an "issuing
public corporation" and a beneficial owner of 10% or more of the shares of the
corporation (an "interested shareholder") for at least three years after the
interested shareholder attains 10% ownership, unless the board of directors of
the issuing public corporation approves the transaction before the interested
shareholder attains 10% ownership. An "issuing public corporation" is defined as
an Ohio corporation with 50 or more shareholders that has its principal place of
business, principal executive offices, or substantial assets within the State of
Ohio, and as to which no close corporation agreement exists. Examples of
transactions regulated by the Merger Moratorium provisions include the
disposition of assets, mergers and consolidations, voluntary dissolutions, and
the transfer of shares ("Moratorium Transactions").
Subsequent to the three-year period, a Moratorium Transaction may take
place provided that certain conditions are satisfied, including (a) the board of
directors approves the transaction, (b) the transaction is approved by the
holders of shares with at least two-thirds of the voting power of the
corporation (or a different proportion set forth in the articles of
incorporation), including at least a majority of the outstanding shares after
excluding shares controlled by the interested shareholder, or (c) the business
combination results in shareholders,
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other than the interested shareholder, receiving a fair price plus interest for
their shares. The Merger Moratorium provisions are applicable to all
corporations formed under Ohio law, but a corporation may elect not to be
covered by the Merger Moratorium provisions, or subsequently elect to be
covered, with an appropriate amendment to its articles of incorporation. Neither
FirstMerit nor Security First has taken any such corporate action to opt out of
the Ohio Merger Moratorium statute.
OHIO "ANTI-GREENMAIL" STATUTE. Pursuant to ORC Section 1707.043, a public
corporation formed in Ohio may recover profits that a shareholder makes from the
sale of the corporation's securities within 18 months after making a proposal to
acquire control or publicly disclosing the possibility of a proposal to acquire
control. The corporation may not, however, recover from a person who proves
either (i) that his sole purpose in making the proposal was to succeed in
acquiring control of the corporation and there were reasonable grounds to
believe that he would acquire control of the corporation or (ii) that his
purpose was not to increase any profit or decrease any loss in the stock. Also,
before the corporation may obtain any recovery, the aggregate amount of the
profit realized by such person must exceed $250,000. Any shareholder may bring
an action on behalf of the corporation if a corporation refuses to bring an
action to recover these profits. The party bringing such an action may recover
his attorneys' fees if the court having jurisdiction over such action orders
recovery of any profits. An Ohio corporation may elect not to be covered by the
"anti-greenmail" statute with an appropriate amendment to its articles of
incorporation, but FirstMerit has not taken any such corporate action to opt out
of the statute.
CONTROL BID PROVISIONS OF THE OHIO SECURITIES ACT. Ohio law further
requires that any offeror making a control bid for any securities of a "subject
company" pursuant to a tender offer must file information specified in the Ohio
Securities Act with the Ohio Division of Securities when the bid commences. The
Ohio Division of Securities must then decide whether it will suspend the bid
under the statute within three calendar days. If it does so, it must initiate
hearings on the suspension within 10 calendar days of the suspension date and
make a determination of whether to maintain the suspension, within 16 calendar
days of the suspension date. For this purpose, a "control bid" is the purchase
of, or an offer to purchase, any equity security of a subject company from a
resident of Ohio that would, in general, result in the offeror acquiring 10% or
more of the outstanding shares of such company. A "subject company" includes any
company with both (a) its principal place of business or principal executive
office in Ohio or assets located in Ohio with a fair market value of at least
$1,000,000 and (b) more than 10% of its record or beneficial equity security
holders are resident in Ohio, more than 10% of its equity securities are owned
of record or beneficially by Ohio residents, or more than 1,000 of its record or
beneficial equity security holders are resident in Ohio.
BHCA. The BHCA requires the prior approval of the Federal Reserve in any
case where a bank holding company proposes to acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank that is
not already majority-owned by it, to acquire all or substantially all of the
assets of another bank or bank holding company, or to merge or consolidate with
any other bank holding company. Section 4 of the BHCA also prohibits a bank
holding company, with certain exceptions, from acquiring more than 5% of the
voting shares of any company that is not a bank and from engaging in any
business other than banking or managing or controlling banks.
DELAWARE BUSINESS COMBINATION STATUTE. Section 203 of the DGCL ("Section
203"), which applies to Security First, regulates transactions with major
stockholders after they become major stockholders. Section 203 prohibits a
Delaware corporation from engaging in mergers, dispositions of 10% or more of
its assets, issuances of stock and other transactions ("business combinations")
with a person or group that owns 15% or more of the voting stock of the
corporation (an "interested stockholder"), for a period of three years after the
interested stockholder crosses the 15% threshold. These restrictions on
transactions involving an interested stockholder do not apply if (a) before the
interested stockholder owned 15% or more of the voting stock, the board of
directors approved the business combination or the transaction that resulted in
the person or group becoming an interested stockholder; (b) in the transaction
that resulted in the person or group becoming an interested stockholder, the
person or group acquired at least 85% of the voting stock other than stock owned
by inside directors and certain employee stock plans; (c) after the person or
group became an interested stockholder, the board of directors and at least
two-thirds of the voting stock other than stock owned by the interested
stockholder approves the business combination; or (d) certain competitive
bidding circumstances.
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AMENDMENT TO CHARTER DOCUMENTS
The FirstMerit Articles presently require that two-thirds of the voting
power of FirstMerit approve any amendment to the Articles, except that (i) with
regard to FirstMerit's Series A Preferred Stock (no shares of which are
presently issued or outstanding), any amendment to the FirstMerit Articles that
would materially alter or change the powers, preferences, or special rights of
such Series A Preferred Stock so as to affect them adversely would have to be
approved by at least a majority vote of the holders of such shares, voting
together as a single class, and (ii) with regard to Article Seventh of the
FirstMerit Articles, certain business combinations require a vote of 80% of the
voting power of FirstMerit, unless the amendment is approved by 75% of the Board
and by a majority of the Continuing Directors, then by two-thirds of the voting
power.
Directors may not amend the code of regulations of an Ohio corporation. The
Regulations of FirstMerit provide for amendment by shareholders holding a
majority of the voting power at a meeting (although Ohio law requires that all
amendments by written action of the shareholders without a meeting must be
approved unanimously by the shareholders entitled to vote thereon). In addition,
any amendments regarding the calling of special meetings of shareholders,
classification of directors, nomination of or removal of directors, or amendment
to the FirstMerit Regulations, must be approved by shareholders holding at least
two-thirds of the voting power of FirstMerit.
The Security First Certificate may be amended only if first approved by
two-thirds of the directors then in office at a duly constituted meeting called
expressly for that purpose and thereafter approved by the vote of the holders of
a majority of the votes eligible to be cast at a duly constituted meeting called
expressly for that purpose, except that the provisions of the Security First
Certificate governing (i) provisions relating to number, classification,
election and removal of directors; (ii) 10% voting limitation; (iii) amendment
of bylaws; (iv) call of special shareholder meetings; (v) offers to acquire and
acquisitions of control; (vi) director liability; (vii) certain business
combinations; (viii) power of indemnification; and (ix) amendments to provisions
relating to the foregoing in the certificate of incorporation must be approved
by the affirmative vote of at least 80% of the outstanding shares of Security
First. This provision would enable the holders of more than 20% of Security
First's voting stock to prevent amendments to the Security First Certificate
even if they were favored by the holders of a majority of the voting stock.
DIRECTORS
NUMBER; CLASSIFICATION. The FirstMerit Regulations presently provide that
the number of directors shall not be greater than 24, divided into three
classes. The shareholders of FirstMerit at the 1995 Annual Meeting of
Shareholders fixed the number of Directors at 18. The respective terms of the
classes are staggered so that the term of one class expires each year, at which
time members of that class are elected to a three-year term.
The Security First Certificate provides that the number of directors shall
be fixed from time to time by the Board of Directors pursuant to a resolution
adopted by a majority of the whole board. The number of directors of Security
First is currently eight. The respective terms of the classes are staggered so
that the term of one class expires each year, at which time members of that
class are elected to a three-year term.
REMOVAL; VACANCY. The FirstMerit Regulations provide that FirstMerit's
shareholders may remove a director for good cause by a vote of two-thirds of the
capital stock entitled to vote for directors. The FirstMerit Regulations provide
that vacancies in FirstMerit's Board of Directors, whether occurring by reason
of a resignation or otherwise, may be filled by the FirstMerit Board acting by a
vote of a majority of directors then in office, even if less than a quorum.
The Security First Certificate provides that a director may be removed only
for cause and then only by the affirmative vote of the holders of at least 80%
of the outstanding shares entitled to vote in an election of directors, voting
as a single class. The Security First Certificate further sates that,
notwithstanding the foregoing, any director who has at any time been
disqualified from office (as defined in the Security First Certificate) may be
removed from office by the affirmative vote of the holders of at least a
majority of the voting power of all of the then-outstanding shares of capital
stock of Security First entitled to vote generally in the election of directors,
voting together as a single class.
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The Security First Bylaws provide that vacancies in Security First's Board
of Directors, whether occurring by reason of an increase in the number of
directors, by resignation or otherwise, may be filled by the Security First
Board acting by a vote of a majority of directors then in office, even if less
than a quorum.
INDEMNIFICATION, INSURANCE AND LIMITATION OF DIRECTOR LIABILITY. Under Ohio
law, Ohio corporations are authorized to indemnify directors, officers,
employees, and agents within prescribed limits and must indemnify them under
certain circumstances. Ohio law does not provide statutory authorization for a
corporation to indemnify directors, officers, employees, and agents for
settlements, fines, or judgments in the context of derivative suits. It
provides, however, that directors (but not officers, employees, and agents) are
entitled to mandatory advancement of expenses, including attorneys' fees,
incurred in defending any action, including derivative actions, brought against
the director, provided the director agrees to cooperate with the corporation
concerning the matter and to repay the amount advanced if it is proved by clear
and convincing evidence that his act or failure to act was done with deliberate
intent to cause injury to the corporation or with reckless disregard for the
corporation's best interests.
Ohio law does not authorize payment of expenses or judgments to a director,
officer, employee, or agent after a finding of negligence or misconduct in a
derivative suit absent a court order. Indemnification is required, however, to
the extent such person succeeds on the merits. In all other cases, if a
director, officer, employee, or agent acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, indemnification is discretionary except as otherwise provided by a
corporation's articles, code of regulations, or by contract and except with
respect to the advancement of expenses of directors.
Under Ohio law, a director is not liable for monetary damages unless it is
proved by clear and convincing evidence that his action or failure to act was
undertaken with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interests of the corporation. There is, however,
no comparable provision limiting the liability of officers, employees, or agents
of a corporation. The statutory right to indemnification is not exclusive in
Ohio, and Ohio corporations may, among other things, procure insurance for such
persons.
The FirstMerit Articles provide that FirstMerit may indemnify to the
fullest extent permitted by law any person made or threatened to be made a party
to any action, suit, or proceeding by reason of the fact that he is or was a
director, officer, employee or agent of FirstMerit, or of any other corporation
or organization for which he was serving as a director, officer, employee or
agent at the request of FirstMerit. FirstMerit has entered into Indemnification
Agreements with each of its directors and executive officers.
Under Delaware law, a Delaware corporation may include in its certificate
of incorporation a provision that eliminates or limits a director's personal
liability for monetary damages for breach of his or her fiduciary duty, subject
to certain limitations. The Security First Certificate provides that a director
shall not be personally liable to Security First or its stockholders for
monetary damages arising out of the director's breach of his or her duty of
care, except (i) for any breach of a director's duty of loyalty to Security
First or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL which imposes liability on directors for unlawful
payment of dividends or unlawful stock repurchases, or (iv) for any transactions
from which the director derived any improper personal benefit. Further, the
Security First Certificate provides that if Delaware law is subsequently amended
to eliminate or limit director liability with respect to these actions, then the
liability of the directors shall be eliminated or limited to the fullest extent
of the law. These provisions do not, however, relieve directors or their duty to
act with due care. In addition, these provisions do not prevent a stockholder
from seeking equitable remedies, including an injunction prohibiting a proposed
action or transaction or rescission of a consummated action or transaction.
Under federal regulations, there is no provision for limitation of
directors' liability to the Associations, nor do the Associations' charters or
bylaws contain any limitation on the liability of directors of the Associations
for conduct in their official capacities.
Under Section 145 of the DGCL, directors, officers, employees and other
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation -- a
"derivative action") if they acted in good faith and in a manner
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they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, regarding any criminal action or proceeding, had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of derivative actions, except that indemnification only extends to
expenses (including attorneys' fees) incurred in connection with the defense or
settlement of such actions. The DGCL requires court approval before there can be
any indemnification where the person seeking indemnification has been found
liable to the corporation. To the extent that a person otherwise eligible to be
indemnified is successful on the merits of any claim or defense described above,
indemnification for expenses (including attorneys' fees) actually and reasonably
incurred is mandated by the DGCL.
The Security First Certificate provides that Security First shall
indemnify, to the fullest extent authorized by the DGCL, each person who was or
is made party to, is threatened to be made a party to, or is involved in, any
action, suit or proceeding because he is or was a director, officer, employee or
agent of Security First or of any Security First subsidiary (or was serving at
the request of Security First as a director, trustee, officer, employee or agent
of another entity) while serving in such capacity against all expenses,
liabilities or loss incurred by such person in connection therewith.
The Security First Certificate also provides that Security First may pay
expenses incurred in defending the proceedings specified above in advance of
their final disposition to the extent permitted by law. Security First may
advance expenses to any director, officer or employee only upon delivery to
Security First of an undertaking by the indemnified party stating that he has
reasonably incurred or will reasonably incur actual expenses in defending an
actual civil or criminal suit, action or proceeding in his capacity as such
director, officer or employee, or arising out of his status as such director,
officer or employee, and that he undertakes to repay all amounts so advanced if
it is ultimately determined that the person receiving such payments is not
entitled to be indemnified. The Security First Certificate also provides for the
continuation of indemnification after the termination of the person's
association with the company.
Finally, the Security First Certificate provides that Security First may
maintain insurance, at its expense, to protect itself and any of its directors,
officers, employees or agents against any expense, liability or loss, regardless
of whether Security First has the power or obligation to indemnify that person
against such expense, liability or loss under the Security First Certificate.
The right to indemnification is not exclusive of any other right which any
person may have or acquire under any statute, provision of the Security First
Certificate or the Security First Bylaws, or otherwise.
Security First has not entered into separate indemnification agreements
with any of its executive officers or directors.
Both FirstMerit and Security First have acquired insurance for their
obligations to provide indemnification to their officers and directors.
DIVIDENDS
An Ohio corporation may pay dividends out of surplus, however created, but
must notify its shareholders if a dividend is paid out of capital surplus.
Delaware corporations may pay dividends out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which declared and for the
preceding fiscal year. Section 170 of the DGCL also provides that dividends may
not be paid out of net profits if, after the payment of the dividend, capital is
less than the capital represented by the outstanding stock of all classes having
a preference upon the distribution of assets.
The ability of FirstMerit and Security First to pay cash dividends to their
respective shareholders is largely dependent on the amount of dividends which
may be declared and paid to each of them by their respective subsidiaries. There
are a number of statutory and regulatory requirements applicable to the payment
of dividends by banks, savings associations and bank holding companies. See
"REGULATORY MATTERS."
PREFERRED STOCK
The terms and provisions of FirstMerit's Preferred Stock are delineated
above under "DESCRIPTION OF FIRSTMERIT CAPITAL STOCK -- FirstMerit Preferred
Stock."
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Security First is authorized under the Security First Certificate to issue
up to 1,000,000 shares of preferred stock, none of which is outstanding. The
Security First Board of Director's has the power to specify certain rights and
preferences of the preferred stock, such as voting rights, without shareholder
approval. Under the Security First Certificate, the Board has the authority to
issue authorized shares of preferred stock in series and to fix the number,
designation, relative rights, preferences and limitations of the shares of each
series of preferred stock, subject to Delaware law and the Security First
Certificate. The authority of the Security First Board includes the right to fix
for each series the dividend rate, redemption price, liquidation rights, sinking
fund provisions, conversion rights and voting rights.
TRANSFER AGENT
FirstMerit's transfer agent is FirstMerit Bank, N.A., Corporate Trust
Department, 121 South Main Street, Suite 200, Akron, Ohio 44308-1444; telephone
number (330) 384-7202; Security First's transfer agent is National City Bank,
Corporate Trust Department, P.O. Box 92301, Cleveland, Ohio 44193-0900;
telephone number (800) 622-6757.
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<PAGE> 67
ELECTION OF DIRECTORS
Security First's Board of Directors is currently composed of eight members.
Directors are generally elected to serve for three year terms or until their
respective successors are elected and qualified. The directors are divided into
three classes, with approximately one-third of the directors elected annually.
The following table sets forth certain information regarding the
composition of Security First's Board of Directors, including terms of office.
It is intended that the proxies solicited on behalf of the Board of Directors
(other than proxies in which the vote is withheld as to the nominees) will be
voted at the Meeting "For" the election of the following nominees. If any
nominee is unable to serve, the shares represented by all valid proxies will be
voted "For' the election of such substitute as the Board of Directors may
recommend. At this time, the Board of Directors knows of no reason why any
nominee might be unable to serve if elected. Except as set forth herein, there
are no arrangements or understandings between any director or nominee and any
other person pursuant to which such director or nominee was selected.
<TABLE>
<CAPTION>
DIRECTOR TERM TO
NAME AGE POSITIONS SINCE EXPIRE
- -------------------------------- --- -------------------------------- -------- -------
<S> <C> <C> <C> <C>
NOMINEES
Austin J. Mulhern............... 56 Director, President and 1985 2001
Chief Operating Officer
James P. Myers.................. 66 Director 1996 2001
DIRECTORS REMAINING IN OFFICE
Charles F. Valentine............ 58 Chairman of the Board and 1981 2000
Chief Executive Officer
Robert L. Anderson.............. 56 Director 1987 2000
Donald E. Snow.................. 73 Director 1987 2000
Nicholas E. Rinaldi, D.D.S. .... 57 Director 1992 1999
Louis J. Sorboro................ 59 Director 1996 1999
Paul V. Voinovich............... 55 Director 1987 1999
</TABLE>
The principal occupation of each Director of Security First is set forth
below. All directors have held their present position for at least five years
unless otherwise indicated.
AUSTIN J. MULHERN. Mr. Mulhern is President and Chief Operating Officer of
Security Federal, positions he has held since 1985. From 1985 to May, 1988, he
was also Chief Financial Officer of Security Federal. Mr. Mulhern has been
President and Chief Operating Officer of Security First since the formation of
Security First in December 1992. In April 1996, Mr. Mulhern was appointed to the
Board of Directors of First Federal.
JAMES P. MYERS. Mr. Myers served on the Board of Directors of First Kent
from March 1994 until its acquisition by Security First in April 1996. He has
also served on the Board of Directors of First Federal since 1972 and as First
Federal's Treasurer from 1975 to 1994. Mr. Myers has been a pharmacist at Hale
B. Thompson, Inc., a retail drug store located in Kent, Ohio since 1958. In
1989, he was appointed President of Hale B. Thompson, Inc.
CHARLES F. VALENTINE. Mr. Valentine is Chairman of the Board and Chief
Executive Officer of Security Federal. He has been with Security Federal since
1980 in various capacities. Mr. Valentine has been Chairman of the Board and
Chief Executive Officer of Security First since its formation in December 1992.
In April 1996, Mr. Valentine was appointed to the Board of Directors of First
Federal.
ROBERT L. ANDERSON. Mr. Anderson is Chairman of the Board and Chief
Executive Officer of Wiseco Piston, Inc., a piston manufacturing company.
DONALD E. SNOW. Mr. Snow retired in 1987, after 19 years as District
Manager of the Ohio Edison Co., an electric utility company in Medina, Ohio.
58
<PAGE> 68
NICHOLAS E. RINALDI, D.D.S. Dr. Rinaldi is practicing dentistry with the
organization of Drs. Rhodes, Rinaldi and Associates, Inc. which operates five
offices in the Cleveland area. Dr. Rinaldi has been a practicing dentist since
1967.
LOUIS J. SORBORO. Mr. Sorboro has served as President and Chief Executive
Officer of First Federal since 1976, and its holding company from March 1994
until its acquisition by Security First in April 1996.
PAUL V. VOINOVICH. Mr. Voinovich is President and Secretary of Voinovich
Companies, a planning, construction and development company based in Cleveland,
Ohio.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
Meetings of Security First's Board of Directors are generally held at least
monthly. The Board of Directors met 14 times during fiscal 1998. During fiscal
1998, no incumbent director attended fewer than 75% of the aggregate of the
total number of meetings of the Board of Directors and the total number of
meetings held by committees on which he served.
During fiscal 1998, the principal standing committees of Security First
were the Audit and Stock Option Committees. Security First did not have a
standing nominating or compensation committee during fiscal 1998. The full Board
of Directors of Security First acts as a nominating committee for the annual
selection of its nominees for election as directors. While the Board of
Directors will consider nominees recommended by others, it has neither actively
solicited recommendations for nominees nor established any procedures for this
purpose. Effective April 22, 1998, Security First formed a Compensation
Committee.
The Audit Committee is currently composed of non-employee Directors
Anderson, Myers, Rinaldi, Snow and Voinovich. The Audit Committee reviews audit
reports and related matters of Security First and the Associations to ensure
effective compliance with regulatory and internal policies and procedures. The
Audit Committee met twice during fiscal 1998.
The Stock Option Committee is responsible for determining awards under
Security First's 1996 Stock Option and Incentive Plan (the "Stock Option Plan").
Directors Anderson, Myers Rinaldi, Snow and Voinovich currently serve on this
committee. The Stock Option Committee met once during fiscal 1998.
Security First has not paid any compensation to its executive officers
since its formation. Security Federal, however, has a standing compensation
committee which is responsible for making recommendations of the salaries,
bonuses and incentives for all officers of Security Federal. Directors Anderson,
Myers, Rinaldi, Snow and Voinovich, all of whom are also directors of Security
First, are members of the compensation committee for Security Federal. During
fiscal 1998, Security Federal's compensation committee met twice.
First Federal's entire Board of Directors, four of whom are also directors
of Security First, act as the compensation committee for First Federal.
Directors of First Federal who are also employees of First Federal do not
participate in compensation discussions relating to themselves. During fiscal
1998, First Federal's Board of Directors met twice to discuss compensation
matters.
COMPENSATION OF DIRECTORS
Directors of Security First who are not employees of Security First or the
Associations ("Non-Employee Directors") are paid a fee of $150 per regular,
special or committee meeting of the Board of Directors attended. Certain
directors of Security First also serve on the Boards of one or both of
Associations. At March 31, 1998, Directors Valentine and Mulhern, both of whom
are employees of Security First and/or the Associations ("Employee Directors"),
served on the Boards of both Security Federal and First Federal. Directors
Anderson, Myers, Rinaldi, Snow and Voinovich, all of whom are Non-Employee
Directors, served on the Board of Security Federal and Directors Sorboro, an
Employee Director, and Myers, a Non-Employee director, served on the Boards of
both Security Federal and First Federal.
During fiscal 1998, Non-Employee Directors of Security Federal received an
annual fee of $3,600 plus $700 per meeting of the Board of Directors of Security
Federal attended. Non-Employee Directors of Security Federal
59
<PAGE> 69
also received fees of $250 per committee meeting attended. During fiscal 1998,
First Federal paid each of its Non-Employee Directors an annual fee of $8,700
for services rendered.
In addition, in May 1997 Directors Anderson, Myers, Rinaldi, Snow and
Voinovich were each granted an option to purchase 1,500 shares of Security First
Common Stock as a result of Security First's performance during the 1997 fiscal
year.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth for the three years ended March 31, 1998,
information as to the compensation of Security First's Chief Executive Officer
and the other most highly compensated executive officers of Security First or
the Associations whose salary and bonus exceeded $100,000 during fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------
- ------------------------------------------------------------------------ RESTRICTED
OTHER ANNUAL STOCK ALL OTHER
FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) (#) ($)
- --------------------------- ------ -------- -------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles F. Valentine
Chairman of the Board and 1998 $210,000 $142,000 -- -- 18,000 $42,133(2)
CEO of Security First 1997 198,125 124,100 -- -- 14,647 28,809
and Security Federal 1996 188,225 81,225 -- -- 15,750 28,587
Austin J. Mulhern
President and COO 1998 $168,800 $114,000 -- -- 15,000 $32,062(3)
of Security First 1997 159,250 99,800 -- -- 12,555 31,198
and Security Federal 1996 151,275 65,250 -- -- 13,500 30,198
Jeffrey J. Calabrese
Vice President and 1998 $ 82,625 $ 40,000 $11,224 -- 7,500 $19,906(4)
Secretary of Security
First 1997 78,675 35,000 12,429 -- 6,975 18,323
and Security Federal 1996 74,925 25,600 10,657 -- 7,500 17,096
Mary H. Crotty
Vice President and 1998 $ 85,050 $ 41,000 -- -- 7,500 $10,327(5)
CFO of Security First 1997 81,000 35,000 -- -- 6,277 8,813
and Security Federal 1996 74,000 22,800 -- -- 6,750 7,296
Thomas J. Deighton
Vice President of 1998 $ 73,575 $ 35,000 -- -- 7,500 $ 8,907(6)
Security First and 1997 69,425 30,000 -- -- 6,277 7,567
Security Federal 1996 66,450 22,800 -- -- 6,750 6,579
Louis J. Sorboro
President of First
Federal 1998 $117,800 $ 40,000 -- -- 8,250 $ 9,550(6)
1997 112,074 31,400 -- -- -- 8,597
1996 107,168 28,590 -- -- -- 7,146
</TABLE>
- ---------------
(1) The named executive officers in the table did not receive any additional
benefits or perquisites which, in the aggregate, exceeded the lesser of 10%
of their salary and bonus or $50,000, except for Mr. Calabrese who received
benefits in fiscal 1998, 1997 and 1996 of $7,234, $8,154 and $6,408,
respectively, in connection with the use of a company car, $3,482, $3,803
and $3,793, respectively, paid on behalf of Mr. Calabrese for club dues and
$508, $472 and $456, respectively, paid on behalf of Mr. Calabrese for
disability insurance.
(2) Includes annual premiums for a split dollar life insurance policy equal to
$16,600 (including certain amounts reimbursable to Security First for its
prior payments of premiums upon termination of the arrangement), annual
premiums on term life insurance of $12,150, and contributions made by
Security Federal to a 401(k) plan on behalf of Mr. Valentine equal to
$13,383 for fiscal 1998.
(3) Includes annual premiums for a split dollar life insurance policy equal to
$19,000 (including certain amounts reimbursable to Security First for its
prior payments of premiums upon termination of the arrangement) and
60
<PAGE> 70
contributions made by Security Federal to a 401(k) plan on behalf of Mr.
Mulhern equal to $13,062 for fiscal 1998.
(4) Includes annual premiums for a split dollar life insurance policy equal to
$9,500 (including certain amounts reimbursable to Security First for its
prior payments of premiums upon termination of the arrangement) and
contributions made by Security Federal to a 401(k) plan on behalf of Mr.
Calabrese equal to $10,406 for fiscal 1998.
(5) Includes contributions made by Security Federal to a 401(k) plan on behalf
of Ms. Crotty for fiscal 1998.
(6) Includes contributions made by Security Federal to a 401(k) plan on behalf
of Mr. Deighton for fiscal 1998.
(7) Includes life insurance premiums of $643 and contributions of $8,907 made to
a 401(k) plan by First Federal on behalf of Mr. Sorboro during fiscal 1998.
The following table sets forth certain information concerning grants of
stock options pursuant to Security First's Stock Option Plan to the named
officers during the fiscal year ended March 31, 1998. No stock appreciation
rights or limited stock appreciation rights have been granted to date.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(4)
---------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- -------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Charles F. Valentine......... 18,000(1) 16% $13.41 05-20-07 $151,803 $384,698
Austin J. Mulhern............ 15,000(1) 14 13.41 05-20-07 126,502 320,581
Jeffrey J. Calabrese......... 7,500(2) 7 13.41 05-20-07 63,251 160,291
Mary H. Crotty............... 7,500(2) 7 13.41 05-20-07 63,251 160,291
Thomas J. Deighton........... 7,500(2) 7 13.41 05-20-07 63,251 160,291
Louis J. Sorboro............. 8,250(3) 7 13.41 05-20-07 69,576 176,320
</TABLE>
- ---------------
(1) All such options were immediately exercisable upon date of grant, except for
7,455 options which became exercisable on January 2, 1998.
(2) All such options were immediately exercisable upon date of grant, except for
45 options which became exercisable on January 2, 1998.
(3) All such options were immediately exercisable upon date of grant, except for
2,880 options which became exercisable on January 2, 1998.
(4) Represents the potential realizable value of the option grant assuming that
the market price of the underlying security appreciates in value from the
date of grant to the end of the option term (10 years) at the annualized
rates as set forth in the table above.
61
<PAGE> 71
The following table sets forth certain information concerning the number
and value of in-the-money (when the fair market value of the common stock
exceeds the exercise price of the option) stock options at March 31, 1998 held
by the named executive officers and stock options exercised during fiscal 1998.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END (#) AT FY-END ($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles F.
Valentine.......... 29,190 $408,767 70,147 -- $983,618 --
Austin J. Mulhern.... 1,150 19,067 56,405 -- 777,324 --
Jeffrey J.
Calabrese.......... -- -- 30,225 -- 419,857 --
Mary H. Crotty....... -- -- 22,027 -- 275,622 --
Thomas J. Deighton... -- -- 20,527 -- 253,212 --
Louis J. Sorboro..... -- -- 35,444 18,128(2) 509,659 $288,746
</TABLE>
- ---------------
(1) The value of options held is based upon the average of the bid and asked
price of Security First's common stock of $22.69 per share as quoted on the
Nasdaq/NMS on March 31, 1998, less the respective exercise prices.
(2) Of this amount, 9,064 options will become exercisable on January 25, 1999
and January 25, 2000.
EMPLOYMENT AGREEMENTS
Security Federal maintains employment agreements with Messrs. Valentine,
Mulhern, Calabrese and Ms. Crotty. First Federal maintains an employment
agreement with Mr. Sorboro. The employment agreements provide for initial annual
base salaries in amounts not less than their current salaries. Each of the
agreements is for a term of three years which may be extended for an additional
one year in addition to the then-remaining term if Security Federal's or First
Federal's Board of Directors, as the case may be, reviews and approves the
extension. The agreements provide for termination upon the employee's death, for
cause or in certain events specified by regulations or by the Board of Directors
at any time, but without prejudice to the employee's right to compensation or
benefits under the employment agreements. The employment agreements are
terminable by the employees upon 90 days written notice to Security Federal or
First Federal, as applicable. Each of the employment agreements provides for
payment to the employee of 299% of base amount of compensation as defined by the
Internal Revenue Code in the event there is a change in control of Security
Federal or First Federal, as appropriate, where employment terminates
involuntarily in connection with such change in control or within 12 months
thereafter. Consummation of the Merger will constitute a change in control under
the employment agreements. See "TERMS OF MERGER -- Interests of Certain Persons
in the Merger" for additional information on change in control payments.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL. Security First has not paid any cash compensation to its executive
officers since its formation. All executive officers of Security First also
currently hold positions with Security Federal, Security First's lead bank
subsidiary, and receive cash compensation from Security Federal.
The function of administering the executive compensation policies of
Security Federal is currently performed by the Compensation Committee of the
Board of Directors of Security Federal. Messrs. Valentine and Mulhern are
excluded from discussion and board deliberations regarding compensation paid to
them as executive officers. The Compensation Committee, all of whom are
non-employee board members, determines the compensation for Messrs. Valentine
and Mulhern. For compensation of executive officers other than themselves,
Messrs. Valentine and Mulhern make recommendations to Security Federal's
Compensation Committee. In this process, the officers are evaluated as to their
performance during the year and compared to Security Federal's
62
<PAGE> 72
performance, thrift industry compensation surveys and comparable positions at
other thrift institutions. The Compensation Committee generally follows
management's recommendations.
The function of administering the executive compensation policies of First
Federal is performed by the non-employee members of First Federal's Board of
Directors. Mr. Sorboro is excluded from discussions and board deliberations
regarding compensation paid to him as an executive officer. For compensation of
executive officers of First Federal other than himself, Mr. Sorboro makes
recommendations to First Federal's Board of Directors, which recommendations the
First Federal Board generally follows.
Base salaries and annual adjustments are determined by evaluating the
responsibilities of the position held and the experience of the individual.
Reference is also made to the competitive marketplace for management talent,
including a comparison of base salaries for comparable positions within the
thrift and banking industry to ensure that base salaries approximate the average
of comparable salary ranges. Adjustments also reflect the performance of
Security Federal and First Federal, the performance of the executive and any
increased responsibilities assumed by the executive.
COMPENSATION OF EXECUTIVE OFFICERS. During 1997 a nationally recognized
compensation consulting firm undertook a comprehensive compensation study
concerning the executive compensation practices of the Associations. With the
recommendation of the compensation consulting firm, in June 1997 Security First
adopted an Annual Incentive Plan providing for cash incentive awards to certain
eligible officers and employees of Security Federal and First Federal, including
executive officers. Recommended awards under the Annual Incentive Plan for
officers and employees of Security Federal and First Federal, as well as annual
performance goals are submitted to the Compensation Committee of the Board of
Directors of Security First for its consideration and approval or ratification.
Security First's Compensation Committee, all non-employee board members, approve
the compensation for Messrs. Valentine, Mulhern and Sorboro. Regarding
compensation of officers and employees of Security Federal and First Federal,
other than Messrs. Valentine, Mulhern and Sorboro, Security First's Compensation
Committee reviews the recommendations of management of Security Federal and
First Federal and ratifies the decisions of Security Federal's Compensation
Committee and the non-employee members of First Federal's Board of Directors as
to compensation issues.
In addition, the Chief Executive Officer of Security First has the
discretion to make individual bonus awards from time to time to any employee
based on his or her performance, regardless of whether that individual is
otherwise eligible to participate in the Annual Incentive Plan. The Annual
Incentive Plan provides that officers and employees at certain salary grade
levels may be entitled to an annual cash incentive bonus ranging from 30% to 70%
of annual salary if and only if (i) Security First achieves a certain return on
average equity (determined annually) and (ii) the operating unit (meaning
Security Federal or First Federal) meets or exceeds its capital requirements and
receives a favorable safety and soundness rating from its banking supervisory
authorities.
Assuming the foregoing criteria are satisfied, an individual employee will
be entitled to an award under the Annual Incentive Plan if his or her individual
performance goals are satisfied and if the operating unit's goals (established
by the committee administering the Annual Incentive Plan, with input from senior
management) are satisfied. Provided that an incentive award is payable under the
terms of the Annual Incentive Plan, the highest salary grade levels are entitled
to an amount up to 70% of their annual salary, with 80% of such award being
determined by operating unit performance and 20% by individual performance. In
contrast, the lowest participating salary grade level would be entitled to 30%
of annual salary, determined equally by operating unit and individual
performance. Operating unit performance levels are determined based on past
performance, expected future performance, annual budgets, peer institution
performance and the committee's judgment concerning shareholder expectations.
Annual cash incentive awards are earned proportionate to achievement of
individual and operating unit performance goals: a threshold performance level
at which 12.5% of the maximum annual incentive award would be payable (but below
which no annual incentive award will be payable) and a maximum performance
level, at which the participating employee would receive 100% of his or her
incentive award. In the case of operating units, maximum performance represents
achievements of 110% of the operating unit's budgeted performance levels
(determined annually), whereas threshold performance represents achievement of
70% of the operating unit's budgeted performance levels (likewise determine
annually). Pro-rated awards would be made for
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<PAGE> 73
performance levels within the threshold-to-maximum range, with 50% of the
maximum award being earned by performance at "target performance" levels of 83%
of budgeted performance. Annual cash incentive awards are calculated based on
audited year-end financial statements. Awards are paid in cash as soon as
possible after approval by the compensation committee. For employees terminated
due to death, disability, retirement or a change in control, proportionate
awards are paid for the portion of the year during which such person was
actively employed with an operating unit.
Because the Compensation Committee views Messrs. Valentine and Mulhern as
having the greatest impact on corporate performance the independent Board
members have established a compensation philosophy of providing base pay and
incentive compensation for Security Federal's top two executive officers
reflective of Security Federal's superior financial performance relative to
comparably situated thrifts. Compensation Committee members also expressed their
philosophy that base salary and incentive compensation for Messrs. Valentine and
Mulhern at levels near the top percentiles in thrift industry compensation
surveys were contingent on satisfactory regulatory examinations relative to (i)
safety and soundness, (ii) Community Reinvestment Act compliance and (iii)
regulatory compliance. For persons other than Messrs. Valentine and Mulhern, the
Compensation Committee seeks to establish executive officer base salaries at a
level commensurate with the thrift subsidiary's corporate performance, peer
group competitors, and the individual officer's performance.
Stock options have been included as key elements in the total executive
officer compensation package for many years. Equity-based compensation provides
a long-term link between the results achieved for shareholders and the rewards
provided to key executive officers. As a result of the Merger, no stock options
were awarded by the Compensation Committee for Security First's performance in
fiscal 1998.
Through the programs described above, a significant portion of the
executive compensation program is linked directly to individual and corporate
performance and long-term stock price appreciation. The Compensation Committee
continues to review all elements of executive compensation to insure that the
total compensation program, and each element therein, meets the business
objectives and philosophy of Security First's two thrift subsidiaries, as
discussed above.
Section 162(m) was added to the Code in 1993. With certain exceptions,
Section 162(m) eliminates the deductibility of compensation over $1 million paid
to certain highly compensated executive officers of publicly held corporations,
such as, in Security First's case, those executive officers identified in the
"Summary Compensation Table." Section 162(m) applies to all remuneration (both
cash and non-cash) that would otherwise be deductible for tax years beginning on
or after January 1, 1994, unless expressly excluded. While the current
compensation of each of Security First's executive officers is well below the $1
million threshold, if certain executives exercise sufficient stock options, it
could be possible for the executive's compensation to exceed $1 million.
As a general rule, it will be the Stock Option Committee's policy to take
into account tax and financial accounting considerations in connection with the
granting of options or other forms of grants and awards under Security First's
Stock Option and Incentive Plan. The Board of Directors through its Stock Option
Committee (in the case of stock option grants and other awards to executive
officers) does not expect that grants or awards will be made which would exceed
the limit on deductibility.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. The base salary of Mr. Valentine
as the Chief Executive Officer was increased in calendar 1998 by 6.0% as a
result of Security Federal exceeding targeted performance objectives.
Like other executive officers, Mr. Valentine participated in the Annual
Incentive Plan. Mr. Valentine, as well as President Mulhern, is eligible to
receive up to 70% of base salary in short-term incentive compensation under the
Annual Incentive Plan. Based on achievement of operating unit and individual
performance goals, the Compensation Committee awarded to Mr. Valentine an annual
cash incentive payment under the Annual Incentive Plan of 64.8% of his current
salary.
In reviewing Mr. Valentine's performance as Chief Executive Officer and the
justification for Security Federal to renew his employment agreement for an
additional year, the Compensation Committee favorably considered Mr. Valentine's
performance relative to the following factors (without, however, assigning any
such
64
<PAGE> 74
factor a specific weight): corporate performance (return on assets and return on
equity), Security First's stock price performance, Security First's growth in
loan volume and the compliance posture of Security Federal.
Submitted by the
Compensation Committee of Security First
Robert L. Anderson
James P. Myers
Nicholas E. Rinaldi, D.D.S.
Donald E. Snow
Paul V. Voinovich
STOCK PERFORMANCE GRAPH
The following graph shows the performance of Security First's stock (based
on an assumed $100 investment) since April 1, 1993 in comparison to the Nasdaq
Market Index and the Media General Savings and Loan Index. ("Selected Thrift
Index")
<TABLE>
<CAPTION>
03/31/93 03/31/94 03/31/95 03/31/96 03/31/97 03/31/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Security First Corp............ $100.00 $115.01 $147.56 $137.59 $218.74 $397.94
Selected Thrift Index.......... 100.00 102.94 116.64 165.00 229.71 389.49
Nasdaq Market Index............ 100.00 115.57 122.61 164.91 184.50 278.82
</TABLE>
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has renewed Security First's arrangement for
Deloitte & Touche LLP to be its auditors for the 1999 fiscal year, subject to
the ratification of the appointment by Security First's shareholders. A
representative of Deloitte & Touche LLP is expected to attend the Meeting to
respond to appropriate questions and will have an opportunity to make a
statement if he or she so desires.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS SECURITY FIRST'S
AUDITORS FOR THE FISCAL YEAR ENDING MARCH 31, 1999.
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<PAGE> 75
SHAREHOLDER PROPOSALS
Security First will hold a 1999 Annual Meeting of Shareholders only if the
Merger is not consummated before the time of such meeting, which is presently
expected to be held on or about July 22, 1999. In such event, in order to be
eligible for inclusion in Security First's proxy materials for its 1999 Annual
Meeting of Shareholders, any shareholder proposal to take action at such meeting
must be received at Security First's main office, 1413 Golden Gate Boulevard,
Mayfield Heights, Ohio 44124 no later than February 23, 1999. Any such proposal
shall be subject to the requirements of the proxy rules adopted under the
Securities Exchange Act of 1934, as amended.
ANNUAL REPORT ON FORM 10-K
A copy of Security First's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998 is available to shareholders free of charge. Requests
should be directed to Mary H. Crotty, Vice President, Security First Corp., 1413
Golden Gate Boulevard, Mayfield Heights, Ohio 44124.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matter should properly come before the Meeting, it is
intended that holders of the proxies will act in accordance with their best
judgment.
LEGAL MATTERS
The validity of the shares of FirstMerit Common Stock to be issued by
FirstMerit under the Merger Agreement and certain federal tax matters relating
to the Merger have been passed upon for FirstMerit by its counsel, Brouse &
McDowell, L.P.A. Philip A. Lloyd II is a shareholder of Brouse & McDowell,
L.P.A. and a director of FirstMerit. Kevin C. O'Neil is a shareholder of Brouse
& McDowell, L.P.A. Due to their involvement in this transaction, Messrs. Lloyd
and O'Neil are required to disclose their beneficial ownership of shares of
FirstMerit Common Stock, which is approximately 320,771 and 3,022 shares,
respectively. Certain legal matters in connection with the Merger will be passed
upon for Security First by Silver, Freedman & Taff, L.L.P. (a limited liability
partnership including professional corporations).
EXPERTS
The consolidated financial statements of FirstMerit incorporated in this
Prospectus and Proxy Statement by reference to the FirstMerit Annual Report on
Form 10-K for the year ended December 31, 1997, as amended by the Form 10-K/A,
have been so incorporated in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Security First Corp. and
subsidiaries as of March 31, 1998 and 1997, and for each of the three years in
the period ended March 31, 1998, attached hereto in Appendix C and incorporated
by reference in this Prospectus and Proxy Statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
attached hereto in Appendix C and incorporated by reference herein, and have
been so attached hereto and incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
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APPENDIX A
AGREEMENT OF AFFILIATION AND PLAN OF MERGER DATED APRIL 5, 1998,
BY AND BETWEEN FIRSTMERIT CORPORATION AND SECURITY FIRST CORP.
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AGREEMENT OF AFFILIATION
AND PLAN OF MERGER
THIS AGREEMENT OF AFFILIATION AND PLAN OF MERGER, dated as of April 4, 1998
(this "Agreement"), is made by and between FirstMerit Corporation, an Ohio
corporation ("FirstMerit"), and Security First Corp., a Delaware corporation
("Security First").
WHEREAS, the respective Boards of Directors of FirstMerit and Security
First have each determined that it is in the best interests of their respective
shareholders for Security First to merge with and into FirstMerit upon the terms
and subject to the conditions set forth herein;
WHEREAS, the respective Boards of Directors of FirstMerit and Security
First have each approved the merger of Security First with and into FirstMerit,
upon the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of FirstMerit intends, contemporaneously
with the merger of Security First with and into FirstMerit, to merge the wholly
owned subsidiaries of Security First (not including the non-banking
subsidiaries), with and into FirstMerit Bank, N.A., a wholly owned subsidiary of
FirstMerit;
WHEREAS, the Board of Directors of FirstMerit will appoint to the
FirstMerit Board of Directors at the Effective Time, an individual to be
recommended by Security First (subject to the approval of the FirstMerit Board
of Directors);
WHEREAS, as an inducement for FirstMerit to enter into this Agreement,
Security First will provide FirstMerit with an option to purchase up to 19.9
percent of the capital stock of Security First, but only if certain events
occur, pursuant to the terms and conditions of the Security First Stock Purchase
Option (as hereinafter defined);
WHEREAS, for Federal income tax purposes, it is intended that the merger
shall qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the merger shall be
accounted for as a "pooling of interests;"
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, and subject to the
terms and conditions set forth herein, the parties hereto hereby agree as
follows:
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1. THE MERGER
1.1. MERGER.
1.1.1. MERGER. At the Effective Time (as hereinafter defined),
Security First will be merged with and into FirstMerit (the "Merger") in
accordance with the provisions of Section 1701.78 of the Ohio General
Corporation Law ("OGCL"). FirstMerit shall be the surviving corporation in
the Merger and shall continue after the Merger to be incorporated under the
laws of the State of Ohio (the "Surviving Corporation"). The Merger shall
have the effects specified in the OGCL. The name of the Surviving
Corporation shall be "FirstMerit Corporation."
1.1.2. EFFECTIVE TIME. As soon as practicable following the Closing
(as hereinafter defined), FirstMerit and Security First (the "Constituent
Corporations") shall cause a certificate of merger complying with the
requirements of Section 1701.81 of the OGCL (the "Certificate of Merger")
to be filed with the Secretary of State of the State of Ohio. The form of
Certificate of Merger is attached hereto as Exhibit 1.1.2, which has
attached to it the Amended and Restated Articles of Incorporation of the
Surviving Corporation. The Merger will become effective at the time and
date which the Certificate of Merger is filed with the Secretary of State
of the State of Ohio (the "Effective Time").
1.1.3. CONSUMMATION OF MERGER. The closing of the Merger (the
"Closing") will take place (i) at 10:00 a.m. (local time) at the principal
executive offices of FirstMerit as promptly as practicable after the date
on which all of the conditions set forth in Article 6 are satisfied or duly
waived, or (ii) at such other time and place and on such other date as
FirstMerit and Security First may agree.
1.1.4. ARTICLES OF INCORPORATION AND REGULATIONS. The Amended and
Restated Articles of Incorporation and Code of Regulations of FirstMerit,
attached hereto as Exhibit 1.1.4, in effect immediately prior to the
Effective Time will be the Amended and Restated Articles of Incorporation
and Regulations of the Surviving Corporation after the Effective Time,
until duly amended in accordance with their respective terms and the OGCL.
1.1.5. DIRECTORS AND OFFICERS. The directors and officers of
FirstMerit immediately prior to the Effective Time will be the directors
and officers, respectively, of the Surviving Corporation, until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the terms of the
Surviving Corporation's Amended and Restated Articles of Incorporation and
Code of Regulations and the OGCL. Immediately following Closing, the Board
of Directors of FirstMerit will appoint to the FirstMerit Board of
Directors, an individual to be recommended by Security First, but subject
to the approval of the FirstMerit Board of Directors, such individual to
serve in the class whose terms expire in 2001.
1.1.6. SERVICE OF PROCESS. B.&McD., Inc., whose address is 106 S.
Main Street, Akron, Summit County, Ohio 44308, is the statutory agent upon
whom any process, notice or demand against FirstMerit, or the Surviving
Corporation may be served.
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2. CONVERSION OF SHARES
2.1. CONVERSION OF SHARES. Subject to the provisions of this Agreement, at
the Effective Time, automatically by virtue of the Merger and without any action
on the part of any party or shareholder, each share of the common stock, $.01
par value per share, of Security First (the "Security First Common Stock"),
issued and outstanding immediately prior to the Effective Time (excluding shares
held by Security First or any of the Security First Subsidiaries (as defined
below) or by FirstMerit or any of the FirstMerit Subsidiaries (as defined
below), in each case other than in a fiduciary capacity or as a result of debts
previously contracted ("Treasury Shares")), shall cease to be outstanding and
shall be converted into and become the right to receive .8855 (subject to
adjustment pursuant to Section 2.5) (the "Exchange Ratio") shares of common
stock, no par value, of FirstMerit ("FirstMerit Common Stock").
2.2. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of FirstMerit Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger;
instead, FirstMerit shall pay to each holder of Security First Common Stock who
would otherwise be entitled to a fractional share of FirstMerit Common Stock
(after taking into account all Security First Certificates delivered by such
holder) an amount in cash (without interest) determined by multiplying such
fraction by the average of the last sale prices of FirstMerit Common Stock, as
reported by The Nasdaq Stock Market National Market System ("Nasdaq/NMS")
reporting system (as reported in The Wall Street Journal or, if not reported
therein, in another authoritative source), for the five Nasdaq/NMS trading days
immediately preceding the Effective Date.
2.3. EXCHANGE PROCEDURES.
2.3.1 At or prior to the Effective Time, FirstMerit shall deposit, or
shall cause to be deposited, with the Exchange Agent, for the benefit of
the holders of Security First Certificates, for exchange in accordance with
this Article 2, certificates representing the shares of FirstMerit Common
Stock ("New Certificates") and an estimated amount of cash (such cash and
New Certificates, together with any dividends or distributions with respect
thereto (without any interest thereon), being hereinafter referred to as
the "Exchange Fund") to be paid pursuant to this Article 2 in exchange for
outstanding shares of Security First Common Stock.
2.3.2. As promptly as practicable after the Effective Date, FirstMerit
shall send or cause to be sent to each former holder of record of shares
(other than Treasury Shares) of Security First Stock immediately prior to
the Effective Time transmittal materials for use in exchanging such
shareholder's Security First Certificates for the consideration set forth
in this Article 2. FirstMerit shall cause the New Certificates into which
shares of a shareholder's Security First Common Stock are converted on the
Effective Date and/or any check in respect of the fractional share
interests or dividends or distributions which such person shall be entitled
to receive to be delivered to such shareholder upon delivery to the
Exchange Agent of Security First Certificates representing such shares of
Security First Common Stock (or indemnity reasonably satisfactory to
FirstMerit and the Exchange Agent, if any of such certificates are lost,
stolen or destroyed) owned by such shareholder. No interest will be paid on
any such cash to be paid pursuant to this Article 2 upon such delivery.
2.3.3. Notwithstanding the foregoing, neither the Exchange Agent nor
any party hereto shall be liable to any former holder of Security First
Common Stock for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
2.3.4. No dividends or other distributions with respect to FirstMerit
Common Stock with a record date occurring after the Effective Time shall be
paid to the holder of any unsurrendered Security First Certificate
representing shares of Security First Common Stock converted in the Merger
into shares of such FirstMerit Common Stock until the holder thereof shall
surrender such Security First Certificate in accordance with this Article
2. After the surrender of a Security First Certificate in accordance with
this Article 2, the record holder thereof shall be entitled to receive any
such dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of FirstMerit Common
Stock represented by such Security First Certificate.
2.3.5. Any portion of the Exchange Fund that remains unclaimed by the
shareholders of Security First
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for twelve months after the Effective Time shall be paid to FirstMerit by
the Exchange Agent. Any shareholders of Security First who have not
theretofore complied with this Article 2 shall thereafter look only to
FirstMerit for payment of the shares of FirstMerit Common Stock, cash in
lieu of any fractional shares and unpaid dividends and distributions on the
FirstMerit Common Stock deliverable in respect of each share of Security
First Common Stock such shareholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon.
2.4. RESERVED.
2.5. ANTI-DILUTION PROVISIONS. In the event FirstMerit changes (or
establishes a record date for changing) the number of shares of FirstMerit
Common Stock issued and outstanding prior to the Effective Date as a result of a
stock split, stock dividend, recapitalization or similar transaction with
respect to the outstanding FirstMerit Common Stock and the record date therefor
shall be prior to the Effective Date, or exchanges FirstMerit Common Stock for a
different number or kind of shares or securities or is involved in any
transaction resulting in any of the foregoing, the Exchange Ratio shall be
proportionately adjusted.
2.6. TREASURY SHARES. Each of the shares of Security First Stock held as
Treasury Shares immediately prior to the Effective Time shall be canceled and
retired at the Effective Time and no consideration shall be issued in exchange
therefor.
2.7. STOCK OPTIONS. The Security First Disclosure Letter (as hereinafter
defined) sets forth a list of each stock option outstanding on the date of this
Agreement (collectively, the "Security First Stock Options"), to purchase Common
Stock heretofore granted pursuant to the Security First 1987 Stock Option and
Incentive Plan, 1996 Stock Option and Incentive Plan and the First Kent
Financial Corporation 1994 Stock Option Plan (the "Security First Option
Plans"). The Security First Disclosure Letter also sets forth with respect to
each Security First Stock Option the option exercise price, the number of shares
subject to the option, the dates of grant, vesting, exercisability and
expiration of the option and that the option is either an incentive or a
nonqualified stock option. Without the written consent of FirstMerit, no
additional stock options shall, after the date of this Agreement, be granted
under the Security First Option Plans. All rights under Security First Stock
Options shall be treated as provided in this Section.
Each Security First Stock Option outstanding immediately prior to the
Effective Time shall be assumed at the Effective Time by the Surviving
Corporation and continue to be an issued and outstanding option of the Surviving
Corporation in accordance with the terms of the respective Security First Option
Plans, except that: (a) the Surviving Corporation and its Compensation Committee
shall be substituted for Security First and the committee of Security First's
Board of Directors administering such Security First Option Plans, (b) from and
after the Effective Time, each such Security First Stock Option may be exercised
only for FirstMerit Common Stock notwithstanding any contrary provision of the
Security First Option Plans or stock option agreements executed in connection
therewith, (c) each such Security First Stock Option shall at the Effective Time
become an option to purchase a number of shares of FirstMerit Common Stock equal
to the product arrived at by multiplying the Exchange Ratio by the number of
shares of Common Stock subject to such option immediately prior to the Effective
Time, and (d) the exercise price per share of FirstMerit Common Stock at which
each such Security First Stock Option is exercisable shall be the amount
(rounded up to the next whole cent) arrived at by dividing the exercise price
per share of Common Stock at which such Security First Stock Option is
exercisable immediately prior to the Effective Time by the Exchange Ratio;
provided, however, that, notwithstanding the foregoing, the Surviving
Corporation shall not issue or pay for any fractional share otherwise issuable
upon any exercise of a Security First Stock Option, as assumed and adjusted as
aforesaid.
In addition, notwithstanding clauses (c) and (d) of the immediately
preceding sentence, each Security First Stock Option which is an incentive stock
option shall be adjusted as required by Section 424 of the Code, and the
regulations promulgated thereunder, so as not to constitute a modification,
extension or renewal of the option, within the meaning of Section 424 of the
Code. The Board of Directors of the Surviving Corporation shall take such action
as may be required under the Security First Option Plans to effectuate the
foregoing. Immediately after Closing, FirstMerit shall reserve for issuance
(and, if not previously registered pursuant to the Securities Act, register) the
number of shares of FirstMerit Common Stock necessary to satisfy FirstMerit's
obligations
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under this Section. Prior to the Closing, and thereafter as may be appropriate,
FirstMerit shall take such actions as are necessary to effect the provisions of
this Section, and to preserve for the holders of Security First Stock Options
the benefits to be provided pursuant to this Section.
2.8. SECURITY FIRST CONVERTIBLE DEBENTURES. The Security First Disclosure
Letter sets forth the terms of the Security First Debentures. Without the
written consent of FirstMerit, no additional Security First Debentures shall,
after the date of this Agreement, be issued. All rights under Security First
Debentures shall be treated as provided in this Section. As soon as practicable
after the date of this Agreement, Security First shall call and redeem, pursuant
to the terms of the Security First Debentures, all of the outstanding Security
First Debentures.
3. REPRESENTATIONS AND WARRANTIES OF FIRSTMERIT
FirstMerit hereby represents and warrants to Security First that:
3.1. CORPORATE ORGANIZATION. FirstMerit is a corporation duly organized,
validly existing and in good standing under the laws of the State of Ohio and is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which its ownership or lease of property or the nature
of the business conducted by it makes such qualification necessary, except for
such jurisdictions in which the failure to be so qualified would not have a
Material Adverse Effect (as hereinafter defined) on FirstMerit. FirstMerit is
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). FirstMerit has the requisite corporate power and
authority to own, lease and operate its properties and assets and to carry on
its business as it is now being conducted.
3.2. AUTHORITY. FirstMerit has the requisite corporate power and authority
to execute and deliver this Agreement and, except for any required approval of
the applicable Regulatory Authorities (as defined hereinafter), to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized and approved by the Board of Directors of FirstMerit, including
provisions for the resolution of certain issues by management, and no other
corporate proceedings on the part of FirstMerit are necessary to authorize this
Agreement or to consummate the transactions so contemplated. This Agreement has
been duly executed and delivered by, and constitutes a valid and binding
obligation of, FirstMerit, enforceable against FirstMerit in accordance with its
terms, except as enforceability hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be brought.
3.3. CAPITALIZATION. The authorized capital stock of FirstMerit consists
of 80,000,000 shares of FirstMerit Common Stock and 7,000,000 shares of
preferred stock. As of December 31, 1997, (i) 68,127,314 shares of FirstMerit
Common Stock (including 6,159,750 treasury shares) were validly issued and
outstanding, fully paid and nonassessable and not issued in violation of any
preemptive right of any shareholder of FirstMerit, and (ii) no shares of
preferred stock were issued and outstanding. Since December 31, 1997 and through
the date of this Agreement, FirstMerit has not issued any additional shares of
FirstMerit Common Stock or preferred stock other than pursuant to the exercise
of employee stock purchase rights or stock options under FirstMerit Option Plans
(as hereinafter defined) outstanding on December 31, 1997. Except as
contemplated by this Agreement, the FirstMerit Rights Plan (as hereinafter
defined) or in the FirstMerit Disclosure Letter (which is a letter attached
hereto as Exhibit 3.3, dated the date of this Agreement, from FirstMerit to
Security First, such letter being identified by Security First executing a copy
thereof), as of the date of this Agreement, there are no shares of capital stock
of FirstMerit authorized, issued or outstanding and there are no outstanding
subscriptions, options, warrants, scrip, rights, calls, convertible securities
or any other similar agreements, arrangements or commitments of any character
relating to the issued or unissued capital stock or other securities of
FirstMerit obligating, or which may obligate, FirstMerit to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock of FirstMerit or obligating, or which may obligate, FirstMerit to grant,
extend or enter into any subscription, option, warrant, scrip, right, call,
convertible security or other similar agreement, arrangement or commitment.
Except as set forth in the FirstMerit Disclosure Letter, there are no voting
trusts or other similar agreements, arrangements or commitments to which
FirstMerit or any FirstMerit Subsidiary (as hereinafter
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defined) is a party with respect to the voting of the capital stock of
FirstMerit. All of the shares of FirstMerit Common Stock issuable in exchange
for the Security First Common Stock at the Effective Time in accordance with
this Agreement will be, when so issued, duly authorized, validly issued, fully
paid and nonassessable and will not be subject to preemptive rights. FirstMerit
has reserved for issuance the number of shares of FirstMerit Common Stock
necessary to satisfy FirstMerit's obligations under Section 2.1.
3.4. SUBSIDIARIES. The FirstMerit Disclosure Letter sets forth, as of the
date of this Agreement, the name and state of incorporation of each banking, and
each other significant subsidiary of FirstMerit (collectively, the "FirstMerit
Subsidiaries"). Except as set forth in the FirstMerit Disclosure Letter, each of
the FirstMerit Subsidiaries is a bank, or a corporation duly organized, validly
existing and in good standing under the laws of its respective jurisdiction of
incorporation or organization and is duly qualified to do business as a foreign
corporation in each jurisdiction in which its ownership or lease of property or
the nature of the business conducted by it makes such qualification necessary,
except for such jurisdictions in which the failure to be so qualified would not
have a Material Adverse Effect on FirstMerit. Each of the FirstMerit
Subsidiaries has the requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its businesses as they are now
being conducted.
Except as set forth in the FirstMerit Disclosure Letter, as of the date of
this Agreement, all outstanding shares of capital stock of each FirstMerit
Subsidiary are owned by FirstMerit or another FirstMerit Subsidiary and are
validly issued, fully paid and nonassessable, have not been issued in violation
of any preemptive right and are owned free and clear of all liens, claims,
charges, options, encumbrances or agreements with respect thereto. Except as set
forth in the FirstMerit Disclosure Letter, as of the date of this Agreement,
neither FirstMerit nor any FirstMerit Subsidiary owns beneficially more than 5%
of any class of equity securities or any similar interests of any corporation,
bank, business, trust, association or similar organization. There are, as of the
date of this Agreement, no outstanding subscriptions, options, warrants, scrip,
rights, calls, convertible securities or any other similar agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock or other securities of any FirstMerit Subsidiary obligating, or
which may obligate, any FirstMerit Subsidiary to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of its capital stock or
obligating, or which may obligate, any FirstMerit Subsidiary to grant, extend or
enter into any subscription, option, warrant, scrip, right, call, convertible
security or other similar agreement, arrangement or commitment.
3.5. INFORMATION IN DISCLOSURE DOCUMENTS, REGISTRATION STATEMENT, ETC.
(a) None of the information with respect to FirstMerit or any
FirstMerit Subsidiary provided by FirstMerit for inclusion in the
registration statement to be filed with the Securities and Exchange
Commission (the "Commission") by FirstMerit on Form S-4 (or any other
appropriate form) under the Securities Act of 1933, as amended (the
"Securities Act") for the purpose of registering the shares of FirstMerit
Common Stock to be issued in the Merger (the "Registration Statement")
will, at the time it becomes effective and at the time of the Security
First Meeting (as hereinafter defined), contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. None of the
information with respect to FirstMerit or any FirstMerit Subsidiary
provided by FirstMerit for inclusion in any prospectus/proxy statement or
information statement or notice of FirstMerit and Security First, or any
amendments or supplements thereto, required to be mailed to Security
First's shareholders in connection with the Merger (the "Proxy" or "Proxy
Statement") will, at the time of the mailing of the Proxy Statement, and at
the time of the Security First Meeting, contain any statement which, at the
time it is made and in light of the circumstances under which it is made,
is false or misleading with respect to any material fact, or which omits to
state any material fact necessary in order to make the statements therein
not false or misleading or necessary to correct any statement in any
earlier communication with respect to the solicitation of any proxy for the
Security First Meeting which has become false or misleading. The
Registration Statement will comply as to form in all material respects with
the provisions of the Securities Act and the rules and regulations
promulgated thereunder. The Proxy Statement will comply as to form in all
material respects with the provisions of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder.
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(b) All documents that FirstMerit is responsible for filing with any
Governmental Entity (as hereafter defined) will comply as to form in all
material respects with applicable law. None of the information with respect
to FirstMerit or any FirstMerit Subsidiary provided by FirstMerit for
inclusion in any document to be filed with any regulatory authority in
connection with the transactions contemplated hereby will contain any
statement of a material fact which is untrue as of the time that such
statement is made.
3.6. CONSENTS AND APPROVALS; NO VIOLATION. Except as set forth in the
FirstMerit Disclosure Letter, neither the execution and delivery of this
Agreement by FirstMerit, nor the consummation by FirstMerit of the transactions
contemplated hereby, nor compliance by FirstMerit with any of the provisions
hereof will (a) conflict with or result in any breach of any provision of its
Amended and Restated Articles of Incorporation or Code of Regulations, (b)
violate, conflict with, constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a right
of termination or acceleration of, or result in the creation of any lien,
security interest, charge or other encumbrance upon any of the properties or
assets of FirstMerit or any of the FirstMerit Subsidiaries under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which
FirstMerit or any FirstMerit Subsidiary is a party or to which they or any of
their respective properties or assets may be subject, except for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens or other encumbrances, which, individually or in the
aggregate, will not have a Material Adverse Effect on FirstMerit, (c) violate
any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to FirstMerit or any FirstMerit Subsidiary or any of their
respective properties or assets, except for such violations which, individually
or in the aggregate, will not have a Material Adverse Effect on FirstMerit, or
(d) require any consent, approval, authorization or permit of or from, or filing
with or notification to, any court, governmental authority or other regulatory
or administrative agency or commission, domestic or foreign ("Governmental
Entity"), except (i) pursuant to the Exchange Act and the Securities Act, (ii)
filing the certificate of merger pursuant to the OGCL and the DGCL, (iii)
filings required under the securities or blue sky laws of the various states,
(iv) filings with, and approval by, the Board of Governors of the Federal
Reserve System (the "FRB"), (v) filings with, and approval by, the Office of
Thrift Supervision ("OTS"), (vi) filings with, and approval by, the Office of
the Comptroller of the Currency (the "OCC"), (vii) filings and approvals
pursuant to any applicable state takeover laws ("State Takeover Approvals"),
(viii) consents, approvals, authorizations, permits, filings or notifications in
connection with compliance with applicable provisions of federal and state
securities laws relating to the regulation of broker-dealers, investment
advisors, or stock transfer agents, or (ix) consents, approvals, authorizations,
permits, filings or notifications which have either been obtained or made prior
to the Closing or which, if not obtained or made, will neither, individually or
in the aggregate, have a Material Adverse Effect on FirstMerit nor restrict
FirstMerit's legal authority to execute and deliver this Agreement and
consummate the transactions contemplated hereby.
3.7. REPORTS AND FINANCIAL STATEMENTS. Since December 31, 1997, FirstMerit
has filed all reports, registrations and statements, together with any required
amendments thereto, that it was required to file with the Commission, including,
but not limited to Forms 10-K, Forms 10-Q, Forms 8-K and proxy statements
(collectively, the "FirstMerit Reports"). FirstMerit has previously made
available or furnished, or, with respect to the FirstMerit Reports filed after
the date of this Agreement, will promptly furnish, Security First with true and
complete copies of each of the FirstMerit Reports. As of their respective dates
(but taking into account any amendments filed prior to the date of this
Agreement), the FirstMerit Reports complied, or, with respect to FirstMerit
Reports filed after the date of this Agreement, will comply, in all material
respects with all the rules and regulations promulgated by the Commission and
did not contain, or, with respect to FirstMerit Reports filed after the date of
this Agreement, will not contain, any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of FirstMerit included in the FirstMerit
Reports (the "FirstMerit Financial Statements") have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
(except as may be indicated therein or in the notes thereto) and fairly present
the consolidated financial position of FirstMerit and the FirstMerit
Subsidiaries as at the dates thereof and the consolidated results of operations
and cash flows for the periods then ended subject, in the case of the unaudited
interim financial
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statements, to normal year-end audit adjustments, any other adjustments
described therein and the absence of footnotes.
3.8. TAXES. Except as set forth in the FirstMerit Disclosure Letter,
FirstMerit and each FirstMerit Subsidiary have prepared in good faith and duly
and timely filed, all federal, state, local and foreign income, franchise,
sales, real and personal property and other tax returns and reports required to
be filed by them on or before the date of this Agreement, except where the
failure to file would not have a Material Adverse Effect on FirstMerit. Except
as set forth in the FirstMerit Disclosure Letter, FirstMerit and each FirstMerit
Subsidiary have paid, or have adequately reserved or have made adequate accruals
(in accordance with generally accepted accounting principles) with respect to,
all taxes, interest and penalties shown to be owing on all such returns or
reports. There are no liens for federal, state, local or foreign taxes upon the
assets of FirstMerit or of any FirstMerit Subsidiary, except for statutory liens
for taxes and assessments not yet delinquent or the validity of which is being
contested in good faith by appropriate proceedings. As of the date of this
Agreement, except as set forth in the FirstMerit Disclosure Letter, neither
FirstMerit nor any of the FirstMerit Subsidiaries is a party to any action or
proceeding, nor is any such action or proceeding threatened, by any Governmental
Entity for the assessment or collection of taxes which are material in amount,
and no deficiency notices or reports have been received by FirstMerit or any of
the FirstMerit Subsidiaries in respect of any material deficiencies for any tax,
assessment or government charges.
3.9. EMPLOYEE PLANS. All employee bonus, deferred compensation, pension,
retirement, profit sharing, stock option, stock purchase, employee stock
ownership, stock appreciation rights, savings, consulting, severance, collective
bargaining, group insurance, fringe benefit and other employee benefit,
incentive and welfare plans, policies, contracts and arrangements and all trust
agreements related thereto, now in effect and relating to any present or former
directors, officers or employees of FirstMerit or FirstMerit Subsidiaries,
whether or not described in Section 3(3) of Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), are identified in the FirstMerit Disclosure
Letter ("FirstMerit Employee Plans"). All of the FirstMerit employee plans have
been maintained, operated and administered in substantial compliance with their
terms, and FirstMerit, all of the FirstMerit Subsidiaries and all of the
FirstMerit Employee Plans currently comply, and have at all relevant times
complied, in all material respects with ERISA, the Code, and any other
applicable laws. FirstMerit has previously delivered or made available to
Security First copies of all FirstMerit Employee Plans, in each case as in
effect on the date of this Agreement.
3.10. MATERIAL CONTRACTS. Except as set forth in the FirstMerit Disclosure
Letter or disclosed in the FirstMerit Reports, neither FirstMerit nor any
FirstMerit Subsidiary is, as of the date of this Agreement, a party to, or is
bound by, (a) any material lease not made in the ordinary course of business of
FirstMerit, (b) any agreement, arrangement, or commitment not made in the
ordinary course of business which materially restricts the conduct of any line
of business of FirstMerit, (c) any material agreement, indenture or other
instrument not specifically disclosed in the FirstMerit Financial Statements
relating to the borrowing of money by FirstMerit or the guarantee by FirstMerit
of any such obligation (other than trade payables and instruments relating to
transactions entered into in the ordinary course of business), (d) any
agreement, arrangement or commitment with or to a labor union, or (e) any other
contract or agreement or amendment thereto that would be required to be filed as
an exhibit to a Form 10-K filed by FirstMerit with the Commission as of the date
of this Agreement (the "FirstMerit Contracts"). Neither FirstMerit nor any
FirstMerit Subsidiary is in default under any FirstMerit Contract, which default
is reasonably likely to have, either individually or in the aggregate, a
Material Adverse Effect on FirstMerit, and there has not occurred any event that
with the lapse of time or the giving of notice or both would constitute such a
default.
3.11. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
FirstMerit Disclosure Letter or disclosed in FirstMerit Reports filed by
FirstMerit with the Commission prior to the date of this Agreement, since
December 31, 1997 to the date of this Agreement, there has not been any change
in the financial condition, results of operations or business of FirstMerit and
the FirstMerit Subsidiaries that either individually or in the aggregate has had
a Material Adverse Effect on FirstMerit.
3.12. LITIGATION. Except as disclosed in the FirstMerit Disclosure Letter
or in FirstMerit Reports filed by FirstMerit with the Commission prior to the
date of this Agreement, there is no litigation, action, arbitration or
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proceeding pending, or, to the best knowledge of FirstMerit, threatened against
or affecting FirstMerit or any FirstMerit Subsidiary which, either individually
or in the aggregate, is having, or insofar as reasonably can be foreseen, will
have, a Material Adverse Effect on FirstMerit, nor is there any judgment,
decree, injunction, rule or order of any Governmental Entity or arbitrator,
outstanding against FirstMerit or any FirstMerit Subsidiary having, or which,
insofar as reasonably can be foreseen, in the future would have, any such
effect.
3.13. COMPLIANCE WITH LAWS AND ORDERS. Except as disclosed in the
FirstMerit Disclosure Letter or in FirstMerit Reports filed by FirstMerit with
the Commission prior to the date of this Agreement, the businesses of FirstMerit
and the FirstMerit Subsidiaries are not being conducted, and have not been
conducted since December 31, 1997, in violation of any law, ordinance,
regulation, judgment, order, decree, license or permit of any Governmental
Entity, except for possible violations which individually or in the aggregate do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on FirstMerit. Except as set forth in the FirstMerit
Disclosure Letter, no investigation or review by any Governmental Entity with
respect to FirstMerit or any of the FirstMerit Subsidiaries outside the ordinary
course of business and not generally applicable to entities engaged in the same
business is pending or, to the knowledge of FirstMerit, threatened, and no
Governmental Entity has indicated an intention to conduct the same in each case
other than those the outcome of which will not have a Material Adverse Effect on
FirstMerit.
3.14. AGREEMENTS WITH BANK REGULATORS. As of the date of this Agreement,
except as set forth in the FirstMerit Disclosure Letter, neither FirstMerit nor
any FirstMerit Subsidiary is a party to any written agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter from, any Governmental Entity outside the
ordinary course of business and not generally applicable to entities engaged in
the same business, including, without limitation, cease and desist or other
orders of any bank regulatory authority, which restricts materially the conduct
of its business, or in any manner relates to its capital adequacy, its credit
policies or its management, nor has FirstMerit been advised by any Governmental
Entity that it is contemplating issuing, requiring or requesting (or is
considering the appropriateness of issuing requiring or requesting) any such
order, directive, agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter or similar undertaking. Except as set
forth in the FirstMerit Disclosure Letter, there are no (i) material violations
or (ii) violations with respect to which refunds or restitutions which are
material in amount to FirstMerit and the FirstMerit Subsidiaries taken as a
whole may be required, cited in any compliance report to FirstMerit or any
FirstMerit Subsidiary as a result of an examination by any bank regulatory
authority.
3.15. FIRSTMERIT OWNERSHIP OF STOCK. Except as disclosed in the FirstMerit
Disclosure Letter, and except pursuant to Stock Purchase Option dated April 4,
1998 (the "Security First Stock Purchase Option"), a copy of which is attached
hereto as Exhibit 3.15, neither FirstMerit nor, to the best of its knowledge,
any of its affiliates or associates (i) beneficially owns, directly or
indirectly, or (ii) are parties to any agreement, arrangement or commitment for
the purpose of acquiring, holding, voting or disposing of, in each case, shares
of Security First Common Stock (other than shares of Security First Common Stock
held in a fiduciary, trust, custodial or agency capacity by a bank or trust
subsidiary of FirstMerit) which in the aggregate, represent 1% or more of the
outstanding shares of Security First Common Stock.
3.16. FEES. Except for the fees paid and payable to Morgan Stanley & Co.
Incorporated, neither FirstMerit nor any FirstMerit Subsidiary has paid or
become obligated to pay any fee or commission to any broker, finder or
intermediary in connection with the transactions contemplated by this Agreement.
3.17. FIRSTMERIT ACTION. The Board of Directors of FirstMerit (at a
meeting duly called and held) has by the requisite vote (i) determined that the
Merger is advisable and in the best interests of FirstMerit and its
shareholders, (ii) authorized and approved this Agreement and the Stock Purchase
Option, and the transactions contemplated hereby and thereby, including the
Merger, and (iii) authorized and approved the Merger in accordance with
applicable takeover laws (if any) with the result that they will not apply to
the consummation of the Merger and acquisition of shares of FirstMerit Common
Stock by the holders of Security First Common Stock pursuant to this Agreement.
3.18. RIGHTS AGREEMENT. No person will become an "Acquiring Person" and no
"Shares Acquisition Date" or "Distribution Date" will occur under the
Shareholder Rights Agreement, as amended and restated,
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dated July 18, 1996, between FirstMerit and FirstMerit Bank, N.A., as rights
agent (the "FirstMerit Rights Plan"), and no holder of rights issued under the
FirstMerit Rights Plan shall have any rights under the FirstMerit Rights Plan as
a result of the approval, execution or delivery of this Agreement or the
consummation of the Merger. No amendments have been made prior to the date of
this Agreement to the FirstMerit Rights Plan except as specifically referred to
in this Section.
3.19. ENVIRONMENTAL MATTERS. Except as set forth in the FirstMerit
Disclosure Letter, to the best of FirstMerit's knowledge: (i) neither FirstMerit
nor any of the FirstMerit Subsidiaries has been or is in violation of or liable
under any Environmental Law (as hereinafter defined), except for any such
violations or liabilities which would not reasonably be expected, individually
or in the aggregate, to have a Material Adverse Effect on FirstMerit; and (ii)
none of the Loan Portfolio Properties and Other Properties Owned (as hereinafter
defined) by FirstMerit or any of the FirstMerit Subsidiaries has been since such
properties have been owned, operated or managed by FirstMerit or any of the
FirstMerit Subsidiaries is in violation of under any Environmental Law, except
for any such violations which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on FirstMerit. Except
as set forth in the FirstMerit Disclosure Letter, there are no actions, suits,
demands, notices, claims, investigations or proceedings pending, or to the best
of FirstMerit's knowledge threatened, relating to the liability of the Loan
Portfolio Properties and Other Properties Owned by FirstMerit or the FirstMerit
Subsidiaries under any Environmental Law, including, without limitation, any
notices, demand letters or requests for information from any federal, state or
local environmental agency relating to any such liabilities under or violations
of Environmental Law.
3.20. ACCOUNTING MATTERS. Neither FirstMerit nor, to the best of its
knowledge, any of its affiliates, has taken or agreed to take any action that
would prevent FirstMerit from accounting for the business combination to be
effected by the Merger as a "pooling of interests."
4. REPRESENTATIONS AND WARRANTIES OF SECURITY FIRST
Security First hereby represents and warrants to FirstMerit that:
4.1. CORPORATE ORGANIZATION. Security First is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which its ownership or lease of property
or the nature of the business conducted by it makes such qualification
necessary, except for such jurisdictions in which the failure to be so qualified
would not have a Material Adverse Effect on Security First. Security First is
registered as a savings and loan holding company with the OTS. Security First
has the requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business as it is now being conducted.
Security First has delivered to FirstMerit as attachments to the Security First
Disclosure Letter true and complete copies of its Certificate of Incorporation
and its Bylaws (the "Corporate Governance Documents") as currently in effect.
4.2. AUTHORITY. Security First has the requisite corporate power and
authority to execute and deliver this Agreement and, except for any required
approval of Security First's shareholders and the approval of the applicable
Regulatory Authorities, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized and approved by the
Board of Directors of Security First and no other corporate proceedings on the
part of Security First are necessary to authorize this Agreement or to
consummate the transactions so contemplated, except for approval by the
shareholders of Security First as provided in Section 6.1(a). This Agreement has
been duly executed and delivered by, and constitutes a valid and binding
obligation of, Security First, enforceable against Security First in accordance
with its terms, except as enforceability hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceedings
may be brought, and except as enforceability hereof may be limited by laws
relating to the safety and soundness of insured depository institutions as set
forth in 12 U.S.C. sec.1818(b) or to the appointment of a conservator or
receiver by the Federal Deposit Insurance Corporation.
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4.3. CAPITALIZATION. The authorized capital stock of Security First
consists of 20,000,000 shares of Security First Common Stock and 1,000,000
shares of serial preferred, par value $.01 per share. As of the date of this
Agreement, (i) 7,555,044 shares of Security First Common Stock were validly
issued and outstanding, fully paid and nonassessable and not issued in violation
of any preemptive right of any Security First shareholder and no shares of
serial preferred were issued. As of the date of this Agreement, there were
88,324 treasury shares and outstanding Security First Stock Options to purchase
374,892 shares of Security First Common Stock, and there were outstanding
Security First 6.25% Convertible Subordinated Debentures ("Security First
Debentures") to covert into 878,048 shares of Security First Common Stock, all
of which are currently redeemable by Security First at 100% of the original
principal amount. Except as contemplated by this Agreement, the Security First
Stock Purchase Option or in the Security First Disclosure Letter (which is a
letter attached hereto as Exhibit 4.3, dated the date of this Agreement, from
Security First to FirstMerit, such letter being identified by FirstMerit
executing a copy thereof), there are no shares of capital stock of Security
First authorized, issued or outstanding and there are no outstanding
subscriptions, options, warrants, scrip, rights, calls, convertible securities
or any other similar agreements, arrangements or commitments of any character
relating to the issued or unissued capital stock or other securities of Security
First obligating, or which may obligate, Security First to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock of Security First or obligating, or which may obligate, Security First to
grant, extend or enter into any subscription, option, warrant, scrip, right,
call, convertible security or other similar agreement, arrangement or
commitment. Except as set forth in the Security First Disclosure Letter, there
are no voting trusts or other similar agreements, arrangements, or commitments
to which Security First or any Security First Subsidiary (as hereinafter
defined) is a party with respect to the voting of the capital stock of Security
First.
4.4. SUBSIDIARIES. The Security First Disclosure Letter sets forth, as of
the date of this Agreement, the name and state of incorporation of each
subsidiary of Security First (collectively, the "Security First Subsidiaries")
and the authorized capital stock of each Security First Subsidiary. Except as
set forth in the Security First Disclosure Letter, each of the Security First
Subsidiaries is a bank, savings association or a corporation, duly organized,
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation or organization and is duly qualified to do
business as a foreign corporation in each jurisdiction in which its ownership or
lease of property or the nature of the business conducted by it makes such
qualification necessary, except for such jurisdictions in which the failure to
be so qualified would not have a Material Adverse Effect on Security First. Each
of the Security First Subsidiaries has the requisite corporate power and
authority to own, lease and operate its properties and assets and to carry on
its businesses as they are now being conducted. Security First has delivered to
FirstMerit as attachments to the Security First Disclosure Letter true and
complete copies of the Security First Subsidiaries' articles of incorporation
and code of regulations (charter or bylaws), each as currently in effect.
Except as set forth in the Security First Disclosure Letter, as of the date
of this Agreement, all outstanding shares of capital stock of each Security
First Subsidiary are owned by Security First or another Security First
Subsidiary and are validly issued, fully paid and nonassessable, have not been
issued in violation of any preemptive right and are owned free and clear of all
liens, claims, charges, options, encumbrances or agreements with respect
thereto. Except as set forth in the Security First Disclosure Letter, as of the
date of this Agreement, neither Security First nor any Security First Subsidiary
owns beneficially more than 5% of any class of equity securities or any similar
interests of any corporation, bank, business, trust, association or similar
organization. There are, as of the date of this Agreement, no outstanding
subscriptions, options, warrants, scrip, rights, calls, convertible securities
or any other similar agreements, arrangements or commitments of any character
relating to the issued or unissued capital stock or other securities of any
Security First Subsidiary obligating, or which may obligate, any Security First
Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of its capital stock or obligating, or which may obligate, any
Security First Subsidiary to grant, extend or enter into any subscription,
option, warrant, scrip, right, call, convertible security or other similar
agreement, arrangement or commitment.
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4.5. INFORMATION IN DISCLOSURE DOCUMENTS, REGISTRATION STATEMENT, ETC.
(a) None of the information with respect to Security First or any Security
First Subsidiary provided by Security First for inclusion in the Registration
Statement will, at the time it becomes effective and at the time of the Security
First Meeting, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. None of the information with respect to Security First or any
Security First Subsidiary provided in writing by Security First for inclusion in
the Proxy Statement will, at the time of the mailing of the Proxy Statement, and
at the time of the Security First Meeting, contain any statement which, at the
time it is made and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or which omits to state
any material fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of any proxy for the Security First Meeting
which has become false or misleading. The Proxy Statement will comply as to form
in all material respects with the provisions of the Exchange Act, and the rules
and regulations promulgated thereunder.
(b) All documents that Security First is responsible for filing with any
Governmental Entity will comply as to form in all material respects with
applicable law. None of the information with respect to Security First or any
Security First Subsidiary provided by Security First for inclusion in any
document to be filed with any Governmental Entity in connection with the
transactions contemplated hereby will contain any statement of a material fact
which is untrue as of the time that such statement is made.
4.6. CONSENT AND APPROVALS; NO VIOLATION. Except as set forth in the
Security First Disclosure Letter, neither the execution and delivery of this
Agreement by Security First, nor the consummation by Security First of the
transactions contemplated hereby, nor compliance by Security First with any of
the provisions hereof, will (a) conflict with or result in any breach of any
provision of its Corporate Governance Documents, (b) violate, conflict with,
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration of, or result in the creation of any lien, security interest,
charge or other encumbrance upon any of the properties or assets of Security
First or any of the Security First Subsidiaries under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Security
First or any Security First Subsidiary is a party or to which they or any of
their respective properties or assets may be subject, except for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens or other encumbrances, that are set forth in the Security
First Disclosure Letter or which, individually or in the aggregate, will not
have a Material Adverse Effect on Security First, (c) violate any judgment,
ruling, order, writ, injunction, decree, statute, rule or regulation applicable
to Security First or any Security First Subsidiary or any of their respective
properties or assets, except for such violations which, individually or in the
aggregate, will not have a Material Adverse Effect on Security First, or (d)
require any consent, approval, authorization or permit of or from, or filing
with or notification to, any Governmental Entity, except (i) pursuant to the
Exchange Act and the Securities Act, (ii) filing certificates of merger pursuant
to the OGCL and the DGCL, (iii) filings required under the securities or blue
sky laws of the various states, (iv) filings with, and approval by, the FRB, (v)
filings with, and approval by, the OTS, (vi) filings with, and approval by the
OCC, (vii) filings and approvals pursuant to any applicable State Takeover
Approvals, or (viii) consents, approvals, authorizations, permits, filings or
notifications which have either been obtained or made prior to the Closing or
which, if not obtained or made, will neither, individually or in the aggregate,
have a Material Adverse Effect on Security First nor restrict Security First's
legal authority to execute and deliver this Agreement and consummate the
transactions contemplated hereby.
4.7. REPORTS AND FINANCIAL STATEMENTS. Since March 31, 1997, Security
First has filed all reports, registrations and statements, together with any
required amendments thereto, that it was required to file with the Commission,
including, but not limited to Forms 10-K, Forms 10-Q, Forms 8-K and proxy
statements (collectively, the "Security First Reports"). Security First has
previously made available or furnished, or, with respect to Security First
Reports filed after the date of this Agreement, will promptly furnish,
FirstMerit with true and complete copies of each of the Security First Reports.
As of their respective dates (but taking into account any amendments filed prior
to the date of this Agreement), and except as stated in the Security First
Disclosure
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Letter, the Security First Reports complied, or, with respect to Security First
Reports filed after the date of this Agreement, will comply, in all material
respects with all the rules and regulations promulgated by the Commission, and
did not contain, or, with respect to Security First Reports filed after the date
of this Agreement, will not contain, any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of Security First included in the
Security First Reports (the "Security First Financial Statements") have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be indicated therein or in the notes thereto)
and fairly present the consolidated financial position of Security First and the
Security First Subsidiaries as at the dates thereof and the consolidated results
of operations and cash flows for the periods then ended subject, in the case of
the unaudited interim financial statements, to normal year-end audit
adjustments, any other adjustments described therein and the absence of
footnotes.
4.8. TAXES. Except as set forth in the Security First Disclosure Letter,
Security First and each Security First Subsidiary have prepared in good faith
and duly and timely filed, or caused to be duly and timely filed, all federal,
state, local and foreign income, franchise, sales, real and personal property
and other tax returns and reports required to be filed by them on or before the
date of this Agreement, except where the failure to file would not have a
Material Adverse Effect on Security First. Except as set forth in the Security
First Disclosure Letter, Security First and each Security First Subsidiary have
paid, or have adequately reserved or have made adequate accruals (in accordance
with generally accepted accounting principles) with respect to, all taxes,
interest and penalties shown to be owing on all such returns and reports. The
Security First Disclosure Letter sets forth, as of the date of this Agreement,
the following information with respect to Security First and each Security First
Subsidiary: (i) the most recent tax year through which the Internal Revenue
Service ("IRS") has completed its examination of such corporation, (ii) whether
there is an examination pending by the IRS with respect to such corporation and,
if so, the tax years involved, (iii) whether such corporation has executed or
filed with the IRS any agreement which is still in effect extending the period
for assessment and collection of any federal tax and, if so, the tax years
covered by such agreement and the expiration date of such extension, and (iv)
whether there are any existing material disputes as to state, local or foreign
taxes. Except as set forth in the Security First Disclosure Letter, there are no
liens for federal, state, local or foreign taxes upon the assets of Security
First or of any Security First Subsidiary, except for statutory liens for taxes
and assessments not yet delinquent or the validity of which is being contested
in good faith by appropriate proceedings. Except as set forth in the Security
First Disclosure Letter, neither Security First nor any of the Security First
Subsidiaries is a party to any action or proceeding, nor is any such action or
proceeding threatened, by any Governmental Entity for the assessment or
collection of taxes which are material in amount, and no deficiency notices or
reports have been received by Security First or any of the Security First
Subsidiaries in respect of any material deficiencies for any tax, assessment, or
government charges. After the date of this Agreement, Security First will
promptly notify FirstMerit of (i) the commencement or threat of any such action
or proceeding involving an amount of taxes material to Security First and its
subsidiaries taken as a whole, and (ii) the receipt by Security First or the
Security First Subsidiaries of any such deficiency notices or reports in respect
of any material deficiencies.
4.9. EMPLOYEE PLANS, EMPLOYEES. All employee bonus, deferred compensation,
pension, retirement, profit sharing, stock option, stock purchase, employee
stock ownership, stock appreciation rights, savings, consulting, severance,
collective bargaining, group insurance, fringe benefit and other employee
benefit, incentive and welfare plans, policies, contracts and arrangements and
all trust agreements related thereto, now in effect and relating to any present
or former directors, officers or employees of Security First or the Security
First Subsidiaries, whether or not described in Section 3(3) of ERISA ("Security
First Employee Plans"), are identified in the Security First Disclosure Letter.
Security First has previously delivered or made available to FirstMerit copies
of all Security First Employee Plans, in each case as in effect on the date of
this Agreement.
All of Security First Employee Plans have been maintained, operated and
administered in substantial compliance with their terms, and Security First, all
of the Security First Subsidiaries and all of the Security First Employee Plans
currently comply, and have at all relevant times complied, in all material
respects with ERISA, the Code, and any other applicable laws. With respect to
each Security First Employee Plan which is a pension plan (as defined in Section
3(2) of ERISA): (a) except as set forth in the Security First Disclosure Letter
each
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pension plan as amended (and any trust relating thereto) intended to be a
qualified plan under Section 401(a) of the Code either has been determined by
the IRS to be so qualified or is the subject of a pending application for such
determination that was timely filed, (b) except as set forth in the Security
First Disclosure Letter, would be fully funded (calculated using the interest
rate and other actuarial assumptions mandated by the Pension Benefit Guaranty
Corporation ("PBGC")) if terminated at the Effective Time and there is no
accumulated funding deficiency (as defined in Section 302 of ERISA and Section
412 of the Code), whether or not waived, and no waiver of the minimum funding
standards of such sections has been requested from the IRS, (c) no reportable
event described in Section 4043 of ERISA has occurred, (d) no defined benefit
plan has been terminated, nor has the PBGC instituted proceedings to terminate a
defined benefit plan or to appoint a trustee or administrator of a defined
benefit plan, and no circumstances exist that constitute grounds under Section
4042 of ERISA entitling the PBGC to institute any such proceedings, and (e) no
pension plan is a "multi-employer plan" within the meaning of Section 3(37) of
ERISA.
Except as set forth in the Security First Disclosure Letter, no Security
First Employee Plan provides benefits, including, without limitation, death or
medical benefits (whether or not insured), with respect to current or former
employees beyond their retirement or other termination of service (other than
(i) temporary coverage mandated by applicable law, (ii) death benefits or
retirement benefits under any "employee pension plan," as that term is defined
in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as
liabilities on the books of Security First or any Security First Subsidiary, or
(iv) benefits the full cost of which are borne by the current or former employee
(or his or her beneficiary)).
Except as set forth in the Security First Disclosure Letter, all employees
of Security First and the Security First Subsidiaries are "at will" and there
are no employment, consulting or like agreements, written or oral, expressed or
implied.
4.10. MATERIAL CONTRACTS. Except as set forth in the Security First
Disclosure Letter or disclosed in the Security First Reports, neither Security
First nor any Security First Subsidiary is, as of the date of this Agreement, a
party to, or is bound by, (a) any material lease not made in the ordinary course
of business of Security First, (b) any agreement, arrangement, or commitment not
made in the ordinary course of business which materially restricts the conduct
of any line of business of Security First, (c) any benefit agreements providing
for aggregate payments to any person in any calendar year in excess of $100,000,
(d) any material agreement, indenture or other instrument not specifically
disclosed in the Security First Financial Statements relating to the borrowing
of money by Security First or the guarantee by Security First of any such
obligation (other than trade payables and instruments relating to transactions
entered into in the ordinary course of business), (e) any agreement, arrangement
or commitment with or to a labor union or (f) any other contract or agreement or
amendment thereto that would be required to be filed as an exhibit to a Form
10-K filed by Security First with the Commission (the agreements and other
documents referred to in clauses (a) through (e) of this sentence, collectively,
the "Security First Contracts"). Except as stated in the Security First
Disclosure Letter, neither Security First nor any Security First Subsidiary is
in default under any Security First Contract, which default is reasonably likely
to have, either individually or in the aggregate, a Material Adverse Effect on
Security First, and there has not occurred any event that with the lapse of time
or the giving of notice or both would constitute such a default.
4.11. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
Security First Disclosure Letter or disclosed in Security First Reports filed by
Security First with the Commission prior to the date of this Agreement, since
March 31, 1997 to the date of this Agreement, there has not been any change in
the financial condition, results of operations or business of Security First and
the Security First Subsidiaries that either individually or in the aggregate has
had a Material Adverse Effect on Security First.
4.12. LITIGATION. Except as disclosed in the Security First Disclosure
Letter or in Security First Reports filed by the Security First with the
Commission prior to the date of this Agreement, there is no litigation, action,
arbitration or proceeding pending, or, to the best knowledge of Security First,
threatened against or affecting Security First or any Security First Subsidiary
which, either individually or in the aggregate, is having, or insofar as
reasonably can be foreseen will have, a Material Adverse Effect on Security
First, nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator, outstanding against Security First or
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any Security First Subsidiary having, or which, insofar as reasonably can be
foreseen, in the future would have, any such effect.
4.13. COMPLIANCE WITH LAWS AND ORDERS. Except as disclosed in the Security
First Disclosure Letter or in Security First Reports filed by Security First
with the Commission prior to the date of this Agreement, the businesses of
Security First and the Security First Subsidiaries are not being conducted, and
have not been conducted since March 31, 1997, in violation of any law,
ordinance, regulation, judgment, order, decree, license or permit of any
Governmental Entity (including, without limitation, zoning ordinances, building
codes, and environmental, civil rights, and occupational health and safety laws
and regulations and, in the case of Security First Subsidiaries that are savings
and loans or thrifts, all statutes, rules and regulations pertaining to the
conduct of such business), except for possible violations which individually or
in the aggregate do not, and, insofar as reasonably can be foreseen, in the
future will not, have a Material Adverse Effect on Security First. Except as set
forth in the Security First Disclosure Letter, no investigation or review by any
Governmental Entity with respect to Security First or any of the Security First
Subsidiaries outside the ordinary course of business and not generally
applicable to entities engaged in the same business is pending or, to the
knowledge of Security First, threatened, nor has any Governmental Entity
indicated an intention to conduct the same in each case other than those the
outcome of which will not have a Material Adverse Effect on Security First.
4.14. AGREEMENTS WITH REGULATORS. As of the date of this Agreement, except
as disclosed in the Security First Disclosure Letter, neither Security First nor
any Security First Subsidiary is a party to any written agreement or memorandum
of understanding with, or a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, any Governmental Entity outside the
ordinary course of business and not generally applicable to entities engaged in
the same business, including, without limitation, cease and desist orders of any
regulatory authority, which restricts materially the conduct of its business, or
in any manner relates to its capital adequacy, its credit policies or its
management, nor has Security First been advised by any Governmental Entity that
it is contemplating issuing, requiring, or requesting (or is considering the
appropriateness of issuing, requiring or requesting) any such order, directive,
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar undertaking. Except as set forth in Security First
Disclosure Letter, there are no (i) material violations, or (ii) violations with
respect to which refunds or restitutions which are material in amount to
Security First and the Security First Subsidiaries taken as a whole may be
required, cited in any compliance report to Security First or any Security First
Subsidiary as a result of an examination by any regulatory authority.
4.15. SECURITY FIRST OWNERSHIP OF STOCK. Except as disclosed in the
Security First Disclosure Letter, as of the date of this Agreement, neither
Security First nor, to the best of its knowledge, any of its affiliates or
associates (i) beneficially owns directly or indirectly, or (ii) are parties to
any agreement, arrangement or commitment for the purpose of acquiring, holding,
voting or disposing of, in each case, shares of FirstMerit Common Stock (other
than shares of FirstMerit Common Stock held in a fiduciary, trust, custodial or
agency capacity by a subsidiary of Security First) which in the aggregate,
represent 5% or more of the outstanding shares of FirstMerit Common Stock.
4.16. FEES. Except for fees paid and payable to Charles Webb & Company
("Charles Webb"), neither Security First nor any Security First Subsidiary has
paid or become obligated to pay any fee or commission to any broker, finder or
intermediary in connection with the transactions contemplated by this Agreement.
4.17. SECURITY FIRST ACTION. The Board of Directors of Security First (at
a meeting duly called and held) has by the requisite vote (i) determined that
the Merger is advisable and in the best interests of Security First and its
shareholders, (ii) authorized and approved this Agreement, the Security First
Stock Purchase Option and the transactions contemplated hereby and thereby,
including the Merger, (iii) directed that the Merger Agreement be submitted for
consideration by Security First's shareholders entitled to vote thereon at the
Security First Meeting, and (iv) authorized and approved the Security First
Stock Purchase Option and the Merger Agreement in accordance with applicable
takeover laws (if any) with the result that they will not apply to the
consummation of the Merger and the acquisition by FirstMerit of shares of
Security First Common Stock pursuant to the Merger, the Security First Stock
Purchase Option or any of the transactions contemplated by this Agreement or the
Security First Stock Purchase Option. Charles Webb, Security First's financial
advisor, has provided the Board of
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Directors of Security First with its opinion that, as of the date of such duly
called meeting of the Board, the Merger Consideration is fair, from a financial
point of view, to the shareholders of Security First.
4.18. VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding shares of Security First Common Stock entitled to vote thereon
is the only vote of the holders of any class or series of Security First capital
stock necessary to approve this Agreement and the transactions contemplated
hereby, unless FirstMerit has exercised its rights to acquire the Security First
Common Stock under the Security First Stock Purchase Option.
4.19. CONDUCT OF SECURITY FIRST TO DATE. Except as disclosed in the
Security First Disclosure Letter and in the Security First Reports filed with
the Commission prior to the date of this Agreement, from and after March 31,
1997, to the date of this Agreement: (a) Security First and the Security First
Subsidiaries have carried on their respective businesses in the ordinary and
usual course consistent with their current practices, (b) Security First has not
issued or sold any of its capital stock (except shares of Security First Common
Stock issued upon exercise of Security First Stock Options or under the Security
First Debentures), or any corporate debt securities which would be classified as
long-term debt on the balance sheets of Security First, (c) Security First has
not granted any option for the purchase of its capital stock (other than
pursuant to the Security First Stock Purchase Option), effected any stock split,
or otherwise changed its authorized capitalization, (d) Security First has not
declared, set aside, or paid any dividend or other distribution in respect of
its capital stock, or, directly or indirectly, redeemed or otherwise acquired
any of its capital stock, except regular quarterly cash dividends (based upon
historic precedent), (e) Security First has neither incurred nor prepaid any
corporate debt securities or instruments which are or would be classified as
long-term debt on the balance sheet of Security First, (f) neither Security
First nor any Security First Subsidiary has sold, assigned, transferred, or
otherwise disposed of to a third party (i) equity securities in or issued by any
Security First Subsidiary, (ii) branch offices of any Security First Subsidiary,
(iii) assets constituting any other line of business, or (iv) any of its other
material properties or assets other than for a fair consideration in the
ordinary course of business, (g) neither Security First nor any Security First
Subsidiary has purchased or otherwise acquired from a third party equity
securities in or issued by such third party other than in the ordinary course of
business, branch offices of such third party, assets constituting any other line
of business, or any other material properties or assets outside the ordinary
course of its business, (h) neither Security First nor any Security First
Subsidiary has: increased the rate of compensation of, or paid any bonus to, any
of its directors, officers, or other employees, except under existing plans and
policies, entered into any new, or amended or supplemented any existing, or
secured, collateralized, or funded any, employment, management, consulting,
deferred compensation, severance, or other similar contract, entered into,
terminated, or substantially modified any Security First Employee Plan in
respect of any of its present or former directors, officers, or other employees,
or agreed to do any of the foregoing, (i) neither Security First nor any
Security First Subsidiary, has entered into any material transaction, contract,
lease, agreement or commitment requiring the approval of the Board of Directors
of Security First or any Security First Subsidiary, or amended, modified or
terminated any contract, lease or other agreement to which it is a party in a
manner requiring the approval of the Board of Directors of Security First or any
Security First Subsidiary, and (j) no Security First Subsidiary has entered into
any material transaction, contract, lease, agreement or commitment outside the
ordinary course of business requiring the approval of the Board of Directors of
such Subsidiary or amended, modified or terminated outside the ordinary course
of business any material contract, lease or other agreement to which it is a
party in a manner requiring the approval of the Board of Directors of such
Subsidiary.
4.20. ENVIRONMENTAL MATTERS. For purposes of this Agreement, the following
terms shall have the indicated meanings:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with
any Governmental Entity relating to (i) the protection, preservation or
restoration of the environment (including, without limitation, air, water
vapor, surface water, ground water, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or
disposal of Hazardous Substances. The term Environmental Law includes,
without limitation; the Comprehensive Environmental Response, Compensation
and Liability Act, as amended, 42 U.S.C. sec.9601, et seq.; the
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Resource Conservation and Recovery Act, as amended, 42 U.S.C. sec.6901, et
seq.; the Clean Air Act, as amended, 42 U.S.C. sec.7401, et seq.; the
Federal Water Pollution Control Act, as amended, 33 U.S.C. sec.1251 et
seq.; the Toxic Substances Control Act, as amended, 125 U.S.C. sec.9601, et
seq.; the Emergency Planning and Community Right to Know Act, 42 U.S.C.
sec.11001, et seq.; the Safe Drinking Water Act, 42 U.S.C. sec.300f, et
seq.; all comparable state and local laws; and any common law (including
without limitation common law that may impose strict liability) that may
impose liability or obligations for injuries or damages due to, or
threatened as a result of, the presence of or exposure to any Hazardous
Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any material containing any such substance as a
component. Hazardous Substances include, without limitation, petroleum or
any derivative or by-product thereof, asbestos, radioactive material, and
polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned, operated or managed (including those held in trust) by
Security First, as the case may be, or any of their subsidiaries.
Except as set forth in Security First Disclosure Letter, to the best of Security
First's knowledge: (i) neither Security First nor any of the Security First
Subsidiaries has been or is in violation of or liable under any Environmental
Law, except for any such violations or liabilities which would not reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect on
Security First; and (ii) none of the Loan Portfolio Properties and Other
Properties Owned by Security First or any of the Security First Subsidiaries has
been since such properties have been owned, operated or managed by Security
First or any of the Security First Subsidiaries, is in violation of any
Environmental Law, except for any such violations which, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect on
Security First. Except as set forth in Security First Disclosure Letter, there
are no actions, suits, demands, notices, claims, investigations or proceedings
pending, or to the best of Security First's knowledge threatened, relating to
the liability of the Loan Portfolio Properties and Other Properties Owned by
Security First or the Security First Subsidiaries under any Environmental Law,
including, without limitation, any notices, demand letters or requests for
information from any federal, state or local environmental agency relating to
any such liabilities under or violations of Environmental Law.
4.21. ACCOUNTING MATTERS. Neither Security First nor, to the best of its
knowledge, any of its affiliates, has taken or agreed to take any action that
would prevent FirstMerit from accounting for the business combination to be
effected by the Merger as a "pooling of interests."
5. COVENANTS
5.1. ACQUISITION PROPOSALS AND NEGOTIATIONS. Each of Security First and
the Security First Subsidiaries shall not, directly or indirectly, and shall
instruct and otherwise use its diligent efforts to cause their respective
officers, directors, employees, agents and advisors not to, directly or
indirectly, solicit or initiate any proposals or offers from any person, or
discuss or negotiate with any such person, relating to any acquisition or
purchase of all or a material amount of the assets of, or any equity securities
of, or any merger, consolidation or business combination with, Security First or
any of the Security First Subsidiaries (such transactions are referred to herein
as "Acquisition Transactions"), provided, however, that nothing contained in
this Section shall prohibit:
(i) Security First or any Security First Subsidiary, as the case may
be, from furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes an unsolicited proposal
of an Acquisition Transaction if and to the extent that,
(a) the Board of Directors of Security First, after consultation
with and based upon the opinion of Silver, Freedman & Taff, L.L.P.
determines in good faith that such action is required for the directors
of Security First to fulfill their fiduciary duties and obligations to
the Security First shareholders and other constituencies under Delaware
law, taking into consideration the sale process engaged in connection
with the transactions contemplated hereby, and
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(b) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, Security First
provides immediate written notice to FirstMerit at least two business
days prior to furnishing information to, or entering into discussions or
negotiations with, such a person or entity, or
(ii) the Board of Directors of Security First from failing to make,
withdrawing or modifying its recommendation referred to in Section 5.14
following receipt of a proposal for an Acquisition Transaction if the Board
of Directors of Security First, after consultation with and based upon the
opinion of Silver, Freedman & Taff, L.L.P. determines in good faith that
such action is required for the directors of Security First to fulfill
their fiduciary duties and obligations to the Security First shareholders
and other constituencies under Delaware law, taking into consideration the
sale process engaged in connection with the transactions contemplated
hereby.
In the event Security First or any officer, director or representative
thereof receives any contact, either oral or written, from a third party or its
representative regarding an Acquisition Transaction or any matter directly or
indirectly related thereto after the date of this Agreement, Security First
shall immediately notify FirstMerit of such contact, and provide such
information requested by FirstMerit, including but not limited to the name of
the party or parties, and all details related thereto. Security First shall have
a continuing obligation to provide information to FirstMerit regarding any
additional or continuing contacts. Any writings received by Security First or
any officer, director or representative thereof, shall be immediately provided
to FirstMerit, regardless of such writing being marked confidential or
otherwise.
5.2. INTERIM OPERATIONS OF SECURITY FIRST. During the period from the date
of this Agreement to the Effective Time, except as specifically contemplated by
this Agreement, as required by law, as set forth in Security First Disclosure
Letter, or as otherwise approved in writing by FirstMerit (which shall not be
unreasonably withheld):
5.2.1. CONDUCT OF BUSINESS. Security First shall, and shall cause
each of the Security First Subsidiaries to, conduct their respective
businesses only in, and not take any action except in the ordinary course
of business substantially consistent with current practices (which
practices include any workout arrangements for troubled loans and real
estate development assets). Security First shall use all diligent efforts
to (i) maintain and preserve intact the business organization of Security
First and each of the Security First Subsidiaries, keep available the
services of its and their present officers and employees, and keep the
branch operations fully staffed with competent employees, (ii) preserve the
goodwill of those having business relationships with Security First or the
Security First Subsidiaries, (iii) maintain and keep its properties in as
good repair and condition as at present, except for depreciation due to
ordinary wear and tear, (iv) attempt to resolve such loans which FirstMerit
has identified in writing to Security First as "troubled," in a workout
arrangement which conditions and terms shall be satisfactory to Security
First and FirstMerit, (v) keep in full force and effect insurance and bonds
comparable in amount and scope of coverage to that now maintained by it,
provided however, in the event that any such insurance (including, without
limitation, directors' and officers' liability insurance) is canceled or
not renewable at its expiration at current or standard rates, Security
First shall consult with FirstMerit in order to determine whether to
exercise its right to extend the discovery period and in evaluating
available alternatives to replace the current insurance, (vi) perform in
all material respects all obligations required to be performed by each of
Security First and each of the Security First Subsidiaries under all
material contracts, leases and documents relating to or affecting its
assets, properties, and business, and (vii) comply with and perform in all
material respects all obligations and duties imposed upon it by all
federal, state, municipal, and local laws, and all rules, regulations and
orders imposed by federal, state, municipal or local governmental agencies.
5.2.2. NEGATIVE COVENANTS. Security First shall not and shall not
permit any of the Security First Subsidiaries to make any change or
amendment to, or to repeal, their respective articles of incorporation or
codes of regulations (or comparable governing instruments). Neither
Security First nor any Security First Subsidiary shall after the date of
this Agreement enter into any loan or credit commitment (including standby
letters of credit) to, or invest (as a venture capital or similar
investment) or agree to invest (as a venture capital or similar investment)
in, any person or entity if such loan, commitment or investment, would
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exceed $500,000 as a residential loan or investment, or $1,000,000 as a
commercial loan, without first consulting with FirstMerit; provided,
however, that nothing in this paragraph shall prohibit Security First or
any Security First Subsidiary from honoring any contractual obligation in
existence on the date of this Agreement. Neither Security First nor any
Security First Subsidiary shall after the date of this Agreement enter into
any participatory agreements, loans, commitments or investments involving
collateral outside of Ohio, without first consulting with FirstMerit,
except that the following are excluded from this restriction: (i) Small
Business Association loans, (ii) agency rated asset backed securities, and
(iii) government obligations of the United States of America, or a state or
municipality within the United States of America.
Neither Security First nor any Security First Subsidiary shall sell,
assign, transfer or otherwise dispose of to a third party, (i) branch
offices of any Security First Subsidiary, or (ii) any of its material
properties or assets. Neither Security First nor any Security First
Subsidiary shall purchase or otherwise acquire from a third party, branch
offices of such third party, assets constituting any other line of
business, or any other material properties or assets outside the ordinary
course of its business. Neither Security First nor any Security First
Subsidiary shall enter into any transaction, contract, lease, agreement or
commitment (or any amendment to any transaction, contract, lease, agreement
or commitment) outside of the ordinary course of business which is material
to Security First and the Security First Subsidiaries taken as a whole.
5.2.3. CAPITAL STOCK. Security First shall not, and shall not permit
any of the Security First Subsidiaries to, issue or sell any shares of
capital stock or any other securities of any of them (other than pursuant
to Security First Stock Options outstanding on the date of this Agreement
and under the Security First Debentures, or the exercise by FirstMerit of
its rights under the Security First Stock Purchase Option) or issue any
securities convertible into or exchangeable for, or options, warrants to
purchase, scrip, rights to subscribe for, calls or commitments of any
character whatsoever relating to, or enter into any contract, commitment or
arrangement with respect to the issuance of, any shares of capital stock or
any other securities of any of them or enter into any arrangement, contract
or commitment with respect to the purchase or voting of shares of their
capital stock, or adjust, split, combine or reclassify any of their capital
stock or other securities or make any other changes in their capital
structures. Neither Security First nor any Security First Subsidiary shall
acquire beneficial ownership of any class of equity securities or any
similar interests of any corporation, bank, business, trust, association or
similar organization.
5.2.4. DIVIDENDS. Security First shall not and shall not permit any
of the Security First Subsidiaries to declare, set aside, pay or make any
dividend or other distribution or payment (whether in cash, stock or
property) with respect to, or purchase or redeem, any shares of the capital
stock of any of them other than (a) Security First's regular quarterly cash
dividends in the amount (subject to the next paragraph) of $.08 per share,
including an increase based upon historical practice to $.09 per share in
May 1998 (to the extent legally permitted), and (b) dividends paid (to the
extent legally permitted) by any Security First Subsidiary to another
Security First Subsidiary or Security First with respect to such Security
First Subsidiary's capital stock. From the date of this Agreement to the
earlier of the Effective Time or the termination of this Agreement,
Security First shall not, without the prior written consent of FirstMerit,
make any changes in its practice of setting dividend record or dividend
payment dates.
The parties agree to consult with respect to the last quarterly
dividend of Security First payable prior to the Effective Time with the
object of assuring that the shareholders of Security First receive an
equitable dividend distribution, taking into consideration the record and
payment dates of the last Security First dividend distribution and the
first FirstMerit dividend distribution following the Merger. It is the
intent of the parties that in the event that the Effective Date will occur
shortly after the record date for the FirstMerit dividend, that the last
Security First dividend to be paid prior to such time, will be grossed-up
on an equitable basis so that the Security First shareholders receive the
economic benefit of such dividend.
5.2.5. EMPLOYEE PLANS, COMPENSATION AND BONUSES. Except as is
necessary to comply with the Code or as contemplated in this Agreement, or
as expressly set forth in the Security First Disclosure Letter regarding
salary increases, incentive pay or bonuses for periods after the date of
this Agreement, Security First shall not, and shall not permit any of the
Security First Subsidiaries to: adopt or amend any bonus, profit sharing,
compensation, severance, termination, stock option, pension, retirement,
deferred compensa-
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tion, employment or other employee benefit agreements, trusts, plans, funds
or other arrangements for the benefit or welfare of any present or former
director, officer or employee of Security First or any Security First
Subsidiary; increase the compensation or fringe benefits of any present or
former director, officer or employee, including the Senior Officers (as
hereinafter defined); pay any bonus, compensation or benefit not required
by any existing plan or arrangement (including, without limitation, the
granting of stock options or stock rights); take any action or grant any
benefit not required under the terms of any existing agreements, trusts,
plans, funds or other such arrangements; or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing.
Pursuant to the terms of certain split-dollar life insurance policies,
the Security First officers will be entitled to purchase the split-dollar
life insurance policies held by Security First on their lives. The names of
the officers, amount and terms of the policies, and the cash
surrender/purchase price are listed on the schedule attached to the
Security First Disclosure Letter.
5.2.6. CONFORMING ACCOUNTING AND RESERVE POLICIES; RESTRUCTURING
EXPENSES.
(a) Notwithstanding that Security First believes that it has
established all reserves and taken all provisions for possible loan
losses required by generally accepted accounting principles and
applicable laws, rules and regulations, Security First recognizes that
FirstMerit has adopted different loan, accrual and reserve policies
(including loan classifications and levels of reserves for possible loan
losses), subject to applicable laws, regulations, and the requirements
of Governmental Entities and generally accepted accounting principles.
From and after the date of this Agreement to the Effective Time,
Security First and FirstMerit shall consult and cooperate with each
other with respect to conforming, as specified in a notice from
FirstMerit to Security First, based upon such consultation, Security
First's loan, accrual and reserve policies to those policies of
FirstMerit.
(b) In addition, from and after the date of this Agreement to the
Effective Time, Security First and FirstMerit shall consult and
cooperate with each other with respect to determining, as specified in a
notice from FirstMerit to Security First, based upon such consultation,
appropriate accruals, reserves and charges to establish and take in
respect of excess facilities and equipment capacity, restructuring
costs, severance costs, litigation matters, write-off or write-down of
various assets and other appropriate accounting adjustments taking into
account the Surviving Corporation's business plan following the Merger.
(c) Security First and FirstMerit shall consult and cooperate with
each other with respect to determining, as specified in a notice from
FirstMerit to Security First, based upon such consultation, the amount
and the timing for recognizing for financial accounting purposes the
expenses of the Merger and the restructuring charges related to or to be
incurred in connection with the Merger.
(d) At the request of FirstMerit, and in an amount and on a basis
satisfactory to Security First, Security First shall promptly establish
and take such reserves and accruals as FirstMerit shall request to
conform, on a mutually satisfactory basis, Security First's loan,
accrual and reserve policies to FirstMerit's policies, shall establish
and take such accruals, reserves and charges in order to implement such
policies in respect of excess facilities and equipment capacity,
severance costs, litigation matters, write-off or write-down of various
assets and other appropriate accounting adjustments, and to recognize
for financial accounting purposes such expenses of the Merger and
restructuring charges related to or to be incurred in connection with
the Merger; provided, however, that it is the objective of FirstMerit
and Security First that such reserves, accruals and charges be taken on
or before the Effective Time, but in no event later than immediately
prior to the Closing; and provided, further, that Security First shall
not be obligated to take any such action pursuant to this Section 5.2.6
unless and until (i) FirstMerit specifies its request in a writing
delivered to Security First, (ii) all conditions to the obligations of
Security First and FirstMerit to consummate the Merger set forth in
Sections 6.1 through 6.3 have been waived or satisfied by the
appropriate party, and (iii) such reserves, accruals and charges conform
with generally accepted accounting principles, applicable laws,
regulations, and the requirements of Governmental Entities.
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5.2.7. STOCK OPTION CASH ELECTION. Security First shall not approve
or allow any holder of a Security First Stock Option to elect or receive a
cash payment in lieu of the right to receive or exercise a Security First
Stock Option.
5.3. INTERIM OPERATIONS OF FIRSTMERIT. During the period from the date of
this Agreement to the Effective Time, except as specifically contemplated by
this Agreement, as required by law, or as otherwise approved in writing by
Security First (which shall not be unreasonably withheld) FirstMerit shall, and
shall cause each of the FirstMerit Subsidiaries to, conduct their respective
businesses in such a manner so as not to materially interfere with the ability
to consummate the Merger, delay the Effective Time or have a Material Adverse
Effect upon the transactions contemplated by the Agreement.
5.4. EMPLOYMENT MATTERS.
(a) As of the Effective Time, FirstMerit agrees to enter into employment
and related agreements with Messrs. Charles F. Valentine, Austin J. Mulhern and
Jeffrey A. Calabrese substantially in the form and upon the terms indicated on
Exhibits 5.4(a)-1 through (a)-3, 5.4(b) and Schedule 5.4 hereto, provided such
persons have not terminated their employment with Security First at or prior to
the Effective Time ("Employment Agreements" or "Employment Agreement"), and
conditioned upon the agreement of each to the cancellation of their current
employment and related agreements with Security First.
(b) As of the Effective Time, Security First will pay the financial
obligations of Security First and the Security First Subsidiaries, as
applicable, with regard to the employment and severance agreements with Louis J.
Sorboro and Mary H. Crotty, and FirstMerit will assume and pay, to the extent
such obligations can be assumed or benefits thereunder provided as a matter of
law, but conditional upon receipt of a release of FirstMerit regarding matters
related to employment and termination of employment. The total due them at the
Effective Date is $415,000 and $254,000 respectively. FirstMerit acknowledges
that the consummation of the Merger will constitute a change in status for these
officers entitling each of them to terminate employment for involuntary
termination under their employment arrangements. The parties listed herein will
not be provided any separation benefits.
(c) FirstMerit agrees to pay as separation monies to employees of Security
First and the Security First Subsidiaries, other than the persons with
Employment Agreements or covered in Section 5.4(a) or (b), in consideration for
a standard release of FirstMerit regarding matters related to employment and
termination of employment, who either at Closing do not become employees of
FirstMerit or its Subsidiaries or to persons who become employees of FirstMerit
or its Subsidiaries but whose employment is terminated during the 365-day period
after the Effective Time (except if such termination is for cause). The
separation monies will be calculated as indicated on Exhibit 5.4(c). Such
employees will also be entitled to any other benefits, if any, required by law.
FirstMerit is not required to hire any employees of Security First or the
Security First Subsidiaries, but may if it so desires. All persons employed
(except for the persons with written employment contracts) by FirstMerit and its
Subsidiaries as of the Effective Time will remain "at will" employees, meaning
that their employment can be terminated for any or no reason.
Notwithstanding anything contained herein to the contrary, no third party
shall have a right to enforce the provisions of Sections 5.4(a), (b) or (c) or
assert any claim hereunder.
(d) Following the Effective Time, the employee benefit programs to be
available and applicable to the persons who were employees of Security First and
the Security First Subsidiaries, and who become employees of FirstMerit and/or
its subsidiaries, are as follows:
(i) Defined Benefit Retirement and Pension Plans. At the Effective
Time (i) each Security First employee shall be credited with their past
service for eligibility and vesting purposes (but not for benefit accrual
purposes) as of the Effective Date of the Merger, and (ii) each Security
First employee who satisfies the age and service eligibility requirements
of the FirstMerit defined benefit plan (including the past service credit
referred to in (i) above) shall be eligible to participate in the
FirstMerit defined benefit plan and accrue benefits thereunder on and after
the date of the Merger in accordance with the provisions thereof.
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(ii) Savings Plans. Security First has a qualified, tax-exempt profit
sharing plan with a cash-or-deferred feature qualifying under Section
401(k) of the Code ("Security First 401K Plan"). With respect to the
Security First 401K Plan, and consistent with past practices, the
participant salary deferral contributions under Section 401(k) of the Code
and employer matching contributions under Section 401(m) of the Code may
continue through the Effective Date. FirstMerit maintains the FirstMerit
Corporation and Subsidiaries Employees' Salary Savings Retirement Plan
("FirstMerit 401K Plan"). At the Effective Time, FirstMerit will credit the
Security First employees who become employees of FirstMerit or any of its
current Subsidiaries, for purposes of the FirstMerit 401K Plan, with all
service with Security First or any of the Security First Subsidiaries for
purposes of determining their eligibility to participate in such plan and
the vested portion of their respective accrued benefits under such plan.
(iii) Health Care Plans. At such time on or after the Effective Time
as FirstMerit shall deem appropriate, FirstMerit and its Subsidiaries will
provide Security First and Security First Subsidiaries employees hired by
FirstMerit with such coverage under the FirstMerit health care plan as they
then provide their employees, with all service with Security First or any
of the Security First Subsidiaries credited for purposes of determining
such employee's eligibility to participate in such plan and without any
"prior existing condition" exclusion. The Security First health care plans
will be continued until the employees so hired can participate in the
FirstMerit health care plans.
No benefits currently provided Security First or the Security First
Subsidiaries employees, which exceed those provided by FirstMerit and its
subsidiaries, will be grandfathered or provided, except if required by law.
Other than otherwise expressly stated herein, FirstMerit shall not assume
any other health care benefit plans or benefits. FirstMerit, where such
right currently exists, retains the existing rights to amend or terminate
any such plan which have been reserved by the plan sponsor in the plan
document or otherwise.
(viii) First Kent Financial Corporation Options and Restricted
Stock. Security First assumed certain obligations related to stock options
and restricted stock that had been issued by First Kent Financial
Corporation ("First Kent") when First Kent was merged with and into
Security First. Security First has represented that some of these options
and the restricted stock will vest over the next two years if the holders
thereof have a position with the Surviving Corporation as an employee,
director or advisory director. FirstMerit agrees to establish a
non-compensated local advisory board and to appoint each holder of an
unvested option or restricted stock to such advisory board for the purpose
of allowing them to vest and exercise their options and restricted stock.
FirstMerit agrees to allow or to take such action necessary at the request
of a holder, to effectuate a change in an option from an incentive to a
non-qualified option, if such is necessary to keep such option from being
forfeited.
5.5. ACCESS, INFORMATION AND CONFIDENTIALITY. Upon reasonable notice,
Security First and each of the Security First Subsidiaries shall afford to
FirstMerit and its representatives (including, without limitation, directors,
officers and employees of FirstMerit, its counsel, accountants, environmental
consultants and other professionals retained by FirstMerit) full access during
normal business hours throughout the period prior to the Effective Time to the
books, contracts, records (including, without limitation, tax returns and work
papers of independent auditors), customer information, properties, personnel and
such other information and documents of Security First and each of the Security
First Subsidiaries. FirstMerit shall have a right with the prior notice to
Security First to have environmental assessments conducted on any properties
owned, managed or controlled by Security First and the Security First
Subsidiaries. Security First shall not be required to provide access to any such
item or information if the providing of such access (i) would be reasonably
likely to result in the loss or impairment of any privilege with respect to such
information, or (ii) would be precluded by any law, ordinance, regulation,
judgment, order, decree, license or permit of any Governmental Entity.
All information furnished by one party to another party in connection with
this Agreement and the transactions contemplated hereby which is regarded by
such furnishing party as confidential will be kept confidential by such other
party and its representatives (including, without limitation, directors,
officers and employees, its counsel, accountants and other professionals
retained by such party) and will be used only in connection with this Agreement
and the transactions contemplated hereby, and not in such party's business or by
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its directors, officers and employees, its counsel, accountants and other
professionals retained by such party if the Merger is not consummated. Nothing
contained in this Section shall restrict or prohibit Security First or
FirstMerit from disclosing information in any document filed with the
Commission, FRB, OTS, OCC and other Governmental Entities and bodies nor shall
it in any way restrict FirstMerit's right to exercise the Security First Stock
Purchase Option, and so long as this Agreement has not been terminated pursuant
to Article 7 hereof, FirstMerit may, notwithstanding this confidentiality
provision, disclose such information as it deems necessary or advisable in
connection with explaining or providing background information to security
analysts and others concerning the transactions contemplated by this Agreement,
except that any such information dealing with the areas of individual employees,
their future employment, reserves established for specific loans, matters
related to litigation and Security First's business strategies, may only be
disclosed with the prior approval of Security First, which approval shall not be
unreasonably withheld. It is the parties' intent to provide such analysts with
accurate information regarding the transaction in a light favorable to
completion of the transactions contemplated by this Agreement.
5.6. CERTAIN FILINGS; CONSENTS AND ARRANGEMENTS. FirstMerit and Security
First shall (a) promptly file all reports and applications required to be filed
with the Commission, the FRB and such other Governmental Entities (the
"Regulatory Authorities") as may have jurisdiction for such approvals as may be
required to be obtained from such Governmental Entities in order to carry out
the transactions contemplated by this Agreement as soon as practicable between
the date of this Agreement and the Effective Time and each FirstMerit Subsidiary
or Security First Subsidiary that is a bank or savings association shall also
file all reports required to be filed with the FRB, the OTS and the OCC with
respect to the Merger and the other transactions contemplated by this Agreement,
(b) cooperate with one another (i) in promptly determining whether any other
filings are required to be made or consents, approvals, permits or
authorizations are required to be obtained under any other federal, state or
foreign law or regulation, and (ii) in promptly making any such filings,
furnishing information required in connection therewith and seeking timely to
obtain any such consents, approvals, permits or authorizations, and (c) deliver
to the other party to this Agreement copies of all such applications and reports
promptly after they are filed. In no event, however, shall either party hereto
be liable for any untrue statement of a material fact or omission to state a
material fact in any filing made with any Governmental Entity pursuant to this
Section made in reliance upon, and in conformity with, written information
concerning the other party hereto furnished by such other party specifically for
use in such filing. Each party hereto shall advise the other party hereto
promptly of the occurrence of any event which makes untrue any statement of a
material fact contained in any such filing or any amendment or supplement
thereto or that requires the making of a change in any such filing or any
amendment or supplement thereto in order to make any material statement therein
not misleading.
5.7. TAKEOVER STATUTES AND PROVISIONS. Security First shall use its
diligent efforts to (i) exempt Security First, this Agreement, the Security
First Stock Purchase Option and the Merger from the requirements of any state
takeover law (including without limitation, statutes relating to business
combinations, control share acquisitions and merger moratoriums) and from any
provisions under its Corporate Governance Documents, as applicable, by action of
Security First's Board of Directors or otherwise, and (ii) assist in any
challenge by FirstMerit to the applicability to the Merger of any state takeover
law.
5.8. INDEMNIFICATION AND INSURANCE. Except as may be limited by applicable
law, for a period of six years after the Effective Time, FirstMerit hereby
agrees to honor the terms of the indemnification provisions of Article Tenth and
the limitations of liability of Article Eleventh of of Security First's
Certificate of Incorporation, including advancement of expenses (subject to
applicable requirements for delivery of an undertaking), copies of which are
attached hereto as Exhibit 5.8, which are provided to Security First's and its
subsidiaries' directors, officers and employees, for matters occurring prior to
the Effective Time. Moreover, indemnification of directors, officers and
employees of Security First and Security First Subsidiaries following the
Effective Time will be provided to the same extent it is provided to other
persons working in similar capacities for FirstMerit following the Closing.
For a period of up to three years following the Effective Time, FirstMerit
will maintain in effect the current insurance policies maintained by Security
First (or substitute policies with substantially the same coverage and terms)
covering directors' and officers' liability with respect to claims which arise
from factors or events which occurred before the Effective Time, except that
FirstMerit's obligation under this paragraph for the second and
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subsequent years following the Effective Time will be based upon its ability to
obtain such insurance at a commercially reasonable cost. Security First shall
notify FirstMerit prior to purchasing or continuing any insurance to cover the
matters contained herein, provided, however, it is the intent of FirstMerit that
tail coverage will be purchased if such is available. To the extent insurance is
available under any of the provisions in this Section to cover such claims and
costs, such insurance shall be the primary source of funding these obligations.
5.9. ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its diligent efforts to take
promptly, or cause to be taken, all actions necessary, proper or advisable under
applicable laws to consummate the transactions contemplated by this Agreement.
In addition, without limitation, each party shall from time to time execute such
certificates as to factual matters necessary, proper or advisable in order to
receive the opinions contemplated by Article 6 of this Agreement.
If, at any time after the Effective Time, the Surviving Corporation
considers or is advised that any further deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record its right, title or interest in and to any of the
rights, properties or assets of Security First acquired or to be acquired by the
Surviving Corporation, Security First and its officers and directors shall be
deemed to have granted to the Surviving Corporation an irrevocable power of
attorney to execute and deliver all such deeds, bills of sale, assignments and
assurances and to take and do all such other actions and things as may be
necessary or desirable to vest, perfect or confirm any and all right, title and
interest in and to such rights, properties or assets in the Surviving
Corporation.
5.10. COMPLIANCE WITH ANTITRUST LAWS. Each of FirstMerit and Security
First shall use its diligent efforts to resolve such objections, if any, which
may be asserted with respect to the Merger by the FRB, the Department of
Justice, or any other Governmental Entity (including, without limitation,
objections under any antitrust laws and any applicable laws or regulations). In
the event a suit is threatened or instituted challenging the Merger as violative
of the antitrust laws, each of FirstMerit and Security First shall use its
diligent efforts to avoid the filing of, resist or resolve such suit. FirstMerit
and Security First shall use their diligent efforts to take such action as may
be required: (a) by the FRB, the Department of Justice, or any other
Governmental Entity in order to resolve such objections as any of them may have
to the Merger, or (b) by any federal or state court of the United States, in any
suit brought by a private party or Governmental Entity challenging the Merger as
violative of any antitrust laws, in order to avoid the entry of, or to effect
the dissolution of, any injunction, temporary restraining order or other order
which has the effect of preventing the consummation of the Merger.
5.11. PUBLICITY. The initial press release announcing this Agreement shall
be a joint press release in a form mutually agreed upon by the parties and
thereafter, except as required by law, Security First and FirstMerit shall
consult with each other and provide a written copy to each other prior to
issuing any press releases, or otherwise making public statements, with respect
to the transactions contemplated hereby and in making any filings with any
Governmental Entity.
5.12. REGISTRATION STATEMENT, PROXY STATEMENT AND COMFORT LETTERS.
(a) FirstMerit will, as soon as practicable, prepare and file with the
Commission the Registration Statement, and any required amendments thereto, will
use all reasonable efforts to have the Registration Statement declared effective
by the Commission as promptly as practicable and will maintain the effectiveness
of such Registration Statement. FirstMerit will also take any action required to
be taken under any applicable state blue sky or securities laws in connection
with the issuance of the FirstMerit Common Stock pursuant to the Merger.
Security First shall promptly furnish FirstMerit all information concerning
Security First, the Security First Subsidiaries, and the holders of its capital
stock and shall promptly take any action as FirstMerit may reasonably request in
connection with any such action.
FirstMerit, with the direct assistance of Security First, will as soon as
practicable prepare and file the Proxy Statement with the Commission, and take
such other action so that Security First may promptly after the effectiveness of
the Registration Statement mail the Proxy Statement to Security First's
shareholders. FirstMerit and Security First shall cooperate and consult with
each other in the preparation of the Proxy Statement and Security First shall
promptly furnish FirstMerit all information concerning Security First, the
Security First
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Subsidiaries, and the holders of its capital stock, and shall promptly take any
action as FirstMerit may reasonably request in connection with any such action.
(b) Each of FirstMerit and Security First will cause its respective
independent auditors to issue a letter addressed to both FirstMerit and Security
First, within three business days prior to the effectiveness of the Registration
Statement and also as of Closing, stating among other things, the following: (i)
such accountants are independent public accountants within the meaning of the
Securities Act and the rules and regulations promulgated thereunder; (ii) in the
opinion of such accountants, the financial statements included in the
Registration Statement and reported on therein by such accountants comply as to
form in all material respects with the applicable accounting requirements of the
Securities Act and the Rules and Regulations promulgated thereunder; (iii) on
the basis of specified limited procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards), including
a reading of the latest available unaudited financial statements, inquiries of
officials responsible for financial and accounting matters, nothing came to
their attention which caused them to believe that, during the period subsequent
to March 31, 1997 for Security First and December 31, 1997 for FirstMerit, to a
specified date not more than three business days prior to the effective date of
the Registration Statement and to a specified date not more than three business
days prior to Closing, there was any change in the shares of its capital stock
or long-term debt, if any, (other than changes due to payments in accordance
with the terms of such debt, or in the event of any such change in long-term
debt, the amount thereof) or any decrease (increase) in the total or per share
amount of its net income (net loss) as compared with the corresponding period in
the preceding year, except in all instances for changes or decreases (increases)
which the Registration Statement discloses have occurred or may occur; (iv) such
accountants have read the other data included in the Registration Statement with
respect to the financial condition and operations of their respective clients
and they find such data to be correctly computed and in agreement with their
respective books and records of FirstMerit and Security First.
(c) FirstMerit shall be responsible for all expenses incident to the
obtaining of the requisite regulatory approvals from Governmental Entities.
Without limiting the generality of the foregoing, the expenses to be assumed by
FirstMerit shall include (i) all expenses for its own legal counsel and other
expenses incurred by FirstMerit incident to the preparation and filing of
applications on its behalf and on behalf of Security First and other requests
for regulatory consents and approvals with the appropriate regulatory agencies
as contemplated by this Agreement; (ii) all expenses for its own legal counsel
and all other expenses incurred in connection with the registration of the
FirstMerit Common Stock under the federal and state securities laws and (iii)
all printing and mailing expenses of the parties. The expenses to be assumed by
FirstMerit shall not include any legal, accounting or other expenses incurred by
Security First in connection with its own corporate proceedings or incident to
the transactions contemplated by this Agreement.
5.13. AFFILIATES COMPLIANCE WITH THE SECURITIES ACT.
(a) Within 30 days after the date of this Agreement, each of Security First
and FirstMerit shall identify to the other party all persons whom it reasonably
believes are its "affiliates" as that term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act and/or Accounting Series, Releases 130 and
135, as amended, of the Commission (the "Affiliates"). Thereafter and until the
Effective Time, each of Security First and FirstMerit shall identify to the
other party each additional person whom it reasonably believes to have
thereafter become its Affiliate.
(b) Each of Security First and FirstMerit shall use its diligent efforts to
cause each person who is identified as an Affiliate pursuant to clause (a) above
to deliver to FirstMerit not later than the date on which the Merger is
approved, a written agreement, substantially in the form of Exhibit 5.13(b)-1
(in the case of Affiliates of Security First) and Exhibit 5.13(b)-2 (in the case
of Affiliates of FirstMerit).
Because the Merger is intended to qualify for pooling of interests
accounting treatment, the shares of FirstMerit Common Stock received by such
Affiliates in the Merger shall not be transferable until such time as financial
results covering at least 30 days of post-Merger operations have been published,
and the certificates representing such shares will bear an appropriate
restrictive legend.
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5.14. SECURITY FIRST SHAREHOLDER MEETING. Security First shall take all
action necessary, in accordance with applicable law and its Corporate Governance
Documents to convene a special or regular meeting of the holders of Common Stock
(the "Security First Meeting") as promptly as practicable after the
effectiveness of the Registration Statement for the purpose of considering and
taking action upon this Agreement and the transactions contemplated herein.
Subject to the fiduciary obligations and duties of the Board of Directors of
Security First under Delaware law and to the provisions of Section 5.1 of this
Agreement, the Board of Directors of Security First shall recommend that the
holders of the Common Stock vote in favor of and approve the Merger and adopt
this Agreement at the Security First Meeting.
5.15. POOLING AND TAX-FREE REORGANIZATION TREATMENT. Neither FirstMerit
nor Security First shall intentionally take or cause to be taken nor fail to
take any action, whether before or after the Effective Time, which would
disqualify the Merger as a "pooling of interests" for accounting purposes or as
a "reorganization" within the meaning of Section 368(a) of the Code, other than
FirstMerit's exercise of its rights under the Security First Stock Purchase
Option.
5.16. MERGERS OF SUBSIDIARIES. The Board of Directors of FirstMerit
intends, contemporaneously with the merger of Security First with and into
FirstMerit, to merge the Security First Subsidiaries (not including the
non-banking subsidiaries) with and into FirstMerit Bank, N.A., a wholly owned
subsidiary of FirstMerit.
Security First shall cause such of the Security First Subsidiaries as
FirstMerit may request to enter into definitive merger or consolidation
agreements with FirstMerit Bank, N.A., providing for the merger or consolidation
of the Security First Subsidiaries with or into FirstMerit Bank, N.A.; provided,
however, that, in all cases, the obligation of Security First to cause such
merger or consolidation shall be subject to the condition that the Merger be
simultaneously consummated; and provided further, notwithstanding anything to
the contrary in this Agreement, (i) the representations and warranties of
Security First in this Agreement shall not be deemed to be untrue or breached,
(ii) Security First shall not be deemed to have failed to perform any covenant
or obligation contained in this Agreement, and (iii) no condition to
FirstMerit's obligation to effect the Merger shall be deemed not to have been
satisfied by or as a result of any merger or consolidation consummated pursuant
to this Section. Security First shall cause the Security First Subsidiaries to
fully cooperate with FirstMerit in consummating these mergers or consolidations,
including cooperating in the filing of any necessary regulatory applications.
5.17. CURRENT INFORMATION. During the period from the date of this
Agreement to the Effective Time, each of Security First and FirstMerit will
promptly notify the other of (i) any material change in the normal course of its
business, (ii) any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or receipt of any
memorandum of understanding or cease and desist order from a regulatory
authority, or (iii) the institution or the threat of material litigation
involving such party and will keep the other party fully informed of such
events. During such period, FirstMerit and Security First shall promptly provide
the other with monthly unaudited financial statements as soon as they are
available and each shall promptly provide the other with a copy of all Reports
filed by it after the date of this Agreement through the Effective Time. Each of
FirstMerit and Security First agrees to keep the foregoing information strictly
confidential, except as required by law.
5.18. INTEGRATION OF OPERATIONS. Subject to applicable laws, regulations
and the requirements of Governmental Entities, during the period from the date
of this Agreement to the Effective Time, the parties will consult and cooperate
fully with each other to do all things advisable to prepare for and facilitate
the integration of Security First and the applicable Security First Subsidiaries
operations into and with FirstMerit's operations as rapidly and effectively as
possible as of the Effective Time, including, without limitation, preparation
for the integration of such branch operations, if any (including, without
limitation, the preparation for the necessary installation of all of
FirstMerit's or its subsidiaries hardware and software systems), management
information systems, financial and accounting operations, employee compensation
and benefit matters and similar matters, and employee training, as requested by
FirstMerit; provided that all such integration prior to the Effective Time shall
be subject to the concurrence of Security First.
5.19. NASD LISTING. FirstMerit will file an additional listing application
with the National Association of Securities Dealers, Inc. (the "NASD") for the
FirstMerit Common Stock to be issued in the Merger at the time
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prescribed by applicable rules and regulations. In addition, FirstMerit will use
its best efforts to maintain its listing on the Nasdaq/NMS.
6. CONDITIONS
6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver at or prior to the Closing of the following
conditions:
(a) The Merger and this Agreement shall have been approved and adopted
by the requisite vote of the holders of Security First's Common Stock.
(b) All authorizations, consents, orders or approvals, lack of any
injunctive actions by the Department of Justice or any state anti-trust
agency, of the FRB, OTS, OCC and any other Governmental Entity
(collectively, "Consents") which are necessary for the consummation of the
Merger (other than immaterial Consents, the failure to obtain which would
not involve criminal liability, any material civil penalties or fines, or
would not have or reasonably be expected to have a Material Adverse Effect
on the combined businesses, financial condition, or results of operations
of FirstMerit, Security First, the FirstMerit Subsidiaries and the Security
First Subsidiaries taken as a whole), shall have been obtained or shall
have occurred and shall be in full force and effect, and all applicable
waiting periods shall have expired, at the Effective Time. A material
Consent shall not be deemed to have been obtained if the Consent shall
include any conditions or requirements which, in the reasonable opinion of
the Board of Directors of FirstMerit, would have a Material Adverse Effect
on the anticipated economic and business benefits to FirstMerit of the
transactions contemplated by this Agreement, taken as a whole.
(c) The Registration Statement shall have become effective in
accordance with the provisions of the Securities Act and shall not be
subject to a stop order suspending the effectiveness of the Registration
Statement.
(d) No temporary restraining order, preliminary or permanent
injunction or other order by any federal or state court or agency in the
United States which enjoins or prohibits the consummation of the Merger
shall have been issued and remain in effect.
(e) FirstMerit shall have obtained an opinion of its counsel,
reasonably satisfactory in form and substance to FirstMerit and dated as of
Closing, to the effect that the Merger will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Code.
(f) FirstMerit shall have received a letter, dated the date of the
Closing, from Coopers & Lybrand to the effect that, for financial reporting
purposes, the Merger qualifies for pooling-of-interests accounting
treatment under generally accepted accounting principles, if consummated in
accordance with this Agreement.
6.2. CONDITIONS TO OBLIGATION OF SECURITY FIRST TO EFFECT THE MERGER. The
obligation of Security First to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Closing of the additional following
conditions:
(a) FirstMerit shall have performed in all material respects all of
its obligations contained in this Agreement required to be performed at or
prior to the Closing.
(b) The representations and warranties of FirstMerit contained in this
Agreement shall be true and correct both: (i) on the date of this
Agreement, and (ii) as of the Effective Time as if made at and as of such
time, (x) except, both on the date of this Agreement and at the Effective
Time, as expressly contemplated or permitted by this Agreement, (y) except,
as of the Effective Time, for representations and warranties relating to a
time or times other than the Effective Time, and (z) except, both on the
date of this Agreement and at the Effective Time, to the extent that the
untruthfulness or inaccuracy of the representations or warranties of
FirstMerit, individually or in the aggregate, shall not have a Material
Adverse Effect on FirstMerit.
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(c) FirstMerit shall have furnished Security First a Certificate dated
the date of the Closing, signed on behalf of FirstMerit by the Chief
Executive Officer or President, and the Chief Financial Officer of
FirstMerit, that to the best of their knowledge and belief, the conditions
set forth in Sections 6.2(a), (b) and (e) have been satisfied.
(d) Security First shall have received the opinion of legal counsel
for FirstMerit, dated as of Closing, substantially to the effect set forth
in Exhibit 6.2(d) hereto, and such certificates from the appropriate
persons and/or authorities regarding FirstMerit's board resolutions, form
of corporate governance documents and good standing.
(e) Since the date of this Agreement, there shall have not been any
change in the financial condition, results of operations or business of
FirstMerit and the Subsidiaries of FirstMerit that would have a Material
Adverse Effect on FirstMerit.
6.3. CONDITIONS TO OBLIGATION OF FIRSTMERIT TO EFFECT THE MERGER. The
obligation of FirstMerit to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Closing of the additional following
conditions:
(a) Security First shall have performed in all material respects all
of its obligations contained in this Agreement required to be performed at
or prior to the Closing.
(b) The representations and warranties of Security First contained in
this Agreement shall be true and correct both: (i) on the date of this
Agreement, and (ii) as of the Effective Time as if made on and as of such
time, (x) except, both on the date of this Agreement and at the Effective
Time, as expressly contemplated or permitted by this Agreement, (y) except,
as of the Effective Time, for representations and warranties relating to a
time or times other than the Effective Time, and (z) except, both on the
date of this Agreement and at the Effective Time, to the extent that the
untruthfulness or inaccuracy of the representations or warranties of
Security First, individually or in the aggregate, shall not have a Material
Adverse Effect on Security First.
(c) Since the date of this Agreement there shall not have been any
change in the financial condition, results of operations or business of
Security First and the subsidiaries of Security First that either
individually or in the aggregate would have a Material Adverse Effect on
Security First, other than change as a result of action taken under Section
5.2.6 and the second paragraph of Section 5.4(a), and the responses thereto
by Security First and the impact thereof on the operating performance of
Security First.
(d) Security First shall have furnished FirstMerit a certificate dated
the date of the Closing signed on behalf of Security First by the Chief
Executive Officer or President, and Chief Financial Officer of Security
First, that to the best of their knowledge and belief, the conditions set
forth in Sections 6.3(a), (b) and (c) have been satisfied. In addition,
Security First shall have furnished FirstMerit certificates, one dated the
effective date of the Registration Statement and Proxy, and one as of the
Closing, signed on behalf of Security First by the Chief Executive Officer
or President, and Chief Financial Officer of Security First, that to the
best of their knowledge and belief, that Security First participated in the
preparation of the Registration Statement and the Proxy Statement,
including review and discussion of the contents thereof, and nothing came
to the attention of Security First that caused it to believe that the
Registration Statement or the Proxy Statement at the time such documents
became effective, and as of the date of Closing, contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they are made, not misleading.
(e) FirstMerit shall have received the opinion of legal counsel for
Security First dated as of Closing, substantially to the effect set forth
in Exhibit 6.3(e) hereto, and such certificates from the appropriate
persons and/or authorities regarding Security First's and its subsidiaries'
board resolutions, forms of corporate governance documents and good
standing.
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7. MISCELLANEOUS
7.1. TERMINATION. Notwithstanding any other provision of this Agreement,
this Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of this Agreement by the shareholders of
Security First:
(a) by mutual agreement of the parties by the vote of a majority of
the Board of Directors of each of FirstMerit and Security First;
(b) by the vote of a majority of the Board of Directors of either
FirstMerit or Security First if the Merger shall not have been consummated
on or before December 31, 1998, unless the failure to consummate by such
date is related to the action or inaction of the Governmental Entities and
such action or inaction is not directly related to either FirstMerit's or
Security First's breach of their respective obligations under Sections 5.6
or 5.12(a), then on or before March 31, 1999. (provided that the
terminating party is not in material breach of any representation,
warranty, covenant or other agreement contained herein);
(c) by the vote of a majority of the Board of Directors of Security
First if any of the conditions specified in Sections 6.1 and 6.2 have not
been met or waived by Security First at such time as such condition can no
longer be satisfied;
(d) by the vote of a majority of the Board of Directors of FirstMerit
if any of the conditions specified in Sections 6.1 and 6.3 have not been
met or waived by FirstMerit at such time as such condition can no longer be
satisfied;
(e) by the vote of a majority of the Board of Directors of either
FirstMerit or Security First if any regulatory agency has denied approval
of the Merger and such denial has become final and non-appealable
(regardless of whether Security First is deemed to be a "party" to an
application with respect to the Merger); and
(f) by the vote of a majority of the Board of Directors of either
FirstMerit or Security First in the event of a material breach by the other
party of any representation, warranty, covenant or agreement, which breach
is not cured, or cannot be cured, within 30 days after written notice
thereof is given to the party committing such breach.
7.2. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES; EFFECT OF
TERMINATION. The representations and warranties or covenants in this Agreement
will terminate at the Effective Time or the earlier termination of this
Agreement pursuant to Section 7.1, as the case may be: provided however, that if
the Merger is consummated, Sections 1.1.5, 2.1 through 2.8, 5.4, 5.5, 5.8, 5.9,
5.10, 5.12(c), 5.13, 5.15, 5.16, 5.19 and 7.2 will survive the Effective Time to
the extent contemplated by such Sections; provided, further in the event of the
termination of this Agreement, this Agreement shall become void and of no effect
except that the first sentence in the second paragraph of Section 5.5, and all
of Sections 5.12(c) and 7.11, will in all events survive any termination of this
Agreement.
7.3. WAIVER. Either party hereto may, by written notice to the other party
hereto, (a) extend the time for the performance of any of the obligations or
other actions of such other party under this Agreement, (b) waive any
inaccuracies in the representations or warranties of such other party contained
in this Agreement or in any document delivered pursuant to this Agreement, (c)
waive compliance with any of the conditions or covenants of such other party
contained in this Agreement, or (d) waive or modify performance of any of the
obligations of such other party under this Agreement. Except as provided in the
preceding sentence, no action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of either party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any of the representations, warranties, covenants, conditions, or agreements
contained in this Agreement. The waiver by either party hereto of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach.
7.4. AMENDMENT. This Agreement may be amended or supplemented by the
parties hereto, by action taken by or on behalf of their respective Boards of
Directors, at any time before or after approval of this Agreement by the
shareholders of Security First, provided however, that any such amendment or
supplement to this Agreement made subsequent to the adoption of this Agreement
by the shareholders of Security First shall not
A-29
<PAGE> 106
(a) alter the amount or change the form of the consideration contemplated by
this Agreement, (b) alter or change any term of the Amended and Restated
Articles of Incorporation of the Surviving Corporation to be affected by the
Merger, or (c) alter or change the qualification of the Merger as a tax-free
reorganization under the provisions of Section 368 of the Code.
7.5. ENTIRE AGREEMENT. This Agreement and the Security First Stock
Purchase Option, and the agreements referenced and contemplated therein and
thereby, contain the entire agreement among FirstMerit and Security First with
respect to the Merger and the other transactions contemplated hereby and
thereby, and supersede all prior agreements among the parties with respect to
such matters.
7.6. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Ohio, without giving effect to the
principles of conflicts of law thereof.
7.7. CERTAIN DEFINITIONS.
(a) For purposes of this Agreement, the term:
(i) "affiliate" and "associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act, as in effect on the date hereof;
(ii) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of stock,
as trustee or executor, by contract or credit arrangement or otherwise;
(iii) "person" means an individual, corporation, partnership,
association, trust or unincorporated organization; and
(iv) "Material Adverse Effect" on Security First or FirstMerit means a
material adverse effect (other than as a result of changes (x) in banking
laws or regulations of general applicability or interpretations thereof by
court or governmental entities, and (y) in generally accepted accounting
principles) on the respective condition (financial and otherwise), results
of operations, or business of Security First and its Subsidiaries, or
FirstMerit and its Subsidiaries, as the case may be, taken as a whole, or
on the ability of Security First or FirstMerit, as the case may be, to
consummate the transactions contemplated hereby.
The effect of any action taken by Security First at the written
request of FirstMerit pursuant to Section 5.2.6 shall not be taken into
consideration in determining whether any Material Adverse Effect has
occurred.
7.8. NOTICES. All notices and other communications hereunder will be in
writing and will be deemed to have been duly given or delivered, if delivered
personally or delivered by a recognized commercial courier, to each of the
parties at the following addresses:
TO SECURITY FIRST:
Charles F. Valentine, Chairman of the
Board and Chief Executive Officer
Security First Corp.
1413 Golden Gate Boulevard
Mayfield Heights, Ohio 44124
WITH A COPY TO:
James S. Fleischer, P.C.
Silver, Freedman & Taff, L.L.P.
1100 New York Ave., N.W.
Suite 700
Washington, D.C. 20005
TO FIRSTMERIT:
John R. Cochran, Chairman and
Chief Executive Officer
FirstMerit Corporation
III Cascade Plaza, 7th Floor
Akron, Ohio 44308
WITH COPIES TO:
Terry E. Patton, Senior Vice President
and Secretary
FirstMerit Corporation
III Cascade Plaza, 7th Floor
Akron, Ohio 44308
Kevin C. O'Neil
Brouse & McDowell
500 First National Tower
Akron, Ohio 44308
A-30
<PAGE> 107
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section 7.8.
7.9. COUNTERPARTS; EXHIBITS. This Agreement may be executed in any number
of counterparts, each of which will be deemed to be an original but all of which
together will constitute but one agreement. Any exhibits or schedules referenced
herein and attached hereto shall be incorporated by reference herein as if fully
written out in this Agreement.
7.10. PARTIES IN INTEREST. This Agreement is not intended to nor will it
confer upon any other person any rights or remedies, except as expressly stated
herein.
7.11. EXPENSES. Except as otherwise set forth in this Agreement, each
party shall be responsible for the costs and expenses incurred by it in
connection with the transactions contemplated by this Agreement. If this
Agreement is terminated by Security First or FirstMerit pursuant to 7.1(f)
because of the material breach by the other party of any representation,
warranty, covenant, undertaking or restriction contained in this Agreement, if
the terminating party is not in material breach of any representation, warranty,
covenant, undertaking or restriction contained in this Agreement, then the
breaching party shall pay all costs and expenses of the terminating party,
including but not limited to printing, mailing and related fees, as well as fees
for financial advisors, accountants and legal counsel; provided, however, that
if this Agreement is terminated under circumstances other than those described
in this Section 7.11, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby will be paid by the party
incurring such costs and expenses.
7.12. ENFORCEMENT OF THE AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached, that it is impossible to measure in money the damages that
would result to a party by reason of the failure of any of the parties to
perform any of the obligations of this Agreement and that money damages would be
an inadequate remedy in this instance. It is accordingly agreed that the parties
hereto will be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, it is agreed and that if any party should institute an action or
proceeding seeking specific enforcement of this Agreement, the party against
which such action or proceeding is brought hereby waives the claim or defense
that the party instituting such action or proceeding has an adequate remedy at
law and hereby agrees not to assert in any such action or proceeding the claim
or defense that such a remedy at law exists and shall waive or not assert any
requirement to post bond in connection with seeking specific performance.
Notwithstanding anything to the contrary herein, and in addition to any rights
set forth in Section 7.11, a party may seek monetary damages against a breaching
party for any willful breach of this Agreement.
7.13. SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party hereto. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced and does not adversely affect
the substance of these transactions in a material way, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
A-31
<PAGE> 108
IN WITNESS WHEREOF, Security First and FirstMerit have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
FirstMerit Corporation
Attest:
<TABLE>
<S> <C> <C>
/s/ TERRY E. PATTON By: /s/ JOHN R. COCHRAN
- ----------------------------------------------------- -------------------------------------------
Terry E. Patton, Secretary John R. Cochran, Chairman and
Chief Executive Officer
</TABLE>
ACKNOWLEDGMENT
STATE OF OHIO )
) SS:
COUNTY OF SUMMIT )
BE IT REMEMBERED that on this 5th day of April, 1998, personally came
before me, a Notary Public in and for the State and County aforesaid, John R.
Cochran, Chairman and Chief Executive Officer, and Terry E. Patton, Senior Vice
President and Secretary of FirstMerit Corporation, an Ohio corporation, and they
duly executed the Agreement of Affiliation and Plan of Merger before me and
acknowledged it to be their act and deed and the act and deed of said
Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 4th day of
April, 1998.
/s/ KEVIN C. O'NEIL
------------------------------------
Kevin C. O'Neil, Notary Public
Security First Corp.
Attest:
<TABLE>
<S> <C> <C>
/s/ JEFFREY J. CALABRESE By: /s/ CHARLES F. VALENTINE
- ----------------------------------------------------- -------------------------------------------
Jeffrey J. Calabrese, Secretary Charles F. Valentine, Chairman of the
Board and Chief Executive Officer
</TABLE>
ACKNOWLEDGMENT
STATE OF OHIO )
) SS:
COUNTY OF CUYAHOGA )
BE IT REMEMBERED that on this 5th day of April, 1998, personally came
before me, a Notary Public in and for the State and County aforesaid, Charles F.
Valentine, Chairman of the Board and Chief Executive Officer and Jeffrey J.
Calabrese, Secretary of Security First Corp., a Delaware corporation, and they
duly executed the Agreement of Affiliation and Plan of Merger before me and
acknowledged it to be their act and deed and the act and deed of said
Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 4th day
of April, 1998.
/s/ DOUGLAS P. BRAUN
------------------------------------
Notary Public
A-32
<PAGE> 109
EXHIBITS TO
AGREEMENT OF AFFILIATION AND PLAN OF MERGER
FIRSTMERIT CORPORATION
AND
SECURITY FIRST CORP.
<TABLE>
<S> <C>
Exhibit 1.1.2.............. Form of Certificate of Merger
Exhibit 1.1.4.............. Articles and Code of Regulations of FirstMerit
Exhibit 3.3................ FirstMerit Disclosure Letter
Exhibit 3.15............... Security First Stock Purchase Option
Exhibit 4.3................ Security First Disclosure Letter
Schedule 5.4............... Summary of Executive Employment Compensation
Exhibit 5.4(a)............. Employment Agreements
5.4(a)-1........... C. Valentine
5.4(a)-2........... A. Mulhern
5.4(a)-3........... J. Calabrese
SERP Membership Agreements
5.4(a)-4........... C. Valentine
5.4(a)-5........... A. Mulhern
Exhibit 5.4(b)............. Form of Change of Control Termination Agreement
Exhibit 5.4(c)............. FirstMerit Severance Policy
Exhibit 5.8................ Indemnification Provisions
Exhibit 5.13(b)-1.......... Form of Affiliates Agreement for FirstMerit
Exhibit 5.13(b)-2.......... Form of Affiliates Agreement for Security First
Exhibit 6.2(d)............. Form of Brouse & McDowell's Legal Opinion
Exhibit 6.3(e)............. Form of Silver Freedman & Taff, L.L.P. Legal Opinion
</TABLE>
A-33
<PAGE> 110
APPENDIX B
FAIRNESS OPINION OF
CHARLES WEBB & COMPANY
<PAGE> 111
CHARLES WEBB & COMPANY LOGO
April 5, 1998
Board of Directors
Security First Corp.
1413 Golden Gate Blvd.
Mayfield Heights, Ohio 44113-2203
Dear Gentlemen:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the stockholders of
Security First Corp. ("Security" or the "Company"), of the consideration to be
received by such stockholders in the merger (the "Merger") between the Company
and FirstMerit Corporation, ("FirstMerit"). We have not been requested to opine
as to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Merger.
Pursuant to the Agreement of Affiliation and Plan of Merger, dated April
5,1998, by and among the Company and FirstMerit (the "Agreement"), at the
effective time of the Merger, FirstMerit will acquire all of the Company's
issued and outstanding shares of common stock. The holders of the Company's
common stock will receive in exchange for each share of Company common stock,
shares of FirstMerit common stock based on an Exchange Ratio of .8855 shares of
FirstMerit common stock for each share of Company common stock.
In addition, the holders of unexercised and outstanding options awarded
pursuant to the Company's 1987 and 1996 Stock Option Plans will receive merger
consideration as described in Section 2.7 of the Agreement. The complete terms
of the proposed transaction are described in the Agreement, and this summary is
qualified in its entirety by reference thereto.
Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc., as
part of its investment banking business, is regularly engaged in the evaluation
of businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, and distributions of listed and unlisted securities.
We are familiar with the market for common stocks of publicly traded banks,
savings institutions and bank and savings institution holding companies.
In connection with this opinion we reviewed certain financial and other
business data supplied to us by the Company including (i) Annual Reports, Proxy
Statements and Form 10-Ks for the years ended March 31, 1995, 1996 and 1997,
(ii) Form 10-Qs for the quarters ended June 30, 1997, September 30, 1997, and
December 31,1997 and other information we deemed relevant. We discussed with
senior management and the boards of directors of the Company and its wholly
owned subsidiary, Security Federal Savings and Loan Association, the current
position and prospective outlook for the Company. We considered historical
quotations and the prices of recorded transactions in the Company's common stock
since its initial public offering. We reviewed financial and stock market data
of other savings institutions, particularly in the Midwestern region of the
United States, and the financial and structural terms of several other recent
transactions involving mergers and acquisitions of savings institutions or
proposed changes of control of comparably situated companies.
For FirstMerit, we reviewed the audited financial statements, 10-K's, and
Proxy Statements for the fiscal years ended December 31, 1997, 1996, and 1995,
and certain other information deemed relevant. We also discussed with senior
management of FirstMerit, the current position and prospective outlook for
FirstMerit.
For purposes of this opinion we have relied, without independent
verification, on the accuracy and completeness of the material furnished to us
by the Company and FirstMerit and the material otherwise made available to us,
including information from published sources, and we have not made any
independent effort to verify such data. With respect to the financial
information, including forecasts and asset valuations we received
B-1
<PAGE> 112
from the Company, we assumed (with your consent) that they had been reasonably
prepared reflecting the best currently available estimates and judgment of the
Company's management. In addition, we have not made or obtained any independent
appraisals or evaluations of the assets or liabilities, and potential and/or
contingent liabilities of the Company or FirstMerit. We have further relied on
the assurances of management of the Company and FirstMerit that they are not
aware of any facts that would make such information inaccurate or misleading. We
express no opinion on matters of a legal, regulatory, tax or accounting nature
or the ability of the Merger, as set forth in the Agreement, to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining
the necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to the Company or the ability to consummate the Merger. Our
opinion is based on the market, economic and other relevant considerations as
they exist and can be evaluated on the date hereof.
Consistent with the engagement letter with you, we have acted as financial
advisor to the Company in connection with the Merger and will receive a fee for
such services, a majority of which is contingent upon the consummation of the
Merger. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement by the Company in connection with the
Merger.
Based upon and subject to the foregoing, as outlined in the foregoing
paragraphs and based on such other matters as we considered relevant, it is our
opinion that as of the date hereof, the consideration to be received by the
stockholders of the Company in the Merger is fair, from a financial point of
view, to the stockholders of the Company.
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent, although this opinion
may be included in its entirety in the proxy statement of the Company used to
solicit stockholder approval of the Merger. It is understood that this letter is
directed to the Board of Directors of the Company in its consideration of the
Agreement, and is not intended to be and does not constitute a recommendation to
any stockholder as to how such stockholder should vote with respect to the
Merger.
Very truly yours,
CHARLES WEBB & COMPANY SIGNATURE
Charles Webb & Company,
a Division of Keefe, Bruyette, & Woods, Inc.
B-2
<PAGE> 113
APPENDIX C
SECURITY FIRST CORP.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
and
Consolidated Statements of Financial Condition as of March 31, 1998 and 1997,
and the related
Consolidated Statements of Income, Shareholders' Equity, and Cash Flows
for each of the Three Years in the Period Ended March 31, 1998.
<PAGE> 114
SECURITY FIRST CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Security First Corp. ("Security First" or the "Company"), a savings and
loan holding company, is the parent corporation to Security Federal Savings and
Loan Association of Cleveland ("Security Federal"), First Federal Savings Bank
of Kent ("First Federal") and SF Development Co. Security Federal has 12
branches in a five-county area in Northeast Ohio. Security Federal has one
wholly-owned subsidiary, Security Financial Corporation ("Security Financial")
which is largely inactive. First Federal was acquired on April 10, 1996 in a
transaction that was accounted for as a pooling of interests and, accordingly,
the financial statements for the Company for all periods presented prior to the
acquisition have been restated to include the results of First Federal and its
former parent Company, First Kent Financial Corporation. First Federal, which
has two branches in Portage County, Ohio, operates as a separate subsidiary of
Security First. SF Development Co. was established in March 1994 for the purpose
of entering into joint ventures to purchase and develop land for residential
properties.
The Company's earnings depend primarily on its net interest income, which
is the difference between the amount it receives from interest earned on its
loans and investments and the amount it pays on its savings deposits and
borrowings. The Company's interest income and interest expense are significantly
impacted by general economic conditions, particularly changes in market interest
rates, government policies, and regulations. The operations of the Company can
also be affected by the economic conditions in its market area, Northeast Ohio.
Certain statements in this report that relate to Security First's plans,
objectives, or future performance may be deemed to be forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are based on Management's current expectations. Actual strategies and
results in future periods may differ materially from those currently expected
because of various risks and uncertainties. Additional discussion of factors
affecting Security First's business and prospects is contained in the Company's
periodic filings with the Securities and Exchange Commission.
OVERVIEW OF FINANCIAL CONDITION
Total assets of $685.5 million at year-end 1998 reflect an increase of
approximately 8% from $634.8 million at March 31, 1997. The Company's 8% growth
in assets during the year ended March 31, 1998 was the result of a $59.5 million
increase in the Company's loan portfolio, which was funded primarily by an
increase in retail savings deposits. Due to the strong loan demand, brokered
deposits in the amount of $21.2 million were used to supplement the increase in
retail savings deposits. The level of liquid assets (including cash, deposits
with banks, federal funds sold, and qualifying investment securities) to
withdrawable savings accounts and short-term borrowings averaged 6.81% for
Security Federal and 11.47% for First Federal for the year ended March 31, 1998
as compared to 6.94% and 11.86%, respectively, for fiscal 1997.
The Company increased shareholders' equity in each of the years 1998, 1997
and 1996 through the retention of net earnings, after the payment of cash
dividends to shareholders. Both Security Federal and First Federal are
categorized as well-capitalized institutions by the Office of Thrift Supervision
("OTS") based on their regulatory capital ratios. See Note 13 of the Notes to
Consolidated Financial Statements at Appendix C in this Proxy
Statement/Prospectus.
C-1
<PAGE> 115
LENDING ACTIVITIES
The following table shows the composition of the Company's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Real Estate Loans:
Permanent -- one-to four-family....................... $248.9 $236.0 $225.6
Permanent -- multi-family and commercial.............. 204.5 169.5 132.9
Construction.......................................... 97.5 105.5 64.8
Residential development............................... 55.9 50.5 43.4
Lines of credit....................................... 27.6 17.7 15.7
Other loans............................................. 45.5 48.4 38.0
Less: net items......................................... (52.4) (59.6) (44.8)
------ ------ ------
Total......................................... $627.5 $568.0 $475.6
====== ====== ======
</TABLE>
One- to four-family permanent real estate mortgage loans are generally
considered to have a lower level of credit risk because the collateral is
generally more liquid than multi-family and commercial real estate and is not
subject to significant fluctuations in the near-term.
Multi-family and commercial real estate lending is generally considered to
involve a higher level of risk than does one- to four-family residential lending
due to the concentration of principal in a limited number of loans and borrowers
and the effects that general economic conditions have on real estate
development. In addition, the nature of these loans is such that the collateral
is less liquid than one- to four-family properties, and such loans are generally
less predictable and more difficult to evaluate and monitor. A significant
potential risk of loss is that the cash flows from the properties may be
inadequate to service the loan payments. The Company attempts to mitigate the
risks associated with this type of lending through its underwriting policies and
its monitoring of the properties, substantially all of which are located in its
market area.
The Company's construction loans often are larger individually, and also
generally involve a greater degree of risk, than its single-family mortgage
loans secured by existing homes. Repayment of construction loans usually is
dependent on both the successful completion of construction within the estimated
time and budget, and the successful marketing of the units. If loan defaults
resulting in foreclosure occur before construction is completed, the Company
would be required either to arrange for the completion of construction or the
disposition of the unfinished units. In either case, the Company may incur
substantial additional costs in the administration of the loans. If loan
defaults resulting in foreclosure occur after construction is completed, the
Company may incur additional costs in marketing and selling the completed units.
The Company attempts to minimize these risks by making construction loans to
established builders in its market area, by monitoring the quality, progress,
and cost of construction and originating loans mainly on single-family, pre-sold
residences.
At March 31, 1998, $84.1 million of Security First's construction loan
portfolio consisted of loans on single-family residences, the majority of which
were pre-sold; i.e., the structure was not built on a speculative basis and the
contract purchaser had a commitment for permanent financing (generally not from
the Company) prior to the commencement of construction.
The Company, through its subsidiary SF Development Co., makes land
acquisition and development loans for single-family residential projects,
usually to developers that have pre-sold some of the lots. All of these
residential development loans are located in the Company's market area.
Residential development lending generally is considered to involve risks similar
to those discussed above regarding multi-family and commercial real estate
lending.
C-2
<PAGE> 116
ASSET QUALITY
General. The Company's goal is to maintain the asset quality level of its
loan portfolio through the use of prudent lending policies and underwriting
standards. The majority of loan delinquencies that do arise are generally
remedied within 90 days as a result of the Company's collection efforts. At
March 31, 1998, the Company's percentage of non-performing assets to total
assets was .42%.
Systematic detailed reviews of the Company's multi-family and commercial
loan portfolios are performed regularly in order to evaluate any potential
credit losses. For loan balances that are significant in total but not
individually significant and are well collateralized, the portfolios are
reviewed in total. These reviews consider, among other factors, economic
conditions, delinquency patterns, and historical loss experiences in the loan
portfolio in order to assess potential credit losses.
Management is of the opinion that the allowance for loan losses at March
31, 1998, which represents 179% of total nonperforming loans, is adequate to
meet potential losses in the portfolio. It must be understood, however, that
there are inherent risks and uncertainties related to the operation of a
financial institution. By necessity, the Company's consolidated financial
statements are dependent upon estimates, appraisals, and evaluations of loans.
Therefore, the possibility exists that abrupt changes in such estimates,
appraisals, and evaluations might be required because of changing economic
conditions and the economic prospects of borrowers.
Non-performing Assets. Generally, it is the Company's policy to discontinue
the accrual of interest on all loans which are 90 days or more past due or when
collectibility of the loan is in doubt. The following table summarizes
non-performing assets at the end of the three most recent years.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NON-PERFORMING ASSETS:
Non-accruing loans................................. $ 2,907 $ 1,643 $ 2,006
Accruing loans past due 90 days.................... -- -- 522
------- ------- -------
Total non-performing loans............... 2,907 1,643 2,528
Real estate owned.................................. 1 5 39
------- ------- -------
Total non-performing assets.............. $ 2,908 $ 1,648 $ 2,567
======= ======= =======
Allowance for loan losses.......................... $ 5,189 $ 4,968 $ 4,572
======= ======= =======
RATIOS:
Non-performing assets to total assets.............. 0.42% 0.26% 0.47%
Non-performing loans to total loans (before
allowance for loan losses)....................... 0.46% 0.29% 0.53%
Allowance for loan losses to non-performing
loans............................................ 178.50% 302.37% 180.85%
Net charge-offs (recoveries) to average loans for
the year......................................... 0.01% (0.01)% 0.02%
</TABLE>
Potential Problem Loans. As of March 31, 1998, there were four commercial
loans totaling $5.7 million which are not reflected in the above table where
known information about possible credit problems of the borrower caused
management to have doubts as to the ability of the borrower to comply with
present loan repayment terms and which may result in disclosure of such loans in
the future.
Although management believes that these loans are adequately secured and no
material loss is expected, certain circumstances may cause the borrower to be
unable to comply with the present loan repayment terms at some future date. The
Company is closely monitoring the status of these loans.
Allowance for Loan Losses. The Company's provision for loan losses was
$310,000 for the fiscal year ended March 31, 1998 compared to $323,000 and
$377,000 for the previous two years. Although management
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<PAGE> 117
believes that the procedures used to evaluate potential losses in the loan
portfolio have resulted in an adequate allowance for loan losses in accordance
with generally accepted accounting principles, recovery of the carrying value of
such loans is dependent to a great extent on economic, operating, and other
conditions that may be beyond the Company's control and, therefore, future
adjustments to the allowance for loan losses may be necessary.
CAPITAL AND DIVIDENDS
The OTS has implemented a statutory framework for capital requirements
which establishes five categories of capital strength, ranging from "well
capitalized" to "critically undercapitalized." An institution's category depends
upon its capital level in relation to relevant capital measures, including two
risk-based capital measures, a leverage capital measure, and certain other
factors. At fiscal year-end 1998, both Security Federal and First Federal
exceeded the level required to meet the definition of a well-capitalized
institution. See Note 13 of the Notes to Consolidated Financial Statements at
Appendix C in this Proxy Statement/Prospectus for a further analysis of both
Security Federal's and First Federal's regulatory capital.
The Company has paid regular cash dividends each quarter since June 1988.
During the current fiscal year, a total of $2.4 million ($.32 per share) in
dividends was declared and paid. The dividend payout rate as a percentage of
earnings per share (diluted) was 28.83%, 35.90%, and 38.57% for the fiscal years
ended March 31, 1998, 1997 and 1996, respectively.
Cash dividend payout levels are continually reviewed by management and the
Board of Directors. The Company intends to continue its policy of paying
quarterly dividends; however, such payment will depend on a number of factors,
including capital requirements, regulatory limitations, the Company's financial
condition and results of operations, and Security Federal's and First Federal's
ability to pay dividends to the Company. At present, the Company's most
significant source of income is dividends from Security Federal and First
Federal; therefore, the Company depends upon such dividends to accumulate
earnings for payment of cash dividends to its shareholders. See Note 12 of the
Notes to Consolidated Financial Statements at Appendix C in this Proxy
Statement/Prospectus for additional restrictions on dividend payments.
LIQUIDITY
The term "liquidity" refers to the ability of the Company to generate
adequate amounts of cash to meet its needs. The Company's liquidity is a measure
of its ability to fund loans and meet withdrawals of deposits and other cash
outflows in a cost effective manner. The principal sources of funds for the
Company's operations are cash flows generated from earnings, savings deposits,
scheduled amortization and prepayment of loans and mortgage-backed securities,
maturities of investment securities, and borrowings from the Federal Home Loan
Bank ("FHLB") of Cincinnati. Because a significant portion of the Company's loan
originations consists of relatively short-term construction and development
loans, the funding source for new loan originations is frequently derived from
maturities and prepayments of other construction loans.
While loan and mortgage-backed securities payments and maturing investments
are relatively stable sources of funds, deposit flows and loan prepayments are
greatly influenced by prevailing interest rates, economic conditions and
competition.
Management regularly reviews the Company's need for cash to fund its
operations and believes, as in the past, that the aforementioned resources are
adequate for its projected requirements. Federal regulations require that
Security Federal and First Federal maintain an average daily balance of liquid
assets of at least 4% of the sum of its net withdrawable deposit accounts and
borrowings payable in one year or less. The average liquid assets ratio for the
fourth quarter of fiscal 1998 was 6.68% and 11.33% for Security Federal and
First Federal, respectively. The Company invests excess cash in federal funds
and short-term investments and also receives interest on excess funds held in
its FHLB demand account. The cash management policies of the Company are
designed to keep liquidity levels within the Federal regulatory requirements.
The Company has a relatively stable retail deposit base and, therefore,
management believes that significant additional borrowings will not be necessary
to maintain its current liquidity position. Certificates of deposit
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<PAGE> 118
scheduled to mature in one year or less at March 31, 1998 totaled $250.0
million, including approximately $239.0 million in retail deposits and $11.0
million in brokered deposits. Management believes that a significant portion of
the retail deposits maturing during fiscal 1999 will be reinvested with the
Company, because historically such deposits have remained with the Company;
however, no assurances can be made that this will occur.
As of March 31, 1998, the Company had commitments to originate loans and
commitments on unfunded lines of credit (typically secured by single-family
residences) totaling $75.1 million. There were no commitments to purchase or
sell loans at March 31, 1998. The Company anticipates that it will have
sufficient funds available during fiscal 1999 from loan and mortgage-backed
security repayments and investment maturities to meet current and future loan
commitments.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company seeks to achieve consistent growth in net interest income while
managing volatility arising from shifts in interest rates. The Asset and
Liability Management Committee (ALCO), comprised of senior management
representatives, oversees financial risk management, establishing broad policies
that govern a variety of financial risks inherent in the Company's operations,
including interest rate, liquidity, and market risks.
The Company's asset and liability management programs are designed to
minimize the impact of significant changes in interest rates on net interest
income. The key components of successful interest rate and credit risk
management include the monitoring and management of rate sensitivity and
repricing characteristics of the balance sheet components, as well as the
creditworthiness of borrowers and the quality of assets.
Both Security Federal and First Federal, like other financial institutions,
are subject to interest rate risk to the extent that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
The OTS provides a Net Portfolio Value ("NPV") approach to the quantification of
interest rate risk. This approach calculates the difference between the present
value of expected cash flows from assets and the present value of expected cash
flows from liabilities, as well as cash flows from off-balance sheet contracts.
Thrift institutions with greater than "normal" interest rate exposure must
take a deduction from their total capital available to meet their risk-based
capital requirement. The amount of the deduction is one-half of the difference
between (a) the institution's actual calculated exposure to a 200 basis point
interest rate increase or decrease (whichever results in the greater pro forma
decrease in NPV) and (b) its "normal" level of exposure which is defined as 2%
of the present value of its assets. The regulation, however, will not become
effective until the OTS evaluates the process by which savings associations may
appeal an interest rate risk deduction determination. It is uncertain as to when
this evaluation may be completed.
Presented below, as of March 31, 1998, is an analysis of Security Federal
and First Federal's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 200 basis points. This analysis was prepared by an
independent third party analysis service. The percentage changes fall within the
policy limits set by the Board of Directors of the Company as the maximum change
in NPV that the Company deems advisable in the event of various changes in
interest rates.
SECURITY FEDERAL AND FIRST FEDERAL
<TABLE>
<CAPTION>
NEXT 12 MONTHS
MARKET VALUE OF PORTFOLIO EQUITY NET INTEREST INCOME
---------------------------------- --------------------
CHANGE IN INTEREST RATE ESTIMATED $ % $ %
(BASIS POINTS) NPV CHANGE CHANGE CHANGE CHANGE
- ----------------------- ----------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+200 $51,402 $ 1,582 3.18% $ 465 1.91%
+100 51,379 1,559 3.13 344 1.41
-- 49,820 -- -- -- --
-100 46,347 (3,473) (6.97) (619) (2.54)
-200 42,005 (7,815) (15.69) (1,385) (5.69)
</TABLE>
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<PAGE> 119
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
RESULTS OF OPERATIONS
General. Security First's consolidated net income was $9.3 million or $1.11
per share (diluted) for the year ended March 31, 1998 compared to $6.4 million
or $.78 per share (diluted) for the year ended March 31, 1997 and $5.6 million
or $.70 per share (diluted) for the year ended March 31, 1996. Net income for
the prior two fiscal years was affected by non-recurring items. During fiscal
1997, net income was reduced by $1.7 million ($2.6 million pretax) due to a
special one-time Savings Association Insurance Fund Assessment ("SAIF")
assessment for the recapitalization of the Federal Deposit Insurance Corporation
("FDIC") insurance fund, which provides government insurance on deposits at
savings and loan institutions. As a result of the assessment, the deposit
insurance premiums paid by Security Federal and First Federal were reduced from
23 basis points to zero, based upon their current risk classifications and the
new assessment schedule for SAIF insured institutions. These premiums are
subject to change in future periods. Net income for fiscal 1996 was impacted by
merger costs of $737,000 related to the acquisition of First Kent Financial
Corporation. Excluding the aforementioned non-recurring items, net income for
fiscal years 1997 and 1996 would have been $8.1 million and $6.3 million, or
$0.98 and $0.79 per share (diluted), respectively.
Non-recurring Items. In four of the past five fiscal years, the Company's
net income was affected by one-time non-recurring items, including $1.7 million
for SAIF assessment in 1997, $737,000 for merger expenses in 1996, $333,000 for
terminated merger costs in 1995 and $1.2 million for the cumulative effect of an
accounting change in 1994. The aforementioned items had the effect of increasing
(decreasing) diluted earnings per share by $(.20) in 1997, $(.09) in 1996,
$(.04) in 1995 and $.18 in 1994.
Interest Income. Total interest income for the year ended March 31, 1998
was $55.7 million compared to $49.2 million and $43.6 million for the years
ended March 31, 1997 and 1996, respectively, largely as a result of increased
lending activity. Average loans outstanding during fiscal 1998 were $596.7
million compared with $525.7 million and $453.5 million for 1997 and 1996,
respectively. The average yield on the loan portfolio increased to 8.82% from
8.78% during 1997. The average yield on loans during fiscal 1996 was 8.90%.
Additionally, interest income included amortization of net deferred loan
fees of $1.8 million, $1.6 million, and $1.7 million for the years ended March
31, 1998, 1997, and 1996, respectively. Origination fees received on loans, net
of certain direct origination costs, are deferred and amortized to interest
income over the contractual life of the loans.
Interest income on total investments during 1998 was $2.9 million, which
was comparable to 1997 and 1996. As noted in the table below, the average
balance outstanding of investment securities and short-term investments was
comparable to 1997 and 1996, while the rates earned on such investments were
somewhat higher during the current fiscal year.
Interest income on mortgage-backed securities was $170,000 in fiscal 1998
compared with $224,000 and $301,000 in 1997 and 1996, respectively. The annual
decreases were principally due to a decline in the average balance outstanding
as a result of scheduled amortization and prepayments of the underlying loans.
Interest Expense. Total interest expense for the year ended March 31, 1998
was $29.6 million compared to $25.6 million and $22.6 million for the years
ended March 31, 1997 and 1996, respectively, as a result of higher volume on
both deposits and borrowings to support lending activity, combined with a higher
interest rate environment. Average deposits outstanding during fiscal 1998 were
$481.7 million at an average cost of 4.65%
C-6
<PAGE> 120
compared with $425.1 million outstanding at an average cost of 4.51% for 1997
and $401.4 million outstanding at 4.63% for 1996.
Interest expense on FHLB advances for the year ended March 31, 1998
increased by $855,000 from the prior year and by $3.2 million compared with
fiscal 1996. The increase in the current year over 1997 is due to a higher
average balance of long-term borrowings, combined with higher rates on both
short- and long-term advances. The increase in interest expense on advances in
1997 compared to 1996 resulted from greater short-and long-term borrowings in
1997, slightly offset by somewhat lower rates on short-term advances.
The following table presents the total dollar amounts of interest income
and interest expense on the indicated amounts of average interest-earning assets
or interest-bearing liabilities for the years ended March 31, 1998, 1997, and
1996. Average balance calculations were based on daily and monthly balances.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNINGS
ASSETS:
Loans(1)................ $596,743 $52,605 8.82% $525,678 $46,165 8.78% $453,491 $40,374 8.90%
Mortgage-backed
securities............ 2,125 170 8.00% 2,783 224 8.05% 3,705 301 8.12%
Investment securities... 37,444 2,437 6.51% 36,837 2,353 6.39% 37,900 2,409 6.36%
Short-term
investments........... 9,238 503 5.44% 8,156 436 5.35% 9,504 509 5.36%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning
assets.............. 645,550 55,715 8.63% 573,454 49,178 8.58% 504,600 43,593 8.64%
Non-interest-earning
assets................ 25,903 24,031 21,255
-------- -------- --------
Total Assets.......... $671,453 $597,485 $525,855
======== ======== ========
INTEREST-BEARING
LIABILITIES:
Passbook accounts....... $ 57,256 $ 1,562 2.73% $ 58,751 $ 1,587 2.70% $ 62,787 $ 1,606 2.56%
Money market/NOW
Accounts.............. 88,007 1,436 1.63% 82,364 1,456 1.77% 76,476 1,537 2.01%
Certificate of deposit
accounts.............. 336,429 19,421 5.77% 283,989 16,148 5.69% 262,156 15,426 5.88%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total deposits........ 481,692 22,420 4.65% 425,104 19,191 4.51% 401,419 18,569 4.63%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Short-term FHLB
advances.............. 75,268 4,495 5.97% 75,547 4,394 5.82% 35,723 2,170 6.07%
Long-term FHLB
advances.............. 35,514 2,146 6.04% 23,433 1,392 5.94% 21,382 1,279 5.98%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total advances........ 110,782 6,642 6.00% 98,980 5,786 5.85% 57,105 3,449 6.04%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Convertible subordinated
debentures............ 7,504 505 6.73% 8,742 586 6.70% 8,789 590 6.71%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities........... 599,978 29,566 4.93% 532,826 25,563 4.80% 467,313 22,608 4.84%
Non-interest-bearing
liabilities........... 9,064 8,089 5,855
-------- -------- --------
Total Liabilities..... 609,042 540,915 473,168
Shareholders' equity.... 62,411 56,570 52,687
-------- -------- --------
Total Liabilities and
Shareholders'
Equity................ $671,453 $597,485 $525,855
======== ======== ========
NET INTEREST
INCOME / INTEREST RATE
SPREAD................ $26,149 3.70% $23,615 3.78% $20,985 3.80%
======= ====== ======= ====== ======= ======
NET INTEREST EARNING
ASSETS / NET YIELD ON
INTEREST EARNING
ASSETS................ $ 45,572 4.05% $ 40,628 4.12% $ 37,287 4.16%
======== ====== ======== ====== ======== ======
PERCENTAGE OF INTEREST-
EARNING ASSETS TO
INTEREST-BEARING
LIABILITIES........... 107.59% 107.63% 107.98%
====== ====== ======
</TABLE>
- ---------------
(1) Average balances include non-accrual loans and interest income includes
deferred loan fee amortization of $1,787,000, $1,579,000, and $1,683,000 for
the years ended March 31, 1998, 1997, and 1996, respectively.
C-7
<PAGE> 121
The changes in net interest income compared to the prior period for the
years ended March 31, 1998, 1997, and 1996 are analyzed in the following table.
The table shows the changes by major component, distinguishing between changes
related to volume as opposed to changes in interest rates and the net effect of
both. Changes not solely attributable to volume or rate changes have been
allocated in proportion to the changes due to volume and rate.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
---------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------- TOTAL ------------------- TOTAL
INCREASE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
--------- ------- ---------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans............................... $6,263 $177 $6,440 $6,331 $(540) $5,791
Mortgage-backed securities.......... (53) (1) (54) (74) (3) (77)
Investment securities............... 39 45 84 (68) 12 (56)
Short-term investments.............. 59 8 67 (72) (1) (73)
------ ---- ------ ------ ----- ------
Total interest-earning
assets.................. $6,308 $229 6,537 $6,117 $(532) 5,585
====== ==== ------ ====== ===== ------
INTEREST-BEARING LIABILITIES:
Deposits............................ $3,146 $ 83 $3,229 $1,210 $(588) $ 622
Short-term FHLB advances............ (16) 117 101 2,312 (88) 2,224
Long-term FHLB advances............. 730 24 754 122 (9) 113
Convertible subordinated
debentures........................ (81) -- (81) (3) (1) (4)
------ ---- ------ ------ ----- ------
Total interest-bearing
liabilities............. $3,779 $224 4,003 $3,641 $(686) 2,955
====== ==== ------ ====== ===== ------
CHANGES IN NET INTEREST INCOME...... $2,534 $2,630
====== ======
</TABLE>
OTHER INCOME. Other income was $1.8 million in fiscal 1998 and $1.7 million
in 1997 and 1996. The increase in other income in fiscal 1998 compared to 1997
was principally due to higher service charges and fee income. Other income in
fiscal 1997 was unchanged from the previous year, as a slight increase in
service charges and fees was offset by decreases in other items.
OTHER EXPENSE. Other operating expenses for fiscal 1998 were $13.3 million
compared to $15.2 million and $13.4 million for the prior two fiscal years.
Excluding the one-time special assessment for recapitalization of SAIF in fiscal
1997, other expenses increased $664,000 or 5.3% in fiscal 1998. This increase
was attributable mainly to higher compensation and employee benefits and
occupancy costs, offset in part by lower expenses for federal deposit insurance
premiums and professional fees. Other operating expenses for fiscal 1997,
exclusive of the SAIF assessment, were comparable to 1996 operating expenses.
Increases in data processing expense and occupancy and other costs related to
the opening of a Security Federal branch office in Willoughby, Ohio, were more
than offset by the decrease in the Federal Deposit Insurance premium after the
one time special SAIF assessment.
FEDERAL INCOME TAXES. The Company's Federal income taxes for the year ended
March 31, 1998 were $5.0 million compared with $3.4 million and $3.3 million for
1997 and 1996, respectively. The effective Federal tax rate was higher in fiscal
1996 because of the tax effect of non-deductible merger expenses.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and the related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require measurement of financial
C-8
<PAGE> 122
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services.
ACCOUNTING AND REPORTING DEVELOPMENTS
See Note 1 to the Notes to Consolidated Financial Statements at Appendix C
in this Proxy Statement/ Prospectus for a discussion of accounting and reporting
developments affecting the Company and newly promulgated FASB Statements that
have not yet been adopted by the Company.
C-9
<PAGE> 123
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 FIRST SECOND THIRD FOURTH
---- ------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Interest income................................... $13,415 $13,826 $14,215 $14,259
Interest expense.................................. 7,133 7,387 7,599 7,447
Net interest income............................... 6,282 6,439 6,616 6,812
Provision for loan losses......................... 58 84 84 84
Net income........................................ 2,190 2,305 2,356 2,460
Net income per common share (basic)(a)(b)......... 0.29 0.30 0.31 0.33
Net income per common share (diluted)(a)(b)....... 0.26 0.28 0.28 0.29
Dividends per common share(b)..................... 0.08 0.08 0.08 0.08
Return on average assets.......................... 1.35% 1.39% 1.37% 1.43%
Return on average equity.......................... 14.52% 14.85% 14.85% 15.42%
Interest rate spread.............................. 3.67% 3.68% 3.65% 3.79%
</TABLE>
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
---- ------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Interest income................................... $11,614 $12,106 $12,584 $12,874
Interest expense.................................. 5,822 6,266 6,680 6,795
Net interest income............................... 5,792 5,840 5,904 6,079
Provision for loan losses......................... 96 84 84 59
Net income........................................ 1,934 286(e) 2,040 2,150
Net income per common share (basic)(c)............ 0.26 0.04(e) 0.27 0.29
Net income per common share (diluted)(c).......... 0.23 0.04 0.25 0.26
Dividends per common share(d)..................... 0.07 0.07 0.07 0.07
Return on average assets.......................... 1.38% 0.19%(e) 1.33% 1.37%
Return on average equity.......................... 14.08% 2.04%(e) 14.39% 14.70%
Interest rate spread.............................. 3.98% 3.80% 3.67% 3.68%
</TABLE>
- ---------------
(a) First and second quarters were restated to reflect the implementation of
SFAS No. 128.
(b) First quarter was restated to reflect the three-for-two stock split
distributed on July 31, 1997.
(c) All periods were restated to reflect the three-for-two stock split
distributed on July 31, 1997 and the implementation of SFAS No. 128.
(d) All periods were restated to reflect the three-for-two stock split
distributed on July 31, 1997.
(e) The decrease in the second quarter is due to the one-time special SAIF
Assessment of $2.6 million ($1.7 million after tax).
YEAR 2000
The Company is currently in the process of conducting a comprehensive
review of its computer systems to identify the systems that could be affected by
the "Year 2000" problem. The Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. Management
anticipates that the enhancements necessary to prepare its system for the year
2000 will be completed in a timely manner.
C-10
<PAGE> 124
The Company is also aware of the risk to third parties, including vendors
(and to the extent appropriate, depositors and borrowers) and the potential
adverse impact on the Company resulting from failures by these parties to
adequately address the Year 2000 problem. The Company has been communicating
with its outside data processing service bureau, as well as other third party
service providers, to assess their progress in evaluating their systems and
implementing any corrective measures required by them to be prepared for the
year 2000. To date, the Company has not been advised by any of its primary
vendors that they do not have plans in place to address and correct the issues
associated with the Year 2000 problem; however, no assurances can be given as to
the adequacy of such plans or to the timeliness of their implementation.
The Company anticipates that it will incur internal staff costs as well as
consulting and other expenses related to the enhancements necessary to prepare
the systems for the year 2000. Management does not anticipate that the cost of
the year 2000 project will have a material impact on the financial condition or
results of operations of the Company.
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<PAGE> 125
DELOITTE & TOUCHE LOGO
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Security First Corp.
We have audited the accompanying consolidated statements of financial
condition of Security First Corp. and subsidiaries as of March 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial condition of Security
First Corp. and subsidiaries as of March 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche
Deloitte & Touche LLP
Cleveland, Ohio
April 22, 1998
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<PAGE> 126
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and deposits with banks................................ $ 10,003 $ 4,685
Interest-bearing deposits with banks........................ 696 1,826
Federal funds sold and short-term investments............... 2,700 2,153
-------- --------
Total cash and cash equivalents................... 13,399 8,664
-------- --------
Investment securities -- available for sale (amortized cost
of $13,905 at March 31, 1998 and $24,969 at March 31,
1997)..................................................... 13,922 24,576
Investment securities -- held to maturity (market value of
$4,009 at March 31, 1998 and $6,986 at March 31, 1997).... 4,000 7,000
Mortgage-backed securities-available for sale (amortized
cost of $1,786 at March 31, 1998 and $2,469 at March 31,
1997)..................................................... 1,843 2,523
Loans held for sale......................................... 624 --
Loans -- net (including allowance for loan losses of $5,189
at March 31, 1998 and $4,968 at March 31, 1997)........... 626,836 567,975
Accrued interest receivable................................. 4,274 4,032
Federal Home Loan Bank stock -- at cost..................... 7,085 6,400
Premises and equipment -- net............................... 8,534 8,853
Cost in excess of fair value of net assets acquired
("goodwill").............................................. 924 1,028
Prepaid expenses and other assets........................... 4,041 3,710
-------- --------
TOTAL ASSETS...................................... $685,482 $634,761
======== ========
LIABILITIES:
Deposits.................................................... $508,157 $445,182
Advances from Federal Home Loan Bank........................ 98,267 115,221
Convertible subordinated debentures......................... 6,840 8,479
Advance payments by borrowers for taxes and insurance
("escrow")................................................ 1,653 1,498
Accrued interest payable.................................... 2,625 2,058
Accounts payable and other accrued expenses................. 3,261 2,888
-------- --------
Total liabilities................................. 620,803 575,326
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock (1,000,000 shares authorized, none
issued)................................................... -- --
Common stock, par value $.01 per share; 20,000,000 shares
authorized; 7,555,044 shares issued and outstanding at
March 31, 1998 and 7,504,649 at March 31, 1997(a)......... 76 75
Capital in excess of par value.............................. 16,021 14,915
Net unrealized gain (loss) on investments and
mortgage-backed securities -- available for sale, net of
tax of $26 at March 31, 1998 and ($111) at March 31,
1997...................................................... 48 (224)
Unearned compensation....................................... (139) (216)
Treasury Stock (88,324 shares at March 31, 1998) at cost.... (1,671) --
Retained earnings (substantially restricted)................ 50,344 44,885
-------- --------
Total shareholders' equity........................ 64,679 59,435
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $685,482 $634,761
======== ========
</TABLE>
- ---------------
(a) Adjusted to reflect the three-for-two stock split distributed July 31, 1997.
See notes to consolidated financial statements
C-13
<PAGE> 127
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Interest Income:
Loans..................................................... $52,605 $46,165 $40,374
Mortgage-backed securities................................ 170 224 301
Investment securities..................................... 2,437 2,353 2,409
Short-term investments.................................... 503 436 509
------- ------- -------
Total interest income............................. 55,715 49,178 43,593
------- ------- -------
Interest Expense:
Deposits.................................................. 22,420 19,191 18,569
Short-term FHLB advances.................................. 4,495 4,394 2,170
Long-term FHLB advances................................... 2,146 1,392 1,279
Convertible subordinated debentures....................... 505 586 590
------- ------- -------
Total interest expense............................ 29,566 25,563 22,608
------- ------- -------
Net interest income......................................... 26,149 23,615 20,985
Provision for loan losses................................... 310 323 377
------- ------- -------
Net interest income after provision for loan losses......... 25,839 23,292 20,608
------- ------- -------
Other income................................................ 1,758 1,698 1,699
Other expenses:
SAIF special assessment................................... -- 2,567 --
Amortization of goodwill.................................. 104 107 111
Merger expenses........................................... -- -- 737
Other..................................................... 13,202 12,535 12,519
------- ------- -------
Total other expenses.............................. 13,306 15,209 13,367
------- ------- -------
Income before federal income taxes.......................... 14,291 9,781 8,940
Federal income taxes........................................ 4,980 3,371 3,334
------- ------- -------
Net income........................................ $ 9,311 $ 6,410 $ 5,606
======= ======= =======
Earnings per share:(a)
Basic..................................................... $ 1.23 $ 0.86 $ 0.78
======= ======= =======
Diluted................................................... $ 1.11 $ 0.78 $ 0.70
======= ======= =======
</TABLE>
- ---------------
(a) Earnings per share calculations for the years ended March 31, 1997 and 1996
were restated to reflect the three-for-two stock split distributed on July
31, 1997 and the implementation of SFAS No.128.
See notes to consolidated financial statements
C-14
<PAGE> 128
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income............................................... $ 9,311 $ 6,410 $ 5,606
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses................................ 310 323 377
Accretion of discounts, amortization of premiums, and
other deferred yield items............................. 107 540 45
Depreciation and amortization............................ 900 782 708
Amortization of goodwill................................. 104 107 111
Effect of change in accrued interest receivable and
payable................................................ 325 19 71
Equity income from joint ventures........................ (53) (89) (83)
FHLB stock dividends..................................... (487) (376) (231)
Deferred federal income taxes............................ 138 239 424
Net change in accounts payable, accrued expenses, and
other assets........................................... (131) 1,020 747
Other.................................................... 206 79 98
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ 10,730 9,054 7,873
--------- --------- ---------
INVESTING ACTIVITIES:
Loans originated......................................... $(262,741) $(280,702) $(190,717)
Increase (decrease) in loans in process.................. (7,593) 14,080 12,346
Loan principal repayments and maturities................. 198,225 150,700 139,761
Proceeds from:
Sales of:
Loans and loan participations....................... 16,344 28,711 1,283
Real estate owned................................... 238 151 324
Investment securities............................... -- -- 500
Mortgage-backed security principal repayments and
maturities.......................................... 682 704 1,040
Investment security maturities......................... 25,401 4,407 30,574
Purchases of:
Loans............................................... (4,495) (6,139) (7,976)
Investment securities............................... (11,310) (4,993) (24,788)
Premises and equipment.............................. (580) (1,193) (1,323)
FHLB stock.......................................... (199) (2,160) (725)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES.................... (46,028) (96,434) (39,701)
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
C-15
<PAGE> 129
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in savings deposits......................... $ 62,975 $ 34,445 $ 17,424
Proceeds from additional FHLB advances................... 223,450 328,300 132,400
Payment of FHLB advances................................. (240,404) (281,164) (114,859)
Proceeds from termination of employee stock ownership
plan................................................... -- 457 --
Net increase (decrease) in mortgage escrow funds......... 155 153 (552)
Payment of dividends on common stock..................... (2,424) (2,186) (1,915)
Proceeds from exercise of stock options.................. 412 132 128
Purchase of treasury stock............................... (4,131) -- --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................ 40,033 80,137 32,626
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 4,735 (7,243) 798
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 8,664 15,907 15,109
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 13,399 $ 8,664 $ 15,907
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings.................... $ 28,999 $ 24,978 $ 22,297
Income taxes........................................... 4,200 3,254 3,286
Noncash investing and financing activities:
Transfer from loans to real estate acquired through
foreclosure......................................... 238 124 128
Effect of conversion of convertible subordinated
debentures.......................................... 1,639 295 30
</TABLE>
See notes to consolidated financial statements
C-16
<PAGE> 130
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
CAPITAL IN ON SECURITIES UNEARNED TOTAL
COMMON EXCESS OF RETAINED AVAILABLE FOR ESOP UNEARNED TREASURY SHAREHOLDERS'
STOCK PAR VALUE EARNINGS SALE SHARES COMPENSATION STOCK EQUITY
------ ---------- -------- ------------- -------- ------------ -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995.... $74 $14,087 $36,962 $ -- $(550) $(364) $ -- $50,209
Issuance of 113,250 shares
of common stock in
connection with exercise
of stock options(1)....... 128 128
Issuance of 3,852 shares of
common stock in connection
with conversions of
subordinated
debentures(1)............. 28 28
Dividends paid -- $.27 per
share(1).................. (1,915) (1,915)
Net income for the year
ended March 31, 1996...... 5,606 5,606
Net unrealized loss on
securities available for
sale...................... (59) (59)
Other....................... 210 103 71 384
--- ------- ------- ---- ----- ----- ------- -------
Balance at March 31, 1996... 74 14,453 40,653 (59) (447) (293) 54,381
Issuance of 73,317 shares of
common stock in connection
with exercise of stock
options(1)................ 132 132
Issuance of 37,880 shares in
connection with
conversions of
subordinated
debentures(1)............. 1 275 276
Effect of termination of
ESOP...................... 25 8 424 457
Dividends paid -- $.28 per
share(1).................. (2,186) (2,186)
Net income for the year
ended March 31, 1997...... 6,410 6,410
Net unrealized loss on
securities available for
sale...................... (165) (165)
Other....................... 30 23 77 130
--- ------- ------- ---- ----- ----- ------- -------
</TABLE>
See notes to consolidated financial statements
C-17
<PAGE> 131
SECURITY FIRST CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
CAPITAL IN ON SECURITIES UNEARNED TOTAL
COMMON EXCESS OF RETAINED AVAILABLE FOR ESOP UNEARNED TREASURY SHAREHOLDERS'
STOCK PAR VALUE EARNINGS SALE SHARES COMPENSATION STOCK EQUITY
------ ---------- -------- ------------- -------- ------------ -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of March 31,
1997...................... 75 14,915 44,885 (224) -- (216) -- 59,435
Purchase of 233,975 shares
of treasury stock......... (4,131) (4,131)
Issuance of 74,029 shares of
common stock in connection
with exercise of stock
options, from treasury.... 16 (692) 1,166 490
Issuance of common stock in
connection with
conversions of
subordinated debentures:
138,797 shares newly
issued.................. 1 976 977
71,623 shares from
treasury................ (736) 1,294 558
Dividends paid -- $. 32 per
share..................... (2,424) (2,424)
Net income for the year
ended March 31, 1998...... 9,311 9,311
Net unrealized gain on
securities available for
sale...................... 272 272
Other....................... 114 77 191
--- ------- ------- ---- ----- ----- ------- -------
Balance as of March 31,
1998...................... $76 $16,021 $50,344 $ 48 -- $(139) $(1,671) $64,679
=== ======= ======= ==== ===== ===== ======= =======
</TABLE>
- ---------------
(1) Number of shares and per share amounts for the years ended March 31, 1997
and 1996 were restated to reflect the three-for-two stock split distributed
on July 31, 1997.
See notes to consolidated financial statements
C-18
<PAGE> 132
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Security First Corp. ("the Company" or "Security
First"), conform to generally accepted accounting principles and prevailing
practices within the banking and thrift industry. A summary of the more
significant policies follows:
NATURE OF OPERATIONS -- Security First is a multiple savings and loan
holding company whose wholly owned subsidiaries are Security Federal Savings and
Loan Association of Cleveland, (the "Association" or "Security Federal"), First
Federal Savings Bank of Kent, ("First Federal"), acquired on April 10, 1996, and
SF Development Corp. The Company is principally engaged in the business of
attracting deposits from the general public and using such deposits, together
with borrowings and other funds, to make loans secured by real estate, various
types of consumer loans and commercial loans primarily in its market area. The
Company's principal market area consists of a six county area in Northeast Ohio,
and the Company's business is conducted through its corporate office located in
Mayfield Heights, Ohio, 12 Security Federal branch offices and two First Federal
offices. Loans and deposits are primarily generated from the areas where its
banking offices are located. The Company's income is derived predominately from
interest on loans and investments and, to a lesser extent, other income. The
Company's principal expenses are interest paid on deposits and borrowings, and
normal operating costs. The Company's operations are principally in the savings
industry, which constitutes a single industry segment. The Company also engages
in real estate development activities which are discussed in Note 18.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company and all subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in
affiliates that are not majority-owned or controlled are accounted for using the
equity method.
INVESTMENT AND MORTGAGE-BACKED SECURITIES -- In accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," investments and mortgage-backed
securities are classified as trading, available for sale, or held to maturity
upon their acquisition. Securities classified as trading are carried at
estimated market value with the unrealized gain or loss recorded in the
statement of income. Securities classified as available for sale are carried at
estimated market value with the unrealized gain or loss reflected as a component
of shareholders' equity. Securities classified as held to maturity are carried
at amortized cost unless there is an other than temporary impairment in value.
Premiums and discounts are recognized in interest income over the period to
maturity.
LOANS -- Loans are stated at the principal amount outstanding, adjusted for
amortization of premiums and accretion of discounts using the interest method.
Loans held for sale are carried at the lower of cost or estimated market value.
Interest is accrued as earned. An allowance for uncollected interest is provided
separately from the allowance for loan losses when payments are 90 days or more
past due or when collectibility of a loan is in doubt. The allowance is
established by a charge to interest income equal to all accrued interest. Income
is subsequently recognized only to the extent that cash payments are received
until the loan is current and, in management's judgment, the borrower has the
ability and intent to make periodic interest and principal payments, at which
time the loan is returned to accrual status.
A loan is considered to be impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In general, the
Company considers a loan on income-producing properties to be impaired when the
debt service
C-19
<PAGE> 133
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ratio is less than 1.0. Loans on non-income producing properties are considered
impaired whenever fair value is less than book value. The Company performs
reviews of all loans over $500,000 to determine if the impairment criteria have
been met. If the impairment criteria have been met, a reserve is calculated
according to the provisions of SFAS No. 114. For loans which are individually
not significant and represent a homogeneous population, the Company evaluates
impairment based on the level and extent of delinquencies in the portfolio and
the Company's prior charge-off experience with those delinquencies. Such loans
include all mortgage loans secured by one-to-four family residential property,
all consumer loans, and certain multi-family real estate loans, non-residential
real estate loans, business loans, and leases. The Company charges off principal
at the earlier of (1) when a total loss of principal has been deemed to have
occurred as a result of book value exceeding the fair value or net realizable
value or (2) when collection efforts have ceased.
PROVISION FOR LOAN LOSSES -- The Company provides valuation reserves for
estimated losses on loans when any significant and permanent decline in value is
identified. Such provisions are based on management's estimate of the net
realizable value or fair value of the collateral, as applicable, considering
current and currently anticipated future operating or sales conditions, thereby
causing these estimates to be particularly susceptible to changes that could
result in a material adjustment to results of operations. In estimating possible
losses on loans, management considers the remaining principal balance and
estimated market value of the property collateralizing the loan, less estimated
selling expenses and holding costs. Recovery of the carrying value of such loans
and real estate is dependent to a great extent on economic, operating, and other
conditions which may be beyond the Company's control. Management also provides
valuation reserves based on the Company's past loan loss experience, known and
inherent risks in the portfolio and current economic conditions. Management
believes that the allowance for loan losses has been recorded in accordance with
generally accepted accounting principles.
LOAN FEES -- Loan origination fees, net of certain direct origination
costs, are deferred and amortized to interest income over the contractual life
of the loan using the level-yield method. Fees received for loan commitments
that are expected to be drawn are deferred and amortized over the life of the
loan using the level-yield method. Unamortized net fees are recognized upon
early repayment of loans. Fees for other loan commitments are deferred and
amortized over the loan commitment period on a straight-line basis. Unamortized
deferred loan fees related to loans repaid are included in income.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized on a straight-line basis over the lease
term or useful life, whichever is shorter. For tax purposes, depreciation on
certain assets is computed using accelerated methods.
REAL ESTATE OWNED -- Real estate owned, which consists of property acquired
in settlement of foreclosed loans, is recorded at the lower of cost or estimated
fair value less estimated selling costs at the date of acquisition. Costs
relating to the development or improvement of real estate owned are capitalized,
whereas those relating to holding and maintaining the property are charged to
expense.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED -- Cost in excess of
fair value of net assets acquired ("goodwill") is stated net of accumulated
amortization. Goodwill is being charged to operations over the estimated
remaining life of the long-term interest-bearing assets acquired using the
level-yield method. The amortization period for all intangible assets is
monitored to determine if events and circumstances require such period to be
reduced.
FEDERAL INCOME TAXES -- The Company and its wholly owned subsidiaries file
a consolidated income tax return. In accordance with generally accepted
accounting principles, deferred tax assets and liabilities are computed annually
for differences between financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, if necessary, to
C-20
<PAGE> 134
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the amount of tax payable or refundable for the period adjusted for
the change during the period in deferred tax assets and liabilities.
EARNINGS PER SHARE -- On December 31, 1997, the Company adopted SFAS No.
128, "Earnings Per Share." All prior-period earnings per share data have been
restated. This statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock. It replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures. The
adoption of SFAS No. 128 did not have a material effect on previously reported
EPS.
Basic EPS is computed as net income available for common shareholders
divided by the weighted average number of common shares outstanding during the
year. Diluted EPS is computed as net income available for common shareholders
divided by the weighted average number of common shares and common share
equivalents outstanding during the year. The treasury stock method and the "if
converted" method are used to convert common stock equivalents to equivalent
common shares.
All shares and per share data have been restated to reflect the provisions
of SFAS No. 128, as well as the three-for-two stock split distributed on July
31, 1997. Basic and diluted EPS of First Kent Financial Corporation, former
parent of First Federal, subsequent to First Federal's mutual to stock
conversion in June 1994, are calculated based on net income subsequent to the
stock conversion divided by the weighted average shares outstanding subsequent
to the stock conversion.
STATEMENT OF CASH FLOWS -- For purposes of the Statement of Cash Flows, the
Company considers as cash equivalents all short-term, highly liquid investments
which are readily convertible to known amounts of cash and which have an
original maturity of three months or less. Such investments include all cash,
deposits with banks, federal funds sold and other short-term investments.
NEW ACCOUNTING STANDARDS -- On January 1, 1997, the Company adopted SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 amends portions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," amends and
extends to all servicing assets and liabilities the accounting standards for
mortgage servicing rights now in SFAS No. 65, and supersedes SFAS No. 122. SFAS
No. 125 provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. Those
standards are based upon consistent application of a financial components
approach that focuses on control. The statement also defines accounting
treatment for servicing assets and other retained interests in the assets that
are transferred. The Financial Accounting Standard Board ("FASB") issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125,"
that deferred the effective date of certain provisions of SFAS No. 125 related
to secured borrowings and collateral, repurchase agreements, dollar rolls,
securities lending, and similar transactions until December 31, 1997. The
adoption of these statements has not had a material effect on the Company's
financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires an enterprise to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial condition. The adoption of this statement is not expected to have a
material effect on the Company's financial condition or results of operations.
SFAS No. 130 will become effective in fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the reporting of financial information about reportable operating segments in
annual and interim financial statements. This statement requires that financial
information be reported on the basis that it is reported internally for
evaluating segment performance and deciding how to
C-21
<PAGE> 135
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocate resources to segments. This statement may result in additional
financial statement disclosures upon adoption; however, the Company does not
expect to make material changes to its current segment reporting. SFAS No. 131
will become effective in fiscal 1999.
RECLASSIFICATION -- Certain items in the consolidated financial statements
for 1997 and 1996 have been reclassified to conform with the 1998 presentation.
2. INVESTMENT SECURITIES
Investment securities classified as available for sale at March 31, 1998,
are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations........... $11,138 $17 $(32) $11,123
Federal National Mortgage Association preferred
stock.......................................... 500 30 -- 530
Federal National Mortgage Association bonds...... 2,169 1 -- 2,170
Unit Investment Trust............................ 98 1 -- 99
------- --- ---- -------
Total.................................. $13,905 $49 $(32) $13,922
======= === ==== =======
</TABLE>
Investment securities classified as held to maturity at March 31, 1998, are
summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations........... $ 4,000 $ 9 -- $ 4,009
======= === === =======
</TABLE>
Investment securities classified as available for sale at March 31, 1997,
are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations........... $22,456 $14 $(410) $22,060
Federal National Mortgage Association preferred
stock.......................................... 500 16 -- 516
Federal National Mortgage Association bonds...... 2,001 -- (13) 1,988
Municipal bond................................... 12 -- -- 12
------- --- ----- -------
Total.................................. $24,969 $30 $(423) $24,576
======= === ===== =======
</TABLE>
Investment securities classified as held to maturity at March 31, 1997, are
summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations............ $7,000 -- $(14) $6,986
====== == ==== ======
</TABLE>
C-22
<PAGE> 136
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maturity distribution of debt investment securities at March 31, 1998,
is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
--------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government and agency obligations -- due after
one year through five years........................ $11,138 $11,123 6.25%
Federal National Mortgage Association bonds -- due in
one year or less................................... 2,169 2,170 5.53
------- ------- ----
Total debt investment securities........... $13,307 $13,293 6.14%
======= ======= ====
</TABLE>
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities classified as available for sale at March 31,
1998, are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates...................... $1,786 $57 -- $1,843
====== === == ======
</TABLE>
Mortgage-backed securities classified as available for sale at March 31,
1997, are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates...................... $2,469 $54 -- $2,523
====== === == ======
</TABLE>
As of March 31, 1998, mortgage-backed securities with a current value of
$1,487,000 were pledged against $1,250,000 in public funds. At March 31, 1997,
mortgage-backed securities with a current value of $1,507,000 were pledged
against $1,250,000 in public funds.
C-23
<PAGE> 137
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate mortgage loans:
Permanent:
One-to-four family........................................ $248,905 $235,959
Multi-family.............................................. 58,918 53,628
Commercial................................................ 145,617 115,882
Construction:
One-to-four family........................................ 84,079 80,498
Multi-family.............................................. -- 1,051
Commercial................................................ 13,361 23,881
Residential development land................................ 55,860 50,432
Lines of credit -- secured by one-to-four family
residences................................................ 27,607 17,756
-------- --------
Total mortgage loans.............................. 634,347 579,087
Business loans.............................................. 7,399 6,165
Consumer loans.............................................. 38,096 42,321
-------- --------
Total loans....................................... 679,842 627,573
Less:
Undisbursed portion of loans in process..................... (42,739) (50,332)
Allowance for loan losses................................... (5,189) (4,968)
Deferred loan fees and discounts............................ (4,454) (4,298)
-------- --------
Loans -- net...................................... $627,460 $567,975
======== ========
</TABLE>
Loans with adjustable rates, included above, totaled $562 million
(approximately 83% of total loans) and $503 million (approximately 80%) at March
31, 1998 and 1997, respectively. Adjustable rate loans include loans which
reprice based on the prime rate, as well as loans ("ARMs") which have interest
rate adjustments of one, three, or five years based on the quarterly national
average of federally insured thrift institutions' cost of funds. The Company's
ARMs generally limit interest rate increases to 2% each rate adjustment period
and have an established ceiling rate of 6% over the original interest rate on
such loans.
Commitments to borrowers to originate loans and for unfunded lines of
credit (typically secured by single-family residences) are summarized below:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commitments to originate:
Fixed-rate loans.......................................... $ 3,601 $ 2,435
Adjustable-rate loans..................................... 29,615 21,533
Unfunded lines of credit.................................... 41,900 30,323
</TABLE>
C-24
<PAGE> 138
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 1998, 1997, and 1996, the Association was servicing loans
for others (on a non-recourse basis) totaling approximately $44.1 million, $37.3
million, and $14.2 million, respectively. Custodial escrow balances maintained
in connection with the foregoing loan servicing were approximately $398,000, and
$241,000 at March 31, 1998 and 1997, respectively.
The Company's primary lending area is within the six county area in
Northeast Ohio wherein its branches are located. At March 31, 1998 and 1997,
substantially all of the Company's loans were to borrowers located in Northeast
Ohio. Although the Company has a diversified loan portfolio, its borrowers'
ability to honor their contracts is substantially dependent upon general
economic conditions of the region.
The Company originates both permanent and construction commercial real
estate loans. Such loans are generally higher risk than single-family
residential real estate loans due to the dependency on income production or
future development of real estate for the repayment of the loan.
The following table summarizes the Company's commercial real estate and
commercial construction loan portfolios by type of collateral.
<TABLE>
<CAPTION>
AT MARCH 31, % OF AT MARCH 31, % OF
COLLATERAL 1998 TOTAL 1997 TOTAL
---------- ------------ ------ ------------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Industrial/warehouses......................... $ 43,636 27.4% $ 38,284 27.4%
Strip shopping centers/retail................. 33,305 21.0 31,925 22.9
Office buildings.............................. 40,225 25.3 34,766 24.9
Golf courses.................................. 9,055 5.7 14,290 10.2
Churches...................................... 3,931 2.5 2,853 2.0
Other......................................... 28,826 18.1 17,645 12.6
-------- ------ -------- -----
$158,978 100.0% $139,763 100.0%
======== ====== ======== =====
</TABLE>
The Company's commercial real estate loan portfolio is comprised of loans,
typically less than $1 million individually, which are collateralized by
property located within its six county market area. Of the $159.0 million in
commercial real estate loans at March 31, 1998, 27 loans were individually
greater than $1 million; seven of such loans were collateralized by retail
shopping centers, six by industrial properties, nine by office buildings, two by
golf courses, two by vacant land, and one by a hotel. The average loan balance
of those loans exceeding $1 million was $1.7 million. Of the commercial real
estate loans under $1 million, the average loan balance at March 31, 1998, was
$208,000.
Residential development land consists of loans secured by land which is
zoned for residential development and located within the Company's market area
of Northeast Ohio. These loans are made to various builders and developers with
whom the Company has generally had long-standing lending relationships.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period............................ $4,968 $4,572 $4,283
Provision charged to expense............................ 310 323 377
Charge-offs............................................. (145) (33) (243)
Recoveries.............................................. 56 106 155
------ ------ ------
Balance, end of period.................................. $5,189 $4,968 $4,572
====== ====== ======
</TABLE>
C-25
<PAGE> 139
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For fiscal years ended and as of March 31, 1998, 1997, and 1996, there were
no loans that were considered to be impaired under SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan."
Nonperforming loans totaled $2.9 million, $1.7 million, and $2.6 million at
March 31, 1998, 1997, and 1996, respectively. Interest income that would have
been recorded under the original terms of the loans and the income actually
recognized for the years ended March 31, 1998, 1997, and 1996 are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1998 1997 1996
----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income that would have been recorded based on
original terms............................................ $320 $ 198 $215
Interest income recognized.................................. 242 312 179
---- ----- ----
Interest income foregone (received)......................... $ 78 $(114) $ 36
==== ===== ====
</TABLE>
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans....................................................... $4,040 $3,556
Investments................................................. 209 441
Mortgage-backed securities.................................. 25 35
------ ------
Total..................................................... $4,274 $4,032
====== ======
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land........................................................ $1,640 $1,640
Buildings and improvements.................................. 8,760 8,519
Furniture, fixtures, and equipment.......................... 5,663 5,337
------ ------
Total..................................................... 16,063 15,496
Less accumulated depreciation and amortization.............. 7,529 6,643
------ ------
Premises and equipment -- net............................. $8,534 $8,853
====== ======
</TABLE>
C-26
<PAGE> 140
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEPOSITS
Deposits by interest rate are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------
1998 1997
------------------ ------------------
TYPE OF ACCOUNT AND INTEREST RATE AMOUNT PERCENT AMOUNT PERCENT
--------------------------------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Passbook accounts : (2.50% to 4.00% at March 31, 1998
and 1997)............................................ $ 57,245 11% $ 58,009 13%
NOW accounts:
Interest-bearing (1.79% to 2.00% at March 31, 1998 and
1997)................................................ 45,460 9 41,589 10
Non-interest-bearing................................... 21,748 4 14,755 3
-------- ---- -------- ----
124,453 24 114,353 26
-------- ---- -------- ----
Money market deposit accounts:
(variable -- 2.23% to 3.00% at March 31, 1998 and
1997)............................................. 24,128 5 25,040 6
-------- ---- -------- ----
Certificate of deposit accounts:
4.0% to 5.9%......................................... 239,207 47 224,499 50
6.0% to 7.9%......................................... 119,686 24 80,643 18
8.0% to 9.9%......................................... 507 -- 475 --
10.0% to 13.9%....................................... 176 -- 172 --
-------- ---- -------- ----
359,576 71 305,789 68
-------- ---- -------- ----
Total............................................. $508,157 100% $445,182 100%
======== ==== ======== ====
</TABLE>
Included in the above table at March 31, 1998, are $94.2 million in
certificates of deposit greater than or equal to $100,000, the majority of which
mature within twelve months. At March 31, 1998, the Company had $21.2 million of
brokered deposits with remaining maturities ranging from one to 31 months, and
interest rates ranging from 5.25% to 6.35%. At March 31, 1997, the company did
not have any brokered deposits.
A summary of certificates of deposit by maturity follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Within 12 months............................................ $249,967 $231,722
12 months to 24 months...................................... 66,724 37,751
24 months to 36 months...................................... 24,422 21,175
36 months to 48 months...................................... 6,944 8,245
Over 48 months.............................................. 11,519 6,896
-------- --------
Total..................................................... $359,576 $305,789
======== ========
</TABLE>
C-27
<PAGE> 141
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts..................................... $ 1,562 $ 1,587 $ 1,604
NOW accounts.......................................... 726 689 677
Money market deposit accounts......................... 710 767 860
Certificate of deposit accounts....................... 19,422 16,148 15,428
------- ------- -------
Total............................................... $22,420 $19,191 $18,569
======= ======= =======
</TABLE>
8. BORROWINGS
FHLB ADVANCES:
Advances from the FHLB consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
RATE
RATE TYPE 1998 1997
---- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
5.01% to 6.00%.................................... Variable $ 16,550 $ 21,449
6.01% to 6.50%.................................... Variable -- 12,772
-------- --------
Total variable rate advances.................... 16,550 34,221
-------- --------
4.01% to 5.00%.................................... Fixed 20,000 --
5.01% to 6.00%.................................... Fixed 24,171 47,000
6.01% to 6.60%.................................... Fixed 37,546 34,000
-------- --------
Total fixed rate advances....................... 81,717 81,000
-------- --------
Total FHLB advances............................. $ 98,267 $115,221
======== ========
</TABLE>
Scheduled payments on FHLB advances at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
YEARS ENDING PRINCIPAL AVERAGE INTEREST
MARCH 31, REPAYMENTS RATE
------------ ---------- ----------------
<S> <C> <C>
1999............................................ $47,767 6.15%
2000............................................ 8,619 6.08
2001............................................ 11,139 5.94
2002............................................ 346 5.50
2003............................................ 5,365 5.61
2004 to 2008...................................... 25,031 4.90
-------
$98,267 5.77%
=======
</TABLE>
CONVERTIBLE SUBORDINATED DEBENTURES
On May 5, 1993, the Company sold $9,775,000 of 15 year, 6.25% convertible
subordinated debentures in a public offering. The debentures are convertible by
the holders at any time prior to maturity, unless previously redeemed, into
common stock of the Company at a conversion rate of 128.37 shares of common
stock for each
C-28
<PAGE> 142
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,000 principal amount of debentures (equivalent to a conversion price of $7.79
per share), as adjusted for the three-for-two stock split in July 1997 and the
two-for-one stock split in September 1993. The debentures are redeemable, in
whole or in part, at the option of the Company on and after May 1, 1996, and if
redeemed during the 12-month periods beginning May 1, 1996 and 1997, at 105% and
102.5% of the principal amount, respectively, and thereafter at 100% of their
principal amount. During fiscal 1998, $1,639,000 of the debentures were
converted into 210,420 shares of common stock.
9. LEASE COMMITMENTS
At March 31, 1998, the Company was obligated under a number of
noncancellable leases for land and buildings. One of the branch leases is
accounted for as a capital lease and the others are accounted for as operating
leases. Rental expense under all leases aggregated approximately $341,000,
$309,000, and $270,000 for the years ended March 31, 1998, 1997, and 1996,
respectively.
The following is a schedule of future minimum annual lease commitments as
of March 31, 1998:
<TABLE>
<CAPTION>
COMMITMENTS UNDER
----------------------------------
CAPITAL LEASE OPERATING
FISCAL YEAR (BUILDING) LEASES TOTAL
----------- ------------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1999............................................... $ 16 $ 325 $ 341
2000............................................... 16 317 333
2001............................................... 16 266 282
2002............................................... 17 262 279
2003............................................... 18 269 287
Thereafter......................................... 67 1,123 1,190
---- ------ ------
Total minimum payments............................. 150 $2,562 $2,712
==== ====== ======
Less interest................................... (46)
----
Capitalized lease obligation......................... $104
====
</TABLE>
Additionally, the Company leases office space to tenants in office
buildings that it owns or rents. Rental income for the years ended March 31,
1998, 1997, and 1996 was $157,000, $149,000, and $149,000, respectively. The
minimum future rental income to be received under all such leases at March 31,
1998 is $98,000 in 1999, $83,000 in 2000, $46,000 in 2001, and $3,000 in 2002.
C-29
<PAGE> 143
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Other income consists of the following:
Service charges and other fees........................ $ 1,617 $ 1,520 $ 1,513
Equity income from joint ventures..................... 53 89 83
Other................................................. 88 89 103
------- ------- -------
Total............................................... $ 1,758 $ 1,698 $ 1,699
======= ======= =======
Other expenses consist of the following:
Salaries and employee benefits........................ $ 6,551 $ 5,690 $ 5,828
Occupancy and equipment............................... 1,952 1,807 1,727
Federal insurance premium............................. 290 719 908
Professional fees..................................... 437 537 494
Other taxes........................................... 760 673 679
Data processing....................................... 524 548 459
Marketing............................................. 386 437 497
Printing and supplies................................. 325 304 298
Supervisory assessment................................ 150 133 124
Other................................................. 1,827 1,687 1,505
------- ------- -------
Total............................................... $13,202 $12,535 $12,519
======= ======= =======
</TABLE>
11. FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current.................................................. $4,841 $3,133 $2,910
Deferred................................................. 139 238 424
------ ------ ------
Total.................................................. $4,980 $3,371 $3,334
====== ====== ======
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective consolidated federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate...................... $5,002 35.0% $3,423 35.0% $3,129 35.0%
Benefit of graduated tax rates............. (39) (.3) (98) (1.0) (93) (1.0)
Purchase accounting........................ 25 .2 24 .3 24 .3
Other -- net............................... (8) (.1) 22 .2 274 3.1
------ ---- ------ ---- ------ ----
Effective income tax provision........... $4,980 34.8% $3,371 34.5% $3,334 37.4%
====== ==== ====== ==== ====== ====
</TABLE>
C-30
<PAGE> 144
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities are as
follows (no valuation allowance was considered necessary):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Book allowance for loan losses......................... $1,823 $1,692 $1,446
Deferred loan fees..................................... 606 694 964
SFAS 106 health care expense........................... 291 236 191
Other.................................................. 163 151 126
------ ------ ------
Total deferred tax assets...................... 2,883 2,773 2,727
------ ------ ------
Deferred tax liabilities:
FHLB stock dividends................................... 752 565 438
Tax bad debt reserves.................................. 599 582 445
Difference between book and tax depreciation........... 106 110 128
Other.................................................. 205 156 118
------ ------ ------
Total deferred tax liabilities......................... 1,662 1,413 1,129
------ ------ ------
Net deferred tax asset................................. $1,221 $1,360 $1,598
====== ====== ======
</TABLE>
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code of 1986, as amended (the "Code") for taxable years
beginning after December 31, 1995. Section 593 allowed thrift institutions to
use the percentage-of-taxable income bad debt accounting method, if more
favorable than the specific charge-off method, for federal income tax purposes.
The excess reserve (deduction based on the percentage-of-taxable income less the
deduction based on the specific charge-off method) accumulated post-1987 is
required to be recaptured ratably over a six-year period beginning in 1996. The
recapture has no effect on the Company's statement of operations as taxes were
provided for in prior years in accordance with SFAS No. 109 "Accounting for
Income Taxes". The timing of this recapture may be delayed for a one or two-year
period to the extent that Security First originates more residential loans than
the average originations in the past six years. Security First met the
origination requirement for 1997 and, therefore, will delay recapture until the
six-year period beginning in 1998. The recapture amount of $1.7 million will
result in payments totaling $582,000 which has been previously accrued. The
pre-1988 reserve provisions are subject only to recapture requirements in the
case of certain excess distributions to, and redemptions of shareholders or if
the Bank no longer qualifies as a "bank". Tax bad debt deductions accumulated
prior to 1988 by the Company are approximately $4,761,000. No deferred income
taxes have been provided on these bad debt deductions and no recapture of these
amounts is anticipated.
12. SHAREHOLDERS' EQUITY
During 1998, the Company's most significant source of income was dividends
from Security Federal and First Federal. Consequently, the Company depends upon
such dividends from both Security Federal and First Federal to accumulate
earnings for payment of cash dividends to its shareholders. The Company received
$12,700,000 and $2,450,000 in cash dividends from Security Federal and First
Federal in the aggregate in fiscal 1998 and 1997, respectively. At March 31,
1998, the dollar amount of Security Federal's and First Federal's retained
earnings available to pay dividends to the Company without prior regulatory
approval was $12.0 million.
In December 1996, the Board of Directors of the Company authorized
management to repurchase up to 300,000 shares (as adjusted for the three-for-two
stock split distributed on July 31, 1997) of the Company's outstanding common
stock. The authorization provided that shares were to be purchased in the open
market at prevailing market prices from time to time over a 12-month period
commencing in January 1997. A six month
C-31
<PAGE> 145
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
extension of the program, through June 30, 1998, was approved by the Board of
Directors on December 16, 1997. The repurchased shares become treasury shares
and used for general corporate purposes, including the issuance of shares in
connection with grants and awards under the Company's stock-based benefit plans.
Under this authorization, 233,975 shares were repurchased during the twelve
months ended March 31, 1998, for an aggregate price of $4,131,000. A portion of
the shares were reissued in connection with the exercise of stock options and
the conversion of convertible subordinated debentures. The difference between
the repurchase and reissuance prices was treated as a reduction of retained
earnings. Subsequent to March 31, 1998, all of the treasury shares were reissued
in connection with stock option exercises and/or subordinated debenture
conversions, and the repurchase program was terminated.
13. REGULATORY CAPITAL REQUIREMENTS
The Company's banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. The regulations
require Security Federal and First Federal to meet specific capital adequacy
guidelines and the regulatory framework for prompt corrective action that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's banking subsidiaries' capital classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require that the banking subsidiaries of the Company maintain minimum amounts
and ratios of Total risk-based, Tier 1 risk based, and Tier 1 leverage capital.
C-32
<PAGE> 146
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As indicated in the following table, the Company's banking subsidiaries
exceeded all the regulatory capital requirements at March 31, 1998 and 1997, and
have been categorized as well-capitalized institutions by the OTS for prompt
corrective action purposes.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
--------------- --------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Total Capital (to Risk Weighted
Assets):
Consolidated........................... $54,468 10.33% $42,178 8.0% $52,723 10.0%
Security Federal....................... 47,619 10.21% 37,313 8.0% 46,642 10.0%
First Federal.......................... 6,849 11.26% 4,865 8.0% 6,081 10.0%
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated........................... 49,502 9.39% 21,089 4.0% 31,633 6.0%
Security Federal....................... 43,054 9.23% 18,657 4.0% 27,985 6.0%
First Federal.......................... 6,448 10.60% 2,432 4.0% 3,648 6.0%
Tier 1 capital (to Adjusted Tangible
Assets):
Consolidated........................... 49,502 7.39% 20,104 3.0% 33,508 5.0%
Security Federal....................... 43,054 7.45% 17,342 3.0% 28,904 5.0%
First Federal.......................... 6,448 7.00% 2,762 3.0% 4,604 5.0%
As of March 31, 1997:
Total Capital (to Risk Weighted
Assets):
Consolidated........................... $57,639 12.30% $37,491 8.0% $46,864 10.0%
Security Federal....................... 46,668 11.39% 32,780 8.0% 40,975 10.0%
First Federal.......................... 10,971 18.63% 4,711 8.0% 5,889 10.0%
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated........................... 52,823 11.27% 18,746 4.0% 28,119 6.0%
Security Federal....................... 42,217 10.30% 16,390 4.0% 24,585 6.0%
First Federal.......................... 10,606 18.01% 2,356 4.0% 3,534 6.0%
Tier 1 capital (to Adjusted Tangible
Assets):
Consolidated........................... 52,823 8.53% 18,584 3.0% 30,974 5.0%
Security Federal....................... 42,217 7.92% 15,991 3.0% 26,652 5.0%
First Federal.......................... 10,606 12.27% 2,593 3.0% 4,322 5.0%
</TABLE>
Management believes that under the current regulations, the banking
subsidiaries of the Company will continue to meet its minimum capital
requirements in the coming year. However, events beyond the Company's control,
such as fluctuations in interest rates or a downturn in the economy in areas in
which the Company's loans are concentrated, could adversely affect future
earnings and, consequently, the Company's ability to meet its future capital
requirements.
14. STOCK OPTION PLAN
Under the Company's stock option and incentive plan, shares of common stock
are reserved for issuance in connection with options granted by the Board of
Directors. Pursuant to the terms of the plan, options to purchase shares are
granted to directors, officers and employees at the fair market value of the
shares at the date of the grant. The plan is administered by a committee
comprised of all of the outside directors. The following table
C-33
<PAGE> 147
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
summarizes data concerning this plan, which was restated to reflect the
three-for-two stock split distributed on July 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS OUTSTANDING OPTIONS EXERCISE PRICE
------------------- --------- ----------------
<S> <C> <C>
Balance at April 1, 1995.............................. 392,418 $ 3.62
Granted............................................... 71,250 9.00
Exercised............................................. (113,250) 1.12
Forfeited............................................. (750) 9.00
--------
Balance at March 31, 1996............................. 349,668 5.50
Granted............................................... 69,041 8.16
Exercised............................................. (76,128) 1.64
Forfeited............................................. (750) 9.00
--------
Balance at March 31, 1997............................. 341,831 6.82
Granted............................................... 110,250 13.41
Exercised............................................. (77,189) 6.14
--------
Balance at March 31, 1998............................. 374,892 $ 8.90
========
</TABLE>
The weighted average exercise price of the outstanding options was $8.90,
and the weighted average remaining contractual life was 7.19 years at March 31,
1998. At March 31, 1998, 1997, and 1996, exercisable options totaled 325,800,
268,193, and 251,520, respectively, with weighted average exercise prices of
$9.20, $6.88, and $5.29, respectively. The expiration dates of the stock options
outstanding at March 31, 1998 are April 29, 2002 for the 36,350 granted at
$3.92; September 23, 2003 for the 4,500 options at $8.37; May 13, 2004 for the
15,000 options at $7.75; December 15, 2004 for the 95,925 options at $6.76; May
17, 2005 for the 63,000 options at $9.00; May 21, 2006 for the 61,643 options at
$8.16; and May 20, 2007 for the 98,474 options at $13.41.
The following table summarizes information about stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES GRANTED REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.92 - 3.92 36,350 4.08 $3.92 36,350 $ 3.92
6.76 - 7.75 110,925 6.63 6.89 61,833 7.00
8.16 - 9.00 129,143 7.55 8.58 129,143 8.58
13.41 - 13.41 98,474 9.14 13.41 98,474 13.41
</TABLE>
On July 25, 1996, shareholders of Security First ratified the adoption of
the 1996 Stock Option and Incentive Plan whereby the Company increased the
number of shares available for future grant by 4.99% of the Company's
outstanding common shares as of March 31, 1996. At March 31, 1998, there were
options to purchase 356,873 shares of common stock available for future grants
to participants, including directors of the Company.
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions
made:
<TABLE>
<CAPTION>
RISK-FREE
OPTIONS GRANTED IN INTEREST DIVIDEND EXPECTED
FISCAL YEAR RATE YIELD VOLATILITY LIVES
------------------ ------------- --------- ---------- --------
<S> <C> <C> <C> <C>
1998 6.47% 1.42% 38% 5 years
1997 6.40% 2.40% 42% 5 years
1996 6.31% 2.40% 42% 5 years
</TABLE>
C-34
<PAGE> 148
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation expense has
been recognized. Had compensation expense been determined consistent with SFAS
No. 123 "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts which reflect the three-for-two
stock split distributed on July 31, 1997):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income.............. $9,311 $9,029 $6,410 $6,270 $5,606 $5,447
Basic earnings per
share................. 1.23 1.20 0.86 0.84 0.78 0.76
Diluted earnings per
share................. 1.11 1.07 0.78 0.77 0.70 0.69
</TABLE>
15. EMPLOYEE BENEFITS
401(K) PLAN
The Company has a qualified, tax-exempt profit sharing plan with a
cash-or-deferred feature qualifying under Section 401(k) of the Code (the
"401(k) Plan"). With certain exceptions, all employees who have attained age 21
and have completed one year of employment, during which they worked at least
1,000 hours, are eligible to participate. Participants are permitted to make
contributions to the 401(k) Plan from one to ten percent of annual eligible
compensation on a pre-tax basis as established by the Company up to a current
maximum of $10,000 per year.
THE COMPANY'S CONTRIBUTIONS TO THE 401(K) PLAN ARE AS FOLLOWS:
1) The Company contributes a discretionary percentage (three percent in the
last three quarters of fiscal 1998, two percent in the first quarter of
fiscal 1998, and two percent for all of fiscal 1997 and fiscal 1996) of
participants' eligible compensation as a base contribution. The cost to
the Company of the base contribution during fiscal 1998, 1997, and 1996
was approximately $81,000, $47,000, and $40,000, respectively.
2) In addition, participants' salary reduction contributions will be
matched by the Company in an amount equal to 50% of the amount of the
salary reduction elected by the participants up to five percent of the
participants' eligible compensation. The cost to the Company of matching
contributions was $64,000 for fiscal 1998, $63,000 for fiscal 1997, and
$63,000 for fiscal 1996.
3) Also, an additional profit-sharing contribution in a discretionary
amount as determined by the Board of Directors may be made by the
Company each year. For fiscal 1998, the discretionary contribution was
$145,000 compared with $129,000 in fiscal 1997 and $82,000 in fiscal
1996.
OTHER EMPLOYEE BENEFITS
The Association provides post-retirement medical insurance benefits to all
employees who retire at age 55 or more with at least five years of service and
whose combined age and years of full-time service equal at least 80 at the time
of retirement. Under this plan, retirees contribute a portion of their monthly
medical premiums.
As a result of the adoption of SFAS No. 106, "Employers' Accounting for
Post-Retirement Benefits Other than Pensions," in fiscal 1994, the Company
incurred a transition obligation (the initial unfunded and unrecognized
accumulated post-retirement benefit obligation) of $1.1 million, which is being
amortized over 20 years.
C-35
<PAGE> 149
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The post-retirement benefit plan is unfunded. Net periodic post-retirement
benefit cost for fiscal years ended March 31 included the following components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1998 1997 1996
----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 77 $ 61 $ 72
Interest cost -- on accumulated post-retirement benefit
obligation................................................ 79 61 83
Amortization of transition obligation....................... 54 54 54
Amortization of prior service cost.......................... 5 -- --
Amortization of gain........................................ (22) (24) (10)
---- ---- ----
Net period post-retirement benefit cost................... $193 $152 $199
==== ==== ====
</TABLE>
The following table sets forth the amount recorded in the Company's
consolidated balance sheets at March 31:
<TABLE>
<CAPTION>
MARCH 31,
----------------
1998 1997
----- -----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Accumulated post-retirement benefit obligation ("APBO"):
Retirees.................................................. $456 $435
Eligible active participants.............................. 76 66
Other active plan participants............................ 778 495
---- ----
Total APBO.................................................. 1,310 996
Unrecognized transition obligation.......................... (802) (856)
Unrecognized gain........................................... 343 553
---- ----
Accrued post-retirement benefit cost................... $851 $693
==== ====
</TABLE>
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.00% for both 1998 and 1997. For fiscal
1998, the health care trend rate was projected to be 8.25% in the first year,
gradually decreasing to 5.5% in the year 2008 and thereafter. For fiscal 1997,
the health care trend rate was projected to be 8.5% in the first year, gradually
decreasing to 5.5% in the year 2008 and thereafter. Increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the APBO and related costs by $284,000 and $221,000 as of March 31, 1998 and
1997, respectively, and would increase the aggregate of the service and interest
components of net periodic post-retirement benefit cost by $40,000 for fiscal
1998 and $33,000 for fiscal 1997.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the disclosure in the financial statements, or notes thereto, of fair
value information for financial instruments, as defined, whether or not
recognized in the balance sheet, for which it is practical to estimate fair
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. In addition, SFAS No. 107 excludes all non-financial instruments
from disclosure requirements; therefore, the aggregate fair value amounts
presented do not represent, and should not be construed to represent, the full
underlying value of the Company.
C-36
<PAGE> 150
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1998 and March 31, 1997, as
appropriate. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents..................... $ 13,399 $ 13,399 $ 8,664 $ 8,664
Investment securities......................... 17,922 17,931 31,576 31,562
Mortgage-backed securities.................... 1,843 1,843 2,523 2,523
Loans......................................... 627,460 640,269 567,975 571,942
FHLB stock.................................... 7,085 7,085 6,400 6,400
Financial Liabilities:
Demand deposits............................... $148,581 $148,581 $139,393 $139,393
Time deposits................................. 359,576 361,357 305,789 306,875
Advances from the FHLB........................ 98,267 98,427 115,221 115,337
Convertible subordinated debentures........... 6,840 6,682 8,479 8,283
</TABLE>
CASH AND CASH EQUIVALENTS. For cash, deposits with banks, and federal
funds sold, the carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES. Estimated fair
values for investment securities and mortgage-backed securities are based on
quoted market prices.
LOANS. For variable rate loans that reprice based on the prime rate, fair
values are based on carrying values. The fair values of other loans are
estimated using discounted cash flow analyses and employ interest rates
currently being offered at the reporting date for loans with similar terms. The
fair value of loans is reduced by an estimate of losses inherent in the loan
portfolio.
FEDERAL HOME LOAN BANK STOCK. The fair value is estimated to be the
carrying value which is par. All transactions in the capital stock of the
Federal Home Loan Bank of Cincinnati are executed at par.
DEPOSITS. The fair value of demand deposits, which includes passbook
accounts, money market accounts, and NOW accounts, is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using discounted cash flows based on rates currently
offered at the reporting date for deposits of similar remaining maturities.
BORROWINGS. Rates currently available to the Company at the reporting date
for debt with similar terms and remaining maturities were used to estimate the
fair value of existing borrowings, including advances from the FHLB and
convertible subordinated debentures.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The fair value of off-balance
sheet financial instruments, including commitments to originate loans, is
considered to be equivalent to the value of the current fees charged to enter
into such commitments. At March 31, 1998 and 1997, such fees were not considered
significant.
C-37
<PAGE> 151
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SECURITY FIRST CORP. FINANCIAL INFORMATION
Following are the summarized financial statements of Security First (parent
company only) as of March 31, 1998 and 1997, and for the years ended March 31,
1998, 1997, and 1996:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Assets:
Cash and cash equivalents................................... $ 2,542 $ 2,801
Investments................................................. 3,135 5,962
Loans....................................................... 14,615 4,861
Investment in First Federal Savings Bank.................... 6,448 10,606
Investment in Security Federal Savings & Loan Association... 44,018 43,041
Prepaid expenses and other assets........................... 976 867
------- -------
Total assets.............................................. $71,734 $68,138
------- -------
Liabilities:
Convertible subordinated debentures......................... $ 6,840 $ 8,479
Accounts payable and accrued expenses....................... 215 225
------- -------
Total liabilities......................................... 7,055 8,703
------- -------
Shareholders' Equity:
Preferred stock, (1,000,000 shares authorized; none
issued)................................................... -- --
Common stock, par value $.01 per share; 20,000,000 shares
authorized; 7,555,044 shares issued and outstanding at
March 31, 1998, and 7,504,649 at March 31, 1997 (a)....... 76 75
Treasury stock (88,324 shares at March 31,1998) at cost..... (1,671) --
Unrealized gain (loss) on investments, (net of tax of $26 at
March 31, 1998 and ($111) at March 31, 1997).............. 48 (224)
Additional paid-in capital.................................. 16,021 14,915
Unearned Compensation....................................... (139) (216)
Retained earnings........................................... 50,344 44,885
------- -------
Total shareholders' equity................................ 64,679 59,435
------- -------
Total liabilities and shareholders' equity................ $71,734 $68,138
======= =======
</TABLE>
- ---------------
(a) Adjusted to reflect the three-for-two stock split distributed on July 31,
1997.
C-38
<PAGE> 152
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries............................... $12,700 $2,450 $4,800
Interest income........................................... 1,109 948 877
------- ------ ------
Total income........................................... 13,809 3,398 5,677
------- ------ ------
Expense:
Interest expense.......................................... 506 590 592
Employee compensation and benefits........................ 296 284 417
Professional fees......................................... 183 224 207
Merger expenses........................................... -- -- 737
Other expenses............................................ 167 142 192
------- ------ ------
Total expenses......................................... 1,152 1,240 2,145
------- ------ ------
Income before federal income taxes.......................... 12,657 2,158 3,532
Federal income tax benefit.................................. 19 103 118
------- ------ ------
Income before equity in undistributed net income of
subsidiaries.............................................. 12,676 2,261 3,650
Equity (deficit) in undistributed net income of
subsidiaries.............................................. (3,365) 4,149 1,956
------- ------ ------
Net income............................................. $ 9,311 $6,410 $5,606
======= ====== ======
</TABLE>
C-39
<PAGE> 153
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net Income.............................................. $ 9,311 $6,410 $5,606
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net earnings of subsidiary...... 3,128 (4,149) (2,756)
Amortization of unearned compensation................... 76 76 72
ESOP expense............................................ -- 27 213
Net change in accounts payable, accrued expenses, and
other assets.......................................... (54) (223) 454
Other................................................... 275 (8) 6
------- ------ ------
Net cash provided by operating activities............... 12,736 2,133 3,595
------- ------ ------
Investing Activities:
Loans originated........................................ (10,067) (2,371) (1,540)
Loan principal repayments............................... 313 427 --
Purchase of investment securities....................... (1,098) (3,993) (2,300)
Sales of investment securities.......................... -- -- 500
Maturities of investment securities..................... 4,000 2,000 4,800
Net change in note due from First Federal............... -- -- 900
------- ------ ------
Net cash provided by (used in) investing activities..... (6,852) (3,937) 2,360
------- ------ ------
Financing Activities:
Payment of dividends on common stock.................... (2,424) (2,187) (1,916)
Proceeds from ESOP termination.......................... -- 457 --
Proceeds from exercise of stock options................. 412 135 128
Purchase of treasury shares............................. (4,131) -- --
Other................................................... -- (1) --
------- ------ ------
Net cash used in financing activities................... (6,143) (1,596) (1,788)
------- ------ ------
Net increase (decrease) in cash and cash equivalents.... (259) (3,400) 4,167
Cash and cash equivalents at beginning of period........ 2,801 6,201 2,034
------- ------ ------
Cash and cash equivalents at end of period.............. $ 2,542 $2,801 $6,201
======= ====== ======
Noncash financing activities:
Effect of conversion of subordinated debentures......... $ 1,639 $ 295 $ 30
</TABLE>
18. INVESTMENT IN REAL ESTATE JOINT VENTURES
The Company's wholly owned subsidiary, SF Development Corp., is involved as
a partner (50% interest) in two joint venture agreements, and (33 1/3% interest)
in a third joint venture agreement with a real estate developer to sell
residential lots and condominium units to builders within the Association's
lending area. Profits and losses of the joint ventures are allocated based upon
contractual terms.
C-40
<PAGE> 154
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined condensed financial statements of the joint ventures are as
follows:
COMBINED CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets:
Cash...................................................... $ 200 $ 102
Notes receivable.......................................... 1,155 1,686
Real estate............................................... 2,938 2,463
Other assets.............................................. 1,183 719
------ ------
Total Assets........................................... $5,476 $4,970
====== ======
Liabilities and Equity:
Loans payable............................................. $4,667 $4,576
Accounts payable and accrued expenses..................... 360 50
Equity.................................................... 449 344
------ ------
Total Liabilities and Equity........................... $5,476 $4,970
====== ======
</TABLE>
COMBINED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Sales....................................................... $ 2,944 $ 2,921
Cost of sales............................................... (2,489) (2,378)
------- -------
Gross profit........................................... 455 543
Interest income............................................. 114 40
Operating expenses.......................................... (465) (406)
------- -------
Net income............................................. $ 104 $ 177
======= =======
SF Development Corp.'s share................................ $ 53 $ 89
======= =======
</TABLE>
C-41
<PAGE> 155
SECURITY FIRST CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------------------
1998 1997 1996
------------ ------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic Earnings Per Share:
Income available to common stockholders........ $ 9,311 $ 6,410 $ 5,606
Average common shares outstanding.............. 7,552,329 7,434,891 7,169,640
Earnings per common share...................... $ 1.23 $ 0.86 $ 0.78
========= ========= ==========
Diluted Earnings Per Share:
Net income..................................... $ 9,311 $ 6,410 $ 5,606
Add interest expense on convertible
subordinated debentures, net of tax......... 334 391 391
--------- --------- ----------
Adjusted income available to common
stockholders................................ $ 9,645 $ 6,801 $ 5,997
Average common shares outstanding.............. 7,552,329 7,434,891 7,169,640
Add common stock equivalents for shares
issuable under:
Stock option plans.......................... 203,597 138,519 215,922
Subordinated debentures conversion.......... 962,511 1,122,026 1,128,750
--------- --------- ----------
Average common and common equivalent shares
outstanding................................. 8,718,437 8,695,436 8,514,312
Earnings per common and common equivalent
share....................................... $ 1.11 $ 0.78 $ 0.70
========= ========= ==========
</TABLE>
20. PENDING MERGER
On April 5, 1998 the Company entered into a definitive agreement for the
acquisition of Security First by FirstMerit Corporation ("FirstMerit"), a
multi-bank holding company headquartered in Akron, Ohio. The agreement
specifies, among other things, that FirstMerit will exchange .8855 of its shares
for each share of the Company in an exchange that is expected to be tax-free for
income tax purposes. It is expected that the acquisition (subject to both
shareholder and regulatory approval) will close in October 1998 and will be
accounted for as a pooling of interests.
C-42
<PAGE> 156
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Article Sixth of the Amended and Restated Articles of
Incorporation of FirstMerit, FirstMerit may indemnify any director or officer,
any former director or officer of FirstMerit and any person who is or has served
at the request of FirstMerit as a director, officer or trustee of another
corporation, partnership, joint venture, trust or other enterprise (and his
heirs, executors and administrators) against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him by reason of the fact that he is or was such director, officer
or trustee in connection with any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, to the
full extent permitted by applicable law, as the same may be in effect from time
to time. The indemnification provided for therein is not deemed to restrict the
right of FirstMerit to (i) indemnify employees, agents and others as permitted
by such law, (ii) purchase and maintain insurance or provide similar protection
on behalf of directors, officers or such other persons against liabilities
asserted against them or expenses incurred by them arising out of their service
to FirstMerit, and (iii) enter into agreements with such directors, officers,
employees, agents or others indemnifying them against any and all liabilities
(or such lesser indemnification as may be provided in such agreements) asserted
against them or incurred by them arising out of their service to FirstMerit.
The rights provided in Article Sixth are in addition to any rights provided
by contract or as a matter of law. Ohio Revised Code Section 1701.13(E) includes
indemnification provisions similar to Article Sixth. Section 1701.13(E) of the
Ohio Revised Code provides that a corporation may indemnify or agree to
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, other than an action by or in
the right of the corporation, by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee,
member, manager, or agent of another corporation, domestic or foreign, nonprofit
or for profit, a limited liability company, or a partnership, joint venture,
trust, or other enterprise, against expenses, including attorney's fees,
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, if he had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or proceeding by judgment, order,
settlement, or conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, that he had reasonable cause to believe that his conduct was
unlawful. Section 1701.13(E)(2) further specifies that a corporation may
indemnify or agree to indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor, by reason of the fact that he is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, trustee, officer, employee, member, manager, or agent of another
corporation, domestic or foreign, nonprofit or for profit, a limited liability
company, or a partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification shall be made
in respect of (a) any claim, issue, or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless, and only to the extent, that the court of
common pleas or the court in which such action or suit was brought determines,
upon application, that, despite the adjudication of liability, but in view of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses as the court of common pleas or such other court
shall deem proper, and (b) any action or suit in which the only liability
asserted against a director is pursuant to Section 1701.95 of the Ohio Revised
Code concerning unlawful loans, dividends and distribution of assets. In
addition, Section 1701.13(E) requires a corporation to pay any expenses,
II-1
<PAGE> 157
including attorney's fees, of a director in defending an action, suit, or
proceeding referred to above as they are incurred, in advance of the final
disposition of the action, suit, or proceeding, upon receipt of an undertaking
by or on behalf of the director in which he agrees to both (i) repay such amount
if it is proved by clear and convincing evidence that his action or failure to
act involved an act or omission undertaken with deliberate intent to cause
injury to the corporation or undertaken with reckless disregard for the best
interests of the corporation and (ii) reasonably cooperate with the corporation
concerning the action, suit, or proceeding.
Section 1701.13(E) further authorizes a corporation to enter into contracts
regarding indemnification and to purchase and maintain insurance on behalf of
any director, trustee, officer, employee or agent for any liability asserted
against him or arising out of his status as such. FirstMerit presently has
contracts with each of its directors and key officers and maintains insurance
for the benefit of persons entitled to indemnification.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. See the Exhibit Index.
(b) Financial Statement Schedules. Not Applicable.
(c) Reports, Opinions or Appraisals. Furnished as Appendix B to the
Prospectus and Proxy Statement.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
FirstMerit's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 158
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(d) FirstMerit undertakes that every prospectus (i) that is filed pursuant
to paragraph (c) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities and at that
time shall be deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
FirstMerit pursuant to the foregoing provisions, or otherwise, FirstMerit has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by FirstMerit of expenses incurred or
paid by a director, officer or controlling person of FirstMerit in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, FirstMerit will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(g) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-3
<PAGE> 159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Akron, State of Ohio, on
the 22nd day of June, 1998.
FirstMerit Corporation
By: /s/ John R. Cochran*
------------------------------------
John R. Cochran, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1933, this
registration statement has been signed on the 22nd day of June, 1998, by the
following persons (including a majority of the Board of Directors of the
registrant) in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ John R. Cochran* President and Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer) and Director
John R. Cochran
/s/ Jack R. Gravo* Executive Vice President, Finance and
- ----------------------------------------------------- Administration (Principal Financial Officer
Jack R. Gravo and Principal Accounting Officer)
/s/ Karen S. Belden* Director
- -----------------------------------------------------
Karen S. Belden
/s/ R. Cary Blair* Director
- -----------------------------------------------------
R. Cary Blair
/s/ John C. Blickle* Director
- -----------------------------------------------------
John C. Blickle
Director
- -----------------------------------------------------
Sid A. Bostic
/s/ Robert W. Briggs* Director
- -----------------------------------------------------
Robert W. Briggs
/s/ Richard Colella* Director
- -----------------------------------------------------
Richard Colella
/s/ Elizabeth A. Dalton* Director
- -----------------------------------------------------
Elizabeth A. Dalton
/s/ Terry L. Haines* Director
- -----------------------------------------------------
Terry L. Haines
/s/ Clifford J. Isroff* Director
- -----------------------------------------------------
Clifford J. Isroff
/s/ Philip A. Lloyd II* Director
- -----------------------------------------------------
Philip A. Lloyd II
/s/ Robert G. Merzweiler* Director
- -----------------------------------------------------
Robert G. Merzweiler
/s/ Stephen E. Myers* Director
- -----------------------------------------------------
Stephen E. Myers
</TABLE>
II-4
<PAGE> 160
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Roger T. Read* Director
- -----------------------------------------------------
Roger T. Read
/s/ Justin T. Rogers, Jr.* Director
- -----------------------------------------------------
Justin T. Rogers, Jr.
/s/ Richard N. Seaman* Director
- -----------------------------------------------------
Richard N. Seaman
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
registration statement on behalf of each of the indicated officers and directors
of FirstMerit Corporation pursuant to a Power of Attorney executed by each such
officer and director and filed with this registration statement.
Dated: June 22, 1998 /s/ Kevin C. O'Neil
--------------------------------------
Kevin C. O'Neil
Attorney-in-Fact
II-5
<PAGE> 161
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
2.1 Agreement of Affiliation and Plan of Merger by and between
FirstMerit Corporation and Security First Corp. dated April
5, 1998 (incorporated by reference from Exhibit 99.1 to the
Form 8-K filed by the registrant on April 9, 1998)
2.2 Security First Corp. Stock Purchase Option by and between
FirstMerit Corporation and Security First Corp. dated April
5, 1998 (incorporated by reference from Exhibit 99.2 to the
Form 8-K filed by the registrant on April 9, 1998)
3.1 Amended and Restated Articles of Incorporation of FirstMerit
Corporation (incorporated by reference from Exhibit 3(a) to
the Form 8-K filed by the registrant on April 9, 1998)
3.2 Amended and Restated Code of Regulations of FirstMerit
Corporation (incorporated by reference from Exhibit 3(b) to
the Form 10-K filed by the registrant on April 9, 1998)
4.1 Shareholders Rights Agreement dated October 21, 1993,
between FirstMerit Corporation and FirstMerit Bank, N.A., as
amended and restated July 18, 1996 and May 20, 1998
(incorporated by reference from Exhibit 4 to the Form 8-A/A
filed by the registrant on June 22, 1998)
5 Opinion Regarding Legality
8 Opinion Regarding Certain Tax Matters
10.1 1982 Incentive Stock Option Plan of FirstMerit Corporation
(incorporated by reference from Exhibit 4.2 to the Form S-8
(No. 33-7266) filed by the registrant on July 15, 1986)
10.2 Amended and Restated 1992 Stock Option Program of FirstMerit
Corporation (incorporated by reference from Exhibit 10.2 to
the Form 10-K filed by the registrant on February 24, 1998)
10.3 1992 Directors Stock Option Program (incorporated by
reference from Exhibit 10.3 to the Form 10-K filed by the
registrant on February 24, 1998)
10.4 FirstMerit Corporation 1995 Restricted Stock Plan
(incorporated by reference from Exhibit (10)(d) to the Form
10-Q for the fiscal quarter ended March 31, 1995, filed by
the registrant on May 15, 1995)
10.5 1997 Stock Option Program of FirstMerit Corporation
(incorporated by reference from Exhibit 10.5 to the Form
10-K filed by the registrant on February 24, 1998)
10.6 1985 FirstMerit Corporation Stock Plan (CV) (incorporated by
reference from Exhibit (10)(a) to the Form S-8 (No.
33-57557) filed by the registrant on February 1, 1995)
10.7 1993 FirstMerit Corporation Stock Plan (CV) (incorporated by
reference from Exhibit (10)(b) to the Form S-8 (No.
33-57557) filed by the registrant on February 1, 1995)
10.8 Amended and Restated FirstMerit Corporation Executive
Deferred Compensation Plan (incorporated by reference from
Exhibit 10(h) to the Form 10-K filed by the registrant on
February 25, 1997)
10.9 Amended and Restated FirstMerit Corporation Director
Deferred Compensation Plan (incorporated by reference from
Exhibit 10(i) to the Form 10-K filed by the registrant on
February 25, 1997)
10.10 FirstMerit Corporation Executive Supplemental Retirement
Plan (incorporated by reference from Exhibit 10(d) to the
Form 10-K filed by the registrant on March 15, 1996)
10.11 FirstMerit Corporation Unfunded Supplemental Benefit Plan
(incorporated by reference from Exhibit 10.11 to the Form
10-K filed by the registrant on February 24, 1998)
10.12 First Amendment to the FirstMerit Corporation Unfunded
Supplemental Benefit Plan (incorporated by reference from
Exhibit 10(v) to the Form 10-K filed by the registrant on
March 2, 1995)
10.13 Supplemental Pension Agreement of John R. Macso
(incorporated by reference from Exhibit 10.13 to the Form
10-K filed by the registrant on February 24, 1998)
10.14 FirstMerit Corporation Executive Committee Life Insurance
Program Summary (incorporated by reference from Exhibit
10(w) to the Form 10-K filed by the registrant on March 2,
1995)
10.15 Long Term Disability Plan (incorporated by reference from
Exhibit 10(x) to the Form 10-K filed by the registrant on
March 2, 1995)
</TABLE>
II-6
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
10.16 Employment Agreement of John R. Cochran (incorporated by
reference from Exhibit 10(a) to the Form 10-Q filed by the
registrant on May 15, 1995)
10.17 Restricted Stock Award Agreement of John R. Cochran
(incorporated by reference from Exhibit 10(e) to the Form
10-Q filed by the registrant on May 15, 1995)
10.18 Restricted Stock Award Agreement of John R. Cochran dated
April 9, 1997 (incorporated by reference from Exhibit 10.18
to the Form 10-K filed by the registrant on February 24,
1998)
10.19 Employment Agreement of Sid A. Bostic dated February 1,1998
(incorporated by reference from Exhibit 10.19 to the Form
10-K filed by the registrant on February 24, 1998)
10.20 Restricted Stock Award Agreement of Sid A. Bostic dated
February 1, 1998 (incorporated by reference from Exhibit
10.20 to the Form 10-K filed by the registrant on February
24, 1998)
10.21 Form of FirstMerit Corporation Termination Agreement
(incorporated by reference from Exhibit 10(r) to the Form
10-K filed by the registrant on February 25, 1997)
10.22 Form of Director and Officer Indemnification Agreement and
Undertaking (incorporated by reference from Exhibit 10(s) to
the Form 8-K/A filed by the registrant on April 27, 1995)
10.23 Distribution Agreement, by and among FirstMerit Corporation,
FirstMerit Bank, N.A. and the Agents (incorporated by
reference from Exhibit (10)(ii) to the Form 8-K/A filed by
the registrant on April 27, 1995)
10.24 Form of FirstMerit Bank, N.A. Global Bank Note (Fixed Rate)
(incorporated by reference from Exhibit (10)(iii) to the
Form 8-K/A filed by the registrant on April 27, 1995)
10.25 Form of FirstMerit Bank, N.A. Global Bank Note (Floating
Rate) (incorporated by reference from Exhibit (10)(iv) to
the Form 8-K/A filed by the registrant on April 27, 1995)
10.26 Form of Employment Agreement of Charles F. Valentine
21 Subsidiaries of FirstMerit Corporation
23.1 Consent of Deloitte & Touche, LLP
23.2 Consent of Coopers & Lybrand, L.L.P.
23.3 Consent of Brouse & McDowell (included in Exhibits 5 and 8)
23.4 Consent of Charles Webb & Company
24 Power of Attorney
99 Form of Proxy -- Security First Corp.
</TABLE>
II-7
<PAGE> 163
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
FIRSTMERIT CORPORATION
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
------------------------
EXHIBITS
------------------------
<PAGE> 1
EXHIBIT 5
BROUSE & MCDOWELL
A LEGAL PROFESSIONAL ASSOCIATION
500 FIRST NATIONAL TOWER
AKRON, OHIO 44308
June 22, 1998
FirstMerit Corporation
III Cascade Plaza, 7th Floor
Akron, Ohio 44308
Gentlemen:
We have acted as legal counsel to you with regard to the Agreement of
Affiliation and Plan of Merger dated April 5, 1998, between FirstMerit
Corporation, an Ohio corporation ("FirstMerit" or "Company") and Security First
Corp., a Delaware Corporation ("Security First") ("Merger Agreement").
In providing our opinions herein, reference is made to: (a) the
registration statement on Form S-4 dated as of the date of this opinion, and any
amendments thereto (the"Registration Statement"), as filed with the Securities
and Exchange Commission ("Commission"); and (b) the terms of the Merger
Agreement between FirstMerit and Security First; all as described in the
Registration Statement.
Unless otherwise defined in this letter, all capitalized terms have the
same meanings as set forth in the Merger Agreement. Our opinion is provided to
you as a legal opinion only, and not as a guaranty or warranty, and is limited
to the specific transactions, documents and matters described above.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(a) the Merger Agreement, (b) the Security First Corp. Stock Purchase Option
dated April 5, 1998, (c) the Registration Statement, and (d) such other
agreements, certificates and documents as we have deemed necessary or
appropriate in order to enable us to render the opinions below.
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authority of all persons signing
documents, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
conformed or photostatic copies and the authenticity of the originals of such
copies. In rendering the opinions set forth below, we have relied upon certain
statements, representations and covenants of Security First and FirstMerit
contained in the Merger Agreement and in documents related thereto. We have made
no independent investigation with regard to statements, representations or
covenants made or to be made in the Merger Agreement and in documents related
thereto. We assume that all such statements and representations are, and will be
at the Effective Time, true and complete, but we express no opinion as to their
accuracy or completeness. We also assume that the transactions described in the
Merger Agreement and in the Registration Statement will be carried out in
accordance with the terms of the Merger Agreement.
We are of the opinion that:
1. The Company is a corporation organized and existing in good standing
under the laws of the State of Ohio.
<PAGE> 2
FirstMerit Corporation
June 22, 1998
Page 2
2. The Shares that may be issued or transferred and sold pursuant to
the Registration Statement are duly authorized, and will be, when issued or
transferred and sold in accordance with the Registration Statement and the
prospectus comprising a part thereof, validly issued, fully paid and
nonassessable.
Our opinion is based on the law, judicial decisions, and such other
legal authorities as we have deemed necessary or appropriate for purposes of our
opinion, as each exists as of the date of this opinion. Existing laws may be
changed by legislation or promulgation of regulations or may be interpreted
differently than they are at present by courts, and such changes may alter the
conclusions reached in this opinion. No opinion is rendered with respect to any
issue or matter not expressly stated herein. In addition, our conclusions are
based upon the law currently in effect, which is subject to change on a
prospective or retroactive basis. If any assumption or representation described
above or contained in the Merger Agreement or related documents is not true,
correct and complete, or in the event of a change in law adversely affecting the
conclusions reached in this letter, our opinion shall be void and of no force or
effect.
We disclaim any undertaking to advise you of changes which hereafter
may be brought to our attention, including any change in the law, whether by
legislative or regulatory action, judicial interpretation or otherwise, or of
any change of facts as they presently exist.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement filed by the Company to effect the registration of the
Shares and any amendments thereto, and to the reference to this firm under the
caption "Legal Opinion" in the prospectus comprising a part of the Registration
Statement.
Very truly yours,
BROUSE & McDOWELL
/s/ BROUSE & McDOWELL
[98-187]
<PAGE> 1
EXHIBIT 8
BROUSE & MCDOWELL
A LEGAL PROFESSIONAL ASSOCIATION
500 FIRST NATIONAL TOWER
AKRON, OHIO 44308
June 22, 1998
FirstMerit Corporation
III Cascade Plaza, 7th Floor
Akron, Ohio 44308
Gentlemen:
We have acted as legal counsel to you with regard to the Agreement of
Affiliation and Plan of Merger dated April 5, 1998, between FirstMerit
Corporation, an Ohio corporation ("FirstMerit" or "Company") and Security First
Corp. ("Security First") ("Merger Agreement"). This opinion is rendered pursuant
to the requirements of the Merger Agreement and pursuant to the requirements of
Item 21(a) of Form S-4 under the Securities Act of 1933, as amended.
In providing our opinions herein, reference is made to: (a) the
registration statement on Form S-4 dated as of the date of this opinion, and any
amendments thereto (the"Registration Statement"), and filed with the Securities
and Exchange Commission ("Commission") in connection with the registration for
issuance by FirstMerit of up to 7,800,000 shares of the Company's common stock,
no par value ("Shares"); (b) the terms of the Merger Agreement between
FirstMerit and Security First; and (c) the provisions for the issuance of the
Shares; all as described in the Registration Statement.
Unless otherwise defined in this letter, all capitalized terms have the
same meanings as set forth in the Merger Agreement. Our opinion is provided to
you as a legal opinion only, and not as a guaranty or warranty, and is limited
to the specific transactions, documents and matters described above.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(a) the Merger Agreement, (b) the Security First Corp. Stock Purchase Option
dated April 5, 1998, (c) the Registration Statement, and (d) such other
certificates and documents as we have deemed necessary or appropriate in order
to enable us to render the opinions below. In our examination, we have assumed
the genuineness of all signatures, the legal capacity of all natural persons,
the authority of all persons signing documents, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such copies. In rendering the opinions set
forth below, we have relied upon certain statements, representations and
covenants of Security First and FirstMerit contained in the Merger Agreement and
in documents related thereto. We have made no independent investigation with
regard to statements, representations or covenants made or to be made in the
Merger Agreement and in documents related thereto. We assume that all such
statements and representations are, and will be at the Effective Time, true and
complete, but we express no opinion as to their accuracy or completeness. We
also assume that the transactions described in the Merger Agreement and in the
Registration Statement will be carried out in accordance with its terms.
<PAGE> 2
FirstMerit Corporation
June 22, 1998
Page 2
In rendering our opinion, we have assumed that (a) the proposed merger
of Security First with and into FirstMerit will qualify as a statutory merger
under the Ohio General Corporation Law, and (b) Security First and FirstMerit
will satisfy all of the terms of the Merger Agreement and the respective
covenants and agreements set forth therein.
Based upon and subject to the foregoing, our opinion, as delineated in
the discussion set forth in the prospectus contained in the Registration
Statement under the heading "The Merger -- Material U.S. Federal Income Tax
Consequences," accurately describes the material federal income tax consequences
generally applicable to the Merger.
No opinion is rendered on any federal, state or local tax matter except
those expressly stated herein. Accordingly, this opinion should not be construed
as applying in any manner to any tax aspect of the Merger other than set forth
above. In addition, no opinion may be implied or inferred beyond that which is
expressly stated herein.
This opinion is based upon the current provisions of the Code, the
Treasury Regulations promulgated thereunder, and the interpretations thereof by
the Internal Revenue Service and those courts having jurisdiction over such
matters as of the date hereof, all of which are subject to change either
prospectively or retroactively. Existing laws may be changed by legislation or
promulgation of regulations or may be interpreted differently than they are at
present by courts, and such changes may alter the conclusions reached in this
opinion. No opinion is rendered with respect to the effect, if any, of any
pending or future legislation or administrative regulation or ruling which may
have a bearing on any of the foregoing.
We disclaim any undertaking to advise you of changes which thereafter
may be brought to our attention, including any change in the law, whether by
legislative or regulatory action, judicial interpretation or otherwise, or of
any change of facts as they presently exist.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus comprising a part of the Registration
Statement.
Very truly yours,
BROUSE & McDOWELL
/s/ BROUSE & McDOWELL
[98-188]
<PAGE> 1
EXHIBIT 10.26
FORM OF
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") entered into this ___ day of
___________, 1998, between and among FirstMerit Corporation, an Ohio corporation
("FirstMerit"), FirstMerit Bank, N.A., a national banking association
("FirstMerit Bank") (collectively sometimes "FirstMerit"), and Charles F.
Valentine ("Executive").
R E C I T A L S :
FirstMerit and FirstMerit Bank desire to employ Executive for a period
certain, subject, however, to the terms and conditions of this Agreement.
IN CONSIDERATION OF THE FOREGOING, the mutual covenants contained
herein, and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
1. Employment
----------
FirstMerit hereby employs Executive, and Executive hereby accepts
employment, according to the terms and conditions set forth in this Agreement
and for the period specified in Section 3 of this Agreement.
2. Duties
------
During the Term (as defined in Section 3), Executive shall serve
FirstMerit and FirstMerit Bank as its Executive Vice President of FirstMerit and
President of the Construction Financing Division of FirstMerit Bank in
accordance with directions from the Chief Executive Officer. During the
Employment Period, Executive shall devote Executive's exclusive business time,
energies, attention and ability to the business of FirstMerit, and shall
faithfully and diligently perform the duties of Executive's employment with
FirstMerit and of any office or offices held by Executive in FirstMerit,
provided that there shall be no set time or minimum time during which Executive
shall perform such services.
It is understood and agreed that, without prior written approval from
the Board of Directors of FirstMerit (the "Board") (which approval shall not be
unreasonably withheld to the extent such activities do not materially interfere
with Executive's duties), Executive may not engage in any other business
activities during the period of Executive's employment by FirstMerit, whether or
not for profit or other pecuniary advantage. Notwithstanding the foregoing, (a)
nothing contained in this Section 2 shall preclude Executive from any investment
or activity that existed at the time of this Agreement, which were disclosed by
Executive to FirstMerit and do not materially interfere with
<PAGE> 2
Executive's duties; (b) Executive may make personal financial investments after
the date of this Agreement which do not involve any active participation on
Executive's part, (c) Executive may engage in charitable, educational,
religious, civic, trade associations and similar types of activities, and (d)
Executive may serve on the board of directors of such other entities as may be
approved by the Board; provided, however, that any such activities described in
item (c) above must be approved in advance by the Board, and any such activities
described in items (c) and (d) above (i) must not interfere with the business or
the performance of the Executive's duties under this Agreement, and (ii) must
not conflict with policies concerning conflicts of interest. Any director's or
other fees received by the Executive related to activities described in (a) and
(d) above may be retained by Executive.
3. Term of Employment
------------------
The term of this Agreement (the "Term") shall commence as of
________________, 1998 (the "Commencement Date"), and shall continue for a
period of three (3) years ending at 11:59 pm Cleveland time on _____________,
20__ (the "Expiration Date"), unless this Agreement has been earlier terminated
in accordance with the provisions of Section 6 hereof. Following the Expiration
Date, Executive's employment status will be "at will."
4. Compensation
------------
4.1 BASE SALARY. While employed under this Agreement, Executive will
receive as his compensation for the performance of his duties and obligations to
FirstMerit under this Agreement a base salary of Two Hundred Nineteen Thousand
Dollars ($219,000.00) per year, which will be payable in semi-monthly
installments, and which will be subject to annual increase by the Compensation
Committee as approved by the Board (the base salary, as it may be increased from
time to time, is referred to herein as the "Base Salary").
4.2 BONUS. In addition to the Base Salary, Executive will be eligible
to receive with respect to each calendar year a bonus of 40%-70% of Base Salary
in accordance with FirstMerit's Incentive Compensation Plan ("ICP"), a copy of
which has been delivered to Executive, as it may be amended from time to time.
Bonuses will be determined by FirstMerit's Compensation Committee in accordance
with the terms of the ICP, subject to approval by the Board, will be calculated
based upon the formula for determining bonuses under the ICP that is in effect
on the Commencement Date unless the formula for determining bonuses under the
ICP that is in effect on the date of determination of the amount of the bonus
would produce a bonus of greater amount, and ordinarily will be paid during the
first quarter of the year following the year to which the bonus relates.
4.3 EMPLOYMENT PAYMENT. At the time that Executive accepts employment
by executing this Agreement, FirstMerit will pay to Executive in cash the sum of
One Hundred Fifty Thousand Dollars ($150,000.00).
-2-
<PAGE> 3
4.4 WITHHOLDING. All compensation payable to Executive pursuant to this
Section 4 shall be paid net of amounts withheld for federal, state, municipal or
local income taxes, Executive's share, if any, of any payroll taxes, and such
other federal, state, municipal or local taxes as may be applicable to amounts
paid by an employer to its employee or to the employer/employee relationship.
5. Other Benefits of Employment
----------------------------
5.1 RETIREMENT BENEFITS
(A) PENSION PLAN. Executive will participate in the Pension
Plan for Employees of FirstMerit Corporation and Subsidiaries (the
"Pension Plan"), a copy of the summary plan description of which has
been provided to Executive, in accordance with the provisions of the
Plan, as amended from time to time.
(B) EMPLOYEES' SALARY SAVINGS RETIREMENT PLAN. Executive will
be entitled to participate in the FirstMerit Corporation and
Subsidiaries Employees' Salary Savings Retirement Plan (the "401(k)
Plan"), a copy of the summary plan description of which has been
provided to Executive, in accordance with the provisions of the Plan,
as amended from time to time.
(C) SERP. Executive will participate in the FirstMerit
Corporation Executive Supplemental Retirement Plan ("Plan") in
accordance with the provisions of the Plan (as may be amended from time
to time) and the provisions of the Membership Agreement entered into by
FirstMerit and Executive in connection with the Plan (the Plan and
Membership Agreement collectively known as the "SERP"). A copy of the
SERP has been provided to Executive. The Membership Agreement provides
that Executive may receive a lump sum cash payment as his benefit under
the SERP in the amount of the greater of (i) the Actuarial Equivalent
(as defined in the SERP) of the Monthly Retirement Income (also as
defined in the SERP) to which Executive is entitled under the terms of
the SERP, or (ii) One Million Four Hundred Twenty Six Thousand Seven
Hundred Sixty Nine Dollars ($1,426,769.00), provided in either case
that Executive is employed under this Agreement on the Expiration Date.
Such amounts payable under the SERP to the Executive, pursuant to the
terms of the SERP, shall be reduced by amounts paid to Executive as
provided in the SERP.
(D) TOP HAT PLAN. Executive will be entitled to participate in
the FirstMerit Corporation Unfunded Supplemental Benefits Plan (the
"Top Hat Plan"), a copy of which has been provided to Executive, in
accordance with the provisions of the Plan, as amended from time to
time. Executive's benefits under the Top Hat Plan shall be calculated
for all purposes based upon Executive's continuous employment at least
through the Expiration Date, unless Executive's employment is
terminated prior thereto under circumstances described in Section 6.2.
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<PAGE> 4
5.2 COMPENSATORY SEVERANCE BENEFIT. In the event that Executive's
employment shall terminate for any reason prior to the Expiration Date,
FirstMerit shall pay to Executive or his estate in a lump sum in cash, within 25
days after the Termination Date, an amount equal to Nine Hundred Eighty-Five
Thousand Dollars ($985,000.00).
5.3 CHANGE OF CONTROL SEVERANCE BENEFIT. In the event that Executive's
employment shall terminate following a Change of Control, which termination
occurs after the first anniversary of this Agreement but before the Expiration
Date, and under any circumstance other than as described in Section 6.2 or
Executive's Death, FirstMerit shall cause the acquiror to pay to Executive in a
lump sum in cash, within 25 days after the later of the date of such Change of
Control or the Termination Date, an amount equal to 200% of Executive's "base
amount" as determined under Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), less the aggregate present value of the payments or
benefits, if any, in the nature of compensation for the benefit of Executive,
arising under any plan or arrangement between FirstMerit and Executive, which
constitute "parachute payments" under Section 280G of the Code.
5.4 DISABILITY. Executive will be entitled to participate in
FirstMerit's Long-Term Disability Plan applicable to executive level employees
of FirstMerit, and in FirstMerit's Short-Term Illness Program, all in accordance
with the provisions of such programs as may be amended from time to time.
5.5 MISCELLANEOUS BENEFITS. Executive will be entitled to participate
in such hospitalization, life insurance, and other employee benefit plans and
programs, if any, as may be adopted by FirstMerit from time to time, in
accordance with the provisions of such plans and programs and on the same basis
as other full-time salaried employees of FirstMerit who participate in such
employee benefit plans (except to the extent that the benefits provided under
any of such plans or programs are expressly offset by any of the benefits
provided under or pursuant to this Agreement).
5.6 STOCK OPTIONS AND GRANTS. On the Commencement Date, FirstMerit will
make an award to Executive under and pursuant to the terms of the FirstMerit
1997 Stock Plan, a copy of which has been provided to Executive, of
non-qualified stock options ("NQSOs") for Twenty-two Thousand Five Hundred
(22,500) shares of FirstMerit Corporation common stock. The award will be made
pursuant to a Stock Option Agreement in the form and subject to the terms
customarily used by FirstMerit, but the terms of which will include the
following: the NQSOs will be issued at fair market value on the date of grant;
will be exercisable with respect to 5,000 shares on and after the first
anniversary of the Commencement Date, an additional 5,000 shares on and after
the second anniversary of the Commencement Date, and an additional 12,500 shares
on and after the Expiration Date. Notwithstanding the foregoing, all NQSOs under
this grant shall vest and become immediately exercisable if Executive's
employment is terminated for any reason other than any circumstance described in
Section 6.2. Once vested, the NQSOs will remain exercisable for a period ten
(10) years from the Commencement Date, notwithstanding that Executive's
employment terminates for any reason prior to the end of such period.
-4-
<PAGE> 5
5.7 INCOME TAX PREPARATION. For calendar years beginning with 1998,
FirstMerit will reimburse Executive for fees incurred in connection with
personal income tax preparation in an amount not to exceed Seven Hundred Fifty
Dollars ($750) per year.
5.8 TAXES AND WITHHOLDING. Executive shall be responsible for paying
all federal, state, municipal or local taxes payable by him with respect to any
benefits provided under this Section 5, and FirstMerit will, when required by
law or when otherwise appropriate or customary, withhold from the benefits or
other compensation amounts sufficient to satisfy such taxes.
5.9 EXECUTIVE PHYSICAL EXAMINATION. Approximately every two (2) years,
Executive will undergo an executive physical examination by physicians (not
including any physicians who have performed or are then performing medical
services for Executive) of the Cleveland Clinic or comparable facility. The
expenses of the physical examinations required under this Section (but not any
treatment in connection therewith), which are not otherwise covered by
FirstMerit-sponsored medical plans, will be borne by FirstMerit.
5.10 VACATION. Executive shall be entitled to four (4) weeks paid
vacation and ten (10) bank holidays per year.
5.11 REIMBURSEMENTS. Executive shall be entitled to reimbursement
privileges with respect to reasonable business expenses in accordance with
FirstMerit's standard reimbursement policy for executive employees of
FirstMerit.
5.12 COUNTRY CLUB DUES; AUTOMOBILE. FirstMerit shall pay on a timely
basis for the dues and reasonable expenses of Executive's membership and
participation in the country clubs that the Executive is a member as of April 5,
1998. The amounts that FirstMerit shall pay pursuant to this Section 5.12 shall
not substantially exceed the amounts that were paid for such benefits during the
twelve month period ending March 31, 1998 by Security First Corp. FirstMerit
agrees to buyout the lease for the automobile which as of April 5, 1998 is being
utilized by Executive for business and transfer the ownership of such automobile
to Executive.
5.13 BOARD OF DIRECTORS. The Board of Directors will appoint Executive
to the Board of Directors of FirstMerit, effective as of the Commencement Date.
Once Executive has become a Director, FirstMerit will agree to nominate
Executive at such times as necessary so that Executive remains a director of
FirstMerit during his employment by FirstMerit. Executive agrees, if asked by
the Board, to tender his resignation in the event he is no longer an employee
for any reason. Nothing in this Section shall require FirstMerit or its Board to
decline to nominate an existing Director at the expiration of such Director's
term.
-5-
<PAGE> 6
6. Termination
-----------
6.1 DEFINITIONS
(A) "CHANGE OF CONTROL" means a change in control of a nature
that would be required to be reported by persons or entities subject to
the reporting requirements of Section 14(a) of the Securities Exchange
Act of 1934 in response to item 5(f) of Schedule 14A of Regulation
14(A) as in effect on the date hereof, or successor provisions thereto,
provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any unaffiliated "person," "entity," or
"group" (as defined in Rule 13(d)-3 issued under the Securities
Exchange Act of 1934) directly or indirectly becomes the owner of
securities of FirstMerit representing thirty percent (30%) or more of
the combined voting power of FirstMerit's then outstanding securities
or (ii) at any time during any period of two (2) consecutive calendar
years individuals, who at the beginning of such period constitute the
Board of Directors of FirstMerit, cease for any reason to constitute at
least the majority of such Board unless the election, or the nomination
for election, by FirstMerit's shareholders of each new director was
approved by a vote of at least two-thirds of the directors still in
office who were directors of FirstMerit at the beginning of such two
(2)-year period.
(B) "TERMINATION DATE" means the date on which Executive's
employment with FirstMerit terminates for any reason.
(C) "TERMINATION OF EMPLOYMENT FOR CAUSE" means the
termination of Executive's employment by FirstMerit on account of (i)
intentional misconduct and/or gross negligence by Executive that has a
material adverse effect on FirstMerit, monetarily or otherwise, (ii)
Executive's personal dishonesty, (iii) incompetence, (iv) breach of a
fiduciary duty involving personal profit, (v) intentional failure to
perform stated duties, (vi) willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final
cease-and- desist order, or (ii) material breach of any provision of
this Agreement by Executive. No act by Executive shall be considered
intentional unless Executive acted or failed to act with an absence of
good faith and without a reasonable belief that his action or failure
to act was in the best interest of FirstMerit. Notwithstanding the
foregoing, there shall not be deemed to have been a Termination of
Employment for Cause unless and until there shall have been delivered
to Executive a copy of a resolution, duly adopted by the affirmative
vote of not less than a majority of the entire membership of the Board
stating that the Board believes the Executive has engaged in conduct
described in the preceding sentence.
(D) "TERMINATION OF EMPLOYMENT FOR GOOD REASON" means the
voluntary termination of Executive's employment by Executive for any of
the following reasons: (i) Executive is required to move to a new
principal work location that is more than 25 miles from Executive's
work location while with his prior employer; (ii) Executive's duties
under this Agreement are subject to a substantial reduction; (iii) the
material breach of this Agreement by FirstMerit, but only if such
breach is not corrected within 30-days after written notice to
FirstMerit detailing the breach; (iv) there is a substantial reduction
in the cash compensation, perquisites or vacation provided to Executive
by FirstMerit; (v)
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<PAGE> 7
significant reduction in Executive's responsibilities and status within
the FirstMerit organization, or a change in his title or office without
prior written consent of Executive; or (vi) involuntary discontinuance
of Executive's participation in any employee benefit plans maintained
by FirstMerit unless such plans are discontinued by reason of law or
loss of tax deductibility to FirstMerit with respect to contributions
to such plans, or are discontinued as a matter of FirstMerit policy
applied equally to all participants in such plans.
6.2 TERMINATION OF EMPLOYMENT UPON RESIGNATION OR FOR CAUSE. If
Executive's employment is terminated as a result of Executive's voluntary
resignation (other than Termination of Employment for Good Reason) or
Termination of Employment for Cause, Executive shall be entitled to receive only
Executive's Base Salary to which he was entitled through the Termination Date,
any unpaid bonus due with respect to the year prior to the year in which the
termination occurred, and such other payments and benefits to which he is
entitled under the terms of this Agreement and as may be available to him
through FirstMerit's benefit plans and policies.
6.3 TERMINATION UNDER OTHER CIRCUMSTANCES.
(A) If Executive's employment is terminated under
circumstances other than as described in Section 6.2, and the Termination Date
is prior to the Expiration Date, Executive's Base Salary and bonus as calculated
through the Expiration Date shall be payable in a lump sum in cash within 25
days after the Termination Date, and all other benefits and entitlements
described in Sections 5.1, 5.2, 5.3, 5.4, 5.5 and 5.6 (including credit for
Years of Service under the Pension Plan, 401(k) Plan and the Top Hat Plan) shall
continue at FirstMerit's expense through the Expiration Date.
(B) If Executive's employment is terminated after the
Expiration Date, Executive shall be entitled to receive his Base Salary and
bonus to which he was entitled through the Termination Date and such other
payments and benefits to which he is entitled under the terms of this Agreement
and as may otherwise be available to him through FirstMerit's benefit plans and
policies.
6.4 EFFECT OF TERMINATION. Upon termination of Executive's employment,
the obligations of each of the parties under this Agreement shall expire as of
the Termination Date, including, without limitation, the obligations of
FirstMerit to pay any compensation to Executive, except to the extent otherwise
specifically provided in this Agreement. Notwithstanding the foregoing, the
obligations contained in Section 7 of this Agreement and the provisions hereof
relating to the obligations of FirstMerit described in the preceding sentence,
shall survive the termination or expiration of this Agreement in accordance with
the terms set forth therein.
7. Confidentiality and Non-Compete
-------------------------------
-7-
<PAGE> 8
7.1 NON-DISCLOSURE. Executive expressly covenants and agrees that he
will not reveal, divulge or make known to any person, firm, company or
corporation any secret or confidential information of any nature concerning
FirstMerit or its business, or anything connected therewith.
7.2 RETURN OF MATERIALS. Executive agrees to deliver or return to
FirstMerit upon termination or expiration of this Agreement or as soon
thereafter as possible, all non-public information, whether written or stored in
media used in computer systems or otherwise, and any other similar items
furnished by FirstMerit or prepared by Executive in connection with his services
hereunder. Executive will retain no copies thereof after termination of this
Agreement or Executive's employment.
7.3 NON-COMPETE. If Executive terminates his employment other than for
Good Reason during the Term, or if FirstMerit terminates Executive's employment
for Cause during the Term, then, until the first anniversary of the Termination
Date, Executive shall not become associated, directly or indirectly, with any
entity, whether as a shareholder (other than as a holder of not more than one
percent (1%) of the outstanding voting shares of any publicly traded company),
principal, partner, employee or consultant (such activities collectively
referred to as an "Associate"), that is actively engaged in any business which
is in competition with FirstMerit or any of its subsidiaries or affiliates in
any geographic area in which FirstMerit or any of its subsidiaries or affiliates
does business at the date of such termination.
7.4 INJUNCTIVE RELIEF. Executive acknowledges that it is impossible to
measure in money the damages that will accrue to FirstMerit by reason of
Executive's failure to observe any of the obligations imposed on him by this
Section 7. Accordingly, if FirstMerit shall institute an action to enforce the
provisions hereof, Executive hereby waives the claim or defense that an adequate
remedy at law is available to FirstMerit, and Executive agrees not to urge in
any such action the claim or defense that such remedy at law exists.
8. Miscellaneous
-------------
8.1 ASSIGNMENT. This Agreement shall be binding upon the parties
hereto, their respective heirs, personal representatives, executors,
administrators and successors.
8.2 GOVERNING LAW. This Agreement shall be construed under and governed
by the internal laws of the State of Ohio. In the event that any provision of
this Agreement shall be held to be void or unenforceable by a court of competent
jurisdiction, this Agreement shall not be rendered null and void thereby but
shall be construed and enforced as if such void or unenforceable provision were
not originally a part of this Agreement. The parties agree to the sole
jurisdiction and venue of the Common Pleas Court in Summit County, Ohio, for any
disputes arising hereunder.
8.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties concerning the employment of Executive by FirstMerit, and any oral
or written statements, representations, agreements or understandings made or
entered into prior to or contemporaneously
-8-
<PAGE> 9
with the execution of this Agreement, are hereby rescinded, revoked and rendered
null and void by the parties.
8.4 ATTORNEYS' FEES. In the event that a dispute should arise between
the parties regarding the performance, interpretation or enforcement of this
Agreement, the prevailing party in such dispute, in addition to the other
remedies to which it is entitled, shall also be entitled to receive court costs
and reasonable attorneys' fees.
8.5 NO MITIGATION. Executive shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
Executive as the result of employment by another employer, by retirement income
after the Termination Date, or otherwise.
8.6 HEADINGS. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed the day and year above first written.
FIRSTMERIT CORPORATION
By:
----------------------------------
John R. Cochran, Chairman and
Chief Executive Officer
-------------------------------------
Charles F. Valentine
-9-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF FIRSTMERIT CORPORATION
Citizens Investment Corporation Ohio corporation
Citizens Savings Corporation of Stark County Ohio corporation
FirstMerit Bank, N.A. National Banking Association
- Abell & Associates, Inc. Ohio corporation
- FirstMerit Leasing Company Ohio corporation
- FirstMerit Insurance Agency, Inc. Ohio corporation
- FirstMerit Mortgage Corporation Ohio corporation
- FirstMerit Securities, Inc. Ohio corporation
FirstMerit Community Development Corporation Ohio corporation
FirstMerit Credit Life Insurance Company Arizona corporation
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-65288, No. 33-65320 and No. 333-4372 of Security First Corp. on Forms S-8 of
our report dated April 22, 1998 incorporated by reference in the Annual Report
on Form 10-K of Security First Corp. for the year ended March 31, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Cleveland, Ohio
June 19, 1998
<PAGE> 2
EXHIBIT 23.1
Consent of Deloitte & Touche LLP
We consent to the use in this Registration Statement of FirstMerit Corporation
on Form S-4 of our report dated April 22, 1998, incorporated by reference in the
Annual Report on Form 10-K of Security First Corp. for the year ended March 31,
1998, and to the use of our report dated April 22, 1998 appearing in the
Prospectus and Proxy Statement, which is part of this Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Prospectus and Proxy Statement.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
June 19, 1998
<PAGE> 1
EXHIBIT 23.2
Consent of Coopers & Lybrand, L.L.P.
We consent to incorporation by reference in Registration Statement (Form S-4),
of our report dated January 15, 1998, relating to the consolidated balance
sheets of FirstMerit Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three year period ended December 31,
1997, which report appears in the 1997 Annual Report on Form 10-K of FirstMerit
Corporation, as amended by Form 10-K/A filed on April 30, 1998. We also consent
to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND, L.L.P.
Akron, Ohio
June 19, 1998
<PAGE> 1
EXHIBIT 23.3
Consent of Charles Webb & Company
We consent to the inclusion in this Registration Statement on Form S-4 of
FirstMerit Corporation of our opinion set forth as Appendix B to the Prospectus
and Proxy Statement, which is part of the Registration Statement, and to the
reference to our firm and summarization of our opinion in the Prospectus and
Proxy Statement under the captions "Opinion of Security First's Financial
Advisor."
/s/ CHARLES WEBB & COMPANY
Washington, D.C.
June 22, 1998
<PAGE> 1
EXHIBIT 24
FIRSTMERIT CORPORATION
LIMITED POWER OF ATTORNEY
REGISTRATION STATEMENT ON FORM S-4
The undersigned directors and officers of FirstMerit Corporation (the
"Company") hereby constitute and appoint Terry E. Patton, and/or Kevin C.
O'Neil, and each of them, with full power of substitution and resubstitution, as
attorneys or attorney of the undersigned, to execute and file under the
Securities Act of 1933 a Registration Statement on Form S-4 relating to the
registration of shares of the Common Stock of the Company relating to the
acquisition of Security First Corp., and any and all amendments and exhibits
thereto, including pre-and post-effective amendments, and any and all
applications or other documents to be filed with the Securities and Exchange
Commission, National Association of Securities Dealers and any state securities
agencies pertaining to such registration, with full power and authority to do
and perform any and all acts and things whatsoever necessary, appropriate or
desirable to be done in the premises, or in the name, place and stead of the
said directors and officers, hereby ratifying and approving the acts of said
attorneys and any of them and any such substitute.
Effective the 18th day of June, 1998, unless otherwise indicated below.
<TABLE>
<S> <C>
/s/ John R. Cochran /s/ Jack R. Gravo
- ------------------------------------- ----------------------------------------------------
John R. Cochran Jack R. Gravo
President and Chief Executive Officer Executive Vice President, Finance and Administration
(Chief Financial Officer and Chief Accounting Officer)
/s/ Karen S. Belden /s/ R. Cary Blair
- ------------------------------------- ----------------------------------------------------
Karen S. Belden, Director R. Cary Blair, Director
/s/ John C. Blickle
- ------------------------------------- ----------------------------------------------------
John C. Blickle, Director Sid A. Bostic, Director
/s/ Robert W. Briggs /s/ Richard Colella
- ------------------------------------- ----------------------------------------------------
Robert W. Briggs, Director Richard Colella, Director
/s/ Elizabeth A. Dalton /s/ Terry L. Haines
- ------------------------------------- ----------------------------------------------------
Elizabeth A. Dalton, Director Terry L. Haines, Director
/s/ Clifford J. Isroff /s/ Philip A. Lloyd II
- ------------------------------------- ----------------------------------------------------
Clifford J. Isroff, Director Philip A. Lloyd, II, Director
/s/ Robert G. Merzweiler /s/ Stephen E. Myers
- ------------------------------------- ----------------------------------------------------
Robert G. Merzweiler, Director Stephen E. Myers, Director
/s/ Roger T. Read /s/ Justin T. Rogers
- ------------------------------------- ----------------------------------------------------
Roger T. Read, Director Justin T. Rogers, Director
/s/ Richard N. Seaman
- -------------------------------------
Richard N. Seaman
</TABLE>
<PAGE> 1
EXHIBIT 99
Form of Proxy -- Security First Corp.
<PAGE> 2
REVOCABLE PROXY
SECURITY FIRST CORP.
ANNUAL MEETING OF STOCKHOLDERS, JULY 30, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SECURITY FIRST
CORP.
The undersigned hereby appoints Charles F. Valentine and Austin J. Mulhern,
and each of them, proxies with power of substitution to vote on behalf of the
stockholders of Security First Corp. on July 30, 1998, and any adjournments and
postponements thereof, with all powers that the undersigned would possess if
personally present, with respect to the proposals set forth on the reverse side
hereof. The affirmative vote of a majority of the shares represented at the
meeting may authorize the adjournment of the meeting; provided, however, that no
proxy which is voted against a proposal will be voted in favor of adjournment to
solicit further proxies for such proposal.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED ON THE
REVERSE SIDE HEREOF, BUT IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED
"FOR" APPROVAL OF ALL PROPOSALS. THE PROXIES MAY VOTE IN THEIR DISCRETION AS TO
OTHER MATTERS WHICH MAY COME BEFORE THE MEETING.
The undersigned acknowledges receipt from Security First Corp prior to the
execution of this proxy of Notice of the Meeting and a Prospectus and Proxy
Statement.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS.
I. The approval and adoption of the Affiliation and Plan of Merger dated April
5, 1998, by and between FirstMerit Corporation and Security First Corp.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
II. The election of AUSTIN J. MULHERN and JAMES P. MYERS as directors of
Security First Corp. each for a term of three years.
[ ] FOR [ ] WITHHOLD [ ] FOR ALL EXCEPT
INSTRUCTIONS: TO VOTE FOR ALL NOMINEES MARK THE BOX "FOR" WITH AN "X". TO
WITHHOLD YOUR VOTE FOR ALL NOMINEES MARK THE BOX "WITHHOLD" WITH AND "X". TO
WITHHOLD YOUR VOTE FOR AN INDIVIDUAL NOMINEE MARK THE BOX "FOR ALL EXCEPT" WITH
AN "X" AND WRITE THE NAME OF THE NOMINEE ON THE LINE PROVIDED BELOW FOR WHOM YOU
WISH TO WITHHOLD YOUR VOTE.
(Continued and to be signed on the reverse side hereof.)
(Proxy -- continued from other side)
III. Ratification of the appointment of Deloitte & Touche LLP as the
Corporation's independent accountants for the fiscal year ending March 31,
1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
A majority of the proxies or substitutes present at the meeting may exercise all
powers granted hereby.
Please sign exactly as your
name appears on this proxy.
If signing for estates,
trusts, corporations or
partnerships, title or
capacity should be stated.
If shares are held jointly,
each holder should sign.
Date: , 1998
Signature:
Signature:
IMPORTANT! PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
