<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[Fee Required]
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No fee required]
For the transition period from ___________________ to ________________
Commission file number 0-17894
FIRSTFEDERAL FINANCIAL SERVICES CORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1622711
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
135 EAST LIBERTY STREET, WOOSTER, OHIO 44691
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330-264-8001)
- --------------------------------------------------------------------------------
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
<TABLE>
<CAPTION>
Title of each class: Name of each exchange on which registered:
- -------------------- ------------------------------------------
<S> <C>
Common Stock, par value $1.00 per share Nasdaq National Market
6 1/2% Cumulative Convertible Preferred
Stock, Series B, without par value Nasdaq National Market
</TABLE>
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the Nasdaq Stock Market as of March 20, 1998, was
$183,633,366. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of March 20, 1998, there were issued and outstanding 6,749,366
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV of Form 10-K - Portions of the Annual Report to
Shareholders for the fiscal year ended December 31, 1997.
Part III of Form 10-K - Portions of the Proxy Statement for 1998 Annual
Meeting of Shareholders.
<PAGE> 2
Note 1: In calculating the market value of securities held by non-affiliates of
Registrant as disclosed on the cover page of this Form 10-K, Registrant has
treated as securities held by affiliates as of December 31, 1997, voting stock
owned of record by its directors and principal executive officers and
shareholders owning greater than 10% of the voting stock.
FIRSTFEDERAL FINANCIAL SERVICES CORP
1997 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART III
Item 10. Directors and Executive Officers of the Registrant..........................................17
Item 11. Executive Compensation......................................................................17
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................17
Item 13. Certain Relationships and Related Transactions..............................................17
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................18
</TABLE>
<PAGE> 3
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the Board
of Directors of FirstFederal Financial Services Corp ("FirstFederal") as of
December 31, 1997.
<TABLE>
<CAPTION>
DIRECTOR TERM TO
NAME AGE POSITIONS HELD IN FIRSTFEDERAL SINCE(1) EXPIRE
- -------------------------------- ------- ------------------------------- ------------ -----------
<S> <C> <C> <C> <C>
R. Victor Dix 63 Director 1971 1998(2)
Daniel H. Plumly 44 Director 1987 1998(2)
L. Dwight Douce 49 Director, Executive Vice President 1989 1998(2)
and Secretary
David J. Olderman 62 Director 1997 1998(2)
David C. Vernon 57 Director 1997 1998(2)
Joseph P. Ciolek 52 Director 1997 1998(2)
Gary G. Clark 48 Chairman of the Board and Chief 1983 1999
Executive Officer
Steven N. Stein 42 Director 1989 1999
Ronald A. James, Jr. 48 Director 1996 1999
Richard E. Herald 68 Director 1977 2000
Gust B. Geralis 41 Director 1988 2000
</TABLE>
(1) Includes service as a director of Signal Bank, a wholly owned subsidiary of
FirstFederal, formerly known as First Federal Savings and Loan Association
of Wooster.
(2) Directors Dix, Plumly, Douce and Olderman will each be nominated for a
three-year term to expire in 2001 at First Federal's Annual Meeting of
Shareholders to be held in June 1998 (the "Annual Meeting"). In addition,
at the Annual meeting, Director Vernon will be nominated for a two-year
term to expire in 2000 and Director Ciolek will be nominated for a one year
term to expire in 1999.
The business experience of each of FirstFederal's directors for at least
the past five years is as follows:
R. Victor Dix. Mr. Dix is the President and Publisher of THE DAILY RECORD
and Chairman and Director of Dix Communications. Mr. Dix has served as a
Director of FirstFederal since its formation in 1989 and as a Director of Signal
Bank since 1971.
Daniel H. Plumly. Mr. Plumly has been engaged in the private practice of
law with the firm of Critchfield, Critchfield & Johnston, Ltd. since 1978 and
has been a principal in the firm since 1981. Mr. Plumly has served as a Director
of FirstFederal since its formation in 1989 and as a Director of Signal Bank
since 1987.
L. Dwight Douce. In April 1994, Mr. Douce was named Executive Vice
President of FirstFederal. Mr. Douce has served as a Director and Secretary of
FirstFederal since its formation in 1989 and served as Treasurer of FirstFederal
from 1989 to 1997. In June 1996, Mr. Douce was named President and Chief
Operating Officer of Signal Bank. Prior thereto, Mr. Douce served as Executive
Vice President of Signal Bank since August 1993, and Chief Financial Officer of
Signal Bank since 1983. A Director of Signal Bank since 1989, Mr. Douce has 14
years of experience with Signal Bank.
David J. Olderman. From 1988 to October 1997, Mr. Olderman served as
Chairman and Chief Executive Officer of Carret, an investment company which
manages approximately $1 billion in customer assets. Mr. Olderman is no longer
involved in the day-to-day affairs of Carret, but will continue to serve as
Chairman in an advisory capacity until
<PAGE> 4
October 1998 as part of Carret's transition to new management. Mr. Olderman is a
director of Grief Bros., Inc., a manufacturer of paper board products located in
Delaware, Ohio.
David C. Vernon. Mr. Vernon has served as Chairman, President and Chief
Executive Officer of Summit Bank since 1991. Summit Bank was acquired by
FirstFederal in July 1997.
Joseph P. Ciolek. Mr. Ciolek has served as President of Alliance Corporate
Resources, Inc. ("Alliance") since 1989. Alliance was acquired by Signal Bank in
July 1997.
Gary G. Clark. Mr. Clark succeeded Richard E. Herald as Chairman of the
Board of FirstFederal and Signal Bank in April 1994. On August 1, 1993, Mr.
Clark succeeded Richard E. Herald as Chief Executive Officer of FirstFederal and
Signal Bank. Mr. Clark has served as a Director of FirstFederal since its
formation in 1989 and President of FirstFederal from the time of its formation
through January 1998. He has also been a Director of Signal Bank since 1983 and
President and Chief Operating Officer of Signal Bank from 1989 until reaching
his current positions. Mr. Clark has 20 years of experience with Signal Bank.
Steven N. Stein. Mr. Stein has served as President of the Belvedere
Corporation, a real estate company, located in Cincinnati, Ohio, since April
1990 and, since August 1995, as Chairman of Financial Stocks, Inc., the general
partner of an investment partnership. Prior thereto he was an attorney with the
law firm of Taft, Stettinius & Hollister, also based in Cincinnati. Mr. Stein
has served as a Director of FirstFederal and Signal Bank since 1989.
Ronald A. James, Jr. Since 1980, Mr. James has served as President of MCi,
which was acquired by FirstFederal in April 1996.
Richard E. Herald. Mr. Herald served as Chairman of the Board of
FirstFederal and Signal Bank from 1989 until his retirement from such positions
in April 1994. Mr. Herald retired from his position as Chief Executive Officer
of FirstFederal and Signal Bank in 1993. From 1977 to February 1989, Mr. Herald
served as President and Chief Executive Officer of Signal Bank.
Gust B. Geralis. Mr. Geralis is a certified public accountant and the
President of Mighty Associates Inc., an automotive service company located in
Medina, Ohio. Mr. Geralis has served as a Director of FirstFederal since its
formation in 1989. Mr. Geralis has also served as a Director of Signal Bank
since 1988.
The business experience of the executive officers of FirstFederal who are
not also directors of FirstFederal is provided under Item 1 of Part I of this
Report and incorporated by reference herein.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires FirstFederal's directors and
executive officers, and persons who own more than 10% of a registered class of
FirstFederal's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of FirstFederal Common Stock and
other equity securities of FirstFederal. Officers, directors and greater than
10% stockholders are required by SEC regulations to furnish FirstFederal with
copies of all Section 16(a) forms they file.
To FirstFederal's knowledge, based solely on a review of the copies of such
reports furnished to FirstFederal and written representations that no other
reports were required during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with, except for the
inadvertent failure to timely file a Form 3 by Director Olderman. A Form 3 was
subsequently filed by Mr. Olderman.
<PAGE> 5
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or granted to FirstFederal's Chief Executive Officer and to certain other
executive officers of FirstFederal whose salary and bonus for fiscal 1997
exceeded $100,000 (the "FirstFederal Named Executive Officers").
<TABLE>
<CAPTION>
==============================================================================================================================
SUMMARY COMPENSATION TABLE
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ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
----------------------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS AWARD(S) OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#)(1) ($) ($)(2)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gary G. Clark 1997 $208,000 $65,000 --- 10,000 --- 22,108
Chairman and Chief Executive 1996 195,000 80,000 --- 10,000 --- 5,802
Officer 1995 180,000 67,500 --- 11,000 --- 5,786
------------------------------------------------------------------------------------------------------------------------------
L. Dwight Douce 1997 $158,000 $25,000 --- 8,000 --- 17,056
Executive Vice President and 1996 135,000 45,000 --- 7,500 --- 5,600
Secretary 1995 115,000 34,500 --- 6,600 --- 4,718
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James J. Little(3) 1997 $138,000 $67,500 --- 18,000 --- 12,053
President and Chief Operating 1996 103,500 100,500 --- 5,000 --- 2,942
Officer 1995 33,500 --- --- 2,750 --- 37
==============================================================================================================================
</TABLE>
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(1) Options granted prior to 1997 have been adjusted for the 25% common stock
dividend paid on May 22, 1997 and the 10% common stock dividends paid on
May 22, 1996 and May 22, 1995 (the "Stock Dividends").
(2) Represents contributions under Signal Bank's 401(k) Savings and Investment
Plan (the "Signal Bank 401(k) Plan") and life insurance premiums paid by
Signal Bank on behalf of each of Messrs. Clark, Douce and Little, as
follows: 1997: 401(k) - $21,530, $16,695 and $11,941; life insurance
premiums - $578, $361 and $112; 1996: 401(k)- $4,500, $4,514 and $2,585;
life insurance premiums - $1,302, $1,086 and $359; and 1995: 401(k) -
$4,916, $3,848 and $0; life insurance premiums - $870, $870 and $37.
(3) Mr. Little became an officer of FirstFederal in July 1995. He became
President and Chief Operating Officer in January 1998 after serving as
Executive Vice President and Chief Financial Officer.
<PAGE> 6
The following table sets forth certain information concerning stock options
granted to the FirstFederal Named Executive Officers in 1997. No stock
appreciation rights were granted to the FirstFederal Named Executive Officers
during 1997.
<TABLE>
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=============================================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
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NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#)(1) YEAR ($/SH) DATE 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gary G. Clark 10,000 5.87% $37.50 06/17/07 $235,800 $ 597,700
- -----------------------------------------------------------------------------------------------------------------------------
L. Dwight Douce 8,000 4.70 37.50 06/17/07 188,640 478,160
- -----------------------------------------------------------------------------------------------------------------------------
James J. Little 18,000 10.57 37.50 06/17/07 424,440 1,075,860
=============================================================================================================================
</TABLE>
- -----------------------------
(1) Options become exercisable in full on June 17, 2000, except with respect to
the option granted to Mr. Little, which will become exercisable with
respect to 8,000 shares on June 17, 2000 and 10,000 shares on June 17,
2002.
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1997 held by the FirstFederal Named
Executive Officers, with adjustments for those options awarded prior to the
Stock Dividends.
<TABLE>
<CAPTION>
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)(2)
--------------------------------------------------------------
SHARES ACQUIRED VALUE REALIZED
NAME ON EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gary G. Clark 3,182 $107,329 41,146 36,250 $1,482,081 $734,962
- ---------------------------------------------------------------------------------------------------------------------------
L. Dwight Douce --- --- 23,458 25,622 830,008 494,023
- ---------------------------------------------------------------------------------------------------------------------------
James J. Little --- --- --- 27,687 --- 351,351
===========================================================================================================================
</TABLE>
- -----------------------------
(1) Represents the difference between the fair market value of the shares of
FirstFederal Common Stock acquired upon exercise (based upon the closing
price per share on the Nasdaq Stock Market on the date of exercise) and the
aggregate exercise price of each option.
(2) Represents the difference between the fair market of the shares of
FirstFederal Common Stock underlying the options on December 31, 1997
(based upon the closing price per share on the Nasdaq Stock Market on
December 31, 1997) and the aggregate exercise price of each option.
<PAGE> 7
EMPLOYMENT AGREEMENTS. Signal Bank has entered into employment agreements
with Messrs. Clark, Douce and Little. The employment agreements provide for an
annual base salary in an amount not less than each individual's respective
current salary and provide for a salary review by the Signal Bank Board not less
often than annually. The agreements also provide for termination upon the
employee's death, for cause or in certain other events specified in the
agreements. The employment agreements are also terminable by the employee upon
90 days written notice to Signal Bank.
The employment agreements provide for payment (in lieu of salary) to
Messrs. Clark, Douce and Little of an amount equal to 299% of their five year
average base compensation, respectively, in the event there is a "change in
control" of Signal Bank where employment terminates in connection with such
change in control or within 12 months thereafter. If the employment of Messrs.
Clark, Douce and Little had been terminated as of December 31, 1997 under
circumstances entitling them to severance pay as described above, they would
have been entitled to receive lump sum cash payments of approximately $682,000,
$440,000 and $612,000, respectively.
DIRECTOR COMPENSATION
Non-employee directors of FirstFederal receive a monthly retainer of $200,
except for Director David J. Olderman, who has declined to accept such
compensation; directors of FirstFederal who are also employees receive no
compensation for their service as directors of FirstFederal. On April 29, 1997,
each non-employee director of FirstFederal was granted an immediately
exercisable option to purchase 1,000 shares of FirstFederal Common Stock,
adjusted to 1,250 shares for the 25% stock dividend paid on May 22, 1997, at a
split-adjusted exercise price of $29.80 per share. Each non-employee director of
Signal Bank receives a monthly retainer of $850 and a fee of $500 for each
meeting of the Board of Directors of Signal Bank (the "Signal Bank Board")
attended. Directors Dix, Geralis, Herald, Plumly and Stein receive such
compensation for their services as members of the Signal Bank Board.
The FirstFederal Board has standing Mergers and Acquisitions, Stock Option
and Compensation and Benefits Committees. The Signal Bank Board also has a
Compensation and Benefits Committee, the members of which are the same as those
of the FirstFederal Board's Compensation and Benefits Committee and which
generally meets jointly with such committee, and an Audit and Compliance
Committee. These committees, and the compensation of their members, are
described below.
Mergers and Acquisitions Committee. The Mergers and Acquisitions Committee
is responsible for advising the FirstFederal Board as to merger and acquisition
opportunities. The present members of this Committee are Directors Gary G.
Clark, Chairman, Daniel H. Plumly, Steven N. Stein, David C. Vernon and L.
Dwight Douce. Non-employee members are compensated at the rate of $300 for each
meeting attended. This Committee met five times in 1997.
Stock Option Committee. The Stock Option Committee is responsible for
administering the Company's 1997 Omnibus Incentive Plan and 1994 Non-Employee
Director Stock Option Plan. The members of this Committee are Directors Steven
N. Stein (Chairman) and Gust B. Geralis. Chairman Stein received $400 and Mr.
Geralis received $300 for each meeting attended during 1997. This Committee met
five times during 1997.
Compensation and Benefits Committees. The FirstFederal and Signal Bank
Boards' Compensation and Benefits Committees are charged with reviewing and
maintaining various items related to compensation, and other types of benefits
such as health and medical insurance, life insurance, long-term disability
insurance, and such other benefits that may from time to time be authorized by
the FirstFederal and Signal Bank Boards, respectively. Directors Steven N. Stein
(Chairman), Gust B. Geralis and Daniel H. Plumly, each an outside director, are
the present members of the Compensation and Benefits Committees of the
FirstFederal and Signal Bank Boards. Members are compensated at the rate of $300
for the Chairman and $400 for each other member for attendance at committee
meetings. The Compensation and Benefits Committee of the FirstFederal Board met
three times during fiscal 1997 and the Compensation and Benefits Committee of
the Signal Bank Board met four times during fiscal 1997.
Audit and Compliance Committee. The Audit and Compliance Committee of the
Signal Bank Board is responsible for monthly review of reports developed by the
internal audit department and compliance department and for follow-up
<PAGE> 8
to determine that adequate action is taken to ensure correction of any problems
that have been identified. Other responsibilities of this Committee are to
recommend annually to the FirstFederal Board the engagement of an independent
auditing firm, to review the scope and results of the audit with the independent
auditors and to meet with internal and independent auditors as appropriate.
Monthly reports are made to the full Signal Bank Board by this Committee.
Current Committee members are Directors Gust B. Geralis (Chairman), Richard E.
Herald, R. Victor Dix and Daniel H. Plumly. Committee members are compensated at
the rate of $300 per meeting attended, except for the Chairman, who receives
$400 per meeting attended. The Audit and Compliance Committee met ten times
during 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Director Daniel H. Plumly, a member of the FirstFederal and Signal Bank
Boards' Compensation and Benefits Committees is a principal in the law firm of
Critchfield, Critchfield & Johnston, Ltd., Wooster, Ohio ("Critchfield").
Critchfield has provided legal services to Signal Bank for many years and to
FirstFederal since its incorporation in 1989. During 1997, compensation paid to
Critchfield for legal services totaled $900,448, as follows: FirstFederal -
$92,345; Signal Bank - $183,457; Signal Securitization Corp. (a subsidiary of
FirstFederal) - $265,150; Summit Bank - $16,115; MCi - $179,717; Alliance, a
subsidiary of Signal Bank; - $64,429; Signal Finance Co., a subsidiary of Signal
Bank, $10,288; all other subsidiaries of Signal Bank - $565; borrowers of Signal
Bank and the sellers of real estate in connection with the closing of real
estate loans made by Signal Bank - $88,382.
Mr. Plumly is also a partner in Heartland Title Agency. During 1997,
Heartland Title Agency received $25,726 from borrowers of Signal Bank and the
sellers of real estate for escrow services, premiums for title insurance, title
search fees and other matters relating to closing real estate loans.
<PAGE> 9
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1997, there were 6,725,535 shares of FirstFederal Common
Stock issued and outstanding.
The following table sets forth, as of December 31, 1997, certain
information as to (i) those persons who were known by management to be
beneficial owners of more than 5% of the outstanding shares of FirstFederal
Common Stock and (ii) the shares of FirstFederal Common Stock beneficially owned
by the directors, nominees and executive officers of FirstFederal as a group.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------------------------------- ----------------------------- ---------------
<S> <C> <C>
The Belden Brick Company, Robert F. Belden, Richard
F. Belden, Sr. and Joseph G. Belden, Sr.
700 Tuscarawas Street
Canton, Ohio 44702.................................. 808,502(1)(5)(7) 11.84%
Carret and Company, Inc.
560 Lexington Avenue
New York, New York 10022............................. 562,100(2) 8.36
Steven N. Stein
2211 Grandin Road
Cincinnati, Ohio 45208............................... 421,577(4)(5)(7) 6.22
Ronald A. James, Jr.
3735 South Duck Creek Road
North Jackson, Ohio 44451............................. 387,357(3)(7) 5.76
Directors, and executive officers as a group (13
persons).............................................. 1,108,419(6) 16.03%
</TABLE>
- ------------------
(1) As reported by The Belden Brick Company ("Belden Brick"), Robert F. Belden,
Richard F. Belden, Sr. and Joseph G. Belden, Sr. Belden Brick reported sole
voting and investment power as to 779,076 of the total of 808,502 shares
covered by the report and did not report shared voting or investment power
as to any shares. Robert F. Belden reported shared voting and investment
power as to 779,076 of such total number of shares and sole voting and
investment power as to 17,004 shares. Richard F. Belden, Sr. reported
shared voting and investment power as to 779,676 of such total number of
shares and sole voting and investment power as to 10,310 shares. Joseph G.
Belden, Sr. reported shared voting and investment power as to 779,076 of
such total number of shares and sole voting and investment power as to
2,112 shares. Of the total 808,502 shares, 100,872 represent shares of
FirstFederal Common Stock issuable upon conversion of shares of
FirstFederal's 6 1/2% Cumulative Convertible Preferred Stock, Series B (the
"Series B Preferred Stock"). Robert F., Richard F. and Joseph G. Belden
disclaimed beneficial ownership of the 779,076 shares of FirstFederal
Common Stock owned by Belden Brick. Richard F. Belden, Sr.
disclaimed beneficial ownership of the 10,310 shares owned by his wife.
(2) As reported by Carret and Company, Inc. ("Carret"). Carret reported sole
voting and investment power as to 82,292 and shared investment but no
voting power as to 179,808 of the total of 562,100 shares covered by
Carret's reports. Of such total, 56,985 represent shares of FirstFederal
Common Stock issuable upon conversion of 35,400 shares of FirstFederal's
Series B Preferred Stock. Carret disclaimed beneficial ownership as to
479,808 shares.
(3) As reported by Ronald A. James, Jr. Except as provided in footnote (7), Mr.
James reported sole voting and investment power as to all of such shares.
<PAGE> 10
(4) As reported by Steven N. Stein. Mr. Stein reported sole voting and
investment power as to 322,881 (except as provided in footnote (7)) and
shared voting and investment power as to 98,696 of the total of 322,881
shares covered by the report. Of such total, 39,810 represent shares of
FirstFederal Common Stock issuable upon conversion of shares of
FirstFederal's Series B Preferred Stock.
(5) Includes shares held directly, as well as 8,862 shares which are subject to
options currently exercisable.
(6) Includes shares held directly, as well as shares which are subject to
currently exercisable options, shares issuable upon conversion of shares of
Series B Preferred Stock, shares which are held in retirement accounts or
by certain members of the named individuals' families, and shares of
restricted stock over which shares the respective directors and officers
may be deemed to have sole or shared voting or investment power.
(7) Amounts for Messrs. James and Stein include 2,500 shares of restricted
stock awarded to each individual over which such individuals have sole
voting and no investment power.
The following table sets forth certain information regarding the beneficial
ownership of FirstFederal Common Stock by FirstFederal's directors and Named
Executive Officers. The following directors and officers beneficially owned more
than 1% of the shares of FirstFederal Common Stock outstanding as of December
31, 1997, as follows: Mr. Stein 6.22%, Mr. James 5.76%, Mr. Herald 1.0% and Mr.
Clark 1.0%. No other director or officer beneficially owned more than 1% of the
shares of FirstFederal Common Stock outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
SHARES OF
FIRSTFEDERAL
POSITIONS HELD IN FIRSTFEDERAL COMMON STOCK
NAME BENEFICIALLY OWNED(1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
R. Victor Dix Director 15,117(2)(3)
Daniel H. Plumly Director 18,811(2)(3)(4)
L. Dwight Douce Director, Executive Vice President 41,316(5)
and Secretary
David J. Olderman Director 17,016
David C. Vernon Director 46,710(6)
James J. Little President and Chief Operating 8,053(7)
Officer
Joseph P. Ciolek Director 1,241
Richard E. Herald Director 61,002(3)(8)
Gust B. Geralis Director 18,035(3)
Gary G. Clark Chairman of the Board and Chief 65,508(5)
Executive Officer
Steven N. Stein Director 421,577(2)(3)(9)
Ronald A. James, Jr. Director 387,357(9)
</TABLE>
- -----------------------------
(1) Includes shares held directly, as well as shares which are held in
retirement accounts or by certain members of the named individuals'
families, over which shares the respective directors may be deemed to have
sole or shared voting or investment power, including shares of restricted
stock over which the respective directors have sole voting but no
investment power.
(2) Includes with respect to Messrs. Dix, Plumly and Stein, 168, 672 and 39,810
shares of FirstFederal Common Stock, respectively, issuable upon conversion
of shares of FirstFederal's Series B Preferred Stock.
<PAGE> 11
(3) Includes 8,862 shares of FirstFederal Common Stock each with respect to
Messrs. Dix, Plumly, Herald, Geralis and Stein, subject to presently
exercisable stock options and 2,500 shares of restricted stock awarded to
each of the aforementioned directors over which such directors have sole
voting but no investment power.
(4) Excludes 812 shares held in the Individual Retirement Account of Mr.
Plumly's wife, as to which Mr. Plumly disclaims beneficial ownership.
(5) Includes with respect to Messrs. Clark and Douce, 41,146 and 23,458 shares
of FirstFederal Common Stock, respectively, subject to presently
exercisable stock options and 10,000 and 7,500 shares of restricted stock,
respectively, over which Mr. Clark and Mr. Douce have sole voting but no
investment power.
(6) Includes 35,855 shares of FirstFederal Common Stock subject to currently
exercisable options. Excludes 292 shares held by Mr. Vernon's wife and 92
shares held in a UGMA account of which Mr. Vernon is custodian, of which
Mr. Vernon disclaims beneficial ownership.
(7) Includes 5,000 shares of restricted stock awarded to Mr. Little over which
Mr. Little has sole voting but no investment power.
(8) Does not include 7,027 shares of FirstFederal Common Stock beneficially
owned by Wayne Mutual Insurance Co., of which Mr. Herald is a director, as
to which shares Mr. Herald disclaims beneficial ownership.
(9) Includes 2,500 shares of restricted stock awarded to each of Messrs. Stein
and James, over which such directors have sole voting but no investment
power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to FirstFederal's policies, all transactions with senior
policy-making officers and directors must be on terms and conditions comparable
to those for similar transactions with non-affiliates. In addition, all loans
and other transactions between FirstFederal and such officers and directors will
be subject to approval by a majority of the FirstFederal Board, including a
majority of its disinterested directors. Signal Bank and Summit Bank continue to
follow a policy of granting to employees loans for the financing and improvement
of their personal residences as well as consumer loans on substantially the same
terms and collateral, except for interest rates and waiver of certain fees, as
those of comparable transactions prevailing at the time.
On December 31, 1997, Director Ronald A. James, Jr., owner of Hudson Mobile
Insurance Agency and Indy Mobile Insurance Agency, entered into an agreement
with Signal Bank for the sale of such agencies for approximately $1.1 million in
cash.
<PAGE> 12
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a)(1) Consolidated Financial Statements:
----------------------------------
The following information appears in the portions of the Corporation's Annual
Report to Shareholders for the year ended December 31, 1997, included as Exhibit
13 to this Report:
<TABLE>
<CAPTION>
PAGES IN
EXHIBIT 13
-----------
<S> <C>
Independent Auditors' Report............................................................................................14
Consolidated Statements of Financial Condition
December 31, 1997 and 1996..........................................................................................2
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995........................................................................3
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995........................................................................4
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995........................................................................5
Notes to Consolidated Financial Statements............................................................................6-14
</TABLE>
(a)(2) Financial Statement Schedules:
------------------------------
Financial statement schedules have been omitted because the required information
is contained in the consolidated financial statements and notes thereto, or
because such schedules are not required or applicable.
<PAGE> 13
(a)(3) Exhibits
--------
<TABLE>
<CAPTION>
REFERENCE TO
REGULATION PRIOR FILING OR
S-K EXHIBIT EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2+ Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession *
3(i)+ Articles of Incorporation **
3(ii)+ By-Laws ***
4+ Instruments defining the rights of security holders, See also Exhibit 3
including debentures ****
9+ Voting Trust Agreement None
10+ Material contracts
1987 Stock Option and Incentive Plan *****
Non-Employee Director Stock Option Plan *****
Management Incentive Compensation Plan ******
1997 Omnibus Incentive Plan ******
Summit Bancorp 1989 Stock Incentive Plan ******
1997 FirstFederal Employee Discount Stock Purchase Plan ******
Branch acquisition agreement with KeyBank, N.A.
dated as of May 16, 1997 *******
Employment agreement of G. Clark **
Employment agreement of L.D. Douce **
Employment agreement of J. Little **
Employment agreement of R. James **
Employment agreement of J. Park 10a
Employment agreement of D. Vernon 10b
11+ Statement regarding computation of per share earnings None
12+ Statement regarding computation of ratios Not required
13 Annual Report to Security Holders 13
16+ Letter regarding change in certifying accountants Not required
18+ Letter regarding change in accounting principles None
21+ Subsidiaries of the registrant 21
22+ Published report regarding matters submitted to vote of
security holders None
23+ Consents of Experts and Counsel 23.1 and 23.2
25+ Power of Attorney Not required
27+ Financial Data Schedule 27
99+ Additional Exhibits -- report of predecessor independent accountants 99
</TABLE>
+ Previously Filed
<PAGE> 14
*Filed as an exhibit to First Shenango Bancorp's Current Report on
Form 8-K filed with the Securities and Exchange Commission on February 23, 1998.
**Filed as exhibits to the Corporation's Annual report on Form
10-K for the fiscal year ended December 31, 1996, filed with the Securities and
Exchange Commission on March 25, 1997 (File No. 0-17594). Such previously filed
document is hereby incorporated herein by reference in accordance with Item 601
of Regulation S-K.
***Filed as exhibits to the Corporation's Registration Statement on
Form S-2 under the Securities Act of 1933, filed with the Securities and
Exchange Commission on September 28, 1992 (Registration No. 33- 50664). All of
such previously filed document is hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
****The Corporation agrees to file with the Securities and Exchange
Commission, if requested, a copy of the indenture relating to the Corporation's
$40,500,000 of 9.125% Subordinated Notes due March 15, 2004.
*****Filed as Exhibit 4 to the Corporation's Registration Statement
on Form S-8 under the Securities Act of 1933, filed with the Securities and
Exchange Commission on May 29, 1992 (Registration No. 33-48246). All of such
previously filed document is hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
******Filed on Form S-8 with the Securities and Exchange Commission
on October 6, 1997 (File No. 0-17894). All of such previously filed document is
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
*******Filed as Exhibit 10 to the Corporation's quarterly report on
Form 10-Q for the nine-month period ended September 30, 1997 filed with the
Securities and Exchange Commission (File No. 0-17894). All of such previously
filed document is hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
EXHIBITS ARE AVAILABLE BY WRITTEN REQUEST TO:
FIRSTFEDERAL FINANCIAL SERVICES CORP
CONNIE S. STROCK
VICE PRESIDENT
P.O. BOX 385
WOOSTER, OH 44691
(b) Reports on Form 8-K:
--------------------
None
<PAGE> 15
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
FIRSTFEDERAL FINANCIAL SERVICES CORP
Date: April 30, 1998 By: /s/ Jon W. Park
- -------------------- --------------------------
Jon W. Park
Chief Financial Officer
<PAGE> 1
Exhibit 13
FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 ($000's except per share data) 1997 1996 1995 1994 1993
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Net interest income $30,543 $25,511 $23,876 $22,727 $20,191
Net income 14,448 9,850 9,446 9,021 9,739
Net income applicable to common stock 12,864 8,154 7,660 7,657 8,733
PER COMMON SHARE DATA
Basic earnings per share $2.59 $1.82 $1.85 $1.86 $2.13
Diluted earnings per share 1.96 1.43 1.42 1.43 1.67
Dividends paid per common share 0.43 0.38 0.34 0.31 0.23
Dividend payout ratio, including preferred dividends 25.65% 34.20% 33.73% 28.84% 20.16%
END OF PERIOD FINANCIAL CONDITION DATA
Total assets $1,457,415 $1,080,383 $947,270 $835,667 $682,639
Net loans and leases 914,356 669,697 581,060 478,576 381,241
Deposits 981,675 671,918 574,041 502,527 453,821
Borrowings including advances 347,243 312,413 286,726 258,171 168,379
Shareholders' equity 104,735 85,287 76,533 69,246 53,673
SELECTED FINANCIAL RATIOS
Return on average assets 1.14% 0.95% 1.07% 1.21% 1.57%
Return on average shareholders' equity 15.14 12.20 12.90 14.17 19.62
Shareholders' equity to total assets 7.19 7.89 8.08 8.29 7.86
Net interest margin 2.62 2.60 2.78 3.17 3.40
Total nonperforming assets to total assets 0.32 0.39 0.20 0.43 0.58
Allowance for loan losses to nonperforming assets 119.07 69.91 158.41 89.62 114.69
==================================================================================================================================
</TABLE>
See accompanying Consolidated Financial Statements and notes. Non-recurring
expenses of $1.2 million ($1 million after tax) reflecting Summit Bank
acquisition transaction costs were recorded in 1997. Non-recurring expenses of
$3.3 million ($2.2 million after tax) were recorded in 1996 for the one-time
assessment to recapitalization the Savings Association Insurance Fund.
MARKET INFORMATION
COMMON STOCK
The Corporation's common stock is traded on the NASDAQ Stock Market. At December
31, 1997, its 6,725,535 outstanding shares were owned by approximately 1,800
shareholders of record. The closing price on December 31, 1997 was $44.00. The
Corporation's current trading symbol remains "FFSW."
PREFERRED STOCK
The Corporation's 6 1/2% Cumulative Convertible Preferred Stock, Series B, is
traded on the NASDAQ Stock Market. At December 31, 1997 there were 429,892
shares outstanding which were held by approximately 85 shareholders of record.
The closing price on December 31, 1997 was $74.00. For its preferred stock, The
Corporation's trading symbol remains "FFSWO." The Corporation's 7% Cumulative
Convertible Preferred Shares, Series A, has been redeemed by the Corporation;
the Series A shares had been traded under the symbol "FFSWP."
HIGH AND LOW STOCK PRICES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK SERIES A PREFERRED STOCK SERIES B
High Low Dividend High Low Dividend High Low Dividend
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997
1st Qtr. $31.40 $28.90 $0.10 $92.94 $85.00 $0.4375 $51.75 $47.50 $0.4063
2nd Qtr. $42.00 $26.80 $0.11 $123.00 $78.50 $0.4375 $66.00 $43.50 $0.4063
3rd Qtr. $43.00 $40.25 $0.11 N/A N/A N/A $69.50 $65.00 $0.4063
4th Qtr. $48.13 $41.00 $0.11 N/A N/A N/A $82.00 $68.00 $0.4063
1996
1st Qtr. $18.73 $17.46 $0.09 $55.00 $52.00 $0.4375 $30.00 $28.00 $0.4063
2nd Qtr. $23.40 $18.00 $0.09 $66.75 $53.00 $0.4375 $39.00 $28.50 $0.4063
3rd Qtr. $25.20 $23.40 $0.10 $74.00 $66.50 $0.4375 $41.63 $37.00 $0.4063
4th Qtr. $32.00 $24.20 $0.10 $89.50 $72.50 $0.4375 $50.88 $40.75 $0.4063
===================================================================================================================================
</TABLE>
Market prices and dividends per share information on common stock have been
adjusted to reflect the 10% stock dividend effective May 22, 1996, and the 25%
stock dividend effective May 22, 1997.
Exhibit 13, Page 1
<PAGE> 2
FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
December 31: ($000's) 1997 1996
==============================================================================================================================
ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 32,323 $ 26,012
Securities available for sale 253,809 165,524
Securities held to maturity(a) 70,959 84,984
Other short term investments 19,216 9,000
Loans held for sale 86,955 88,982
Loans and leases:
Residential mortgage loans 506,113 534,046
Commercial loans 45,293 4,850
Commercial mortgage loans 72,001 17,370
Commercial lease financing 41,909 --
Finance contracts 4,585 --
Manufactured housing loans 110,827 38,840
Consumer loans 139,166 77,507
Allowance for credit losses (5,538) (2,916)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 914,356 669,697
Premises and equipment, net 15,942 10,386
Intangible assets 32,062 10,572
Other assets 31,793 15,226
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,457,415 $1,080,383
==============================================================================================================================
LIABILITIES:
- ------------------------------------------------------------------------------------------------------------------------------
Deposits:
Non-interest bearing demand $ 47,574 $ 21,268
Interest checking 129,577 64,863
Savings 158,370 143,382
Money market 34,881 14,464
Certificates of $100,000 or more 164,349 82,122
Certificates and other time deposits 446,924 345,819
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 981,675 671,918
Short term borrowings 98,032 93,265
Long term borrowings 249,211 219,148
Other liabilities 23,762 10,765
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,352,680 995,096
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
- ------------------------------------------------------------------------------------------------------------------------------
Preferred stock(b) 9,917 22,693
Common stock(c) 7,070 4,053
Additional paid-in capital 44,584 29,568
Retained earnings 45,249 32,756
Treasury stock, at cost (1,751) (2,637)
Securities equity valuation account (334) (1,146)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 104,735 85,287
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,457,415 $1,080,383
==============================================================================================================================
<FN>
(a) Market value $71,059 in 1997 and $83,958 in 1996.
(b) Preferred stock, no par value; authorized 1,500,000 shares; Series B
429,892 and 479,327 issued and outstanding, respectively. Series A 498,287
issued and outstanding in 1996.
(c) Common stock, $1.00 par value; authorized 20,000,000 shares; 6,725,535 (net
of 343,580 treasury shares) and 4,530,887 (net of 535,605 treasury shares),
respectively.
</TABLE>
See accompanying notes to consolidated financial statements.
Exhibit 13, Page 2
<PAGE> 3
FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
For the years ended December 31: ($000's except per share data) 1997 1996 1995
============================================================================================================================
INTEREST INCOME:
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans and leases $68,481 $56,274 $42,841
Securities available for sale 15,288 11,554 12,895
Securities held to maturity 5,686 5,288 9,084
Other 638 443 102
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 90,093 73,559 64,922
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
- ----------------------------------------------------------------------------------------------------------------------------
Interest on deposits:
Interest checking 1,701 1,192 942
Savings 4,355 4,069 3,863
Money market 1,043 483 424
Certificates of $100,000 or more 6,190 4,001 2,116
Certificates and other time deposits 22,233 19,398 16,773
- ----------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 35,522 29,143 24,118
Short-term borrowings 6,968 4,915 3,555
Long-term debt 17,060 13,990 13,373
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 59,550 48,048 41,046
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 30,543 25,511 23,876
Provision for credit losses 842 360 ----
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 29,701 25,151 23,876
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Manufactured housing income 16,001 11,640 ----
Mortgage banking income 5,168 3,515 2,610
Customer service fee income 4,804 1,854 495
Net securities gains 1,175 397 384
Other 2,137 523 678
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 29,285 17,929 4,167
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
- ----------------------------------------------------------------------------------------------------------------------------
Personnel 16,469 10,938 5,763
Net occupancy expense 3,097 1,975 1,676
Outside services, data processing and communications 3,487 2,344 1,727
Professional fees 1,593 1,430 899
Amortization of intangibles 1,798 1,119 388
Other 7,990 6,199 3,198
Non-recurring expenses (a) 1,209 3,341 ----
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 35,643 27,346 13,651
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 23,343 15,734 14,392
Provision for income taxes 8,895 5,884 4,946
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $14,448 $9,850 $9,446
============================================================================================================================
Net income applicable to common stock $12,864 $8,154 $7,660
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $2.59 $1.82 $1.85
Diluted $1.96 $1.43 $1.42
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 4,971,619 4,469,970 4,136,379
Diluted 7,378,105 6,901,071 6,649,975
============================================================================================================================
<FN>
(a) Non-recurring expenses in 1997 of $1.2 million reflect acquisition
transaction costs of Summit Bank, N.A. and 1996 expenses of $3.3 million reflect
a one-time assessment for the recapitalization of the Savings Association
Insurance Fund (SAIF).
</TABLE>
See accompanying notes to consolidated financial statements.
Exhibit 13, Page 3
<PAGE> 4
FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Securities
Years ended December 31, 1997, 1996, 1995 Preferred Common Paid-In Retained Treasury Equity Valuation
($000's except per share data) Stock Stock Capital Earnings Stock Account Total
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 25,123 $3,096 $ 11,140 $ 34,604 $(2,139) $(2,578) $ 69,246
Net income -- -- -- 9,446 -- -- 9,446
Cash dividends:
Common stock $.34 per share -- -- -- (1,403) -- -- (1,403)
Series A preferred stock - $1.75 per share -- -- -- (974) -- -- (974)
Series B preferred stock - $1.63 per share -- -- -- (809) -- -- (809)
Proceeds from exercise of common stock options -
1,130 shares -- -- 2 -- 5 -- 7
Contribution of 3,076 shares to the 401(k) plan -- -- -- -- 41 -- 41
Conversion and redemption of 20,053 Series A
preferred shares to common shares (501) -- 213 -- 288 -- --
Purchase of Series A preferred stock - 16,000 shares (402) -- (296) -- -- -- (698)
Purchase of Series B preferred stock - 3,500 shares (88) -- (6) -- -- -- (94)
Purchase of treasury stock - 60,236 shares -- -- -- -- (954) -- (954)
10% common stock dividend - 309,000 shares -- 309 5,257 (5,566) -- -- --
Unrealized gain on securities available for sale -- -- -- -- -- 2,725 2,725
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 24,132 3,405 16,310 35,298 (2,759) 147 76,533
Net income -- -- -- 9,850 -- -- 9,850
Cash dividends:
Common stock $.38 per share -- -- -- (1,704) -- -- (1,704)
Series A preferred stock - $1.75 per share -- -- -- (870) -- -- (870)
Series B preferred stock - $1.63 per share -- -- -- (795) -- -- (795)
Proceeds from exercise of common stock options -
13,523 shares -- -- 119 -- 139 -- 258
Contribution of 5,291 shares to the 401(k) plan -- -- -- -- 101 -- 101
Conversion and redemption of 15,260 Series A
preferred shares to common shares and 3,550
Series B preferred shares to common shares (459) -- 198 -- 261 -- --
Purchase of Series A preferred stock - 25,300 shares (639) -- (879) -- -- -- (1,518)
Purchase of Series B preferred stock - 9,900 shares (341) -- (143) -- -- -- (484)
Purchase of treasury stock - 17,589 shares -- -- -- -- (379) -- (379)
Issuance of 384,233 common shares in MCi acquisition -- 279 5,309 -- -- -- 5,588
10% common stock dividend - 369,000 shares -- 369 8,654 (9,023) -- -- --
Unrealized loss on securities available for sale -- -- -- -- -- (1,293) (1,293)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 22,693 4,053 29,568 32,756 (2,637) (1,146) 85,287
Net income -- -- -- 14,448 -- -- 14,448
Cash dividends:
Common stock - $.43 per share -- -- -- (2,122) -- -- (2,122)
Series A preferred stock - $1.75 per share -- -- -- (861) -- -- (861)
Series B preferred stock - $1.63 per share -- -- -- (723) -- -- (723)
Issuance of 548,949 common shares in Summit acquisition -- 549 4,911 1,499 -- (44) 6,915
Proceeds from exercise of common stock options -
49,476 shares -- -- 325 -- 225 -- 550
Tax benefit on stock options exercised -- -- -- 257 -- -- 257
Contribution of 2,737 shares to the 401(k) plan -- -- -- -- 133 -- 133
Conversion and redemption of 496,249 Series
A preferred shares to common shares (11,539) 1,455 9,991 -- 93 -- --
Conversion and redemption of 49,435 Series
B preferred shares to common shares (1,237) -- 802 -- 435 -- --
25% common stock dividend - 1,013,000 shares -- 1,013 (1,013) (5) -- -- (5)
Unrealized gain on securities available for sale -- -- -- -- -- 856 856
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 9,917 $7,070 $ 44,584 $ 45,249 ($1,751) ($334) $ 104,735
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Exhibit 13, Page 4
<PAGE> 5
FIRSTFEDERAL FINANCIAL SERVICES CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31: ($000's) 1997 1996 1995
================================================================================================================================
OPERATING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $14,448 $9,850 $9,446
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 842 360 ----
Depreciation, amortization and accretion 5,671 2,724 1,240
Net securities (gains) (1,175) (397) (384)
Net gain on sales of loans (9,706) (3,882) (1,451)
Proceeds from sales of loans held for sale 259,199 272,765 88,548
Origination of loans held for sale (257,172) (322,729) (120,303)
(Increase) decrease in other assets (45,343) 7,222 (1,536)
Increase in other liabilities 4,090 795 4,247
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (29,146) (33,292) (20,193)
================================================================================================================================
INVESTING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of securities available for sale 83,766 47,105 47,067
Proceeds from calls, paydowns and maturities of securities available for sale 42,891 71,602 27,728
Purchases of securities available for sale (216,117) (68,895) (70,449)
Purchases of securities held to maturity (1,417) (9,638) (14,209)
Proceeds from maturities of securities held to maturity 15,442 14,596 22,070
Increase in other short-term investments (10,216) (138) (7,765)
Increase in loans and leases (144,780) (125,223) (70,135)
Purchases of premises and equipment, net (5,556) (3,524) (491)
Net cash from purchases of subsidiaries and other acquisitions 2,556 ---- ----
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (233,431) (74,115) (66,184)
================================================================================================================================
FINANCING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------------------
Increase in core deposits 86,157 71,450 71,514
Acquisition of deposits 150,800 24,606 ----
Net change in short-term borrowings 4,767 29,789 (26,666)
Net change in long-term debt 30,063 (5,555) 55,221
Cash dividends paid (3,706) (3,369) (3,186)
Exercise of stock options 807 258 7
Purchases of treasury stock ---- (379) (954)
Purchases of preferred stock -- (2,002) (792)
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 268,888 114,798 95,144
================================================================================================================================
INCREASE IN CASH AND DUE FROM BANKS 6,311 7,391 8,767
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 26,012 18,621 9,854
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $32,323 $26,012 $18,621
================================================================================================================================
</TABLE>
The Corporation paid Federal income taxes of $6,420, $5,427 and
$4,025 in 1997, 1996 and 1995, respectively.
The Corporation paid interest of $58,123, $47,785 and $39,692 in
1997, 1996 and 1995, respectively.
See accompanying notes to consolidated financial statements.
Exhibit 13, Page 5
<PAGE> 6
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
NATURE OF OPERATIONS
FirstFederal Financial Services Corp ("The Corporation") conducts its
principal activities through its banking and non-banking subsidiaries with 29
banking offices located throughout north central Ohio and non-banking facilities
in Ohio, Indiana and Virginia doing business in 42 states. Principal activities
include commercial and retail banking, investment services and brokering and
servicing manufactured housing finance contracts.
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of FirstFederal
Financial Services Corp and its subsidiaries. All material intercompany
transactions and balances have been eliminated. Certain prior period data has
been reclassified to conform to current period presentation.
The preparation of Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Actual results could differ from those
estimates.
SECURITIES
Securities are classified as held to maturity, available for sale or
trading. Only those securities classified as held to maturity, and which
management has the intent and ability to hold to maturity, are reported at
amortized cost. Available for sale and trading securities are reported at fair
value with unrealized gains and losses, net of related deferred income taxes,
included in shareholders' equity or income, respectively. The cost of securities
sold is based on the specific identification method.
Other short term investments consist primarily of interest bearing deposits
with the Federal Home Loan Bank of Cincinnati (FHLB).
LOANS AND LEASES
Interest income on loans is based on the principal balance outstanding. The
accrual of interest for commercial, construction and mortgage loans is
discontinued when there is a clear indication that the borrower's cash flow may
not be sufficient to meet payments as they become due. Such loans are also
placed on nonaccrual status when principal or interest is past due ninety days
or more, unless the loan is well secured and in the process of collection. When
a loan is placed on nonaccrual status, all previously accrued and unpaid
interest is reversed against income. A loan remains on non-accrual status until
the loan is current as to payment of both principal and interest, and/or the
borrower demonstrates the ability to pay and remain current.
Direct loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized over the estimated
life of the related loans or commitments as a yield adjustment. Net deferred
loan fees or costs related to loans paid off or sold are included in income at
the time of sale.
Income on direct financing leases is recognized on a basis to achieve a
constant periodic rate of return on the outstanding investment.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rates or the fair value
of the underlying collateral. Impaired loans have been defined as all nonaccrual
loans.
Loans held for sale are valued at the lower of aggregate cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements and were $86,955,000 and $88,982,000 at December 31,
1997 and 1996 respectively. The Corporation has commitments to sell residential
mortgage loans held for sale in the secondary market. Gains and losses on
residential mortgage loans sold are recorded at the time of the sale and are
recognized as mortgage banking income. Mortgage servicing rights associated with
mortgage loans originated and sold, where servicing is retained, are capitalized
and amortized over the period of net revenue. The carrying value of such rights
is subject to periodic adjustment based upon changing market conditions.
The Corporation adopted the provisions of SFAS 125, "Accounting and
Reporting for transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," on January 1, 1997, which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 is based on consistent application of a
financial-components approach that focuses on control. Under the
financial-components approach, the Corporation recognizes the financial and
servicing asset it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS 125 also provides consistent standards for
distinguishing transfers of financial assets that are secured borrowings.
The Corporation records an asset upon sale or securitization of loans with
servicing retained and allocates the total cost of loans to the servicing rights
and the loans based on their relative fair values. The resulting servicing
rights are amortized in proportion to, and over the period of, estimated net
servicing revenues. Servicing rights are assessed for impairment recognized
through a valuation allowance. For purposes of measuring impairment, the rights
are stratified based on interest rate and original maturity.
ALLOWANCE FOR CREDIT LOSSES
The allowance is maintained at a level management considers to be adequate
to absorb potential loan and lease losses. Credit losses are charged and
recoveries are credited to the allowance. Provisions for credit losses are based
on management's review of the historical credit loss experience and such other
factors which, in management's judgement, deserve consideration under existing
economic conditions in estimating potential credit losses.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation and amortization. Depreciation is computed on
the straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed on the straight-line method
over the lives of the related leases or useful lives of the related assets,
whichever is shorter. Maintenance, repairs and minor improvements are charged to
operating expenses as incurred.
INTANGIBLE ASSETS
Intangible assets, primarily premiums on purchased deposits, are amortized
on a straight-line basis generally over a period of up to 15 years. Management
reviews intangible assets for possible impairment if there is a significant
event that detrimentally affects operations. Impairment is measured using
estimates of the future earnings potential of the entity or assets acquired.
Amortization of intangible assets was $1.7 million and $1.1 million in 1997 and
1996, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation has entered into interest rate swap agreements to achieve a
lower aggregate borrowing cost on certain fixed-rate long-term borrowings. Net
interest expense resulting from the differential between exchanging fixed-rate
and floating interest payments is recorded on an accrual basis as an adjustment
to the interest expense of the associated liability.
The Corporation periodically hedges the value of manufactured housing loans
held for sale to mitigate the impact on the change
Exhibit 13, Page 6
<PAGE> 7
in value on sale of loans due to future fluctuations in interest rates. The
contracts are designated as hedges, with gains and losses recorded as basis
adjustments to loans held for sale.
The Corporation does not hold or issue derivative financial instruments
for trading purposes.
NET INCOME PER SHARE
Earnings per share is calculated by dividing net income for the period by
the weighted average number of shares of common stock outstanding during the
period. The assumed conversion of convertible preferred stock and the exercise
of stock options is included in the calculation of diluted earnings per share.
SFAS No. 128, "Earnings Per Share," was adopted for 1997 with all
prior-period earnings per share data restated. The statement requires dual
presentation of basic earnings per share and diluted earnings per share on the
Consolidated Statements of Income.
STOCK DIVIDEND
The Corporation's board of directors approved a 25% stock dividend in April
1997 and 10% stock dividend on both May 22, 1996 and May 22, 1995. The
consolidated financial statements, notes and other references to share and per
share data have been retroactively restated for the stock dividends.
STOCK-BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation," was adopted January
1, 1996 and encourages, but does not require, adoption of a fair-value-based
accounting method for employee stock-based compensation arrangements. The
Corporation has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and
is effective for fiscal years beginnings after December 15, 1997. The statement
requires additional reporting of items that affect comprehensive income but not
net income. Examples relevant to the Corporation include unrealized gains and
losses on securities available for sale. This statement will result in
additional financial statement disclosures upon adoption.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. The statement requires financial disclosure
and descriptive information about reportable operating segments. This statement
may result in additional financial statement disclosures upon adoption, however
the Corporation does not expect to make material changes to its current segment
groupings.
NOTE 2 - SECURITIES
Securities available for sale as of December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1997
-------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
($000'S) COST GAINS LOSSES VALUE
===============================================================
<S> <C> <C> <C> <C>
U.S. Government and
agency obligations.... $29,240 $88 ($33) $29,295
Obligations of states
and political
subdivisions.......... 1,967 50 ---- 2,017
Agency mortgage-
backed securities..... 167,178 417 (1,127) 166,468
Retained interest in
securitized assets. 27,023 ---- ---- 27,023
Other bonds, notes
and debentures........ 894 20 (3) 911
Other securities...... 28,043 75 (23) 28,095
- ---------------------------------------------------------------
Total securities...... $254,345 $650 ($1,186) $253,809
===============================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1996
---------------------------------------------
Amortized Unrealized Unrealized Market
($000's) Cost Gains Losses Value
==============================================================
<S> <C> <C> <C> <C>
U.S. Government
and agency
obligations........ $45,430 $22 ($129) $45,323
Agency mortgage-
backed securities.. 95,445 244 (1,904) 93,785
Retained interest in
securitized assets 6,491 ---- ---- 6,491
Other bonds, notes
and debentures..... 2,435 9 (4) 2,440
Other securities... 17,485 ---- ---- 17,485
- --------------------------------------------------------------
Total securities... $167,286 $275 ($2,037) $165,524
==============================================================
</TABLE>
Securities held to maturity as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1997
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
($000'S) COST GAINS LOSSES VALUE
==============================================================
<S> <C> <C> <C> <C>
U.S. Government
and agency
obligations......... $4,500 $3 ($31) $4,472
Obligations of
states and political
subdivisions........ 2,906 64 ---- 2,970
Agency mortgage-
backed securities... 61,450 424 (385) 61,489
Other securities.... 2,103 25 ---- 2,128
- --------------------------------------------------------------
Total securities.... $70,959 $516 ($416) $71,059
==============================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1996
---------------------------------------------
Amortized Unrealized Unrealized Market
($000's) Cost Gains Losses Value
==============================================================
<S> <C> <C> <C> <C>
U.S. Government
and agency
obligations......... $4,501 $12 ($45) $4,468
Obligations of
states and political
subdivisions........ 1,634 24 ---- 1,658
Agency mortgage-
backed securities... 78,737 369 (1,386) 77,720
Other securities.... 112 ---- ---- 112
- --------------------------------------------------------------
Total securities.... $84,984 $405 ($1,431) $83,958
==============================================================
</TABLE>
The amortized cost and approximate market value of securities at December
31, 1997, by expected actual maturity, are shown in the following table. Actual
maturities may differ from contractual maturities when there exists a right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities were estimated based on historical and
expected future prepayment trends.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
($000'S) COST VALUE COST VALUE
==============================================================
<S> <C> <C> <C> <C>
Debt securities:
Under 1 year.... $31,036 $31,122 $3,751 $3,724
1-5 years....... 155,072 155,094 51,033 50,979
6-10 years...... 52,779 52,464 5,121 5,135
Over 10 years... 15,458 15,129 11,054 11,221
- --------------------------------------------------------------
Total securities... $254,345 $253,809 $70,959 $71,059
==============================================================
</TABLE>
At December 31, 1997 and 1996, securities with a book value of $119,185,000
and $32,800,000, respectively, were pledged to secure short-term borrowings,
public deposits, and for other purposes as required or permitted by law.
Realized gains and losses respectively were as follows: 1997 - $1,180,000 and
($5,000); 1996 - $731,000 and ($334,000); and 1995 - $504,000 and ($120,000).
Exhibit 13, Page 7
<PAGE> 8
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
Transactions in the allowance for credit losses for the years ended
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996 1995
==============================================================
<S> <C> <C> <C>
Balance at January 1............ $2,916 $2,994 $3,204
Losses charged off.............. (831) (454) (225)
Recoveries of losses
previously charged off....... 100 16 15
- --------------------------------------------------------------
Net charge-offs................. (731) (438) (210)
Provision charged to operations. 842 360 ----
Reserves of acquired businesses 2,511 ---- ----
- --------------------------------------------------------------
Balance at December 31.......... $5,538 $2,916 $2,994
==============================================================
</TABLE>
Impaired loan information at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996
==============================================================
<S> <C> <C>
Impaired loans with a valuation reserve...... $4,353 $3,590
Valuation reserve on impaired loans.......... 2,177 1,795
Average impaired loans....................... $3,972 $2,508
==============================================================
</TABLE>
Cash basis interest income recognized on impaired loans during both years
was immaterial.
NOTE 4 - COMMERCIAL LEASE FINANCING
A summary of the gross investment in commercial lease financing at December
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996
==============================================================
<S> <C> <C>
Direct financing leases.................... $33,695 ----
Operating leases........................... 8,214 ----
- --------------------------------------------------------------
Total commercial lease financing........... $41,909 ----
==============================================================
</TABLE>
The components of the investment in direct financing leases at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
($000's) 1997 1996
==================================================================
<S> <C> <C>
Rentals receivables..............................$37,182 ----
Estimated residual value of leased assets........ 4,628 ----
- ------------------------------------------------------------------
Gross investment in direct financing leases...... 41,810 ----
Unearned income.................................. 8,115 ----
- ------------------------------------------------------------------
Total net investment in direct financing leases.. $33,695 ----
==================================================================
</TABLE>
At December 31, 1997, the minimum future lease payments receivable for each
of the years 1998 through 2002 were $13,600,000, $11,094,000, $8,276,000, and
$5,509,000, and $2,977,000, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Estimated
($000's) Useful Life 1997 1996
==============================================================
<S> <C> <C> <C>
Land and improvements........ ---- $2,147 $1,206
Buildings.................... 25 10,472 8,590
Furniture and equipment...... 3 to 10 yrs 13,183 7,276
Leasehold improvements....... 5 to 25 yrs 1,212 512
Accumulated depreciation and
amortization................. (11,072) (7,198)
- --------------------------------------------------------------
Total premises and equipment $15,942 $10,386
==============================================================
</TABLE>
Depreciation and amortization expense related to premises and equipment was
$2,565,994 in 1997, $1,051,654 in 1996, and $539,371 in 1995.
The Corporation's subsidiaries have entered into a number of noncancelable
lease agreements with respect to premises. A summary of the minimum annual
rental commitments under these leases at December 31, 1997, exclusive of taxes
and other charges payable under the leases:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's)
==============================================================
<S> <C>
1998................................................... $624
1999................................................... 576
2000................................................... 513
2001................................................... 301
2002................................................... 106
2003 and subsequent years.............................. 720
- --------------------------------------------------------------
Total.................................................. $2,840
==============================================================
</TABLE>
Rental expense for cancelable and noncancelable leases was $361,000 for
1997, $248,000 for 1996 and $119,000 for 1995.
NOTE 6 - SHORT-TERM BORROWINGS
A summary of short-term borrowings and rates at December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
($000's) 1997 1996 1995
================================================================
<S> <C> <C> <C>
FHLB advances:
Balance........................ $38,802 $67,648 $37,369
Rate........................... 5.92% 5.98% 5.29%
- ----------------------------------------------------------------
Securities sold under agreements to repurchase:
Balance........................ $55,814 $20,402 $24,654
Rate........................... 5.68% 5.44% 5.85%
- ----------------------------------------------------------------
Other borrowings:
Balance........................ $3,416 $5,215 ----
Rate........................... 8.50% 5.88% ----
- ----------------------------------------------------------------
Total short-term borrowings:
Balance........................ $98,032 $93,265 $62,023
Rate........................... 5.90% 5.86% 5.51%
================================================================
Average outstanding............... $119,552 $83,198 $84,111
Maximum month-end balance......... $171,353 $124,652 $118,345
Weighted average interest rate.... 5.82% 5.63% 5.73%
================================================================
</TABLE>
The market value of securities sold under repurchase agreements, all of
which were under the Corporation's control, totaled $60,401,819 at December 31,
1997.
At December 31, 1997, the Corporation had unused lines of credit of
$40,000,000 available to support corporate requirements.
NOTE 7 - LONG-TERM BORROWINGS
A summary of long-term borrowings at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996
==============================================================
<S> <C> <C>
Subordinated debt, 9.125% due 2004......... $40,500 ----
Federal Home Loan Bank advances............ 183,952 $219,148
Other, ranging from 8.0% to 9.6%........... 24,759 ----
- --------------------------------------------------------------
Total long-term borrowings................. $249,211 $219,148
==============================================================
</TABLE>
Interest on the subordinated debt is payable semiannually beginning in
September 1997, and the debt is redeemable at the option of the Corporation any
time after June 30, 2002 until its maturity date of June 30, 2004.
At December 31, 1997, Federal Home Loan bank (FHLB) advances have rates
ranging from 5.10% to 7.57%, with interest payable monthly. The advances are
secured by a blanket lien on first mortgage loans with balances totaling 150
percent of such advances. The FHLB stock also serves as collateral for the
advances. Long-term debt is scheduled to mature as follows: $8,946,000 in 1998,
$67,736,000 in 1999, $51,077,000 in 2000, $12,300,000 in 2001, $26,709,000 in
2002, and $82,443,000 in 2003 and thereafter.
NOTE 8 - INCOME TAXES
The Corporation and its subsidiaries file a consolidated Federal income tax
return. A summary of applicable income taxes included in the Consolidated
Statements of Income follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996 1995
==============================================================
<S> <C> <C> <C>
Current U.S. income taxes.......... $2,781 $874 $4,516
State and local income taxes....... 311 283 ----
- --------------------------------------------------------------
Total.............................. 3,092 1,157 4,516
- --------------------------------------------------------------
Deferred U.S. income taxes resulting
from temporary differences......... 5,803 4,727 430
- --------------------------------------------------------------
</TABLE>
Exhibit 13, Page 8
<PAGE> 9
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------
Provision for income taxes..........$8,895 $5,884 $4,946
==============================================================
</TABLE>
Deferred income taxes are included in the caption Other Liabilities in the
Consolidated Balance Sheets and are comprised of the following temporary
differences at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
($000's) 1997 1996
==================================================================
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses.................. $1,870 $758
Basis differences - fixed assets............. ---- 367
Other assets................................. 614 328
- ------------------------------------------------------------------
Total gross deferred tax assets................. 2,484 1,453
- ------------------------------------------------------------------
Deferred Tax Liabilities:
Basis difference - leased property........... 3,976 ----
Unrealized gain on loans and securities
available for sale......................... 165 594
FHLB stock dividends......................... 1,985 1,438
Originated servicing rights.................. 887 526
Deferred loan fees net of costs.............. 3,708 3,030
Tax bad debt reserve over base year reserves. 654 654
Deferred gain on sale of loans............... 2,066 535
Basis difference - fixed assets.............. 106 ----
Other net liabilities........................ 77 13
- ------------------------------------------------------------------
Total gross deferred tax liabilities............ 13,624 6,790
- ------------------------------------------------------------------
Net deferred tax liability.................. $11,140 $5,337
==================================================================
</TABLE>
Management has determined no valuation allowance for deferred tax assets
was required at December 31, 1997 or 1996.
A reconciliation between the statutory U.S. income tax rate and the
Corporation's effective tax rate:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1997 1996 1995
==============================================================
<S> <C> <C> <C>
Statutory tax rate.................. 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes net of 0.9 1.1 ----
federal benefit..................
Non-deductible merger transaction 0.9 ---- ----
expenses......................
Amortization of intangibles...... 1.0 1.0 ----
Other - net...................... 0.3 .3 (.6)
- --------------------------------------------------------------
Effective tax rate.................. 38.1% 37.4% 34.4%
==============================================================
</TABLE>
Retained earnings at December 31, 1997 includes approximately $3.6 million
in allocations of earnings for bad debt deductions of a former thrift subsidiary
for which no income tax has been provided. Under current tax law, if the
Corporation's subsidiary uses this bad debt reserve for purposes other than to
absorb bad debt losses or if it no longer qualifies as a bank or merges into a
non-bank entity, the bad debt reserve will be subject to federal income tax at
the current corporate rate.
NOTE 9 - MANUFACTURED HOUSING INCOME
The Corporation, through its subsidiary Mobile Consultants, Inc. (MCi), has
sold certain manufactured housing finance contracts (MHF contracts) to various
financial institutions while retaining the collection and recovery aspect of
servicing. The amount of MHF contracts serviced as described above totaled
$430.1 million and $438 million, at December 31, 1997 and 1996, respectively. At
the time MCi sells a MHF contract to an unaffiliated financial institution,
approximately one third of the fee collected is recorded as a "manufactured
housing brokerage fee" and the remaining two thirds of the fee is deposited into
escrow accounts and is available to offset potential prepayment or credit losses
("MCi reserves"). The MCi reserves are recognized as "servicing income on
brokered MHF contracts" ratably over the MHF contract life based on the present
value of the future cash flows of the MCi reserves utilizing assumptions for
prepayment and credit losses and a discount rate. The undiscounted balance of
the MCi reserves was $46.4 million and $46 million as of December 31, 1997 and
1996, respectively.
The Corporation's subsidiary, Signal Bank, N.A., purchases MHF contracts
from MCi, a portion of which are packaged in asset backed securitizations (ABS
pools) and sold to investors. Sales and securitizations of MHF contracts totaled
$137.3 million in 1997 and $48.9 million in 1996. At the time of sale, the
Corporation records an asset, "retained interest in securitized assets,"
representing the discounted future cash flows to be received by the Corporation
for 1) servicing income from the ABS pool, 2) principal and interest payments on
MHF contracts contributed to the ABS pools as a credit enhancement, referred to
as over-collateralization and 3) excess interest spread. Excess interest spread
represents the difference between interest collected from MHF contract borrowers
and interest paid to investors in the ABS pools net of a 60 basis point per
annum provision for credit risk and further reduced by the impact of estimated
prepayments using 130 MHP. MHP is the manufactured housing industry standard
index for prepayment. Prepayment and credit loss assumptions are based on the
Corporation's historical experience. Subordinated future cash flows from the ABS
pools have been discounted at 10%. The carrying value of retained interest in
securitized assets is subject to periodic adjustment based upon potential
impairment and changing market conditions. Management periodically reviews the
retained interest in securitized assets for possible impairment by comparing
actual cash flows received by the Corporation from the ABS pools and actual
prepayments and credit losses to the corresponding projections used at the time
of sale for each ABS pool. Impairment, if any, is charged to operations.
Favorable experience is recognized prospectively as realized. The aggregate
amount of ABS pools serviced by the Corporation totaled $186.2 million and $48
million at December 31, 1997 and 1996, respectively, and such amounts are not
included in the accompanying Consolidated Financial Statements. Changes in the
retained interest in securitized assets for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996
==============================================================
<S> <C> <C>
Balance at January 1...................... $6,491 ----
Retained interest from ABS pool sales..... 21,386 $6,500
Amortization.............................. (854) (9)
- --------------------------------------------------------------
Balance at December 31 $27,023 $6,491
==============================================================
</TABLE>
The portion of retained interest representing future servicing income was
$5.7 million at December 31, 1997.
The components of manufactured housing income were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996 1995
==============================================================
<S> <C> <C> <C>
Gain on sale of ABS pools.......... $5,734 $1,574 ----
Manufactured housing brokerage fees 3,151 6,726 ----
Servicing income on brokered MHF 4,400 3,200 ----
contracts.......................
Servicing income on ABS pools...... 1,399 80 ----
Interest income on retained interest in
securitized assets.............. 1,317 60 ----
- --------------------------------------------------------------
TOTAL MANUFACTURED HOUSING
INCOME.....................$16,001 $11,640 $0
==============================================================
</TABLE>
NOTE 10 - MORTGAGE BANKING INCOME
The Corporation has sold certain loans to various investors while retaining
servicing rights. Loans serviced for others totaled $521 million and $419
million at December 31, 1997 and 1996, respectively, and are not included in the
accompanying Consolidated Financial Statements. Changes in mortgage servicing
rights, classified on the balance sheet within other assets, for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996
==============================================================
<S> <C> <C>
Balance at January 1........................ $1,503 ----
Originated mortgage servicing rights........ 1,589 $1,611
</TABLE>
Exhibit 13, Page 9
<PAGE> 10
<TABLE>
<S> <C> <C>
Amortization................................ (551) (108)
- --------------------------------------------------------------
Balance at December 31 $2,541 $1,503
==============================================================
</TABLE>
The components of mortgage banking income were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
($000's) 1997 1996 1995
=======================================================================
<S> <C> <C> <C>
Gain on sale of mortgage loans............. $3,972 $2,308 $1,451
Mortgage loan fee income................... 350 500 460
Mortgage servicing fees, net of amortization 846 707 699
- -----------------------------------------------------------------------
TOTAL MORTGAGE BANKING INCOME $5,168 $3,515 $2,610
=======================================================================
</TABLE>
NOTE 11 - STOCK COMPENSATION PLANS
Options can be granted under the Corporation's Stock Option Plans to key
employees and directors of the Corporation and its subsidiaries for up to
1,070,640 shares of the Corporation's common stock. All options granted have up
to ten year terms and vest and become fully exercisable at the end of three
years of continued employment. A summary of option transactions during 1997,
1996 and 1995:
<TABLE>
- ---------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------
AVERAGE Average Average
(Shares in OPTION Option Option
000's) SHARES PRICE Shares Price Shares Price
=====================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning
of year........ 372,313 $12.48 268,783 $11.48 192,785 $10.25
Exercised......... (46,762) 11.83 (27,936) 9.25 (1,243) 5.98
Expired........... (13,175) ---- (7,409) ---- (379) ----
Granted........... 184,837 38.13 138,875 22.10 77,620 14.38
Acquired
business....... 54,005 13.00 ---- ---- ---- ----
- ---------------------------------------------------------------------
Outstanding,
end of year ... 551,218 $22.95 372,313 $12.48 268,783 $11.48
- ---------------------------------------------------------------------
Exercisable,
end of year ... 191,534 $11.68 114,298 $9.73 85,636 $9.25
=====================================================================
</TABLE>
As of December 31, 1997, options outstanding have exercise prices between
$2.18 and $44.63 and a weighted average remaining contractual life of 7.7 years.
At December 31, 1997, there were 460,055 incentive options and 91,163
nonqualified options outstanding and 519,422 shares were available for granting
additional options.
Under the 1997 Employee Stock purchase Plan, the Corporation is authorized
to issue up to 136, 878 shares of common stock to its full time employees,
nearly all of whom are eligible to participate. Under the terms of the Plan,
employees can choose each year to have up to 10 percent of their annual
compensation withheld to purchase the Corporation's common stock. The purchase
price of the stock is 85 percent of the lower of its beginning-of-purchase
period or end-of-purchase period market price. Approximately 25 percent of
eligible employees currently participate in the Plan. Under the Plan, the
Corporation sold 6,053 shares to employees for 1997.
The Corporation has elected to disclose pro forma net income and net income
per share as if the fair-value-based method had been applied in measuring
compensation costs. The Corporation's pro forma information for the years ended
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1997 1996 1995
==============================================================
<S> <C> <C> <C>
Pro forma net income ($000's).........$13,610 $9,412 $9,209
Pro forma basic net income per share.. $2.42 $1.73 $1.79
Pro forma diluted net income per share $1.84 $1.36 $1.38
==============================================================
</TABLE>
Compensation expense reflected in the pro forma disclosures is not
indicative of future amounts when the SFAS No. 123 prescribed method will apply
to all outstanding nonvested awards.
The weighted average fair value of options granted was $17.43 in 1997,
$11.54 in 1996 and $7.40 in 1995. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in 1997, 1996 and 1995: expected
dividend yield of 1.10%, 1.78% and 1.78% and expected option lives of 10 years;
expected volatility of 30%, 39%, and 39%, and risk-free interest rates of 5.70%,
6.25%, and 6.25%, respectively.
The Corporation granted restricted stock to certain officers and directors
in 1996 of which 53,125 shares are outstanding as of December 31, 1997. The
restricted stock vests at a rate of 20% per year on each January 31 through
January 2001, provided the Corporation return on average shareholders' equity of
the preceding year equals or exceeds 15%. Restricted Stock Compensation Expense
was $50,000 in 1997. As of January 31, 1998, 20% of the restricted shares
vested.
NOTE 12 - PREFERRED STOCK
The Corporation issued in 1994 500,000 shares of 6 1/2 percent cumulative
convertible preferred stock, Series B, without par value. The stock is
convertible at the option of the holder at any time or it may be redeemed by the
Corporation on or after June 24, 1999 into 722,734 shares of common stock or
1.6812 common shares for each outstanding share of Series B preferred stock.
Cash dividends are payable quarterly on December 1, March 1, June 1 and
September 1 of each year.
On December 16, 1997, the Corporation redeemed and converted the remaining
482,586 outstanding Series A preferred stock into 1,455,335 shares of common
stock. The 7 percent cumulative convertible Series A preferred stock was
originally issued in 1992.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Corporation has a profit sharing plan covering substantially all
employees. Employer contributions to the plan reflect a 75 percent match of
employee contributions up to 4% of employees wages and additional discretionary
contributions as approved by the Board of Directors. As of December 31, 1997,
the profit sharing plan held 22,855 shares of the Corporation valued at
$1,005,620. Employer contributions to the profit sharing plan were $270,000,
$100,000 and $60,000 for 1997, 1996 and 1995, respectively.
The Corporation sponsored a final-pay noncontributory defined benefit plan
for Signal Bank, N.A. employees. Effective December 31, 1996, the employer
terminated the plan, settled the accumulated benefit obligation of $2,592,000
(nonvested benefits became vested upon termination of the plan) by rolling plan
assets, primarily certificates of deposit, into the profit sharing plan and
purchasing nonparticipating annuity contracts. Defined benefits were not
provided under any successor plan.
As a result, the Corporation recognized a loss of $200,000 determined as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Before Effect of After
($000's) Termination Termination Termination
========================================================================
<S> <C> <C> <C>
Assets and obligations:
Accumulated benefit obligation ($2,592) $2,592 $ ----
Effects of projected future
compensation levels........ (584) 584 ----
----------------------------------
Projected benefit obligation. (3,176) 3,176 ----
Plan assets at fair value..... 2,736 (2,736) ----
Items not yet recognized in
earnings:
Unrecognized net asset at
transition................. 582 (582) ----
Unrecognized net gain
subsequent to transition... (342) 342 ----
----------------------------------
(Accrued)/prepaid pension cost on
the balance sheet ............ ($200) $200 $ ----
========================================================================
</TABLE>
Net periodic pension expense was $200,000, $143,000 and $133,000 for 1997,
1996 and 1995, respectively.
The Corporation does not provide postretirement benefits nor does it have
any material liabilities for postemployment benefits.
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation, in the normal course of business, is a party to financial
instruments with off-balance-sheet risk to meet the
Exhibit 13, Page 10
<PAGE> 11
financing needs of its customers and to minimize exposure to fluctuations in
interest rates. These financial instruments primarily include commitments to
extend credit, standby and commercial letters of credit, and commitments to sell
residential mortgage loans. These instruments involve, to varying degrees,
elements of credit risk, counterparty risk and market risk in excess of the
amounts recognized in the Consolidated Balance Sheets. The contract or notional
amounts of these instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments.
Creditworthiness for all instruments is evaluated on a case-by-case basis
in accordance with Corporation credit policies. Collateral, if deemed necessary,
is based on management's credit evaluation of the counterparty and may include
business assets of commercial borrowers as well as personal property and real
estate of individual borrowers and guarantors.
A summary of significant commitments and other off-balance-sheet items at
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Contract or
Notional Amount
---------------------
($000's) 1997 1996
==============================================================
<S> <C> <C>
Commitments to extend credit............. $162,235 $68,866
Letters of credit (including standby 908 239
letters of credit)....................
Commitments to sell residential
mortgage loans........................ 10,320 56,124
Interest rate swap agreements............ 65,500 ----
Forward contract on loans held for sale.. 41,000 ----
==============================================================
</TABLE>
Commitments to extend credit are agreements to lend. Commitments generally
have fixed expiration dates or other termination clauses that may require
payment of a fee. Since many of the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Corporation's exposure to credit risk in the event of
nonperformance by the other party is the contract amount.
Standby and commercial letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. At December 31,
1997, all standby letters of credit will expire within one year. The amount of
credit risk involved in issuing letters of credit in the event of nonperformance
by the other party is the contract amount.
The Corporation enters into forward contracts for future delivery of
residential mortgage loans of a specified yield to reduce the interest rate risk
associated with fixed-rate residential mortgages held for sale and commitments
to fund residential mortgages. Credit risk arises from the possible inability of
the other parties to comply with the contract terms. The majority of the
Corporation's contracts are with U.S. government-sponsored agencies (FNMA and
FHLMC). Fixed rate commitments to sell residential mortgage loans of $8.3
million at December 31, 1997 are subject to market risk resulting from
fluctuations in interest rates and the Corporation's exposure is limited to the
replacement value of those commitments.
These contracts carry the risk of the counterparty's future ability to
perform under the agreement. A limit of market exposure is approved for all
counterparties.
In 1997, the Corporation entered into interest rate swap agreements with a
notional principal amount of $65.5 million in connection with the issuance of
$40.5 million of long-term, fixed-rate subordinated notes and a $25 million
brokered certificate of deposit. The Corporation receives fixed-rate payments at
9.125% and 7.10%, respectively, and pays a variable interest rate based upon
three-month LIBOR. These transactions involve the exchange of fixed and floating
rate payments without the exchange of the underlying principal amount. At
December 31, 1997, the Corporation has a $41 million forward contract due to
mature January 21, 1998 on manufactured housing loans held for sale. Notional
principal amounts are often used to express the volume of these types of
transactions, however, they do not represent the much smaller amounts that are
potentially subject to credit risk. Entering into interest rate swap agreements
and hedges involves the risk of dealing with counterparties and their ability to
meet the terms of the contract. The Corporation controls the credit risk of
these transactions through adherence to an investment policy, credit approval
policies and monitoring procedures.
There are legal claims pending against the Corporation and its
subsidiaries. Based on a review of such litigation with legal counsel,
management believes that any resulting liability would not have a material
effect upon the Corporation's consolidated financial position or results of
operations.
NOTE 15 - ACQUISITIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
CONSIDERATION
-------------------
COMMON
DATE CASH SHARES METHOD OF
COMPLETED ($000'S) ISSUED ACCOUNTING
===============================================================
<S> <C> <C> <C> <C>
Alpha Equipment
Group, Inc......... 10-31-97 $1,700 ---- purchase
Summit Bancorp........ 7-8-97 ---- 548,949 pooling
Alliance Corporate
Resources, Inc..... 7-1-97 2,000 ---- purchase
Mobile Consultants,
Inc................ 4-3-96 6,900 384,233 purchase
===============================================================
</TABLE>
The Consolidated Financial Statements have not been restated to include the
acquisition of Summit Bancorp due to immateriality.
On February 9, 1998, the Corporation announced the signing of a definitive
agreement for the affiliation of First Shenango Bancorp, Inc. First Shenango's
wholly-owned subsidiary, First Federal Savings Bank of New Castle, is expected
to become a separate operating subsidiary of the Corporation and operate under
its current name and banking charter. Under the terms of the agreement, the
Corporation will exchange 1.143 shares of its common stock for each of the
2,069,007 outstanding shares of First Shenango stock and 109,074 outstanding
options. Based on the closing price of FirstFederal Financial Services Corp on
February 6, 1998 of $41.75, the transaction would be valued at approximately
$103.9 million, or $47.72 per share of First Shenango stock. The merger, which
will be accounted for as a pooling of interests, is expected to be consummated
in the third quarter, pending First Shenango and FirstFederal Financial Services
Corp shareholder approval, regulatory approval and other customary conditions of
closing. The transaction is expected to be a tax-free reorganization for federal
income tax purposes. First Shenango has four banking offices in Lawrence County,
Pennsylvania. At December 31, 1997, First Shenango had total assets of $375.0
million, deposits of $275.2 million and shareholders' equity of $47.9 million.
On September 15, 1997, the Corporation purchased deposits of approximately
$151 million, loans of $24 million and seven North Central Ohio branch
facilities from KeyBank, N.A. for approximately $19 million. On March 23, 1996,
the Corporation purchased deposits of approximately $26.6 million and a branch
facility in Mount Vernon, Ohio from Peoples National Bank for $2.4 million.
NOTE 16 - REGULATORY MATTERS
The principal source of income and funds for the Corporation (parent
company) are dividends from its subsidiaries. During the year 1998, the amount
of dividends that the banking subsidiaries can pay to the Corporation without
prior approval of regulatory agencies is limited to their 1997 eligible net
profits, as defined, plus the adjusted retained 1996 and 1995 net income of the
subsidiaries.
Banking subsidiaries must maintain noninterest-bearing cash
Exhibit 13, Page 11
<PAGE> 12
balances on reserve with the Federal Reserve Bank. In 1997 and 1996, the
subsidiary banks were required to maintain average reserve balances of
$5,821,000 and $3,511,000, respectively.
The Federal Reserve Board adopted quantitative measures which assign risk
weightings to assets and off-balance-sheet items and also define and set minimum
regulatory capital requirements (risk-based capital ratios). All banks are
required to have core capital (Tier 1) of at least 4% of risk-weighted assets,
total capital of at least 8% of risk-weighted assets and a minimum Tier 1
leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital
consists principally of shareholders' equity excluding unrealized gains and
losses on securities available for sale, less goodwill. Total capital consists
of Tier 1 capital plus certain debt instruments and the allowance for credit
losses, subject to limitation. Failure to meet certain capital requirements can
initiate certain actions by regulators that, if undertaken, could have a direct
material effect on the Consolidated Financial Statements. The regulations also
define well capitalized levels. The subsidiary banks exceeded the minimum
guidelines for well capitalized institutions.
Capital and risk-based capital and leverage ratios for the Corporation and
its significant subsidiaries at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1997
--------------------
($000's) AMOUNT RATIO
===============================================================
<S> <C> <C>
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
FirstFederal Financial Services Corp... $114,668 12.89%
Signal Bank N.A........................ 100,948 11.43%
Summit Bank N.A........................ 7,355 9.88%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
FirstFederal Financial Services Corp... 72,753 8.18%
Signal Bank N.A........................ 86,441 9.78%
Summit Bank N.A........................ 6,423 8.63%
TIER 1 LEVERAGE CAPITAL (TO AVERAGE
ASSETS):
FirstFederal Financial Services Corp... 72,753 5.23%
Signal Bank N.A........................ 86,441 6.68%
Summit Bank N.A........................ $6,423 6.40%
===============================================================
</TABLE>
In 1996, the Corporation had total capital to risk-weighted assets of
14.52%. Prior to July 1, 1997, the Corporation operated as a thrift holding
company and was not required to compute Tier 1 risk adjusted capital. The thrift
leverage (core) capital ratio, is comparable to the "Tier 1 leverage" ratio
reported currently. The leverage (core) capital ratio was 6.60% on December 31,
1996, compared to the regulatory requirement of 3.00%.
NOTE 17 - EARNINGS PER SHARE
Reconciliation of Basic Earnings Per Share to Diluted Earnings Per Share
for the Years Ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1997
------------------------------------
PER-SHARE
(000's except per share data) INCOME SHARES AMOUNT
==============================================================
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders.............. $12,864 4,972 $2.59
EFFECT OF DILUTIVE SECURITIES
Convertible Preferred........ 1,584 2,170 0.57
Stock Options................ ---- 236 0.06
- --------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions............... $14,448 7,378 $1.96
==============================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1996
------------------------------------
Per-Share
(000's except per share data) Income Shares Amount
==============================================================
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders............... $8,154 4,470 $1.82
EFFECTIVE OF DILUTIVE
SECURITIES
Convertible Preferred......... 1,665 2,340 0.38
Stock Options................. 31 91 0.01
- --------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions................ $9,850 6,901 $1.43
==============================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1995
------------------------------------
Per-Share
(000's except per share data) Income Shares Amount
==============================================================
<S> <C> <C> <C>
BASIC EPS
Income available to common
shareholders............... $7,660 4,136 $1.85
EFFECTIVE OF DILUTIVE
SECURITIES
Convertible Preferred......... 1,783 2,392 0.41
Stock Options................. 3 122 0.02
- --------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions................ $9,446 6,650 $1.42
==============================================================
</TABLE>
NOTE 18 - RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, certain directors, executive officers,
principal holders of Corporation common stock and associates of such persons
were indebted to the banking subsidiaries in the aggregate amount, net of
participations, of $1,803,922 and $130,701, respectively. Summit Bank, N.A. had
approximately $1.7 million of related party loans when acquired. During 1997,
new loans aggregating $84,900 were made to such parties and loans aggregating
$148,735 were repaid. Such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the time of
comparable transactions with unrelated parties.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments at
December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1997
-----------------------
CARRYING
($000's) AMOUNT FAIR VALUE
===============================================================
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments........ $51,539 $51,539
Securities available for sale.......... 253,809 253,809
Securities held to maturity............ 70,959 71,059
Loans and leases including loans held
for sale............................ 1,001,311 1,000,587
FINANCIAL LIABILITIES:
Deposits............................... 981,675 981,675
Borrowings............................. 347,243 352,399
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: NOTIONAL
--------
AMOUNT
------
Commitments to extend credit........... $162,235 162,235
Letters of credit...................... 908 908
Forward contracts:
Commitments to sell loans........... 10,320 10,320
Forward contract on loans held for sale 41,000 (692)
Interest rate swaps.................... 65,500 252
===============================================================
</TABLE>
Exhibit 13, Page 12
<PAGE> 13
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1996
Carrying
($000's) Amount Fair Value
===============================================================
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments ....... $35,012 $35,012
Securities available for sale ......... 165,524 165,524
Securities held to maturity ........... 84,984 83,958
Loans including loans held for sale ... 758,679 754,930
FINANCIAL LIABILITIES:
Deposits .............................. 671,918 692,049
Borrowings ............................ 312,413 312,612
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: NOTIONAL
--------
AMOUNT
------
Commitments to extend credit .......... $68,866 68,866
Letters of credit ..................... 239 239
Forward contracts:
Commitments to sell loans .......... 56,124 56,124
===============================================================
</TABLE>
Fair values for financial instruments were based on various assumptions and
estimates as of a specific point in time and may vary significantly from amounts
that will be realized in actual transactions. In addition, certain financial
instruments and all non-financial instruments were excluded from the fair value
disclosure requirements. Therefore, the fair values presented above should not
be construed as the underlying value of the Corporation. In addition, the
negative fair value of the interest rate hedge represents the estimated amount
the Corporation would have to pay at each date to cancel the contracts or
transfer them to other parties.
The following methods and assumptions were used in determining the fair
value of selected financial instruments:
SHORT-TERM FINANCIAL ASSETS AND LIABILITIES - for financial instruments
with short or no stated maturity, prevailing market rates and limited credit
risk, carrying amounts approximate fair value. Those financial instruments
include cash and due from banks, other short-term investments, certain deposits
(non-interest bearing demand, interest checking, savings and money market),
repurchase agreements and short-term borrowings.
SECURITIES, AVAILABLE FOR SALE AND HELD TO MATURITY - fair values were
based on quoted market prices, dealer quotes and prices obtained from
independent pricing services.
LOANS AND LEASES - fair values were estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrow with similar credit ratings and for the same remaining maturities.
DEPOSITS - fair values for certificates of deposit - were estimated using a
discounted cash flow calculation that applies interest rates currently being
offered for deposits of similar remaining maturities.
LONG-TERM DEBT AND SUBORDINATED DEBT - fair value of long-term debt was
based on quoted market prices, when available, and a discounted cash flow
calculation using prevailing market rates for borrowings of similar terms.
INTEREST RATE SWAPS AND FORWARD CONTRACTS - fair values of interest rate
swaps and forward contracts were based on quoted market prices.
COMMITMENTS AND LETTERS OF CREDIT - fair value of commitments to extend
credit are based on the estimated cost to terminate them or otherwise settle
the obligation with the counterparties at the reporting date.
NOTE 20 - SEGMENTS
The Corporation's principal activities include Community
Banking and Specialty Finance. Community Banking offers a full
range of deposit and loan products and other services to
individuals and businesses. The Specialty Finance Group 1)
originates financing and services the collection and recovery of
loans on manufactured houses through MCi, 2) provides
equipment leasing, 3) provides investment advisory services,
financial planning and portfolio management, 4) provides common
financing services and 5) real estate appraisal services.
The financial information for each business segment reflect those which are
specifically identifiable or which are allocated based on an internal allocation
method. The allocation has been consistently applied for all periods presented.
The measurement of the performance of the business segments is based on the
management structure of the Corporation and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not necessarily indicative of the segments' financial
condition and results of operations if they were independent entities.
Selected financial information by business segment for the three years
ended December 31 is included in the following summary:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
($000's) 1997 1996 1995
==============================================================
<S> <C> <C> <C>
REVENUES:
Community Banking Group $98,564 $79,740 $68,782
Specialty Finance Group 20,814 11,748 307
- --------------------------------------------------------------
TOTAL ................... 119,378 91,488 69,089
==============================================================
NET INCOME:
Community Banking Group 7,465 6,899 9,368
Specialty Finance Group 6,983 2,951 78
- --------------------------------------------------------------
TOTAL ................... 14,448 9,850 9,446
==============================================================
IDENTIFIABLE ASSETS:
Community Banking Group 1,393,160 1,058,095 945,972
Specialty Finance Group 64,255 22,288 1,298
- --------------------------------------------------------------
TOTAL ................... $1,457,415 $1,080,383 $947,270
==============================================================
</TABLE>
Capital expenditures relating primarily to the Community Banking Group
totaled $5,556,000, $3,524,000, and $491,000 in 1997, 1996, and 1995,
respectively. These expenditures consisted primarily of investments in data
processing equipment, including network computer technology, software,
operations, operations equipment and the retail distribution network.
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the Corporation ($000's):
<TABLE>
<CAPTION>
- --------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996 1995
==============================================================
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries ...... $1,000 $1,000 $10,000
Interest on loans to subsidiaries 111 ---- ----
Securities gains ................. 576 ---- ----
Other ............................ 741 407 240
- --------------------------------------------------------------
TOTAL INCOME ..................... 2,428 1,407 10,240
- --------------------------------------------------------------
EXPENSES:
Interest ......................... 2,922 ---- ----
Other ............................ 587 597 194
- --------------------------------------------------------------
TOTAL EXPENSES 3,509 597 194
- --------------------------------------------------------------
INCOME BEFORE TAXES AND
CHANGE IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES (1,081) 810 10,046
Applicable income taxes (benefit) (378) 284 3,516
- --------------------------------------------------------------
INCOME BEFORE CHANGES
IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES ...... (703) 526 6,530
- --------------------------------------------------------------
Undistributed earnings of
subsidiaries ................... 15,151 9,324 2,916
- --------------------------------------------------------------
NET INCOME .......................$14,448 $9,850 $9,446
==============================================================
</TABLE>
Exhibit 13, Page 13
<PAGE> 14
<TABLE>
<CAPTION>
- --------------------------------------------------------------
CONDENSED BALANCE SHEET (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996
==============================================================
<S> <C> <C>
ASSETS:
Cash and equivalents ..................... $1,140 $1,784
Securities available for sale ............ 1,575 2,934
Loans to subsidiaries .................... 10,000 ----
Investment in subsidiaries ............... 144,713 84,481
Other assets ............................. 1,147 2,788
- --------------------------------------------------------------
TOTAL ASSETS ............................. 158,575 91,987
- --------------------------------------------------------------
LIABILITIES:
Subordinated debt ........................ 40,500 ----
- --------------------------------------------------------------
Accrued expenses and other liabilities ... 13,340 6,700
- --------------------------------------------------------------
TOTAL LIABILITIES ........................ 53,840 6,700
- --------------------------------------------------------------
SHAREHOLDERS' EQUITY ..................... 104,735 85,287
- --------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $158,575 $91,987
==============================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
For the Years Ended December 31: 1997 1996 1995
==============================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ...................... $14,448 $9,850 $9,446
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Undistributed earnings of
subsidiaries .............. (15,151) (9,324) (2,916)
Securities gains ............. (576) ---- ----
Decrease (increase) in other
assets .................... 1,641 2,788 61
Increase (decrease) in accrued
expenses and other
liabilities ............... (2,074) 1,431 3,415
- --------------------------------------------------------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES ........ (1,712) 4,745 10,006
- --------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities ......... (9,698) (9,415) (10,010)
Proceeds from sales or maturities
of securities ................ 10,982 18,404 4,434
Capital contributions to
subsidiaries ................. (37,817) (10,589) ----
- --------------------------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES ................... (36,533) (1,600) (5,576)
- --------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of debt ................ 40,500 4,000 ----
Purchase of treasury stock ...... ---- (379) (954)
Purchase of preferred stock ..... ---- (2,002) (792)
Proceeds from stock options ..... 807 258 7
Cash dividends paid ............. (3,706) (3,369) (3,186)
- --------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ......... 37,601 (1,492) (4,925)
- --------------------------------------------------------------
INCREASE (DECREASE) IN CASH ..... (644) 1,653 (495)
CASH AT BEGINNING OF YEAR ....... 1,784 131 626
- --------------------------------------------------------------
CASH AT END OF YEAR ............. $1,140 $1,784 $131
==============================================================
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
FirstFederal Financial Services Corp
Wooster, Ohio:
We have audited the accompanying consolidated balance sheets of FirstFederal
Financial Services Corp and subsidiaries (the Corporation) as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated financial statements
of the Corporation for the year ended December 31, 1995, were audited by other
auditors whose report thereon, dated January 26, 1996, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FirstFederal
Financial Services Corp and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," in 1997.
/s/ KPMG Peat Marwick LLP
Cleveland, Ohio
February 6, 1998
Exhibit 13, Page 14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION:
Many of the statements in Management's Discussion and Analysis of Financial
Condition and Result of Operations, including the following discussion of the
banking industry, set forth management's opinions with respect to present or
future trends or factors affecting the operations, markets and products of
FirstFederal Financial Services Corp and its consolidated subsidiaries (the
"Corporation"). Actual results could differ materially from those projected. The
Corporation undertakes no obligation to release revisions to these
forward-looking statements or reflect events or circumstances after the date of
this report.
The data presented in the following pages should be read in conjunction with
the audited Consolidated Financial Statements.
RESULTS OF OPERATIONS SUMMARY:
Net income advanced by 46.7% in 1997 and 4.3% in 1996. The Corporation's
net income to average assets, referred to as return on average assets (ROA), and
return on average shareholders' equity (ROE) follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1997 1996 1995 1994 1993
==============================================================
<S> <C> <C> <C> <C> <C>
Net Income ($000's).. $14,448 $9,850 $9,446 $9,021 $9,739
Basic Income per
share(a).......... 2.59 1.82 1.85 1.86 2.13
Diluted income per
share (a) ....... 1.96 1.43 1.42 1.43 1.67
ROA (b).............. 1.22% 1.16% 1.07% 1.21% 1.57%
ROE (b).............. 16.19% 14.72% 12.90% 14.17% 19.62%
==============================================================
<FN>
(a) Per share amounts have been restated to reflect stock dividends.
(b) Non-recurring expenses of $1.2 million ($1 million after tax) reflecting
Summit acquisition costs included in the third quarter of 1997 and $3.3
million ($2.2 million after tax) included in the third quarter of 1996 for
the one-time assessment for the re-capitalization of the Savings
Association Insurance Fund (SAIF) have been excluded for comparative
purposes from the performance ratios shown above.
</TABLE>
NET INTEREST INCOME
The largest source of the Corporation's revenue is net interest income. Net
interest income is the spread between interest income on interest-earning
assets, such as loans and leases and securities, and the interest expense on
liabilities used to fund those assets, such as interest-bearing deposits and
borrowings. Net interest income is affected by both changes in the level of
interest rates and changes in the amount and composition of interest-earning
assets and interest-bearing liabilities. Changes in net interest income are
frequently measured by two statistics-net interest margin and net interest rate
spread. Net interest margin is expressed as net interest income divided by
average interest-earning assets. Net interest rate spread is the difference
between the average yield earned on interest-earning assets and the average rate
incurred on the interest-bearing liabilities. Table 1, Consolidated Average
Balance Sheets and Analysis of Net Interest Income, presents the net interest
income, net interest margin, and net interest rate spread for the five years
1993 through 1997, comparing interest revenue and interest-bearing assets
outstanding with interest cost and average interest-bearing liabilities
outstanding. Nonaccrual loans and leases have been included in the average loan
and lease balances. Average outstanding securities balances were based on
amortized cost excluding unrealized gains or losses on securities available for
sale.
Net interest income grew to $30.5 million in 1997, an increase of 19% over
the $25.5 million earned during 1996. Net interest income increased 6.9% in 1996
over 1995. For 1997, net interest income growth resulted from an increase in
average interest-earning assets, a portion of which is attributable to 1997
businesses acquired, and improvement in the net interest margin from a higher
yield on loans and leases. The increase in 1996 was attributable primarily to
average interest-earning asset growth which overcame the effect of a compressed
net interest margin.
During 1997, average interest-earning assets grew by $183 million to $1.2
billion, an increase of 18.6% over 1996. In 1996, average interest-earning
assets grew 14.3% over 1995. Securitization and sales of manufactured housing
loans and cash proceeds from the KeyBank deposit acquisition in 1997 affected
the Corporation's earning asset mix in 1997. The Corporation continues to use
loan securitization and sales to increase balance sheet flexibility.
TABLE 1 - CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST
INCOME: FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
---------------------------------------- ------------------------------------
AVERAGE AVERAGE Average Average
OUT- REVENUE/ YIELD/ Out- Revenue/ Yield/
(000's) STANDING COST RATE standing Cost Rate
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans and leases including loans held for sale ... $821,150 $68,481 8.34% $718,802 $56,274 7.83%
Securities ....................................... 328,882 20,974 6.38 251,718 16,842 6.69
Other interest-earning assets .................... 13,733 638 4.65 10,364 443 4.27
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ....................... 1,163,765 90,093 7.74 980,884 73,559 7.50
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets ......................... 105,379 54,405
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ........................................ $1,269,144 $1,035,289
===================================================================================================================================
LIABILITIES
Interest-bearing liabilities ........................
Interest checking ................................ $86,449 1,701 1.97 $57,547 1,192 2.07
Savings .......................................... 135,544 4,355 3.21 132,874 4,069 3.06
Money market ..................................... 23,552 1,043 4.43 14,034 483 3.44
Certificates of deposit .......................... 468,828 28,423 6.06 400,972 23,399 5.84
Advances and other borrowings .................... 381,982 24,028 6.29 317,999 18,905 5.94
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities .................. 1,096,355 59,550 5.43 923,426 48,048 5.20
- -----------------------------------------------------------------------------------------------------------------------------------
Demand deposits ..................................... 32,795 ---- 20,090
Other non-interest bearing liabilities .............. 44,585 11,010
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities ................................... 1,173,735 954,526
Shareholders' equity ................................ 95,409 80,763
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $1,269,144 $1,035,289
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME MARGIN .......................... $30,543 2.62% $25,511 2.60%
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST RATE SPREAD ............................ 2.31% 2.30%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES .................. 106.15% 106.22%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE EQUITY TO AVERAGE
TOTAL ASSETS..................................... 7.52% 7.80%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 13, Page 15
<PAGE> 16
Sales and securitizations allow the Corporation to expand origination and
servicing, and the related fee income, without increasing leverage. Sales and
securitization of manufactured housing loans totaled $137.3 million in 1997 and
$48.9 million in 1996. A portion of the proceeds from the $40.5 million
subordinated debt offering in March 1997 and the KeyBank deposit acquisition
were invested in securities to provide liquidity to fund loan and lease growth
in our North Central Ohio markets.
Average interest-bearing liabilities grew from $799 million in 1995 to $923
million in 1996 to $1.1 billion in 1997. Core deposits remain our most important
funding source because they are relatively lower cost and the basis for ongoing
customer relationships. In 1997, average core deposits increased 21.0% due to a
renewed focus on new transaction account products and promotions, and deposit
acquisitions in 1997 and 1996. Acquisitions contributed approximately $70
million of the $122 million total growth in average core deposits. Average
demand, interest checking and savings accounts comprised 34.1% of total core
deposits, compared to 33.7% in 1996 and 35.5% in 1995. Average non-core deposits
and short-term borrowings increased to 52.6% from 50.8% of average
interest-earning assets in 1996. The net interest margin improved 2 basis points
(bp) (a basis point is equivalent to .01%) to 2.62% in 1997 from 2.60% in 1996.
The 1997 increase follows an 18 bp drop in the net interest margin in 1996. The
total cost of interest-bearing liabilities increased 23 bps during 1997 to 5.43%
reflecting higher borrowing costs on short and long-term debt and interest rate
increases on certain deposit products which generated additional core deposits
in 1997. Interest-bearing deposit costs increased 16 bps from 4.81% in 1996 to
4.97% in 1997. The cost of borrowed funds, including short-term borrowings,
subordinated notes and long-term debt, increased by 35 bps from 5.94% in 1996 to
6.29% in 1997. The effect of interest free funds on the net interest margin
improved from 14 bps in 1996 to 20 bps in 1997 primarily due to the effect of
acquisitions. Net interest margins compressed during 1995 and the first part of
1996, due primarily to 1995's rapid rise in short-term interest rates which
caused short-term liabilities to reprice upward faster than short-term assets.
Margins stabilized in the last part of 1996 as strong loan and lease volume and
higher interest rates improved average interest-earning asset yields. The margin
was also affected in part by additional balance sheet leverage in 1997 through
the purchase of securities funded primarily by short-term borrowings. This
securities leverage strategy favorably impacted 1997 ROE but negatively impacted
the net interest margin.
Table 2, the Analysis of Net Interest Income Changes, separates the
Corporation's change in net interest income into two components: (1) volume of
average interest-earning assets and interest-bearing liabilities outstanding;
and (2) average yields on interest-earning assets and average rates for
interest-bearing liabilities. Table 2 illustrates the net interest income effect
of balance sheet changes and changes in interest rate levels which occurred
during 1997 and 1996.
NON-INTEREST INCOME
Total non-interest income increased 63% over 1996 and was up 330% in 1996
over 1995.
The largest increase was attributable to manufactured housing income, which
originated in 1996 with the Corporation's acquisition of MCi, increasing $4.4
million in 1997 to $16 million from $11.6 million in 1996. Originations of
manufactured housing finance contracts (MHF contracts) increased to $310.3
million in 1997 from $260.6 million in 1996 reflecting expansion of MCi's
manufactured housing dealer base from 27 states in 1996 to 42 states. Gains
realized upon the sale of MHF contracts improved in 1997 as management directed
more product into asset securitizations or bulk sales and reduced the number of
MHF contracts brokered on a flow basis to other financial institutions. Sales
and securitizations of MHF contracts totaled $137.3 million in 1997 compared to
$48.9 million in 1996. The components of manufactured housing income are shown
in Note 9 to the Consolidated Financial Statements. Wider pricing spreads and
heightened market sensitivity to gain on sale accounting is anticipated to
result in lower gains realized upon the sale of MHF contracts in 1998 compared
to 1997.
Mortgage banking income increased 47% in 1997 and 35% in 1996 in large part
due to lower interest rates which fueled origination volume and generated
increased gains on sales of mortgage loans. Gains on sales of residential
mortgage loans for 1997 were $4 million compared to $2.3 million for 1996, which
TABLE 1 CONTINUED
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------- -----------------------------------------------------------------------------------
Average Average Average Average Average
Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Average Yield/
standing Cost Rate standing Cost Rate standing Cost Rate
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$527,885 $42,841 8.12% $413,639 $33,750 8.16% $339,437 $29,472 8.68%
328,541 21,979 6.69 292,569 17,676 6.04 247,762 15,731 6.35
1,651 102 6.18 9,693 561 5.79 6,819 307 4.50
- -----------------------------------------------------------------------------------------------------------------------------------
858,077 64,922 7.57 715,901 51,987 7.26 594,018 45,510 7.66
- -----------------------------------------------------------------------------------------------------------------------------------
27,650 25,821 26,921
- -----------------------------------------------------------------------------------------------------------------------------------
$885,727 $741,722 $620,939
===================================================================================================================================
$49,746 942 1.89 $44,293 857 1.93 $36,410 787 2.16
127,789 3,863 3.02 151,214 4,578 3.03 137,199 4,489 3.27
12,537 424 3.38 15,507 391 2.52 17,064 465 2.73
325,391 18,889 5.81 267,227 12,845 4.81 236,114 11,567 4.90
283,828 16,928 5.96 190,612 10,589 5.56 132,962 8,011 6.03
- -----------------------------------------------------------------------------------------------------------------------------------
799,291 41,046 5.14 668,853 29,260 4.37 559,749 25,319 4.52
- -----------------------------------------------------------------------------------------------------------------------------------
8,804 6,679 7,272
4,421 2,605 4,281
- -----------------------------------------------------------------------------------------------------------------------------------
812,516 678,137 571,302
73,211 63,585 49,637
- -----------------------------------------------------------------------------------------------------------------------------------
$885,727 $741,722 $620,939
- -----------------------------------------------------------------------------------------------------------------------------------
$23,876 2.78% $22,727 3.17% $20,191 3.40%
- -----------------------------------------------------------------------------------------------------------------------------------
2.43% 2.89% 3.14%
- -----------------------------------------------------------------------------------------------------------------------------------
107.35% 107.03% 106.12%
- -----------------------------------------------------------------------------------------------------------------------------------
8.27% 8.57% 7.99%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 13, Page 16
<PAGE> 17
TABLE 2 - ANALYSIS OF NET INTEREST INCOME CHANGES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 Compared to 1995
------------------------------------------------ --------------------------------------------
($000's) VOLUME YIELD/RATE TOTAL Volume Yield/Rate Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income
Loans and leases ...................... $8,541 $3,666 $12,207 $14,963 ($1,530) $13,433
Securities ............................ 4,912 (780) 4,132 (5,137) ---- (5,137)
Other interest earning assets ......... 156 39 195 373 (32) 341
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME CHANGE ............. 13,609 2,925 16,534 10,199 (1,562) 8,637
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense
Deposits .............................. 6,453 (74) 6,379 3,449 1,576 5,025
Advances and other borrowings ......... 4,010 1,113 5,123 2,034 (57) 1,977
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE CHANGE ............ 10,463 1,039 11,502 5,483 1,519 7,002
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST
INCOME ................................ $3,146 $1,886 $5,032 $4,716 ($3,081) $1,635
====================================================================================================================================
</TABLE>
included the effect of adopting SFAS No. 122, and $1.5 million for 1995. During
1997, the Corporation originated $240.2 million in residential mortgage loans
compared to $368.5 million in 1996, whereas sales totaled $121.6 million in 1997
and $223.4 million in 1996. Origination volume in 1997 was lower that 1996
primarily due to mortgage product mix and pricing changes implemented by
management to enhance profit margins from mortgage banking activities.
Residential mortgage loans serviced at December 31, 1997 were $1 billion,
including $521 million serviced for others.
Customer service fee income totaled $4.8 million in 1997 and $1.9 million in
1996, up 159% and 275%, respectively. The growth in both years was fueled by an
expanding delivery system, deposit acquisitions, successful product campaigns
and pricing enhancements.
Other income increased $1.6 million in 1997, reflecting lease
consulting activities of ACR acquired in 1997.
NON-INTEREST EXPENSE
The Corporation strives to control operating expenses through efficient
staffing and a constant focus on improving productivity.
Operating expense levels are often measured using the efficiency ratio
(operating expenses before amortization divided by the sum of net interest
income and non-interest income). The Corporation's efficiency ratio compares
favorably to other banks at 54.55%, 52.78% and 50.61% for 1997, 1996 and 1995,
respectively, excluding the impact of non-recurring expenses. Total non-interest
expense excluding non-recurring expenses increased 43% in 1997 and 76% in 1996.
Acquisitions and growth affected year-to-year operating expense comparisons.
Excluding the non-recurring expenses, salaries, wages, incentives and
employee benefits comprised 48% and 46% of total non-interest expense in 1997
and 1996, respectively, and increased by 51% and 90% during the same periods.
The number of full-time equivalent (FTE) employees was 635 at the end of the
year, an increase of 205 over year end 1996. The majority of the increase in
FTE employees is directly due to acquisitions. Average salaries, wages,
incentives and benefits per FTE have increased 2% from 1996, which was
relatively unchanged from 1995.
Net occupancy expenses increased 57% in 1997 and 18% in 1996. Increased
costs in 1997 are associated with the net addition of 15 locations, primarily
from acquisitions, including rental property costs, utilities, real estate taxes
and depreciation. Upgrades of equipment to support growth and processing
technology also contributed to the increase.
Non-interest expense in 1997 includes $1.2 million for acquisition
transaction costs of Summit Bank and 1996 expense includes a $3.3 million
one-time assessment to recapitalize the SAIF fund.
Outside services, data processing and communications expenses increased to
$3.5 million, up $1.1 million or 49% over 1996, which was directly related to
increased loan and deposit volumes. Intangible amortization was up approximately
$.7 million in 1997 due to acquisition activity.
FINANCIAL CONDITION
SECURITIES
The investment portfolio consists largely of fixed and floating rate
mortgage related securities, predominantly underwritten to the standards of and
guaranteed by the government-sponsored agencies of FHLMC and FNMA. These
securities differ from traditional debt securities primarily in that they have
uncertain maturity dates and are priced based on estimated prepayment rates on
the underlying mortgages. The estimated average life of the portfolio is 4.3
years based on current prepayment expectations.
The growth in the securities portfolio in 1997 reflects the investment of
proceeds from deposit acquisitions and the $40.5 million subordinated debt
offering in March 1997. The securities portfolio provides liquidity to fund
future loan and lease growth in our expanding markets.
SECURITIES PORTFOLIO AT DECEMBER 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------- ----------------
($000's) 1997 1996 1995 1994 1993
================================================================================================================= ================
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agencies ................... $29,295 $45,323 $38,971 $26,182 ----
States and political subdivisions ............... 2,017 ---- ---- ---- ----
Agency mortgage-backed securities ............... 166,468 93,785 174,974 118,031 ----
Retained interest in securitized assets ......... 27,023 6,491 ---- ---- ----
Other bonds, notes and debentures ............... 911 2,440 2,982 1,968 ----
Other securities ................................ 28,095 17,485 ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities ................................... $253,809 $165,524 $216,927 $146,181 ----
================================================================================================================= ================
Securities held to maturity:
U S government agencies ........................ 4,500 4,501 2,502 3,503 $23,816
States and political subdivisions ............... 2,905 1,634 994 547 427
Agency mortgage-backed securities ............... 25,799 78,737 86,147 163,921 231,828
Other bonds, notes and debentures ............... 35,652 ---- ---- ---- ----
Other securities ................................ 2,103 112 299 526 3,007
- ----------------------------------------------------------------------------------------------------------------- ----------------
Total securities ................................... $70,959 $84,984 $89,942 $168,497 $259,078
================================================================================================================= ================
</TABLE>
Exhibit 13, Page 17
<PAGE> 18
MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD OF SECURITIES AT DECEMBER 31,
1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MATURITY 1-5 YEAR 6-10 YEAR OVER 10
UNDER 1 YEAR MATURITY MATURITY YEAR MATURITY TOTAL
------------------- ------------------- -------------------- ------------------- -------------------
($000's) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. government and
agencies .............. $999 5.95% $28,296 6.41% ---- ---- ---- ---- $29,295 6.39%
- -----------------------------------------------------------------------------------------------------------------------------------
States and political
subdivisions (a) ..... 108 6.31 93 7.46 ---- ---- $1,816 7.82% 2,017 7.72
- -----------------------------------------------------------------------------------------------------------------------------------
Agency mortgage-backed
securities ........... 4,862 6.01 112,043 6.33 $36,250 6.33% 13,313 6.10 166,468 6.30
- -----------------------------------------------------------------------------------------------------------------------------------
Other bonds, notes,
debentures and
securities ........... 25,153 6.42 14,662 6.30 16,214 6.25 ---- ---- 56,029 6.41
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
U.S. Government and
agencies ............. 2,500 5.05 ---- ---- ---- ---- 2,000 7.50 4,500 6.14
- -----------------------------------------------------------------------------------------------------------------------------------
State and political
subdivisions (a) ...... 118 7.90 563 6.92 1,122 7.71 1,103 8.75 2,906 7.96
- -----------------------------------------------------------------------------------------------------------------------------------
Agency mortgage-backed
securities .......... 1,095 7.80 48,405 6.44 3,999 6.03 7,951 6.67 61,450 6.40
- -----------------------------------------------------------------------------------------------------------------------------------
Other bonds, notes and
debentures .......... 38 7.63 2,065 6.89 ---- ---- 2,103 6.77
===================================================================================================================================
</TABLE>
Maturities of mortgage-backed securities were estimated based on historical and
predicted prepayment trends.
(a) taxable equivalent yield
LOAN AND LEASE PORTFOLIO AT DECEMBER 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ------------------- ------------------- ------------------ ------------------
($000's) Amount % Amount % Amount % Amount % Amount %
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial:
Commercial.............. $45,293 4.9% $4,850 0.7%
Mortgage................ 72,001 7.8 17,370 2.6 $26,966 4.6% $18,396 3.8% $20,838 5.4%
Finance Contracts....... 4,585 0.5 ---- ---- ---- ---- ---- ----
Leases.................. 41,909 4.6 ---- ---- ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------------
Consumer:.
Mortgage................ 506,113 55.0 534,046 79.4 484,744 83.0 411,690 85.5 322,694 83.7
Consumer Loans.......... 139,166 15.1 77,507 11.5 72,344 12.4 51,694 10.7 42,221 10.9
Manufactured Housing.... 110,827 12.1 38,840 5.8 ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------------
Total...................... $919,894 100% $672,613 100% $584,054 100% $481,780 100% $385,753 100%
==================================================================================================================================
</TABLE>
Loan and lease balances increased 37% and 15%, respectively, in 1997 and
1996. Acquisitions completed in 1997 represent $119.1 million of the $247.3
million increase in 1997. In both years, the growth in outstandings was affected
considerably by sales and securitizations of mortgage and manufactured housing
loans, which allows the Corporation to be selective in how much of the expanding
origination volume is retained in the loan and lease portfolio. For example,
manufactured housing loan originations were $310.3 million in 1997 compared to
$260.6 million in 1996, a 19% increase, but the related manufactured housing
loan outstandings only increased $72 million because $137.3 million of this
origination volume was securitized and sold in 1997. Similarly, residential
mortgage loan balances actually declined during 1997 because the Corporation
sold $121.9 million in mortgage loans which when combined with loan repayments,
exceeded mortgage loan originations of $240.2 million in 1997. Consumer loans
grew by 80% and 7% in 1997 and 1996, respectively, primarily due to increases in
home equity loans in 1997.
Commercial loan and lease outstandings increased to $163.8 million in 1997
from $22 million in 1996. The majority of the $141.4 million increase in 1997
reflects expanded commercial loan and lease portfolios and origination abilities
through acquisitions completed in 1997. Commercial mortgages represent 8% of the
total loan and lease portfolio and include primary financing of loans on
properties occupied by the principal borrower ("owner-occupied") within our
banking market areas in Ohio.
ALLOWANCE FOR CREDIT LOSSES FIVE YEAR HISTORY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
($000's) 1997 1996 1995 1994 1993
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at January 1........................................ $2,916 $2,994 $3,204 $4,512 $3,923
Provision for credit losses................................. 842 360 ---- 15 1,025
Losses charged off.......................................... (831) (454) (225) (1,337) (482)
Recoveries of losses previously charged off................. 100 16 15 14 46
Allowance of acquired businesses............................ 2,511 ---- ---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31...................................... 5,538 2,916 2,994 3,204 4,512
===================================================================================================================================
Loans and leases outstanding at December 31................. 919,894 672,613 584,054 481,780 385,753
Average loans and leases excluding loans held for sale...... 733,181 655,979 527,885 413,639 339,437
Net charge-offs as a percent of average loans and
leases outstanding....................................... 0.10% 0.07% 0.04% 0.32% 0.13%
Allowance as a percent of total nonperforming assets........ 119.07 69.91 158.41 89.62 114.69
Allowance as a percent of total under-performing assets..... 115.11 69.91 158.41 89.62 114.69
===================================================================================================================================
</TABLE>
Exhibit 13, Page 18
<PAGE> 19
ALLOWANCE FOR CREDIT LOSSES
The Corporation provides as an expense an amount for expected credit
losses. The provision for credit losses is based on the growth of the loan and
lease portfolio and on recent loss experience. Actual losses on loans and leases
are charged against the allowance for credit losses. The amount of loans and
leases actually removed as assets from the Consolidated Balance Sheets is
referred to as charge-offs and, after netting out recoveries on previously
charged off assets becomes net charge-offs.
Charge-offs, net of recoveries, increased $293,000 over 1996 due to higher
losses on commercial loans. Net charge-offs as a percent of average loans and
leases outstanding were 0.10%, 0.07% and 0.04% for 1997, 1996 and 1995
respectively. The allowance for credit losses as a percentage of total loans and
leases increased to 0.60% at December 31, 1997 from 0.43% at December 31, 1996
due to the changing mix in loans and leases outstanding.
UNDERPERFORMING ASSETS
Underperforming assets consist of (1) nonaccrual loans and leases on which
the ultimate collectibility of the full amount of interest is uncertain, (2)
loans and leases which have been renegotiated to provide for a reduction or
deferral of interest or principal because of deterioration in the financial
position of the borrower, (3) loans and leases past due ninety days or more as
to principal or interest and (4) other real estate owned. A summary of
underperforming assets at December 31 follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
($000's) 1997 1996 1995 1994 1993
===================================================================
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases . $4,353 $3,590 $1,425 $831 $3,390
Renegotiated loans and leases ---- 340 366 2,714 491
Other real estate owned ..... 298 241 99 30 53
- -------------------------------------------------------------------
Total nonperforming as ...... 4,651 4,171 1,890 3,575 3,934
Ninety days past due loans
and leases still accruing ... 160 ---- ---- ---- ----
- -------------------------------------------------------------------
Total underperforming assets $4,811 $4,171 $1,890 $3,575 $3,934
- -------------------------------------------------------------------
Nonperforming assets as a
percent of total loans,
leases and other real
estate owned ............. 0.51% 0.62% 0.32% 0.74% 1.02%
Underperforming assets as a
percent of total loans,
leases and other real
estate owned ............. 0.52 0.62 0.32 0.74 1.02
===================================================================
</TABLE>
Nonperforming assets as a percentage of total loans, leases and other real
estate owned decreased to 0.51% at December 31, 1997 from 0.62% at December 31,
1996. Of the total underperforming assets at December 31, 1997, $2.3 million are
to residential mortgage borrowers and $.5 million relate to commercial loans or
mortgages on projects in the Corporation's primary banking market areas in Ohio.
The remaining $2 million of underperforming assets relate to consumer loans,
primarily manufactured housing finance contracts, located throughout the United
States.
At the time loans are classified as non-accrual, any related interest
income is reversed. For the years ended December 31, 1997, 1996 and 1995
respectively, additional interest income of $114,146, $70,660 and $75,642 would
have been recorded if the nonaccrual and renegotiated loans and leases had been
current in accordance with their original terms. No interest income on such
loans was recorded for the years ended 1997, 1996 and 1995, respectively, after
the dates on which such loans became nonaccrual loans.
At December 31, 1996, underperforming residential mortgage loans were $2.3
million and underperforming commercials loans and consumer loans were $1 million
and $.8 million, respectively.
DEPOSITS
Interest-earning assets are funded primarily by core deposits. The
accompanying tables show the relative composition of the Corporation's average
deposits and the change in average deposit sources during the last five years.
Average core deposits increased 19.4% in 1997 due to a continued sales
focus on transaction accounts and deposit acquisitions. Our new Money Market
Index Account lead to increased savings and money market balances, while the
High Performance Checking product and promotional campaigns contributed to
advances in demand and interest checking. Core deposit growth in 1997 was
instrumental in funding 1997 average asset growth of 22.6% without any
significant change in short-term borrowings. The acquisition of deposits from
KeyBank, N.A. increased deposits by $150.8 million. Deposits acquired in 1996
totaled approximately $26.6 million.
Scheduled maturities of certificates and other time deposits at December
31, 1997, were as follows: through 1998 - $379,600,000; 1999 through 2002 -
$184,680,000; and 2003 and after - $46,993,000.
Interest expense on certificates of $100,000 or more was $6,190,000,
$4,001,000 and $2,116,000 for 1997, 1996 and 1995, respectively. The following
tables depict the distribution of average deposits and changes in average
deposit sources for each of the last five years.
DISTRIBUTION OF AVERAGE DEPOSITS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1997 1996 1995 1994 1993
===============================================================
<S> <C> <C> <C> <C> <C>
Demand 4.4% 3.2% 1.6% 1.4% 1.7%
Interest checking 11.6 9.2 9.5 9.1 8.4
Savings 18.1 21.3 24.4 31.2 31.6
Money market 3.2 2.2 2.4 3.2 3.9
Certificates of
Deposit 62.7 64.1 62.1 55.1 54.4
- ---------------------------------------------------------------
Total 100% 100% 100% 100% 100%
===============================================================
</TABLE>
CHANGE IN AVERAGE DEPOSIT SOURCES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
($000's) 1997 1996 1995 1994 1993
===============================================================
<S> <C> <C> <C> <C> <C>
Demand $12,705 $11,286 $2,125 ($593) $4,604
Interest checking 28,902 7,801 5,453 7,883 7,059
Savings 2,670 5,085 (23,425) 14,015 47,605
Money market 9,518 1,497 (2,970) (1,557) (1,702)
Certificates of
Deposit 67,856 75,581 58,164 31,113 813
- ---------------------------------------------------------------
Total $121,651 $101,250 $39,347 $50,861 $58,379
===============================================================
</TABLE>
SHORT-TERM BORROWINGS
Short-term borrowings primarily consist of securities sold under agreements
to repurchase and advances from the Federal Home Loan Bank of Cincinnati (FHLB).
Short-term borrowings are generally used to fund loans held for sale and the
portion of earning asset growth not funded by core deposits. Average short-term
borrowings as a percentage of average earning assets increased from 8.5% in 1996
to 10.3% in 1997. At year end 1997, borrowings supported a relatively smaller
proportion of earning asset growth compared to 1996 because of the
aforementioned deposit acquisitions and success in increasing core deposits. In
1996 and in 1995, loan and lease growth outpaced core deposit growth, increasing
the reliance on short-term borrowings.
LONG-TERM BORROWINGS
Long-term borrowings, primarily consist of FHLB advances and subordinated
debt. Long-term borrowings are generally used to fund longer term earning assets
such as residential mortgage loans and manufactured housing loans. The $40.5
million subordinated debt is redeemable at the option of the Corporation at any
time after June 30, 2002 until its maturity date of June 30, 2004. The
subordinated debt qualifies as Tier 2 regulatory capital.
In February, 1998, the Corporation issued $50 million of 8.67% Junior
Subordinated Deferrable Interest Debentures due in 2028. Portions of these
subordinated debentures qualify as Tier 1 and Tier 2 regulatory capital.
Exhibit 13, Page 19
<PAGE> 20
CAPITAL RESOURCES
At December 31, 1997, shareholders' equity was $104.7 million compared to
$85.3 million at December 31, 1996, an increase of $19.4 million or 23%. This
increase in capital resulted primarily from the retention of earnings and the
issuance of stock in an acquisition.
The following table shows several capital ratios for the last three years:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1997 1996 1995
==============================================================
<S> <C> <C> <C>
Average shareholders' equity to:
Average assets...................... 7.52% 7.80% 8.26%
Average deposits.................... 12.77 12.91 13.96
Average loans and leases excluding
loans held for sale............... 13.01 12.31 13.87
==============================================================
</TABLE>
LIQUIDITY AND MARKET RISK
The objective of the Corporation's Asset/Liability Management function is
to maintain consistent growth in net interest income within the Corporation's
policy guidelines. This objective is accomplished through flexible management of
the Corporation's balance sheet liquidity and interest rate risk exposures due
to changes in economic conditions, interest rate levels and customer
preferences.
The goal of liquidity management is to provide adequate funds to meet
changes in loan and lease demand or any potential unexpected deposit
withdrawals. This goal is accomplished primarily by maintaining sufficient
liquid assets in the form of investment securities and loans held for sale along
with consistent core deposit growth, and the availability of unused borrowing
capacity at FHLB. At December 31, 1997, the Corporation had approximately $141
million in securities, loans held for sale and other short-term investments
maturing within one year compared to $121 million at year-end 1996. Additional
asset liquidity is provided by the remainder of the securities portfolio and
selected securitizable loan assets. The Corporation funds interest-earning
assets with core deposits and borrowings. Average core deposits have funded
approximately 66% of total average interest-earning assets over the last five
years. This, in addition to the Corporation's borrowing capacity and 8% average
equity capital base, serves as a stable funding base.
Management considers interest rate risk to be the Corporation's most
significant market risk. Interest rate risk is the exposure to adverse changes
in the net interest income of the Corporation as a result of changes in interest
rates. Consistency in the Corporation's earnings is largely dependent on the
effective management of interest rate risk.
The Corporation's Asset/Liability Management Committee (ALCO), which
includes senior management representatives and reports to the Board of
Directors, monitors and considers methods of managing the rate sensitivity and
repricing characteristics of the balance sheet components consistent with
maintaining acceptable levels of changes in economic value of equity (EVE) and
net interest income (NII). The Corporation's asset/liability management program
is designed to minimize the impact of sudden and sustained changes in interest
rates on EVE and NII.
The Corporation employs a variety of measurement techniques to identify and
manage its exposure to changing interest rates. An income simulation model is
used to determine the Corporation's sensitivity to changes in interest rates,
while interest rate sensitivity gap analysis is used to determine the repricing
characteristics of the subsidiaries assets and liabilities. If estimated changes
to EVE and NII are not within the limits established by the Board, the Board may
direct management to adjust its asset and liability mix to bring interest rate
risk within board-approved limits. The models are based on actual cash flows and
repricing characteristics for on and off balance sheet instruments and
incorporate market-based assumptions regarding the impact of changing interest
rates on the prepayment rate of certain assets and liabilities. The models also
include senior management projections for activity levels in product lines
offered by the Corporation. Assumptions based on the historical behavior of
deposit rates and balances in relation to changes in interest rates are also
inherently uncertain and, as a result, the model cannot precisely measure net
interest rates or NII. Actual results will differ from simulated results due to
timing, magnitude, and frequency of interest rate changes as well as changes in
market conditions and management strategies.
The Board of Directors has adopted an interest rate risk policy which
establishes maximum decreases in the EVE of 20%, 40%, 60% and 80% and decreases
in NII of 10%, 20%, 30% and 40% in the event of a sudden and sustained 1 to 4
percent increase or decrease in market interest rates. The following table
presents the Corporation's projected change in EVE and NII for various rate
shock levels at December 31, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Change in Percent Change in Percent Change in
Interest Rates EVE over 12 months NII over 12 months
==============================================================
<S> <C> <C>
+2.0% -18.8% -0.3%
+1.0 -8.7 -0.2
0 ---- ----
-1.0 4.5 -1.7
-2.0 0.4 -3.4
==============================================================
</TABLE>
At December 31, 1997, the estimated changes in EVE and NII were within the
policy guidelines established by the Board of Directors.
In order to reduce the exposure to interest rate fluctuations and to manage
liquidity, the Corporation has developed strategies to shorten the effective
maturity and increase the interest rate sensitivity of its asset base. Emphasis
has been placed on the origination of adjustable-rate residential and commercial
mortgage loans and adjustable-rate commercial and consumer loans to decrease the
average maturity and repricing characteristics of the Corporation's assets. In
addition, long-term, fixed-rate mortgage loans are underwritten according to
guidelines of the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal
National Mortgage Association (FNMA) to facilitate sale of those loans into the
secondary market for cash. Long-term, fixed rate manufactured housing loans are
underwritten in accordance with guidelines established to facilitate
securitization and sale to investors in secondary markets as well. As a primary
means of funding interest-earning assets, the Corporation maintains core
transaction deposits which generally are more resistant to interest rate changes
than other funding options. The Corporation continually evaluates interest rate
risk management opportunities, including the use of derivative financial
instruments such as interest rate swaps and forward commitments. The Corporation
does not currently engage in trading activities.
In addition, the Corporation uses interest rate sensitivity gap analysis to
monitor the relationship between the maturity and repricing of its
interest-earning assets and interest-bearing liabilities, while maintaining an
acceptable interest rate spread. Interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered positive when
the amount of interest-rate-sensitive assets exceeds the amount of
interest-rate-sensitive liabilities, and is considered negative when the amount
of interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect NII, while a positive gap would
result in an increase in NII. Conversely, during a period of falling interest
rates, a negative gap would result in an increase in NII, while a positive gap
would negatively affect NII.
The following table summarizes the Corporation's interest rate sensitivity
gap analysis at December 31, 1997:
Exhibit 13, Page 20
<PAGE> 21
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Within 1 1-3 years 3-5 years greater than 5 years
($000's) year
============================================================================
<S> <C> <C> <C> <C>
Total interest rate
sensitive assets....$659,327 $263,535 $177,488 $245,492
Total interest rate
sensitive
liabilities........ 783,762 345,140 100,893 99,591
Periodic GAP..........(124,435) (81,605) 76,594 145,901
Cumulative GAP........(124,435) (206,040) (129,446) 16,454
Cumulative GAP%....... (8.5%) (14.1%) (8.9%) 1.1%
============================================================================
</TABLE>
YEAR 2000
Some of the Corporation's computer programs were originally designed to
recognize calendar years by their last two digits. Calculations performed using
these truncated fields may not work properly with dates from the year 2000 and
beyond. The Corporation began planning its year 2000 conversion in 1997 and
formed a project committee that quarterly reviews the status of the conversion.
A comprehensive review to identify the systems affected by this issue was
completed, estimated cost projections were determined and an implementation plan
was compiled and is currently being executed. As a result of the procedures
already completed, the Corporation expects to either modify or upgrade existing
systems or replace some systems altogether. Considerable progress has been made
by Corporation personnel and it is anticipated that this project will be largely
completed by internal staff. The Corporation does not expect to spend any
significant amounts with outside contractors relative to the completion of this
task although no assurance can be given in this regard. Projected capital
expenditures for 1998 and 1999 to upgrade technology equipment not year 2000
compliant is $1.5 to $2.0 million. These capital expenditures should not result
in a material incremental increase in capital outlays from 1997 levels. Many of
the Corporation systems are vendor-supplied, and most vendors have provided the
Corporation with certification or a delivery commitment letter. The Corporation
presently believes with the planned modifications to existing systems,
conversion to new systems, and vendor delivery of millennium-compliant systems,
the year 2000 compliance issues will be resolved on a timely basis, and any
related costs will not have a material impact on the operations, cash flows, or
financial condition of future periods although no assurance can be given in this
regard. In addition to internal efforts, the Corporation began a series of
customer awareness seminars in February 1998 to encourage commercial banking
customers to address year 2000 risks and concerns present in their respective
businesses.
SUMMARIZED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------- -----------------------------------------------
FOURTH THIRD SECOND FIRST Fourth Third Second First
(Unaudited)($000's) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income................ $26,194 $24,888 $20,313 $18,698 $19,440 $18,881 $17,967 $17,271
Net Interest Income............ 9,502 8,238 6,409 6,394 6,272 6,499 6,494 6,246
Provision for credit losses.... 300 265 170 107 90 90 90 90
Income before income taxes..... 6,980 5,227 5,486 5,650 5,231 1,289 5,324 3,890
Net income..................... 3,982 3,205 3,696 3,565 3,165 782 3,351 2,552
- --------------------------------------------------------------------------------------------------------------------------------
Net income per share basic..... 0.65 0.56 0.70 0.68 0.60 0.08 0.64 0.50
- --------------------------------------------------------------------------------------------------------------------------------
Net income per share diluted... 0.51 0.41 0.53 0.51 0.45 0.11 0.48 0.39
================================================================================================================================
</TABLE>
Exhibit 13, Page 21
