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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[Fee Required]
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No fee required]
For the transition period from ___________________ to ________________
Commission file number 0-17894
FIRSTFEDERAL FINANCIAL SERVICES CORP
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(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)
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Securities Registered Pursuant to Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
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Title of each class: Name of each exchange on which registered:
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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.
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Note 1: In calculating the market value of securities held by non-affiliates of
Registrant as disclosed on the cover page of this Form 10-K, Registrant has
treated as securities held by affiliates as of December 31, 1997, voting stock
owned of record by its directors and principal executive officers and
shareholders owning greater than 10% of the voting stock.
FIRSTFEDERAL FINANCIAL SERVICES CORP
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business.....................................................................................3
Item 2. Properties..................................................................................15
Item 3. Legal Proceedings...........................................................................16
Item 4. Submission of Matters to a Vote of Security Holders.........................................16
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters............Ex. 13, pg. 1
Item 6. Selected Financial Data..........................................................Ex. 13, pg. 1
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations...............................................................Ex. 13, pg. 15
Item 7a. Quantitative and Qualitative Disclosures About Market Risk......................Ex. 13, pg. 20
Item 8. Financial Statements and Supplementary Data......................................Ex. 13, pg. 2
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................17
PART III
Item 10. Directors and Executive Officers of the Registrant..........................................17
Item 11. Executive Compensation......................................................................17
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . ..17
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . 17
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . .18
</TABLE>
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PART I
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ITEM 1. BUSINESS
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ORGANIZATION
FirstFederal Financial Services Corp (the "Corporation"), an Ohio corporation,
is a bank holding company which has as its primary wholly-owned subsidiaries
Signal Bank, N.A., a national bank ("Signal Bank"), Summit Bank, N.A., a
national bank ("Summit Bank") and Mobile Consultants, Inc., a broker and
servicer of manufactured housing finance contracts ("MCi"). At December 31,
1997, the Corporation had assets of $1.5 billion, deposits of $981.7 million and
shareholders' equity of $104.7 million.
Founded in 1905 as an Ohio chartered stock building and loan association, Signal
Bank (formerly known as First Federal Savings and Loan Association of Wooster)
converted to a federally chartered mutual thrift in 1935, converted from mutual
to stock form in 1987, and converted from a savings and loan association to a
national bank in July 1997. On September 15, 1997, Signal Bank completed the
acquisition of seven branches with approximately $151 million in deposits.
Signal Bank serves north central Ohio (its "Market Area") through its home
office, 23 full service banking offices, and 3 limited service facilities.
Signal Bank offers a wide range of competitive consumer-oriented lending and
deposit products and services throughout its Market Area. Signal Bank has
achieved significant growth in recent years through the expansion of its asset
origination capabilities and by acquiring branches in its Market Area.
Summit Bank was acquired by the Corporation in July 1997. Summit Bank offers a
full complement of banking products and services to small businesses,
individuals and professionals in the Akron, Canton and Cleveland, Ohio
metropolitan areas. Summit Bank operates 2 full service banking offices.
MCi, a manufactured housing finance company which brokers manufactured home
loans to and on behalf of financial institutions, was acquired by the
Corporation in April 1996. MCi facilitates the origination of primarily
non-mortgage, consumer loan contracts through 3,500 dealers of manufactured
homes located in 42 states. MCi also services the collection and recovery of
troubled loans on behalf of the financial institutions which originate the
loans.
The Corporation has one other wholly-owned subsidiary, Summit Banc Investments
Corporation, which offers a full range of investment advisory services,
financial planning and portfolio management. Signal Bank has 8 wholly-owned
subsidiaries: Signal Mortgage Corp, a mortgage originator; Signal Finance Corp,
a multi-purpose finance company; Signal Securitization Corp, an issuer of
asset-backed securities; Alliance Corporate Resources ("ACR"), Inc., an
information technology equipment leasing and consulting company, HFS Agency,
Inc., seller of insurance and annuity products; Home Financial Services
Corporation, an investment sales and advisory company; Professional Appraisal
Services Corp, a real estate appraisal company; and Venture Mortgage Corp, a
mortgage banking joint venture. Summit Bank has one wholly-owned subsidiary,
Alpha Equipment Group, Inc., an equipment leasing company.
In February 1998, the Corporation formed Signal Capital Trust One ("Signal
Trust"), a Delaware business trust. Signal Trust was formed for the purpose of
(I) issuing and selling $50 million of its 8.67% Capital Securities, Series A
(the "Capital Securities") and common securities (the "Common Securities"), (ii)
investing the proceeds thereof in the 8.67% Junior Subordinated Deferrable
Interest Debentures, Series A, issued by the Corporation (the "FirstFederal
Debentures") and (iii) engaging in certain other limited activities. The Capital
Securities were issued and sold to investors in a private placement exempt from
the Securities Act of 1933 on February 10, 1998. The Corporation is the sole
owner of the Common Securities. Distributions on the Capital Securities are
guaranteed by the Corporation, are cumulative, began accumulating on February
13, 1998 and are payable semi-annually in arrears on February 15 and August 15
of each year, commencing August 15, 1998 at the annual rate of 8.67% of the
liquidation amount of $1,000 per security. The interest payment schedule of the
FirstFederal Debentures is identical to that of the Capital Securities, except
that so long as the Corporation is not in default
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under the indenture governing the FirstFederal Debentures, the Corporation may
defer the payment of interest on the FirstFederal Debentures at any time and
from time to time for a period not exceeding ten consecutive semi-annual periods
(an "Extension Period"). During any Extension Period, the Corporation will be
prohibited from taking certain actions, including declaring or paying any
dividends or distributions on or redeeming or purchasing any of its capital
stock.
When used in this form 10-K and in future filings by the Corporation with the
Securities and Exchange Commission (the "SEC"), in the Corporation's press
release or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, (I) the possibility that expected
cost savings from the planned acquisition of First Shenango (as described below)
cannot be fully realized or realized within the expected time frame, (ii) the
possibility that costs or difficulties related to the integration of the
businesses of the Corporation and First Shenango are greater than expected,
(iii) the possibility that revenues following the proposed acquisition of First
Shenango are lower than expected, (iv) changes in economic conditions in the
Corporation's market area, (v) changes in policies by regulatory agencies and
new legislation, (vi) fluctuations in interest rates, (vii) demand for loans in
the Corporation's market area, and (viii) competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Corporation wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Corporation wishes to advise readers that the factors listed
above and other factors could affect the Corporation's financial performance and
could cause the Corporation's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
The Corporation does not undertake - and specifically declines any obligation -
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
ACQUISITIONS
On February 9, 1998, the Corporation announced the signing of a definitive
agreement for the acquisition of First Shenango Bancorp, Inc. ("First
Shenango"). First Shenango's wholly-owned subsidiary, First Federal Savings Bank
of New Castle, is expected to become a separate operating subsidiary of the
Corporation and operate under its current name and banking charter. Under the
terms of the agreement, the Corporation will exchange 1.143 shares of its common
stock for each of the 2,069,007 outstanding shares of First Shenango stock and
109,074 outstanding options. Based on the closing price per share of the
Corporation's common stock on February 6, 1998 of $41.75, the transaction would
be valued at approximately $103.9 million, or $47.72 per share of First Shenango
stock. The merger, which will be accounted for as a pooling of interests, is
expected to be consummated in the third quarter of 1998, pending approval by
First Shenango's and the Corporation's shareholders, regulatory authorities and
other customary conditions of closing. The transaction is expected to be a
tax-fee reorganization for federal income tax purposes. First Shenango has four
banking offices in Lawrence County, Pennsylvania. At December 31, 1997, First
Shenango had total assets of $375.0 million, deposits of $275.2 million and
shareholders' equity of $47.9 million.
On September 15, 1997, Signal Bank completed the acquisition of seven branches
of KeyBank, National Association, which have approximately $151 million in
deposits and are located in the cities of Bucyrus, Crestline, Cygnet, Galion,
Tiffin, Wayne and Willard in north central and north western Ohio. The purchase
price was equal to 12.15% of average deposits measured just prior to closing
resulting in approximately $19 million in goodwill.
On July 8, 1997, the Corporation acquired Summit Bancorp, the parent company of
Summit Bank through the exchange of 2.3375 common shares of the Corporation's
common stock for each of the 234,891 shares of Summit Bancorp stock outstanding.
At the time of acquisition, Summit Bank had $89 million in assets and $73
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million in deposits and operated two offices in Summit County. The Summit
acquisition was accounted for as a pooling-of-interests.
On April 3, 1996, the Corporation acquired MCi. In the transaction, the Company
acquired $7.1 million in assets consisting primarily of advances receivable on
manufactured home loans and furniture and fixtures. The Corporation also assumed
the liabilities of MCi, which consisted mainly of accounts payable to dealers
and lines of credit. The purchase price of $10.6 million was comprised of $1
million in cash, $4 million in notes due quarterly during 1997, and 384,232
shares of the Corporation's common stock, valued at $5.6 million. The
transaction was accounted for under the purchase method of accounting and,
accordingly, the assets and liabilities of MCi were recorded at their estimated
fair value at the date of acquisition. The purchase resulted in a cost in excess
of fair value of net assets of $5.6 million, which is being amortized by the
straight-line method over a period of no longer than 10 years.
STATISTICAL INFORMATION
Pages 5 to 7 contain statistical information on the Corporation and its
subsidiaries. Information about the Corporation's business segments is
incorporated herein by reference to page 13 of Registrant's 1997 Annual Report
to Shareholders attached to this filing as Exhibit 13.
SECURITIES PORTFOLIO
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The securities portfolio as of December 31 for each of the last five years, and
the maturity distribution and weighted average yield of securities as of
December 31, 1997, are incorporated herein by reference from the securities
tables on pages 17 and 18 of the Corporation's 1997 Annual Report to
Shareholders attached to this filing as Exhibit 13.
As of December 31, 1997, the Corporation owned no securities (other than U.S.
Government and U.S. Government agencies and corporations) issued by one issuer
for which the book value exceeded ten percent of shareholders' equity.
AVERAGE BALANCE SHEETS
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The average balance sheets are incorporated herein by reference from Table 1 on
pages 15 and 16 of the Corporation's 1997 Annual Report to Shareholders attached
to this filing as Exhibit 13.
ANALYSIS OF NET INTEREST INCOME AND NET INTEREST INCOME CHANGES
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The analysis of net interest income and the analysis of net interest income
changes are incorporated herein by reference to Table 1 and Table 2 and the
related discussion on pages 15 through 17 of the Corporation's 1997 Annual
Report to Shareholders attached to this filing as Exhibit 13.
TYPES OF LOANS AND LEASES
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The loans and lease portfolio as of December 31 for each of the last five years,
and the percentage distribution by loan type, are incorporated herein by
reference from the loan and lease table on page 18 of the Corporation's 1997
Annual Report to Shareholders attached to this filing as Exhibit 13.
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
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The remaining maturities of the loan portfolio distributed to reflect cash flows
at December 31, 1997, based on scheduled repayments and the sensitivity of loans
to interest rate changes for loans due after one year is shown below. Commercial
loans includes commercial real estate, commercial leases and commercial finance
contracts. Consumer loans include residential mortgage loans, manufactured
housing loans and consumer loans.
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<TABLE>
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($000's) Commercial Loans Real Estate Consumer
Construction Loans Loans
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Due in one year or less.................................................. $108,174 $9,181 $279,854
Due after one year through five years.................................... 76,923 ---- 315,017
Due after five years..................................................... 28,983 ---- 188,717
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TOTAL $214,080 $9,181 $783,588
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Loans due after one year:
Predetermined interest rate........................................... $95,913 ---- $432,125
Floating or adjustable interest rate.................................. $9,993 ---- $71,609
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LOANS AND LEASES AT RISK
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The table of underperforming assets and the related discussion states the amount
of non-accrual, past-due and renegotiated loans and leases on page 19 of the
Corporation's 1997 Annual Report to Shareholders attached to this filing as
Exhibit 13 is incorporated herein by reference. At December 31, 1997, loans with
a total principal balance of $7.7 million have been identified by management as
potentially nonperforming in the future, compared to $2.4 million at December
31, 1996 and $1.3 million at December 31, 1995. Increases in both years relate
primarily to commercial loans. Management works closely with these borrowers in
their efforts to resolve potential cash flow problems. Potential problem loans
are not included in nonperforming assets since the borrowers currently meet all
applicable loan agreement terms.
SUMMARY OF CREDIT LOSS EXPERIENCE
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The table below reflects net charge-offs of loans and leases for each of the
last five years.
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NET CHARGE-OFFS ($000'S) 1997 1996 1995 1994 1993
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Commercial and industrial loans..................... $220 ---- ---- ---- ----
Real estate construction loans...................... ---- ---- ---- ---- ----
Commercial real estate loans........................ 106 $309 ---- $1,110 $253
Commercial lease financing.......................... 4 ---- ---- ---- ----
Residential mortgage loans.......................... 12 20 46 56 (1)
Consumer loans...................................... 389 109 164 157 184
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TOTAL $731 $438 $210 $1,323 $436
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Net charge-offs as a percent of average
loans and leases................................. 0.09% 0.06% 0.04% 0.32% 0.13%
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</TABLE>
The table below sets forth the allocation of the allowance for credit losses by
loan category at the dates indicated.
<TABLE>
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AT DECEMBER 31,
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1997 1996 1995 1994 1993
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% of Loans to % of Loans to % of Loans to % of Loans to % of Loans to
($000's) AMOUNT Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Commercial and
industrial loans.......... $1,216 10.0% ---- 0.7% ---- ---- ---- ---- ---- ----
Residential mortgage
loans..................... 707 55.0 $593 79.4% $616 83.0% $867 85.5% $645 83.7%
Commercial real estate....... 1,062 7.8 1,633 2.6 1,702 4.6 1,453 3.8 3,245 5.4
Consumer and other........... 2,553 27.2 690 17.3 676 12.4 884 10.7 622 10.9
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Total allowance for
credit losses............. $5,538 100% $2,916 100% $2,994 100% $3,204 100% $4,512 100%
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</TABLE>
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The analysis above is for analytical purposes. The allowance for credit losses
is general in nature and is available to absorb losses from any portion of the
loan and lease portfolio.
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT AT DECEMBER 31, 1997
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The following table indicates the amount of the Corporation's certificates of
deposit by time remaining until maturity as of December 31, 1997.
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($000's) All CDS CDS over $100,000
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Due within three months................ $172,198 $70,144
Due in three to six months................. 104,299 15,002
Due in six to twelve months................ 103,103 41,783
Due after one year through five
years.................................... 184,680 37,420
Due after five years........................ 46,993 ----
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TOTAL $611,273 $164,349
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</TABLE>
REGULATION AND SUPERVISION
GENERAL
The Corporation is a registered bank holding company, subject to broad federal
regulation and oversight by the Federal Reserve Bank (FRB). Signal Bank and
Summit Bank (the "Banks") are national banks subject to broad federal regulation
and oversight extending to all their operations by the Office of the Comptroller
of the Currency (OCC) and by the Federal Deposit Insurance Corporation (FDIC).
The Banks are also members of the Federal Home Loan Bank (FHLB) of Cincinnati.
Signal Bank is a member of the Savings Association Insurance Fund (SAIF) and
Summit Bank is a member of the Bank Insurance Fund (BIF) and the deposits of
both Banks are insured by the FDIC.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document. See Note 16 of Notes To Consolidated Financial
Statements.
FEDERAL REGULATION OF NATIONAL BANKS
The OCC has extensive authority over the operations of national banks. As part
of this authority, the Banks are required to file periodic reports with the OCC
and are subject to periodic examinations by the OCC. All national banks are
subject to a semi-annual assessment, based upon the bank's total assets, to fund
the operations of the OCC.
The OCC also has extensive enforcement authority over all national banks,
including the Banks. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OCC.
Except under certain circumstances, public disclosure of final enforcement
actions by the OCC is required.
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The Banks' loans-to-one borrower limit is generally limited to 15% of unimpaired
capital and surplus. At December 31, 1997, the maximum amount which the Banks'
have lent to any one borrower and the borrower's related entities was
approximately $5.2 million, of which $4.3 million and $900,000 was lent by
Signal Bank and Summit Bank, respectively. The Banks' five largest lending
relationships at December 31, 1997 were performing in accordance with their
terms and totaled $22.4 million, in aggregate. The five largest lending
relationships were funded with $20.1 million and $2.3 million from Signal Bank
and Summit Bank, respectively.
The OCC, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, internal controls and audit systems, interest rate risk
exposure and compensation and other employee benefits. Any institution which
fails to comply with these standards must submit a compliance plan. Failure to
submit a plan or to comply with an approved plan will subject the institution to
further enforcement action.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Signal Bank is a member of the SAIF and Summit Bank is a member of the BIF, both
of which are administered by the FDIC. Deposits are insured up to applicable
limits by the FDIC and such insurance is backed by the full faith and credit of
the United States Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against banks after giving the OCC an opportunity to take
such action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory concern
pay the highest premium. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period.
In order to equalize the deposit insurance premium schedules for BIF and SAIF
insured institutions, the FDIC imposed a one-time special assessment on all
SAIF-assessable deposits pursuant to federal legislation passed on September 30,
1996. Signal Bank's special assessment, which was $3.3 million, was paid in
November 1996. Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s. In 1997, for SAIF-insured institutions, the assessment was equal to about
6.50 basis points for each $100 in domestic deposits, while BIF-insured
institutions paid an assessment equal to about 1.30 basis points for each $100
in domestic deposits. The assessment is expected to be reduced to about 2 basis
points no later than January 1, 2000, when BIF insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of BIF and SAIF deposits will continue until the bonds mature in
the year 2017.
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NATIONAL BANKS
The Banks are subject to the capital regulations of the OCC. The OCC's
regulations establish two capital standards for national banks: a leverage
requirement and a risk-based capital requirement. In addition, the OCC may, on a
case-by-case basis, establish individual minimum capital requirements for a
national bank that vary from the requirements which would otherwise apply under
OCC regulations. A national bank that fails to satisfy the capital requirements
established under the OCC's regulations will be subject to such administrative
action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier 1
capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common shareholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's regulations require
national banks to maintain "total capital" equal to at least 8% of total
risk-weighted assets. For purposes of the risk-based capital requirement, "total
capital" means Tier 1 capital (as described above) plus "Tier 2 capital,"
provided that the amount of Tier 2 capital may not exceed the amount of Tier 1
capital, less certain assets. The components of Tier 2 capital include certain
permanent and maturing capital instruments that do not qualify as core capital
and general valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. The OCC has revised its risk-based capital requirements to
permit the OCC to require higher levels of capital for an institution in light
of its interest rate risk.
PROMPT CORRECTIVE ACTION
The OCC is authorized and, under certain circumstances required, to take certain
actions against national banks that fail to meet their capital requirements. The
OCC is generally required to take action to restrict the activities of an
"undercapitalized institution" (generally defined to be one with less than
either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8%
risk-based capital ratio). Any such institution must submit a capital
restoration plan and until such plan is approved by the OCC may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OCC is
authorized to impose the additional restrictions that are applicable to
significantly undercapitalized banks.
Any national banking association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. A national bank that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized banks. In addition, the OCC must
appoint a receiver (or conservator with the concurrence of the FDIC) for a
national bank, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized bank is also subject to the
general enforcement authority of the OCC, including the appointment of a
conservator or a receiver.
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The OCC is also generally authorized to reclassify a bank into a lower capital
category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The Banks' ability to pay dividends is governed by the National Bank Act and OCC
regulations. Under such statute and regulations, all dividends by a national
bank must be paid out of current or retained net profits, after deducting
reserves for losses and bad debts. The National Bank Act further restricts the
payment of dividends out of net profits by prohibiting a national bank from
declaring a cash dividend on its shares of common stock until the surplus fund
equals the amount of capital stock or, if the surplus fund does not equal the
amount of capital stock, until one-tenth of the Banks' net profits for the
preceding half year in the case of quarterly or semi-annual dividends, or the
preceding two half-year periods in the case of annual dividends, are transferred
to the surplus fund. In addition, the prior approval of the OCC is required for
the payment of a dividend if the total of all dividends declared by a national
bank in any calendar year would exceed the total of its net profits for the year
combined with its net profits for the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a national
bank when it determines such payment to be an unsafe and unsound banking
practice. In addition, the Banks would be prohibited by federal statute and the
OCC's prompt corrective action regulations from making any capital distribution
if, after giving effect to the distribution, the Banks would be classified as
"undercapitalized" under the OCC's regulations. See "Prompt Corrective Action."
ACCOUNTING
The OCC requires that investment activities of a national bank be in compliance
with approved and documented investment policies and strategies, and must be
accounted for in accordance with generally accepted accounting principles
("GAAP"). Accordingly, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Banks are in compliance with these
requirements.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has
a continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OCC, in connection with the examination of the Banks, to
assess the institutions' records of meeting the credit needs of its communities
and to take such record into account in its evaluation of certain applications,
such as a merger or the establishment of a branch, by the Banks. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OCC.
The federal banking agencies, including the OCC, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, the Banks may be required to devote additional funds for
10
<PAGE> 11
investment and lending in its local community. The last CRA compliance exams
ranked Signal Bank as outstanding and Summit Bank as satisfactory.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a national bank or its subsidiaries and its
affiliates are required to be on terms as favorable to the institution as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of capital of the
Banks. Affiliates of the Banks include any Corporation which is under common
control with the Banks. Subsidiaries of the Banks are not deemed affiliates.
However, the FRB has the discretion to treat subsidiaries of national banks as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
("Insiders") are also subject to conflict of interest rules enforced by the OCC.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, as a general matter, loans to Insiders must be made on terms
substantially the same as for loans to unaffiliated individuals.
FEDERAL RESERVE SYSTEM
The FRB requires all depository institutions to maintain non-interest bearing
reserves at specified levels against their transaction accounts (primarily
checking, NOW and Super NOW checking accounts). National banks are authorized to
borrow from the Federal Reserve Bank "discount window," but FRB regulations
require companies to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank. The
Banks are also members of the Federal Reserve System.
HOLDING COMPANY REGULATION
GENERAL
The Corporation is a bank holding company, registered with the FRB. Bank holding
companies are subject to comprehensive regulation by the FRB under the BHCA, and
the regulations of the FRB. As a bank holding company, the Corporation is
required to file reports with the FRB and such additional information as the FRB
may require, and will be subject to regular examinations by the FRB. The FRB
also has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under FRB policy, a bank holding company must serve as a source of strength for
its subsidiary banks. Under this policy the FRB may require, and has required in
the past, a holding company to contribute additional capital to an
undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before: (I)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or
11
<PAGE> 12
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank or bank holding company; or (iii) merging or
consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any corporation which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution, mortgage company, finance company, credit card
company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing property
on a full-payout, non-operating basis; selling money orders, travelers' checks
and United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Act of
1994 (the "Act") was enacted to ease restrictions on interstate banking.
Effective September 29, 1995, the Act allows the FRB to approve an application
of an adequately capitalized and adequately managed bank holding company to
acquire control of, or acquire all or substantially all of the assets of, a bank
located in a state other than such holding company's home state, without regard
to whether the transaction is prohibited by the laws of any state. The FRB may
not approve the acquisition of the bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law of
the host state. The Act also prohibits the FRB from approving an application if
the applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. The Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the Act.
Additionally, on June 1, 1997, the federal banking agencies were authorized to
approve interstate merger transactions without regard to whether such
transaction is prohibited by the law of any state, unless the home state of one
of the banks opted out of the Act by adopting a law after the date of enactment
of the Act and prior to June 1, 1997 which applies equally to all out-of-state
banks and expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above. The State of
Ohio has authorized interstate merger transactions.
The Act authorizes the OCC and FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The Act also requires the appropriate federal banking
agencies to prescribe regulations which prohibit any out-of-state bank from
using the interstate branching authority primarily for the purpose of deposit
production. These
12
<PAGE> 13
regulations include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve.
DIVIDENDS
The FRB has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the FRB's view that a bank holding company
should pay cash dividends only to the extent that the holding company's net
income for the past year is sufficient to cover both the cash dividends and a
rate of earning retention that is consistent with the holding company's capital
needs, asset quality and overall financial condition. The FRB also indicated
that it would be inappropriate for a corporation experiencing serious financial
problems to borrow funds to pay dividends. Furthermore, under the prompt
corrective action regulations adopted by the FRB, the FRB may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized". See "Capital Requirements --
Prompt Corrective Action."
Bank holding companies are required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any corporation that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
CAPITAL REQUIREMENTS. The FRB has established capital requirements for bank
holding companies that generally parallel the capital requirements for national
banks. See "Regulatory Capital Requirements - National Banks." The Corporation's
capital exceeds such requirements.
FEDERAL HOME LOAN BANK SYSTEM
The Banks are members of the FHLB of Cincinnati, one of twelve regional FHLBs
that administer the home financing credit function of member institutions. Each
FHLB serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures, established by the board
of directors of the FHLB which are subject to the oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.
As members, the Banks are required to purchase and maintain stock in the FHLB of
Cincinnati. At December 31, 1997, the Banks had $19.9 million in FHLB stock,
which was in compliance with this requirement. In the past fiscal year, FHLB
stock paid dividends to both Banks.
Under federal law the FHLBs are required to provide funds for the resolution of
troubled savings institutions and to contribute to low- and moderately priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value
13
<PAGE> 14
of FHLB stock in the future. A reduction in value of the Banks' FHLB stock may
result in a corresponding reduction in the Banks' capital.
For the year ended December 31, 1997, dividends paid by the FHLB of Cincinnati
to the Banks totaled $1.3 million, which constitutes a $269,000 increase over
the amount of dividends received in calendar year 1996.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
In addition to the regular income tax, corporations, including the Banks,
generally are subject to a minimum tax. An alternative minimum tax is imposed at
a minimum tax rate of 20% on alternative minimum taxable income, which is the
sum of a corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and net
operating losses can offset no more than 90% of alternative minimum taxable
income. For taxable years beginning after 1986 and before 1996, entities, such
as the Banks, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
The Corporation files consolidated federal income tax returns on a fiscal year
basis using the accrual method of accounting.
Signal Bank and its consolidated subsidiaries have been audited by the IRS with
respect to consolidated federal income tax returns through December 31, 1992.
Summit Bancorp and its consolidated subsidiary have been audited by the IRS with
respect to consolidated federal income tax returns through December 31, 1993.
With respect to years examined by the IRS, either all deficiencies have been
satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Banks) would not result in a deficiency which could have a
material adverse effect on the financial condition of the Corporation, the Banks
or their consolidated subsidiaries.
OHIO TAXATION
As national banks, the Banks are subject to an Ohio franchise tax based on its
net worth plus certain reserve amounts. Total net worth for this purpose is
reduced by certain exempted assets. The resultant net worth is taxed at a rate
of 1.5% for 1997.
Certain subsidiaries in the consolidated group will be subject to Ohio franchise
tax based on the greater of the tax on net worth or the tax on net income,
subject to various adjustments and varying rates. In addition, the subsidiaries
will be subject to state taxes in other states in which they do business. Local
taxes on property and income will also be imposed in certain jurisdictions.
For additional information regarding taxation, see Note 8 of the Notes to the
Consolidated Financial Statements in the Annual Report.
14
<PAGE> 15
EMPLOYEES
At December 31, 1997, the Corporation had a total of 635 full-time equivalent
(FTE) employees including 191 part-time employees. None of the Corporation's
employees are represented by a collective bargaining group. Management considers
its employee relations to be excellent.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
- ----------------------------------------
The following information as to the business experience during the last five
years is supplied with respect to executive officers who do not serve on the
Corporation's Board of Directors.
JAMES J. LITTLE. In January 1998, age 35, Mr. Little became President and Chief
Operating Officer of the Corporation. Mr. Little served as Executive Vice
President and Chief Financial Officer of the Corporation from June 1996 until
his appointment as President and Chief Operating Officer and as Executive Vice
President from July 1995 to June 1996. Prior to joining the Corporation in July
1995, Mr. Little served as President and Chief Executive Officer of Falls
Financial, Inc. from 1993 to 1995 and as Executive Vice President and Chief
Financial Officer of Falls Financial, Inc. from 1989 to 1993.
JON W. PARK. Mr. Park, age 36, is Chief Financial Officer of the Corporation.
Mr. Park has served as Senior Vice President and Chief Financial Officer of
Signal Bank, N.A. since September 1997 and as Vice President and Chief Financial
Officer of Summit Bank since December 1995. Mr. Park previously worked for Ernst
& Young LLP from 1984 through November 1995. Mr. Park is a certified public
accountant.
COMPETITION
The Banks face strong competition, both in originating real estate, commercial
and consumer loans and in attracting deposits. Competition in originating loans
comes primarily from commercial banks, credit unions and savings institutions
located in the Banks' market area. Commercial banks, credit unions and savings
institutions provide vigorous competition in consumer lending. The Bank competes
for real estate and other loans principally on the basis of the quality of
services it provides to borrowers, the interest rates and loan processing fees
it charges, and the types of loans it originates. See "-Lending Activities."
The Banks attract deposits through retail banking offices. Therefore,
competition for those deposits is principally from retail brokerage offices,
commercial banks, credit unions and savings institutions located in the
communities in the Banks' Market Areas. The Banks compete for these deposits by
offering a variety of account alternatives at competitive rates and by providing
convenient business hours.
ITEM 2. PROPERTIES
- -------------------
The Corporation's executive offices and the main office of Signal Bank are
located in downtown Wooster, Ohio in a 4-story office building owned by Signal
Bank.
At December 31, 1997, the Corporation, through Signal Bank and Summit Bank,
operated 28 banking centers in Ohio, of which 20 were owned and 8 were leased.
The Specialty Finance Group of the Corporation operated 6 facilities (4 in Ohio,
1 in Indiana and 1 in Virginia) at December 31, 1997, of
15
<PAGE> 16
which 1 was owned and 5 were leased. The properties owned are generally free
from mortgages and encumbrances.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
In the ordinary course of their respective businesses, the Corporation and its
subsidiaries are parties to various legal proceedings. In the opinion of
management of the Corporation, after consideration of advice from outside
litigation counsel, the ultimate resolution of any legal proceedings outstanding
as of December 31, 1997 will not have a material adverse effect on the
Corporation's consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise, during the three months ended December 31, 1997.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- ------------------------------------------------------------------------------
The information under the caption "Market Information" in the portions of the
Corporation's Annual Report to Shareholders for the year ended December 31,
1997, included as Exhibit 13 to this Report, is herein incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required by this item is incorporated by reference from page 1
of the Corporation's 1997 Annual Report to Shareholders attached to this filing
as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the portions of the
Corporation's Annual Report to Shareholders for the year ended December 31,
1997, included as Exhibit 13 to this Report, is herein incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information required by this item is incorporated herein by reference from
page 20 of the Corporation's 1997 Annual Report to Shareholders attached to this
filing as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements and notes thereto contained in the
portions of the Corporation's Annual Report to Shareholders for the year ended
December 31, 1997, included as Exhibit 13 to this Report, are herein
incorporated by reference.
The independent auditor's report of Deloitte & Touche LLP dated January 26, 1996
is included as Exhibit 99 to this Report and is herein incorporated by
reference.
16
<PAGE> 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The information required by Item 304 of Regulation S-K was previously filed as
part of the Corporation's Current Report on Form 8-K reporting the event of
August 20, 1996 filed on August 27, 1996, as amended on Form 8-K/A filed on
September 9, 1996.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information concerning Executive Officers of the Corporation is contained under
the heading "Executive Officers Who Are Not Directors" on page 15 herein.
Information concerning Directors of the Registrant and compliance with the
reporting requirements of Section 16(a) of the Securities and Exchange Act of
1934, as amended, is incorporated herein by reference from the definitive Proxy
Statement for the Annual meeting of Shareholders to be held in 1998, a copy of
which will be filed with the SEC in April 1998. Information contained under the
headings "Compensation Committee Report on Executive Compensation" and
"Performance Graph" included in the Proxy Statement pursuant to Items 402(k) and
402(l) of Regulation S-K are specifically not incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held in 1998, a copy of which will be filed with the SEC in
April 1998. Information contained under the headings "Compensation Committee
Report on Executive Compensation" and "Performance Graph" included in the Proxy
Statement pursuant to Items 402(k) and 402(l) of Regulation S-K are specifically
not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held in 1998, a copy of
which will be filed with the SEC in April 1998. Information contained under the
headings "Compensation Committee Report on Executive Compensation" and
"Performance Graph" included in the Proxy Statement pursuant to Items 402(k) and
402(l) of Regulation S-K are specifically not incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held in 1998, a copy of which will be filed
with the SEC in April 1998. Information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" included in the Proxy Statement pursuant to Items 402(k) and 402(l) of
Regulation S-K are specifically not incorporated by reference herein.
17
<PAGE> 18
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a)(1) Consolidated Financial Statements:
----------------------------------
The following information appears in the portions of the Corporation's Annual
Report to Shareholders for the year ended December 31, 1997, included as Exhibit
13 to this Report:
<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.
18
<PAGE> 19
(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>
19
<PAGE> 20
*Filed as an exhibit to First Shenango Bancorp's Current Report on
Form 8-K filed with the Securities and Exchange Commission on February 23, 1998.
**Filed as exhibits to the Corporation's Annual report on Form
10-K for the fiscal year ended December 31, 1996, filed with the Securities and
Exchange Commission on March 25, 1997 (File No. 0-17594). Such previously filed
document is hereby incorporated herein by reference in accordance with Item 601
of Regulation S-K.
***Filed as exhibits to the Corporation's Registration Statement on
Form S-2 under the Securities Act of 1933, filed with the Securities and
Exchange Commission on September 28, 1992 (Registration No. 33- 50664). All of
such previously filed document is hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
****The Corporation agrees to file with the Securities and Exchange
Commission, if requested, a copy of the indenture relating to the Corporation's
$40,500,000 of 9.125% Subordinated Notes due March 15, 2004.
*****Filed as Exhibit 4 to the Corporation's Registration Statement
on Form S-8 under the Securities Act of 1933, filed with the Securities and
Exchange Commission on May 29, 1992 (Registration No. 33-48246). All of such
previously filed document is hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
******Filed on Form S-8 with the Securities and Exchange Commission
on October 6, 1997 (File No. 0-17894). All of such previously filed document is
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
*******Filed as Exhibit 10 to the Corporation's quarterly report on
Form 10-Q for the nine-month period ended September 30, 1997 filed with the
Securities and Exchange Commission (File No. 0-17894). All of such previously
filed document is hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
EXHIBITS ARE AVAILABLE BY WRITTEN REQUEST TO:
FIRSTFEDERAL FINANCIAL SERVICES CORP
CONNIE S. STROCK
VICE PRESIDENT
P.O. BOX 385
WOOSTER, OH 44691
(b) Reports on Form 8-K:
--------------------
None
20
<PAGE> 21
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRSTFEDERAL FINANCIAL SERVICES CORP
<TABLE>
<S> <C>
Date: March 26, 1998 By: /s/ Jon W. Park
- ------------------------------------------------------------------------------------------------------------------
Jon W. Park
Chief Financial Officer
(Duly Authorized Representative and Principal
Financial and Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ Gary G. Clark By: /s/ Joseph P. Ciolek
------------------------------------- -------------------------------------
GARY G. CLARK, Chairman of the Board, JOSEPH P. CIOLEK, Director
Principal Executive Officer and
Chief Executive Officer Date: March 26, 1998
--------------
Date: March 26, 1998
--------------
By: /s/ L. Dwight Douce
-------------------------------------
By: /s/ Steven N. Stein L. DWIGHT DOUCE, Executive Vice
------------------------------------- President, Secretary and Director
STEVEN N. STEIN, Director
Date: March 26, 1998
Date: March 26, 1998 --------------
--------------
By: /s/ Gust B. Geralis
By: /s/ R. Victor Dix -------------------------------------
------------------------------------- GUST B. GERALIS, Director
R. VICTOR DIX, Director
Date: March 26, 1998
Date: March 26, 1998 --------------
--------------
By: /s/ Richard E. Herald
By: /s/ David C. Vernon -------------------------------------
------------------------------------- RICHARD E. HERALD, Director
DAVID C. VERNON, Director
Date: March 26, 1998
Date: March 26, 1998 --------------
--------------
By: /s/ Daniel H. Plumly
-------------------------------------
DANIEL H. PLUMLY, Director
Date: March 26, 1998
--------------
</TABLE>
21
<PAGE> 1
EXHIBIT 10a.
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this 8th
day of July, 1997, by and between FIRSTFEDERAL FINANCIAL SERVICES CORP (the
"Company"), and JON W. PARK (the "Executive"), effective for all purposes and in
all respects at the Closing as such term is defined in the Agreement of
Affiliation and Plan of Merger dated December 30, 1996, by and between the
Company and Summit Bancorp (the "Merger Agreement").
WHEREAS, prior to Closing, Executive was Vice President and Chief
Financial Officer of Summit Bank, National Association, formerly known as Summit
Bank ("Summit Bank") and party to certain agreements which shall terminate upon
the Closing of the Merger Agreement;
WHEREAS, as a result of the Merger Agreement, Company is acquiring all
of the issued and outstanding capital stock of Summit Bank;
WHEREAS, Executive has unique talents and experience;
WHEREAS, Company desires to employ Executive in the capacity of
Treasurer of Company on and after the Closing on the terms and conditions set
forth herein;
WHEREAS, Executive desires to be employed by Company in the aforesaid
capacity; and
WHEREAS, Executive and Company desire to set forth in writing the terms
and conditions of their agreements and understandings.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties intending to be legally bound, agree as follows:
1. TERM. The term of this Agreement shall be a period of two (2) years
commencing on the Closing Date (the "Commencement Date"), subject to earlier
termination as provided herein. Beginning on the second anniversary of the
Commencement Date, and on each anniversary thereafter, the term of this
Agreement shall be extended for a period of one year, PROVIDED THAT neither the
Executive nor Company has given notice to the other in writing at least 90 days
prior to such anniversary that the term of this Agreement shall not be extended
further. Reference herein to the term of this Agreement shall refer to both such
initial term and such extended terms.
2. EMPLOYMENT. The Executive is employed as the Treasurer of Company.
As Treasurer, Executive shall render administrative and management services as
are customarily performed by persons situated in similar executive capacities,
including but not limited to such duties and responsibilities as set forth in
Exhibit A attached hereto and incorporated hereby by reference, and shall have
such other powers and duties as the Chief Executive Officer of the
<PAGE> 2
Company may prescribe from time to time. The Executive shall devote his best
efforts and all his business time and attention to the business and affairs of
Company.
3. COMPENSATION.
(a) SALARY. Company agrees to pay the Executive during the term of this
Agreement an annual base salary of Seventy Seven Thousand Dollars ($77,000.00).
The base salary shall be paid in accordance with Company's standard pay
practices and shall be subject to all local, state, and federal withholding
requirements. The Executive's base salary may not be reduced during the term of
this Agreement.
(b) DISCRETIONARY BONUSES. The Executive shall be entitled to
discretionary bonuses as authorized and declared by the Company's Board of
Directors to its executives subject to such terms and conditions set forth in
the Management Incentive Compensation Plan.
(c) EXPENSES. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Company and Signal Bank,
National Association, formerly known as First Federal Savings and Loan
Association of Wooster ("Signal Bank"), PROVIDED THAT the Executive properly
accounts for such expenses in accordance with such policies and procedures.
(d) NONCOMPETITION PAYMENT. In partial consideration for the execution
of this Agreement, the Executive agrees to the noncompetition provisions set
forth in Section 7 hereof.
4. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. The
Executive shall be entitled to participate in all plans relating to stock
options (at a minimum level of 2,000 shares for the first year of this
Agreement; and thereafter as the Company's Stock Option Committee shall
determine), thrift, profit-sharing, group life insurance, medical and dental
coverage, education, and other retirement or employee benefits or combinations
thereof ("Plans") that are now or hereafter maintained for the benefit of Signal
Bank's executive employees or its employees generally, provided that the
Executive meets all eligibility requirements of such Plans.
(b) FRINGE BENEFITS. The Executive shall be eligible to participate in,
and receive benefits under, any other fringe benefit plans which are or may
become applicable to Company's or Signal Bank's executive officers.
(c) MOVING EXPENSES. In the event Company requests Executive to
maintain his principal work place in Wooster and Executive moves his principal
residence to Wooster, Company shall reimburse Executive all reasonable expenses
related to such move including broker or realtor fees, real property purchase
closing costs, and packing and shipment of household good costs. Executive shall
also be entitled to participate in the Signal Bank's employee loan program then
in effect.
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<PAGE> 3
5. VACATIONS; LEAVE. The Executive shall be entitled to three (3) weeks
or, if greater, that number of weeks of annual paid vacation provided in
accordance with the policies established by Company's Board of Directors for
executive employees and to voluntary leave of absence, with or without pay, from
time to time at such times and upon such conditions as the Board of Directors of
Company may determine in their discretion.
6. TERMINATION OF EMPLOYMENT.
(a) INVOLUNTARY TERMINATION. The Board of Directors may terminate the
Executive's employment at any time, but, except in the case of Termination for
Cause, termination of employment shall not prejudice the Executive's right to
compensation or other benefits under this Agreement. In the event of Involuntary
Termination, Company shall pay to the Executive during the remaining term of
this Agreement but in no event less than twelve (12) months, his salary at the
rate in effect immediately prior to the Date of Termination, payable in such
manner and at such times as such salary would have been payable to the Executive
under Section 1 if the Executive had continued to be employed by Company.
(b) TERMINATION FOR CAUSE. In the event of Termination for Cause,
Company shall pay the Executive his salary through the Date of Termination, and
Company shall have no further obligation to the Executive under this Agreement.
(c) DEATH; DISABILITY. In the event of the death of the Executive while
employed under this Agreement and prior to any termination of employment, the
Executive's estate, or such person as the Executive may have previously
designated in writing, shall be entitled to receive from Company the salary of
the Executive through the last day of the calendar month in which the Executive
died. If the Executive becomes disabled as defined in Company's then current
disability plan or if the Executive is otherwise unable to serve as Treasurer,
the Executive shall be entitled to receive group and other disability income
benefits of the type then provided by Signal Bank for executive officers.
7. NONCOMPETITION.
(a) As a material inducement to Company to enter into this Agreement
and for Company to pay Executive compensation stated in Section 3, as well as
any additional benefits provided for herein, Executive covenants and agrees
that:
(i) If Executive voluntarily terminates his employment or is
terminated for Cause, Executive shall not, in the Market Area as
defined below, directly or indirectly, for a period commencing on the
Closing Date and continuing for one year following the Date of
Termination (the "Restricted Period"), for whatever reason, directly or
indirectly, whether as shareholder, partner, joint venturer, or agent
of any person, firm or corporation or other entity or otherwise, engage
in any or all of the following activities:
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<PAGE> 4
(a) Enter into or engage in any business which directly or
indirectly competes with the business of Company and its subsidiaries
(collectively for purposes only of this Section "Company");
(b) Interfere or attempt to interfere with the business,
goodwill, trade, customers or employees of Company or with any one
dealing with Company in the operation of Company's business;
(c) Solicit borrowers' and depositors' business, patronage, or
perform any services for, any business which directly or indirectly
competes with the business carried on by Company;
(d) Promote or assist, financially or otherwise, any person,
firm, association or corporation engaged in any business which directly
or indirectly competes with the business carried on by Company.
(ii) During the Restricted Period, the Executive shall not,
directly or indirectly, knowingly solicit or encourage to leave the
employment of Company, any employee of Company or hire any employee who
has left the employment of Company after the date of this Agreement
within one year of the termination of such employee's employment with
Company or such shorter period as shall be agreed by Company in
writing.
(b) If the Executive violates this restrictive covenant and Company
brings legal action for injunctive or other relief, Company shall not as a
result of the time involved in obtaining the relief be deprived of the benefit
of the full period of the restrictive covenant. Accordingly, the restrictive
covenant shall be deemed to have the duration specified herein, computed from
the date the relief is granted, but reduced by the time between the period when
the restriction began to run and the date of the first violation of the covenant
by Executive.
If any court shall determine that the duration or geographical limit of
any restriction contained in this paragraph is unenforceable, it is the
intention of the parties that the restrictive covenant set forth herein shall
not thereby be permitted to be terminated but shall be deemed amended to the
extent required to render it valid and enforceable. Such amendment shall apply
only with respect to the operation of this paragraph and the jurisdiction of the
court that has made the adjudication.
(c) If any court determines that any provision of this Section, or any
part thereof, is invalid or unenforceable, the remainder of the provisions of
this Section shall not thereby be affected and shall be given full effect,
without regard to the invalid portions.
(d) If any court determines that any of the provisions of this Section,
or any part thereof, is unenforceable because of the duration of such provision
or the area covered thereby, such court shall have the power to reduce the
duration or area of such provisions and, in its reduced form, such provision
shall then be enforceable and shall be enforced.
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<PAGE> 5
8. DISCLOSURE OF INFORMATION. The Executive acknowledges that in and as
a result of his employment hereunder, he will be making use of, acquiring and/or
adding to confidential information of a special and unique nature and value
relating to such matters as Company's and its affiliated companies' trade
secrets, systems, procedures, manuals, confidential reports, and lists of
customers. As a material inducement to Company to enter into this Agreement and
for Company to pay Executive compensation stated in Section 3, as well as any
additional benefits provided for herein, Executive covenants and agrees that he
shall not at any time during or following the term of his employment, directly
or indirectly divulge or disclose for any purpose whatsoever any confidential
information that has been obtained by or disclosed to him as the result of
employment by Company heretofore or hereafter, except that there shall be no
breach of this Section so long as Executive is acting in good faith and there is
no material harm to Company; provided, however, that this duty of
confidentiality shall not apply to information which is on the date hereof
generally known to the public or which is subsequently made public by an
individual authorized to do so.
9. SURRENDER OF BOOKS AND RECORDS. Executive acknowledges that all
files, books, records, literature, products, and other materials owned by
Company or its affiliates or used by it in connection with the conduct of its
business shall at all times remain the property of Company and that upon
termination of the employment hereunder, irrespective of the time, manner, or
cause of said termination, Executive will surrender to Company all such files,
books, records, literature, products, and other materials, other than such
personal effects not related to the operation of the business.
10. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
11. REMEDIES. It is recognized by Executive that a special and
confidential relationship exists between Company and Executive because of his
knowledge, expertise and judgment and the dependence of Company upon his
knowledge, expertise and judgment. Executive agrees that the remedy at law for
any breach of threatened breach of the covenants set forth in paragraphs 7, 8
and 9 hereof will be inadequate and that any breach or attempted breach of such
covenants would cause such immediate and permanent damage as would be
irreparable and the exact amount of which would be impossible to ascertain.
Executive further agrees that in the event of any such breach or threatened
breach of such covenants by Executive, in addition to any and all other legal
and equitable remedies available, Company may have any of such actions enjoined
by any court authorized by law to take such action. Executive acknowledges and
agrees that the limitations contained in paragraphs 7, 8 and 9 hereof are
reasonable and properly required for the adequate protection of Company.
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<PAGE> 6
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to Company at its home office,
to the attention of the Board of Directors with a copy to the secretary of
Company, or, if to the Executive, to such home or other address as the Executive
has most recently provided, in writing to Company.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. HEADINGS. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity and unenforceability of any provisions shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by and is to be
construed and enforced in accordance with the laws of the State of Ohio.
17. ARBITRATION. Any dispute or controversy arising hereunder or in
connection with this Agreement shall be finally and conclusively determined by
the decision of a board of arbitration consisting of three members (hereinafter
sometimes called the "Board of Arbitration") collected as hereinafter provided.
Both Company and Executive shall select one member and the third member shall be
selected by mutual agreement of the other members, or if the other members fail
to reach an agreement on a third member within 20 days after their selection,
the third member shall thereafter be selected by the American Arbitration
Association upon application made to it for such purpose by Company. The Board
of Arbitration shall meet in Wooster, Ohio, or in such other place as the
majority of the members of the Board of Arbitration determines more appropriate
and shall reach and render a decision in writing (concurred in by a majority by
the members of the Board of Arbitration) with respect to the resolution of the
dispute or controversy. In connection with rendering its decision, the Board of
Arbitration shall adopt and follow such rules and procedures, except with regard
to discovery matters, as a majority of the members of the Board of Arbitration
deem necessary or appropriate. Arbitration discovery shall be that discovery
allowed by Ohio Rules of Civil Procedure Title V as amended and modified by the
parties herein permitting discovery by deposition, interrogatories, requests for
admission, and production of documents, which Rules are incorporated by
reference herein, but shall be modified in their application as follows: (i)
depositions shall be limited to: the adversary (or in case of a corporation or
other entity to two agents thereof who may be required to be identified as
competent for the discovery purpose); other third party witnesses whose
discovery may lead to relevant evidence for the preparation of the arbitration;
other third party witnesses whose testimony reasonably needs to be perpetuated,
including witnesses who by affidavit, state that they cannot be available for
the hearing. Depositions of third party witnesses shall be limited to three;
(ii) request for production of documents shall be limited to one set of relevant
and
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<PAGE> 7
reasonable requests and to such supplemental requests as may be reasonably
required from information produced; (iii) each side shall be permitted one set
of interrogatories and request for admissions, each consisting of no more than
thirty (30) items including sub-parts; (iv) the limitations contained herein on
the number of depositions, requests for production of documents, interrogatories
and requests for admissions may be modified by a majority of the members of the
Board of Arbitration upon motion of a party; (v) all discovery disputes shall be
resolved by the Board of Arbitration whose decision shall be final, except as
below provided, in any post-award proceeding under O.R.C. Chapter 2711, the
court may consider as an additional ground for vacating or modifying the award
an Arbitration Discovery decision involving a gross abuse of discretion, the
Board of Arbitration and/or the court shall also be empowered to impose costs,
expenses (excluding attorney's fees) and sanctions as provided in the Rules of
Civil Procedure against any party for failure to comply with the Arbitration
Discovery, and to base such imposition on the same criteria used by the courts
in similar circumstances. To the extent practical, decisions of the Board of
Arbitration shall be rendered no more than 30 calendar days following
commencement of proceedings with respect thereto. The Board of Arbitration's
written decision made by the Board of Arbitration (either prior to or after the
expiration of such 30 calendar day period) shall be final, binding and
conclusive on Company and Executive and shall be entitled to be enforced to the
fullest extent permitted by law and entered in any court of competent
jurisdiction. Each party shall bear its own costs and expenses and an equal
share of the Board of Arbitration's fees and administrative fees of arbitration.
Notwithstanding anything in this Agreement to the contrary, nothing in this
Agreement shall restrict or prohibit any party to any arbitration under this
Section from obtaining injunctive relief in connection with any claim hereunder.
18. OTHER AGREEMENTS. At the Effective Time (as defined in the Merger
Agreement), all agreements by and between Executive and Summit Bancorp and
Summit Bank shall terminate and be null and void, except that the Company shall
provide the Executive with benefits substantially equivalent to those provided
by the Agreements listed on the attached Schedule 18. At the Effective Time,
this Agreement shall constitute the sole agreement for employment for Executive,
except that Executive's rights to compensation or other benefits under those
agreements set forth in Schedule 18 shall not be prejudiced as a result of
Involuntary or Voluntary Termination under this Agreement, except as set forth
therein.
19. DEFINITIONS.
(a) The term "Date of Termination" means the earlier of (1) the date
upon which Company gives notice to the Executive of the termination of his
employment with Company other than pursuant to Paragraph 1 or (2) the date upon
which the Executive ceases to serve as an employee of Company.
(b) The term "Involuntary Termination" means the termination of the
employment of Executive without his express written consent, and shall include a
material diminution of or interference with the Executive's duties,
responsibilities and benefits as Treasurer of the Company, including (without
limitation) any of the following actions unless consented to in
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<PAGE> 8
writing by the Executive; (1) a change in the principal workplace of the
Executive to a location outside of a 60 mile radius from Company's headquarters
office as of the date hereof; (2) a material demotion of the Executive; (3) a
material adverse change in the Executive's salary, perquisites, benefits,
contingent benefits or vacation, other than as part of an overall program
applied uniformly and with equitable effect to all members of the senior
management of the Company; and (4) a material permanent increase in the required
hours of work or the workload of the Executive. The term "Involuntary
Termination" does not include Termination for Cause or termination of employment
due to retirement, death, or disability.
(c) The terms "Termination for Cause" and "Terminated for Cause" mean
termination of the employment of the Executive because of the Executive's
personal dishonesty, willful misconduct, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses), incompetence, or
material breach of any provision of this Agreement. No act, or failure to act,
on the Executive's part shall be considered "willful" unless the Executive has
acted (or failed to act) with an absence of good faith and without reasonable
belief that the Executive's action or failure to act was in the best interest of
Company.
(d) The term "Market Area" means the following counties: Wayne, Medina,
Summit, Tuscarawas, Knox, Ashland, Richland, and Licking.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
FIRSTFEDERAL FINANCIAL
SERVICES CORP
By /s/ Gary G. Clark
---------------------------------------
Name: Gary G. Clark
Title: Chairman of the Board, President
and Chief Executive Officer
EXECUTIVE:
/s/ Jon W. Park
---------------------------------------
Jon W. Park
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<PAGE> 1
EXHIBIT 10b.
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into this 8th
day of July, 1997, by and among SUMMIT BANK, NATIONAL ASSOCIATION, a bank
chartered under the laws of the United States ("Summit"), FIRSTFEDERAL FINANCIAL
SERVICES CORP (the "Company"), and DAVID C. VERNON (the "Executive"), effective
for all purposes and in all respects at the Closing as such term is defined in
the Agreement of Affiliation and Plan of Merger dated December 30, 1996, by and
between the Company and Summit Bancorp (the "Merger Agreement").
WHEREAS, prior to Closing, Executive was Chairman of the Board, Chief
Executive Officer, President, and a member of the Board of Directors of Summit;
WHEREAS, as a result of the Merger Agreement, Company is acquiring all
of the issued and outstanding capital stock of Summit;
WHEREAS, Executive has unique talents and experience which are of value
to Summit;
WHEREAS, Summit desires to employ Executive in the capacity of Chairman
of the Board, Chief Executive Officer, and President of Summit on and after the
Closing on the terms and conditions set forth herein;
WHEREAS, Executive desires to be employed by Summit in the aforesaid
capacity; and
WHEREAS, Executive and Summit desire to set forth in writing the terms
and conditions of their agreements and understandings.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties intending to be legally bound, agree as follows:
1. TERM. The term of this Agreement shall be a period of five (5) years
commencing on the Closing Date (the "Commencement Date"), subject to earlier
termination as provided herein. Beginning on the fifth anniversary of the
Commencement Date, and on each anniversary thereafter, the term of this
Agreement shall be extended for a period of one year, PROVIDED THAT neither the
Executive nor Summit has given notice to the other in writing at least 90 days
prior to such anniversary that the term of this Agreement shall not be extended
further. Reference herein to the term of this Agreement shall refer to both such
initial term and such extended terms.
<PAGE> 2
2. EMPLOYMENT. The Executive is employed as the Chairman of the Board,
Chief Executive Officer, and President of Summit. As Chairman of the Board,
Chief Executive Officer, and President, Executive shall render administrative
and management services as are customarily performed by persons situated in
similar executive capacities, including but not limited to such duties and
responsibilities as set forth in Exhibit A, and shall have such other powers and
duties of an officer of Summit as the Summit Board of Directors may prescribe
from time to time. The Executive shall continue to devote his best efforts and
all his business time and attention to the business and affairs of Summit.
During the Executive's employment with Summit, the Executive shall not engage in
any activity which conflicts or interferes with the performance of the duties
hereunder or usurps the business interest, existing or potential, of Summit.
Executive may terminate his employment under this Agreement at any time upon
ninety (90) days prior written notice.
3. COMPENSATION.
(a) SALARY. Summit agrees to pay the Executive during the term of this
Agreement an annual base salary of One Hundred Thirty Thousand Dollars
($130,000.00) ("Base Salary"). The base salary shall be paid in accordance with
Summit's standard pay practices and shall be subject to all local, state, and
federal withholding requirements. The Base Salary may be raised from time to
time within the sound discretion of the Summit Board of Directors but may not be
reduced during the term of this Agreement.
(b) DISCRETIONARY BONUSES. The Executive shall be entitled to
discretionary bonuses as authorized and declared by the Company's Board of
Directors subject to such terms and conditions set forth in the Management
Incentive Compensation Plan.
(c) EXPENSES. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Executive in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Company and Summit,
PROVIDED THAT the Executive properly accounts for such expenses in accordance
with such policies and procedures.
(d) NONCOMPETITION PAYMENT. In partial consideration for the execution
of this Agreement, the Executive agrees to the noncompetition provisions set
forth in Section 7 hereof.
(e) CHANGE IN CONTROL. Subject to the terms of this Paragraph, in the
event of Involuntary Termination in connection with or within 12 months after a
Change in Control which occurs at any time while Executive is employed under
this Agreement, Summit shall in addition to all other benefits set forth or
provided for in this Agreement, (i) pay to the Executive in a lump sum in cash
within 25 business days after the Date of Termination an amount equal to 299% of
the Executive's "base amount" as defined in Section 280G of the Internal Revenue
Code of 1986 as amended (the "Code"), excluding from such base amount the
amounts received or to be received by the Executive solely in connection with
Section 5.1.15 of the Merger Agreement and the agreements listed on Schedule 18
hereof, (ii) provide to the Executive during the remaining
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<PAGE> 3
term of this Agreement such health benefits as are maintained for executive
officers of Summit from time to time during such remaining term of this
Agreement or substantially the same health benefits as Summit maintains for its
executive officers immediately prior to the Change in Control, whichever are
greater. Notwithstanding any other provision of this Agreement, if payments
under this Agreement, together with any other payments received or to be
received by the Executive in connection with the change in control, would cause
any amount to be non-deductible by Summit for federal income tax purposes
pursuant to ss.280G of the Code, then the benefits under this Agreement
(excluding therefrom any benefits under Schedule 18 and the agreements listed on
Schedule 18 hereof and the Salary Continuation Agreement between Summit and
Executive) shall be reduced (not less than zero) to the extent necessary so as
to maximize payments to the Executive without causing any amount to become
non-deductible by Summit or the Company. The Executive shall determine the
allocation of such reduction among payments to the Executive.
(f) BUSINESS ACQUISITION BONUS. In the event the Company or any
subsidiary completes the acquisition of another financial institution for which
Executive was substantially responsible for the identification and negotiation
of such acquisition, Executive shall receive stock options or restricted stock
in an amount and pursuant to such terms and conditions to be determined by the
Company's Stock Option Committee of the Board of Directors.
4. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. The
Executive shall be entitled to participate in all plans relating to stock
options (at a minimum level of 5,000 option shares for the first year of this
Agreement; and thereafter as the Company's Stock Option Committee shall
determine), thrift, profit-sharing, group life insurance, medical and dental
coverage, education, and other retirement or employee benefits or combinations
thereof ("Plans") that are now or hereafter maintained for the benefit of
Summit's executive employees or its employees generally, provided that the
Executive meets all eligibility requirements of such Plans and subject to the
integration of such Plans into the Company's plans. In the event any of such
Plans are not integrated into the Company's plans, Executive will nonetheless
continue to receive the benefits of any Plans Summit continues to provide to its
employees. During the term of this Agreement, Summit shall continue to pay the
premiums on that certain universal life insurance policy insuring the Executive
in the amount of $250,000.
(b) FRINGE BENEFITS. The Executive shall be eligible to participate in,
and receive benefits under, any other fringe benefit plans which are or may
become applicable to Summit's executive officers specifically including but not
limited to a car allowance in an amount not in excess of $600 per month, plus
the cost of standard liability and casualty insurance coverage.
(c) MEMBERSHIPS. Summit shall pay dues on behalf of Executive for
memberships in Firestone Country Club and Fairlawn Country Club. Executive shall
be responsible for all personal expenses incurred in connection with such
memberships.
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(d) SICK LEAVE. Executive shall be entitled to up to six (6) months of
paid sick leave per year in the event of illness. Executive shall not be
entitled to be compensated by Summit during sick leave in excess of six (6)
months per year. Executive shall not be entitled to any additional compensation
or benefit for any unused sick leave other than the payments due under a certain
Salary Continuation Agreement dated July 15, 1993, by and between Executive and
Summit.
5. VACATIONS; LEAVE. The Executive shall be entitled to five (5) weeks
or, if greater, that number of weeks of annual paid vacation provided in
accordance with the policies established by Company's Board of Directors for
executive employees and to voluntary leave of absence, with or without pay, from
time to time at such times and upon such conditions as the Board of Directors of
Company may determine in its discretion.
6. TERMINATION OF EMPLOYMENT.
(a) INVOLUNTARY TERMINATION. The Summit Board of Directors may
terminate the Executive's employment at any time, but, except in the case of
Termination for Cause, termination of employment shall not prejudice the
Executive's right to compensation or other benefits under this Agreement. In the
event of Involuntary Termination, Summit shall pay to the Executive during the
remaining term of this Agreement, his Base Salary at the rate in effect
immediately prior to the Date of Termination, payable in such manner and at such
times as such salary would have been payable to the Executive under Section 1 if
the Executive had continued to be employed by Summit.
(b) TERMINATION FOR CAUSE. In the event of Termination for Cause,
Summit shall pay the Executive his salary through the Date of Termination, and
Summit shall have no further obligation to the Executive under this Agreement.
(c) DEATH; DISABILITY. In the event of the death of the Executive while
employed under this Agreement and prior to any termination of employment, the
Executive's estate, or such person as the Executive may have previously
designated in writing, shall be entitled to receive from Summit the salary of
the Executive through the last day of the calendar month in which the Executive
died. If the Executive becomes disabled as defined in Summit's then current
disability plan or if the Executive is otherwise unable to serve as Chairman of
the Board, Chief Executive Officer, or President, the Executive shall be
entitled to receive group and other disability income benefits of the type then
provided by Summit for executive officers.
7. NONCOMPETITION.
(a) Executive covenants and agrees that:
(i) If Executive voluntarily terminates his employment or is
terminated for Cause, Executive shall not, in the Market Area (as
defined below), directly or indirectly, for a period commencing on the
Closing Date and continuing for three years following the Date
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of Termination (the "Restricted Period"), for whatever reason, directly
or indirectly, whether as shareholder, partner, employee, officer,
joint venturer, or agent of any person, firm or corporation or other
entity or otherwise, engage in any or all of the following activities:
(a) Enter into or engage in any business which directly or
indirectly competes with the business of Summit;
(b) Interfere or attempt to interfere with the business,
goodwill, trade, customers or employees of Summit or with any one
dealing with Summit in the operation of Summit's business;
(c) Solicit borrowers' and depositors' business, patronage, or
perform any services for, any business which directly or indirectly
competes with the business carried on by Summit;
(d) Promote or assist, financially or otherwise, any person,
firm, association or corporation engaged in any business which directly
or indirectly competes with the business carried on by Summit.
(ii) During the Restricted Period, the Executive shall not,
directly or indirectly, knowingly solicit or encourage to leave the
employment of Company or Summit, any employee of Summit or hire any
employee who has left the employment of Summit after the date of this
Agreement within one year of the termination of such employee's
employment with Summit or such shorter period as shall be agreed by
Summit in writing.
(b) If the Executive violates this restrictive covenant and Summit
brings legal action for injunctive or other relief, Summit shall not as a result
of the time involved in obtaining the relief be deprived of the benefit of the
full period of the restrictive covenant. Accordingly, the restrictive covenant
shall be deemed to have the duration specified herein, computed from the date
the relief is granted, but reduced by the time between the period when the
restriction began to run and the date of the first violation of the covenant by
Executive.
If any court shall determine that the duration or geographical limit of
any restriction contained in this paragraph is unenforceable, it is the
intention of the parties that the restrictive covenant set forth herein shall
not thereby be permitted to be terminated but shall be deemed amended to the
extent required to render it valid and enforceable. Such amendment shall apply
only with respect to the operation of this paragraph and the jurisdiction of the
court that has made the adjudication.
(c) If any court determines that any provision of this Section, or any
part thereof, is invalid or unenforceable, the remainder of the provisions of
this Section shall not thereby be affected and shall be given full effect,
without regard to the invalid portions.
-5-
<PAGE> 6
(d) If any court determines that any of the provisions of this Section,
or any part thereof, is unenforceable because of the duration of such provision
or the area covered thereby, such court shall have the power to reduce the
duration or area of such provisions and, in its reduced form, such provision
shall then be enforceable and shall be enforced.
(e) Notwithstanding any term to the contrary herein, during the
Restricted Period Executive may engage in the type of business currently
conducted by Summit Banc Investments Corporation, and the restrictions set forth
in subparagraphs 7(a)(i)(a), (b), (c) and (d) shall not apply to Executive's
activities under this subparagraph (e).
8. DISCLOSURE OF INFORMATION. The Executive acknowledges that in and as
a result of his employment hereunder, he will be making use of, acquiring and/or
adding to confidential information of a special and unique nature and value
relating to such matters as Summit's and its affiliated companies' trade
secrets, systems, procedures, manuals, confidential reports, and lists of
customers. As a material inducement to Summit to enter into this Agreement and
for Summit to pay Executive compensation stated in Section 3, as well as any
additional benefits provided for herein, Executive covenants and agrees that he
shall not at any time during or following the term of his employment, directly
or indirectly divulge or disclose for any purpose whatsoever any confidential
information that has been obtained by or disclosed to him as the result of
employment by Summit heretofore or hereafter, except that there shall be no
breach of this Section so long as Executive is acting in good faith and there is
no material harm to Summit; provided, however, that this duty of confidentiality
shall not apply to information which is on the date hereof generally known to
the public or which is subsequently made public by an individual authorized to
do so.
9. SURRENDER OF BOOKS AND RECORDS. Executive acknowledges that all
files, books, records, literature, products, and other materials owned by Summit
or its affiliates or used by it in connection with the conduct of its business
shall at all times remain the property of Summit and that upon termination of
the employment hereunder, irrespective of the time, manner, or cause of said
termination, Executive will surrender to Summit all such files, books, records,
literature, products, and other materials, other than such personal effects not
related to the operation of the business.
10. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party.
(b) This Agreement and all rights of the Executive hereunder shall
inure to the benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
-6-
<PAGE> 7
11. REMEDIES. It is recognized by Executive that a special and
confidential relationship exists between Summit and Executive because of his
knowledge, expertise and judgment and the dependence of Summit upon his
knowledge, expertise and judgment. Executive agrees that the remedy at law for
any breach of threatened breach of the covenants set forth in paragraphs 7, 8
and 9 hereof will be inadequate and that any breach or attempted breach of such
covenants would cause such immediate and permanent damage as would be
irreparable and the exact amount of which would be impossible to ascertain.
Executive further agrees that in the event of any such breach or threatened
breach of such covenants by Executive, in addition to any and all other legal
and equitable remedies available, Summit may have any of such actions enjoined
by any court authorized by law to take such action. Executive acknowledges and
agrees that the limitations contained in paragraphs 7, 8 and 9 hereof are
reasonable and properly required for the adequate protection of Summit.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to Summit at its home office,
to the attention of the Board of Directors with a copy to the secretary of
Summit, or, if to the Executive, to such home or other address as the Executive
has most recently provided, in writing to Summit.
13. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. HEADINGS. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity and unenforceability of any provisions shall not
affect the validity or enforceability of the other provisions hereof.
16. GOVERNING LAW. This Agreement shall be governed by and is to be
construed and enforced in accordance with the laws of the State of Ohio.
17. ARBITRATION. Any dispute or controversy arising hereunder or in
connection with this Agreement shall be finally and conclusively determined by
the decision of a board of arbitration consisting of three members (hereinafter
sometimes called the "Board of Arbitration") collected as hereinafter provided.
Both Summit and Executive shall select one member and the third member shall be
selected by mutual agreement of the other members, or if the other members fail
to reach an agreement on a third member within 20 days after their selection,
the third member shall thereafter be selected by the American Arbitration
Association upon application made to it for such purpose by Summit. The Board of
Arbitration shall meet in Wooster, Ohio, or in such other place as the majority
of the members of the Board of Arbitration determines more appropriate and shall
reach and render a decision in writing (concurred in by a
-7-
<PAGE> 8
majority by the members of the Board of Arbitration) with respect to the
resolution of the dispute or controversy. In connection with rendering its
decision, the Board of Arbitration shall adopt and follow such rules and
procedures, except with regard to discovery matters, as a majority of the
members of the Board of Arbitration deem necessary or appropriate. Arbitration
discovery shall be that discovery allowed by Ohio Rules of Civil Procedure
(Title V) as amended and modified by the parties herein permitting discovery by
deposition, interrogatories, requests for admission, and production of
documents, which Rules are incorporated by reference herein, but shall be
modified in their application as follows: (i) depositions shall be limited to:
the adversary (or in case of a corporation or other entity to two agents thereof
who may be required to be identified as competent for the discovery purpose);
other third party witnesses whose discovery may lead to relevant evidence for
the preparation of the arbitration; other third party witnesses whose testimony
reasonably needs to be perpetuated, including witnesses who by affidavit, state
that they cannot be available for the hearing. Depositions of third party
witnesses shall be limited to three; (ii) request for production of documents
shall be limited to one set of relevant and reasonable requests and to such
supplemental requests as may be reasonably required from information produced;
(iii) each side shall be permitted one set of interrogatories and request for
admissions, each consisting of no more than thirty (30) items including
sub-parts; (iv) the limitations contained herein on the number of depositions,
requests for production of documents, interrogatories and requests for
admissions may be modified by a majority of the members of the Board of
Arbitration upon motion of a party; (v) all discovery disputes shall be resolved
by the Board of Arbitration whose decision shall be final, except as below
provided, in any post-award proceeding under O.R.C. Chapter 2711, the court may
consider as an additional ground for vacating or modifying the award an
Arbitration Discovery decision involving a gross abuse of discretion, the Board
of Arbitration and/or the court shall also be empowered to impose costs,
expenses (excluding attorney's fees) and sanctions as provided in the Rules of
Civil Procedure against any party for failure to comply with the Arbitration
Discovery, and to base such imposition on the same criteria used by the courts
in similar circumstances. To the extent practical, decisions of the Board of
Arbitration shall be rendered no more than 30 calendar days following
commencement of proceedings with respect thereto. The Board of Arbitration's
written decision made by the Board of Arbitration (either prior to or after the
expiration of such 30 calendar day period) shall be final, binding and
conclusive on Summit and Executive and shall be entitled to be enforced to the
fullest extent permitted by law and entered in any court of competent
jurisdiction. Each party shall bear its own costs and expenses and an equal
share of the Board of Arbitration's fees and administrative fees of arbitration.
Notwithstanding anything in this Agreement to the contrary, nothing in this
Agreement shall restrict or prohibit any party to any arbitration under this
Section from obtaining injunctive relief in connection with any claim hereunder.
18. OTHER AGREEMENTS. At the Effective Time (as defined in the Merger
Agreement), all agreements by and between Executive and Summit Bancorp and/or
Summit Bank, National Association, formerly known as Summit Bank, except the
agreements listed on the attached Schedule 18, which agreements are not
considered benefits subject to the terms of this Agreement, shall terminate and
be null and void. At the Effective Time, this Agreement shall constitute the
sole agreement for employment for Executive, except that Executive's rights to
compensation or
-8-
<PAGE> 9
other benefits under those agreements set forth in Schedule 18 shall not be
prejudiced as a result of Involuntary or Voluntary Termination under this
Agreement, except as set forth therein.
19. CERTAIN REDUCTION OF PAYMENTS BY SUMMIT.
(a) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
20. DEFINITIONS.
(a) The term "Date of Termination" means the earlier of (1) the date
upon which Summit gives notice to the Executive of the termination of his
employment with Summit other than pursuant to Paragraph 1 or (2) the date upon
which the Executive ceases to serve as an employee of Summit.
(b) The term "Involuntary Termination" means the termination of the
employment of Executive without his express written consent, and shall include a
material diminution of or interference with the Executive's duties,
responsibilities and benefits as Chairman of the Board, Chief Executive Officer,
and President of Summit, including (without limitation) any of the following
actions unless consented to in writing by the Executive; (1) a change in the
principal workplace of the Executive to a location outside Summit County; (2) a
material demotion of the Executive; (3) a material reduction in the number or
seniority of other Summit personnel reporting to the Executive or a material
reduction in the frequency with which, or in the nature of the matters with
respect to which, such personnel are to report to the Executive, other than as
part of an Summit-wide reduction in staff; (4) a material adverse change in the
Executive's salary, perquisites, benefits, contingent benefits or vacation,
other than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of Summit or the Company; and (5)
a material permanent increase in the required hours of work or the workload of
the Executive. The term "Involuntary Termination" does not include Termination
for Cause or termination of employment due to retirement, death, or disability.
(c) The terms "Termination for Cause" and "Terminated for Cause" mean
termination of the employment of the Executive because of the Executive's gross
negligence, unethical behavior, or any other acts which subject Summit to civil
or criminal liability.
(d) The term "Market Area" means Summit County, Ohio.
(e) The term "Change in Control" means (1) an event of a nature that
(i) results in a change in control of Summit or the Company within the meaning
of the Bank Holding Company Act and its related regulations, (12 USCS 1841 and
12 CFR 225) as in effect on the date hereof; or (ii) would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); (2) any person (as that term is used in
Sections 13(d) or 14(d) of the Exchange Act) who is or becomes the beneficial
owner (as defined in Rule 13d-3 under the
-9-
<PAGE> 10
Exchange Act), directly or indirectly of securities of Summit or the Company
representing 20% or more of Summit's or the Company's outstanding securities; or
(3) individuals who are members of the board of directors of the Company on the
date hereof (the "Incumbent Board") who cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Company's stockholders was approved by the
nominating committee serving under the Incumbent Board, shall be considered a
member of the Incumbent Board. The term "Change in Control" shall not include an
acquisition of securities by an employee benefit plan of Summit or the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
SUMMIT BANK, NATIONAL
ASSOCIATION
By /s/ David c. Vernon
---------------------------------------
Name: David C. Vernon
Title: Chairman of the Board, President
and Chief Executive Officer
FIRSTFEDERAL FINANCIAL
SERVICES CORP
By /s/ Gary G. Clark
---------------------------------------
Name: Gary G. Clark
Title: Chairman of the Board, President
and Chief Executive Officer
EXECUTIVE:
/s/ David C. Vernon
---------------------------------------
David C. Vernon
-10-
<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 $52.00 $52.00 $0.4375 $30.00 $28.00 $0.4063
2nd Qtr. $23.40 $18.00 $0.09 $66.75 $53.00 $0.4375 $39.00 $28.50 $0.4063
3rd Qtr. $25.20 $23.40 $0.10 $74.00 $66.50 $0.4375 $41.63 $37.00 $0.4063
4th Qtr. $32.00 $24.20 $0.10 $89.50 $72.50 $0.4375 $50.88 $40.75 $0.4063
===================================================================================================================================
</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 5,257 (5,566) -- -- --
Unrealized gain on securities available for sale -- -- -- -- -- 2,725 2,725
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 24,132 3,405 16,310 35,298 (2,759) 147 76,533
Net income -- -- -- 9,850 -- -- 9,850
Cash dividends:
Common stock $.38 per share -- -- -- (1,704) -- -- (1,704)
Series A preferred stock - $1.75 per share -- -- -- (870) -- -- (870)
Series B preferred stock - $1.63 per share -- -- -- (795) -- -- (795)
Proceeds from exercise of common stock options -
13,523 shares -- -- 119 -- 139 -- 258
Contribution of 5,291 shares to the 401(k) plan -- -- -- -- 101 -- 101
Conversion and redemption of 15,260 Series A
preferred shares to common shares and 3,550
Series B preferred shares to common shares (459) -- 198 -- 261 -- --
Purchase of Series A preferred stock - 25,300 shares (639) -- (879) -- -- -- (1,518)
Purchase of Series B preferred stock - 9,900 shares (341) -- (143) -- -- -- (484)
Purchase of treasury stock - 17,589 shares -- -- -- -- (379) -- (379)
Issuance of 384,233 common shares in MCi acquisition -- 279 5,309 -- -- -- 5,588
10% common stock dividend -- 369 8,654 (9,023) -- -- --
Unrealized loss on securities available for sale -- -- -- -- -- (1,293) (1,293)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 22,693 4,053 29,568 32,756 (2,637) (1,146) 85,287
Net income -- -- -- 14,448 -- -- 14,448
Cash dividends:
Common stock - $.43 per share -- -- -- (2,122) -- -- (2,122)
Series A preferred stock - $1.75 per share -- -- -- (861) -- -- (861)
Series B preferred stock - $1.63 per share -- -- -- (723) -- -- (723)
Issuance of 548,949 common shares in Summit acquisition -- 549 4,911 1,499 -- (44) 6,915
Proceeds from exercise of common stock options -
49,476 shares -- -- 325 -- 225 -- 550
Tax benefit on stock options exercised -- -- -- 257 -- -- 257
Contribution of 2,737 shares to the 401(k) plan -- -- -- -- 133 -- 133
Conversion and redemption of 496,249 Series
A preferred shares to common shares (11,539) 1,455 9,991 -- 93 -- --
Conversion and redemption of 49,435 Series
B preferred shares to common shares (1,237) -- 802 -- 435 -- --
25% common stock dividend -- 1,013 (1,013) (5) -- -- (5)
Unrealized gain on securities available for sale -- -- -- -- -- 856 856
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 9,917 $7,070 $ 44,584 $ 45,249 ($1,751) ($334) $ 104,735
===================================================================================================================================
</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%. 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 TAXES AND
CHANGE IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES ...... (703) 526 6,530
- --------------------------------------------------------------
Undistributed earnings of
subsidiaries ................... 15,151 9,324 2,916
- --------------------------------------------------------------
NET INCOME .......................$14,448 $9,850 $9,446
==============================================================
</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 2.66% $25,511 2.60%
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST RATE SPREAD ............................ 2.31% 2.30%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES .................. 106.15% 106.22%
- -----------------------------------------------------------------------------------------------------------------------------------
</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%
- -----------------------------------------------------------------------------------------------------------------------------------
</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
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Date and Percent of
Voting Shares,
Year and Partnership Interests,
State Voting Trust Certificates,
Name and Address Incorporated Capital Contributions Description of Activity
- ---------------- ------------ -------------------------- -----------------------
<S> <C> <C> <C>
Signal Bank, N.A. Ohio 1987 100% Commercial banking
1905
Summit Bank, N.A. Ohio 1997 100% Commercial banking
1991
Summit Banc Investments Corp. Ohio 1997 100% Securities product sales
1996
Alpha Equipment Group, Inc.(2) Ohio 1997 100% Equipment leasing
1990
Signal Finance Company(1) Ohio 1997 100% Multi-purpose finance company
1997
Alliance Corporate Resources, Inc.(1) Ohio 1997 100% Information technology leasing
1987
Signal Mortgage Corp.(1) Ohio 1978 100% Mortgage loan origination
1978
First Federal Capital Corp. I(1) Delaware 1986 100% CMO Issue
1986
Home Financial Services, Inc.(1) Ohio 1988 100% Securities product sales
1988
H.F.S. Agency, Inc.(1) Ohio 1989 96% Tax-deferred annuity sales
1989
Professional Appraisal Services Corp.(1) Ohio 1993 100% Appraisal services
1993
Venture Mortgage Corp.(1) Ohio 1996 100% Operating subsidiary
1995
Signal Securitization Corp.(1) Delaware 1996 100% Securitization Issue
1996
Mobile Consultants, Inc. Ohio 1996 100% Origination and servicing of
1973 manufactured housing loans
<FN>
(1) Subsidiaries of Signal Bank, N.A., subsidiary of the Registrant.
(2) Subsidiary of Summit Bank, N.A., subsidiary of the Registrant.
</TABLE>
<PAGE> 1
Exhibit 23.1
The Board of Directors
FirstFederal Financial Services Corp and Subsidiaries:
We consent to incorporation by reference in the registration statements (No.
33-48246, No. 33-87046, No. 333-37305, No. 333-37219, and No. 333-24707) on
Form S-8 of FirstFederal Financial Services Corp of our report dated February
6, 1998, relating to the consolidated balance sheets of FirstFederal Financial
Services Corp and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years then ended, which report appears in the December 31,
1997 annual report on Form 10-K of FirstFederal Financial Services Corp.
Our report refers to the adoption of the provisions of the Financial
Accounting Standard Boards' Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, in 1997.
/s/ KPMG Peat Marwick LLP
Cleveland, Ohio
March 25, 1998
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in these Registration Statements
No. 33-48246, No. 33-87046, No. 333-24707, No. 333-37219 and No. 333-37305 of
FirstFederal Financial Services Corp on Form S-8 of our report dated January
26, 1996 appearing in this Annual Report on Form 10-K of FirstFederal Financial
Services Corp for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED CONDENSED BALANCE SHEET AND STATEMENT OF INCOME FOR
THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 32,323
<INT-BEARING-DEPOSITS> 19,216
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 253,809
<INVESTMENTS-CARRYING> 70,959
<INVESTMENTS-MARKET> 71,059
<LOANS> 1,006,849
<ALLOWANCE> 5,538
<TOTAL-ASSETS> 1,457,415
<DEPOSITS> 981,675
<SHORT-TERM> 98,032
<LIABILITIES-OTHER> 23,762
<LONG-TERM> 249,211
9,917
0
<COMMON> 7,070
<OTHER-SE> 87,748
<TOTAL-LIABILITIES-AND-EQUITY> 1,457,415
<INTEREST-LOAN> 68,481
<INTEREST-INVEST> 20,974
<INTEREST-OTHER> 638
<INTEREST-TOTAL> 90,093
<INTEREST-DEPOSIT> 35,522
<INTEREST-EXPENSE> 59,550
<INTEREST-INCOME-NET> 30,543
<LOAN-LOSSES> 842
<SECURITIES-GAINS> 1,175
<EXPENSE-OTHER> 35,643
<INCOME-PRETAX> 23,343
<INCOME-PRE-EXTRAORDINARY> 14,448
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,448
<EPS-PRIMARY> 2.59
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 2.62
<LOANS-NON> 4,353
<LOANS-PAST> 160
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,916
<CHARGE-OFFS> 831
<RECOVERIES> 100
<ALLOWANCE-CLOSE> 5,538
<ALLOWANCE-DOMESTIC> 5,538
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED CONDENSED BALANCE SHEET AND STATEMENT OF INCOME FOR
THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,012
<INT-BEARING-DEPOSITS> 9,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 141,548
<INVESTMENTS-CARRYING> 84,984
<INVESTMENTS-MARKET> 83,958
<LOANS> 756,768
<ALLOWANCE> 2,916
<TOTAL-ASSETS> 1,080,383
<DEPOSITS> 671,918
<SHORT-TERM> 93,265
<LIABILITIES-OTHER> 10,765
<LONG-TERM> 219,148
22,693
0
<COMMON> 4,053
<OTHER-SE> 58,541
<TOTAL-LIABILITIES-AND-EQUITY> 1,080,383
<INTEREST-LOAN> 56,274
<INTEREST-INVEST> 16,842
<INTEREST-OTHER> 443
<INTEREST-TOTAL> 73,559
<INTEREST-DEPOSIT> 29,143
<INTEREST-EXPENSE> 48,048
<INTEREST-INCOME-NET> 25,511
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 397
<EXPENSE-OTHER> 27,346
<INCOME-PRETAX> 15,734
<INCOME-PRE-EXTRAORDINARY> 9,850
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,850
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 2.60
<LOANS-NON> 3,590
<LOANS-PAST> 0
<LOANS-TROUBLED> 340
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,994
<CHARGE-OFFS> 454
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 2,916
<ALLOWANCE-DOMESTIC> 2,916
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
REVISED DUE TO ADOPTION OF FAS 128, EARNINGS PER SHARE
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of FirstFederal Financial Services
Corp.
Wooster, Ohio
We have audited the consolidated statements of financial condition of
FirstFederal Financial Services Corp and Subsidiary (the "Corporation") as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepting auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. we believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstFederal
Financial Services Corp and Subsidiary at December 31, 1995 in conformity with
generally accented accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements in
1994, the Corporation changed its method of accounting for certain investments
in debt and equity securities to conform with Statement of Financial Accounting
Standard No. 115.
/s/ Deloitte & Touche LLP
January 26, 1996
Columbus, Ohio
